10KSB/A 1 d10ksba.txt FORM 10-KSB/A #1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to FORM 10-KSB/A ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 2000 0-28462 WEBB INTERACTIVE SERVICES, INC. (Exact name of registrant as specified in its charter) Colorado 84-1293864 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1899 Wynkoop, Suite 600, Denver, CO 80202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 296-9200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ - Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [__]. Registrant's revenues for fiscal year ended December 31, 2000: $4,014,393. Aggregate market value of voting stock held by non-affiliates of registrant as of March 23, 2001: Approximately $20,145,000. Number of shares outstanding as of March 23, 2001: 10,354,473 shares of common stock, no par value. Documents incorporated by reference: Definitive Proxy Statement for 2001 Annual Meeting of Shareholders for Part III. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Webb provides innovative advanced online commerce and communication solutions for businesses. Our AccelX product line of XML-based commerce and buyer-seller interaction products and services provides businesses with powerful web-site development and communication tools to attract customers, generate leads, increase buyer-seller interaction and strengthen customer relationship management. Our Jabber.com, Inc. subsidiary is building a business around commercializing Jabber.org open-source technologies for real time XML-based communications. Jabber.com is currently focused on developing and marketing commercial-grade instant messaging software, solutions and hosting for large enterprises, service providers and independent software vendors. We distribute our AccelX products and services on a private-label basis to high-volume distribution partners such as yellow page directory publishers, newspapers, city guides, vertical market portals and other aggregators of local businesses. Our AccelX products may be either licensed or delivered on an application service provider business model whereby we would host the software on our servers and expect to deliver and manage the service on behalf of our distribution partners. Generally, these services are provided on a revenue-share basis providing us with recurring revenues as our distribution partners sell these services to their small business customers. This distribution model is designed to provide us with a growing base of businesses using one or more of our services who are ideal customers for additional AccelX services. Prior to January 2000, we were organized around our primary market focus on local commerce services, with an additional business unit dedicated to e-banking services. During the third quarter of fiscal 2000, we discontinued our e-banking business. In January 2000, we formed a new subsidiary in order to commercialize separately the Jabber.org instant messaging system from our AccelX business. We intend to seek participation from external partners to help us maximize the value of our instant messaging business. During July 2000, we completed a business plan for our Jabber.com subsidiary. The plan focuses Jabber.com's business development efforts on three areas: . Providing professional services to help companies implement, customize and host instant messaging applications; . Developing instant messaging services for businesses, which may be either licensed or delivered on an application service provider business model; and . Developing open gateway services through strategic relationships with companies in the areas of Internet protocol telephony, mobile services, customer services and exchange services. On March 1, 2001, Jabber.com introduced the Jabber Commercial Server 2.0, a highly scaleable Jabber server that provides the foundation for current and future server products. Jabber Commercial Server 2.0 provides enterprises and service providers with enhanced performance, scalability, reliability and security compared to the Jabber open-source software. To date, Jabber.com's activities have focused primarily on promoting the wide-spread use of the Jabber open-source instant messaging protocol (XMPP), providing professional services to businesses desiring to test the Jabber open-source platform and developing the Jabber Commercial Server 2.0 software. We have incurred losses from operations since inception. At December 31, 2000, we had an accumulated deficit of approximately $91.5 million. The accumulated deficit at December 31, 2000, included approximately $51.6 million of non-cash expenses related to the following: . Beneficial conversion features related to the 10% convertible note payable, preferred stock and preferred stock dividends; . Reset of warrant exercise prices; 2 . Stock and stock options issued for services; . Warrants issued to customers; . Interest expense on the 10% convertible note paid by the issuance of similar notes; . Amortization of intangible assets acquired in consideration for the issuance of our securities; . Impairment loss on acquired intangible assets and goodwill; . Write-off of securities received for our e-banking business; and . Preferred stock dividends. As a result of the $2.5 million preferred stock private placement we completed in February 2001, we will record an additional non-cash expense totaling approximately $2 million associated with issuance of our series C-1 preferred stock. In addition, we will record an additional non-cash expense totaling approximately $3.3 million associated with the reset of conversion prices for our series B-2 preferred stock and 10% convertible note payable as well as the reset of exercise price for certain warrants issued in connection with our series B preferred stock private placement. We may record substantial additional non-cash charges in connection with future financings. RESULTS OF OPERATIONS In December 1999, we issued a warrant to the holder of our 10% note payable in connection with amending the terms of our 10% note payable. This warrant was issued in connection with the sale of our series B preferred stock, which we completed in February 2000. We originally recorded the warrant, valued at $2,311,475, as a series B preferred stock offering cost. We have now determined that it is appropriate to re-characterize this warrant as additional consideration to the note holder, and have revised our accounting for this warrant to reflect it as a deferred financing asset related to the 10% note payable. Accordingly, the results of operations for periods after December 1999, have been restated to reflect such capitalization and amortization of the $2,311,475 as additional non-cash interest expense from the date of issuance to the date of maturity for the 10% convertible note payable, August 25, 2002. This restatement has no effect on previously reported cash flows from operations, investing activities, or financing activities. During July and September 2000, we issued 912,500 shares of common stock of our subsidiary, Jabber.com, to Jabber.com employees, an officer of Webb and members of the Jabber.com advisory boards for services provided to Jabber.com and to be rendered in future periods. Certain of the shares were vested immediately, and certain shares vest over a periods ranging from one month to two years. We recorded the estimated fair value of these shares and the related deferred compensation totalling $523,700 on the grant date. Through December 31, 2000, we recorded compensation expense totalling $276,337. In our previously reported results for the year ended December 31, 2000, we recorded minority interest on our balance sheet equal to the total value of the common stock and did not allocate any of Jabber.com's losses to the minority shareholders of Jabber.com. We have revised our accounting for the minority interest to reflect the minority share of Jabber's losses in an amount equal to the minority interest share of Jabber.com's net assets. This restatement and its impact on previously reported quarterly amounts are presented below. Unaudited Condensed Consolidated Statement of Operations:
Year Ended December 31, 2000 ---------------------------------------------- As Reported As Restated --------------------- ------------------- Loss from operations $(35,578,433) $(35,578,433) Interest income 731,808 731,808 Interest expense (605,638) (1,124,011) Loss on foreign currency transactions (130,357) (130,357) Loss on write-off of investment in common stock (448,172) (448,172 Loss on disposition of property and equipment (344,341) (344,341) ------------------- ------------------- Net loss from continuing operations (36,375,133) (36,893,506) Net loss from discontinued operations (203,372) (203,372) ------------------- ------------------- Net loss before minority interest (36,578,505) (37,096,878)
3 Minority interest in losses of subsidiary - 276,337 ------------------- ------------------- Net loss (36,578,405) (36,820,441) Preferred stock dividends (373,126) (373,126) Accretion of preferred stock to redemption value (11,660,000) (11,660,000) ------------------- ------------------- Net loss applicable to common stockholders $(48,611,631) $(48,853,567) =================== =================== Net loss per share, basic and diluted $(5.37) $(5.39) =================== =================== Weighted average shares outstanding, basic and diluted 9,060,437 9,060,437 =================== ===================
Three Months Ended March 31, 2000 -------------------------------------------- As Reported As Restated ------------------- ------------------- Loss from operations $ (5,346,648) $ (5,346,648) Interest income 161,887 161,887 Interest expense (174,990) (369,380) ------------------- ------------------- Net loss from continuing operations (5,359,751) (5,554,141) Net loss from discontinued operations (34,791) (34,791) ------------------- ------------------- Net loss (5,394,521) (5,588,932) Preferred stock dividends (373,126) (373,126) Accretion of preferred stock to redemption value (12,500,000) (12,500,000) ------------------- ------------------- Net loss applicable to common stockholders $ (18,267,668) $ (18,462,058) =================== =================== Net loss per share, basic and diluted $ (2.11) $ (2.13) =================== =================== Weighted average shares outstanding, basic and diluted 8,667,640 8,667,640 =================== ===================
Three Months Ended Six Months Ended June 30, 2000 June 30,2000 -------------------------------------------- -------------------------------------------- As Reported As Restated As Reported As Restated ------------------- ------------------- ------------------- ------------------- Loss from operations $ (7,118,958) $ (7,118,958) $ (12,465,584) $ (12,465,584) Interest income 283,486 283,486 445,373 445,373 Interest expense (172,961) (280,170) (347,951) (649,550) ------------------- ------------------- ------------------- ------------------- Net loss from continuing operations (7,008,433) (7,115,642) (12,368,162) (12,669,761) Net loss from discontinued operations (27,065) (27,065) (61,857) (61,857) ------------------- ------------------- ------------------- ------------------- Net loss (7,035,498) (7,142,707) (12,430,019) (12,731,618) Preferred stock dividends - - (373,126) (373,126) Accretion of preferred stock to redemption value - - (12,500,000) (12,500,000) ------------------- ------------------- ------------------- ------------------- Net loss applicable to common stockholders $ (7,035,498) $ $(7,142,707) $ (25,303,145) $ (25,604,744) =================== =================== =================== =================== Net loss per share, basic and diluted $ (0.77) $ (0.78) $ (2.85) $ (2.88) =================== =================== =================== =================== Weighted average shares outstanding, basic and diluted 9,112,440 9,112,440 8,888,848 8,888,848 =================== =================== =================== ===================
4
Three Months Ended Nine Months Ended September 30, 2000 September 30,2000 -------------------------------------------- -------------------------------------------- As Reported As Restated As Reported As Restated -------------- -------------- --------------- --------------- Loss from operations $ (6,749,146) $ (6,749,146) $ (19,215,645) $ (19,215,645) Interest income 70,761 70,761 508,096 508,096 Interest expense (109,571) (217,958) (457,523) (867,509) -------------- -------------- --------------- --------------- Net loss from continuing operations (7,136,037) (7,244,424) (19,505,115) (19,915,101) Net loss from discontinued operations (203,372) (203,372) (265,129) (265,129) -------------- -------------- --------------- --------------- Net loss (7,339,409) (7,447,796) (19,770,244) (20,180,230) Preferred stock dividends - - (373,126) (373,126) Accretion of preferred stock to redemption value - - (12,500,000) (12,500,000) -------------- -------------- --------------- --------------- Net loss applicable to common stockholders $ (7,339,409) $ (7,447,796) $ (32,643,370) $ (33,053,356) ============== ============== =============== =============== Net loss per share, basic and diluted $ (0.80) $ (0.81) $ (3.63) $ (3.67) ============== ============== =============== =============== Weighted average shares outstanding, basic and diluted 9,217,471 9,217,471 8,999,188 8,999,188 ============== ============== =============== ===============
Twelve Months Ended December 31, 2000 and 1999. Revenues: Components of net revenues from continuing operations and cost of revenues are as follows:
Year Ended December 31, --------------------------------------- 2000 1999 --------------- --------------- Net revenues: Licenses $ 2,155,990 $ 392,810 Services 1,858,403 682,877 Hardware and third party software sales - 117,509 --------------- --------------- Total net revenues 4,014,393 1,193,196 --------------- --------------- Cost of revenues: Cost of licenses 867,759 382,951 Cost of services 2,642,745 886,652 Cost of hardware and third party software - 94,155 --------------- --------------- Total cost of revenues 3,510,504 1,363,758 --------------- --------------- Gross margin $ 503,889 $ (170,562) =============== ===============
License revenues represent fees earned for granting customers licenses to use our software products which we began to sell in the second half of 1999. During the year ended December 31, 2000, we recognized $1,476,228 from the sale of initial software licenses and $679,762 from recurring license fees. The software license revenues in 2000 were primarily from a sale to VNU Publitec, a European yellow page publisher, and to Vetconnect, Inc., a vertical portal that provides Internet services for veterinarians, both of these contracts contained up-front license fees without a recurring revenue component. While our basic distribution model is to provide services to aggregators of small business who agree to pay us a portion of their future revenues, thereby providing us with the expectation of future revenues as our distribution partners sell our services to their small business customers, late in 5 1999 we began offering perpetual software licenses. In addition, during 2000, we began to license our AccelX software products under a hybrid model whereby our customers purchase a fixed number of licenses under a perpetual license arrangement and purchase additional licenses on a recurring revenue share basis. Software license fees may continue to represent a significant portion of license revenue for at least the next several quarters as these fees are generally significantly larger than are the initial fees paid by those distribution partners who agree to pay us a portion of their future revenues. We estimate that it will take those distribution partners up to one year or more after they commence distribution of our AccelX services to develop a significant base of small businesses using these services for the recurring revenues to become significant. Recurring license revenues in 2000 and 1999 were primarily a result of fees earned from Switchboard, Inc. in the form of quarterly guaranteed minimum payments required to maintain limited exclusivity for our Site Builder product for a segment of the United States market. Switchboard's exclusivity rights terminated on June 30, 2000, and Switchboard will not, therefore, pay quarterly guaranteed minimum payments in the future. Services revenues consist principally of revenue derived from professional services for the customization of our software to customer specifications, assisting our customers in configuring and integrating our software applications, hosting fees and fees for ongoing maintenance and support. Our net revenues from services were $1,858,403 for the year ended December 31, 2000, which represents an increase of 172.1% when compared with the year ended December 31, 1999. The increase is primarily due to an increase in professional service revenue of $805,121 we earned in connection with the integration of our software products with our customers; increases in revenue recognized from support and maintenance agreements of $240,251 for our AccelX software; and service revenues during 2000 totaling $305,875 for our Jabber.com subsidiary. Revenues from hardware and software include the resale of computer hardware and third party software to customers generally in connection with implementing our local directory products and services. During the year ended December 31, 1999, we sold equipment totaling $117,539 to customers with whom we had existing contracts to provide equipment. We do not anticipate significant revenues from hardware and equipment sales in future periods. During the fourth quarter of 2000, it became apparent that most large aggregators of small businesses were delaying software and technology purchase decisions due to uncertainties with regard to the domestic economy, a reluctance to make significant investments in new Internet-related products and services and management changes or reorganizations at many of these companies. These factors appear to be continuing to cause a slow down in purchase decisions by many of our potential domestic customers and may continue to do so for much of 2001. This could result in lower domestic sales of our products and services, particularly for our AccelX products and services, than contemplated in our business plan for the year. In addition, to the extent that purchase decisions are made, they may be for lower up-front license fees and professional services in order to reduce our customers' financial commitments and to put a greater emphasis on revenue sharing arrangements. This also could result in lower revenues in 2001 than contemplated in our business plan. Cost of Revenues: Cost of revenues as a percentage of net revenues from continuing operations was 87.4% for the year ended December 31, 2000, compared to 114.3% for the year ended December 31, 1999. Cost of license revenues - Cost of license revenues consists of compensation costs associated with personnel who assist our customers in delivering services to end users, third party content software license fees, and third party transaction fees. Cost of license revenues were $867,759 for the year ended December 31, 2000, or 40.2% of net license revenues, compared with $382,951, or 97.5% of net license revenues for the year ended December 31, 1999. The absolute dollar increase was primarily attributable to (i) costs of $151,625associated with the establishment of our client services infrastructure during the second half of 2000, primarily for compensation and contractor expenses, to assist our distribution partners in the sell-through of our products and services to small business; (ii) third party license fees we purchased for $90,000 for map publishing; and (iii) costs totalling $496,264 associated with delivering software enhancements for which we earn monthly license fees. Since our business plan is heavily dependent on 6 recurring revenue from our distribution partners, we will continue to incur costs in assisting our distribution partners in obtaining market penetration and sell-through of our products and services and these costs may be significant. Cost of service revenues - Cost of service revenues consists of compensation costs and consulting fees associated with performing custom programming, installation and integration services for our customers and support services as well as costs for hosting services which consist of costs to operate our network operating center. Cost of service revenues was $2,642,745 for the year ended December 31, 2000, or 142.2% of net service revenues, compared with $886,652, or 129.8% of net service revenues for the year ended December 31, 1999. The absolute dollar increase was attributable to (i) providing a higher volume of professional services to our customers, which accounted for $894,989 of the increase; and (ii) incurring $695,246 more costs associated with our network operating center, which we placed into service during the second quarter of 1999. Our network operating center has been built to accommodate our current customer base as well as significant additional projected growth. Consequently, the current cost to operate the network operating center is high compared to current revenues and will remain relatively high for at least the next several quarters as we continue to execute on our business plan. We also anticipate that cost of service revenues will increase in absolute dollars as well as a percentage of service revenues for at least the next several quarters as we build the support infrastructure for our Jabber.com subsidiary. Cost of hardware and third party software revenues - Cost of hardware and software revenues consists of computer and third party software purchased for resale to cable operators. Due to the change in our business model, equipment sales are not expected to be significant in future periods. Operating Expenses: Sales and marketing expenses consist primarily of employee compensation, cost of travel, advertising and public relations, trade show expenses, and costs of marketing materials. Sales and marketing expenses were $3,039,673 for the year ended December 31, 2000, or 75.7% of net revenues compared with $1,726,004, or 144.7% of net revenues for the year ended December 31, 1999. These expenses included $468,972 in 2000, for our Jabber.com subsidiary. The increase in absolute dollars was primarily attributable to (i) higher employee compensation costs totalling $395,172 as a result of increased hiring in 2000; (ii) increased commission expense of $227,762 as a result of increased revenues; (iii) an increase in employee recruiting fees totalling $309,407; (iv) an increase in travel expenses totalling $105,168 primarily associated with opening European markets and a general increase in airfares during the second half of 2000; and (v) an $319,221 increase in fees paid to consultants for market research and costs related to the outsourcing of public relations and the redesign of our web site. We expect sales and marketing expenses to increase on an absolute dollar basis in future periods but decrease as a percentage of net revenues as our revenues increase from current levels as we continue to market our products and services. Product development expenses consist primarily of employee compensation and programming fees relating to the development and enhancement of the features and functionality of our software products and services. During 2000 and 1999, all product development costs were expensed as incurred. Product development expenses were $5,376,972 for the year ended December 31, 2000, or 133.9% of net revenues compared with $2,891,569 or 242.3% of net revenues for the year ended December 31, 1999. Product development expenses in 2000 include the development of our AccelX software products and our Jabber.com instant messaging products, which we began developing in the second quarter of 2000. During the year ended December 31, 2000, we incurred expenses totaling $3,960,382 developing our AccelX products and $1,416,590 developing our Jabber products. In addition to the costs we incurred developing our Jabber.com products, the increase in absolute dollars was due primarily to (i) higher employee compensation costs totalling $2,090,295 as a result of hiring additional employees in 2000; (ii) an increase in contract labor totalling $530,942 to augment our development team; and (iii) an increase in employee recruiting costs totalling $137,499. We believe that significant investments in product development are critical to attaining our strategic objectives and, as a result, we expect product development expenses to increase in future periods. 7 General and administrative expenses consist primarily of employee compensation, consulting expenses, fees for professional services, and non-cash expense related to stock and warrants issued for services. General and administrative expenses were $10,341,650 for the year ended December 31, 2000, or 257.6% of net revenues compared with $6,311,544, or 529.0% of net revenues for the year ended December 31, 1999. These expenses include $4,682,641 for 2000, for our Jabber.com subsidiary. The increase in absolute dollars was primarily attributable to (i) consulting fees totaling $2.8 million, incurred with Diamond Technology Partners Inc. in connection with the development of our business plan for our Jabber.com subsidiary, of which $680,000 will be paid in securities of Jabber.com, Inc. on the date of the closing of the first third- party equity financing of Jabber.com; (ii) higher employee compensation costs totalling $360,512 primarily as a result of an increase in the number of employees in 2000; (iii) increased travel expenses totalling $249,912 primarily as a result of more international travel and a general increase in airfares during the second half of 2000 ; (iv) severance costs totalling $281,912 associated with employee terminations within our operations and product development areas; and (v) increased office rent and related facility costs totalling $183,905 as we moved to a new office location during the second quarter of 2000. In future periods, we expect general and administrative expenses to decrease as a percentage of revenues as our revenues increase. Customer acquisition costs consist of the value of warrants to purchase our common stock we issued to customers in connection with customer contracts for our products and services. On June 30, 1999, we issued a warrant to purchase 150,000 shares of our common stock to Switchboard, Inc. in connection with the license agreement we entered into with them on the same date. The warrant vested on the date of issuance and there was no performance obligation associated with the issuance of the warrant. In 1998, we commenced a warrant issuance program, which was terminated in 1999, related to our broadband cable business in which we issued warrants for an aggregate of 11,667 shares to two cable operators during 1999. There were no performance obligations associated with the issuance of these warrants. Because these agreements did not contain minimum guaranteed revenues or performance obligations, we did not have any past transactions with these customers, and due to the start-up nature of these services and other uncertainties regarding these arrangements, we recorded expense for customer acquisition costs on the date of issuance totalling $941,684 for the years ended December 31 1999, or 78.9% of 1999 net revenues. As a matter of general business practice, we do not enter into transactions with our customers in which we incur customer acquisition costs. Depreciation and amortization was $9,155,123 for the year ended December 31, 2000, compared to $2,902,523 for the year ended December 31, 1999. We recorded more depreciation expense in 2000 as a result of an increase in fixed assets primarily from construction of our network operating center, which was placed in service in the second quarter of 1999, and computer hardware and third party software to support our AccelX services and computer equipment to support our product development team. We also amortized the intangible assets and goodwill we acquired in the Durand Communications, NetIgnite, and Update Systems acquisitions and recorded $8,347,207 and $2,523,351 of amortization expense for the years ended December 31, 2000 and 1999, respectively. Because our business has never been profitable, and due to the other risks and uncertainties discussed herein, it is possible that an analysis of these long-lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. If we determine that these long- lived assets are impaired, we would record a charge to earnings, which could be as much as the remaining net book value of the assets. During the year ended December 31, 2000, we recorded an impairment loss in our AccelX business segment totaling $8,168,904 from our assessment of the impairment of assets we purchased in connection with our acquisitions of Durand Communications and Update Systems. The impaired assets consisted of developed technology and goodwill as summarized in the following table:
Durand Update Total -------------- ------------- ------------ Developed technology $ 3,261,751 $ - $ 3,261,751 Goodwill 1,471,346 3,435,807 4,907,153 -------------- ------------- ------------ Total impairment loss $ 4,733,097 $ 3,435,807 $ 8,168,904 ============== ============= ============
8 Durand was acquired in 1999. The primary asset that Webb acquired in this transaction was the group communications software developed by Durand. Elements of the Durand technology have been integrated with our Jabber.com instant messaging software. NetIgnite was acquired in 1999 for its web site publishing technology, which has been integrated into our AccelX product line. Update Systems was acquired during the first week of 2001. Update Systems had developed a notification product for small businesses which we believed could be easily integrated into our AccelX product line and, pending this integration, sold as a stand-alone product. Based on a review of the acquired technologies in combination with our evolving business plan, we determined that only a portion of such acquired technologies are utilized in our current products. Further, substantially less revenue had been recorded from products incorporating the acquired technologies than was originally expected and our current estimated revenues projected to be earned from the purchased technologies are also less than previously forecasted. During the fourth quarter of 2000, it became apparent that due to an overall economic slow down and its impact on our customers, coupled with substantial volatility in the capital and business environment and delays in purchasing decisions for new Internet-related products and services by large aggregators of small businesses, that the carrying amount of the acquired intangibles should be assessed for impairment. As a result, we assessed impairment by comparing the estimated undiscounted net cash flows expected to be generated from our current product offerings which use the purchased technologies to their remaining net book values of the assets. Our analysis showed that such assets were in fact impaired. Accordingly, the impairment charge was recorded based upon the difference between the carrying amount and the estimated fair value of the assets, determined using the net present value of the estimated future cash flows. We will continue to evaluate the carrying value of the remaining intangible assets for possible impairment. Such a review may indicate further impairment that would require us to record additional losses in future periods and those losses could be substantial. Other Income and Expenses: Interest income was $731,808 for the year ended December 31, 2000, compared to $225,712 for the year ended December 31, 1999. We earn interest by investing surplus cash in highly liquid investment funds or AAA or similarly rated commercial paper. Interest expense was $1,124,011 for the year ended December 31, 2000, compared to $2,352,062 for the year ended December 31, 1999. We recorded the following interest expense related to the 10% convertible note payable:
Year Ended December 31, --------------------------------------------- 2000 1999 ------------------- ------------------- (As Restated - See Note 23 to Notes to Consolidated Financial Statements) Interest paid with principal-in-kind notes $ 154,110 $ - Amortization of discount 198,744 124,615 Amortization of financing costs 591,075 45,142 Beneficial conversion feature - 1,967,522 --------------- -------------- Total non cash interest expense 943,929 2,137,279 Interest expense payable in cash 63,014 173,973 --------------- -------------- Total 10% note payable interest expense $ 1,006,943 $ 2,311,252 =============== ==============
9 Loss on disposition of property and equipment totalled $344,341 for the year ended December 31, 2000. This resulted primarily from the relocation of our offices and the write off of unamortized leasehold improvements, including the cost of our computer center build-out, and disposed of existing office furnishings and equipment. Discontinued Operations: On September 12, 2000, we sold our e-banking segment to a privately held company for consideration valued at $487,873, which was approximately the same as the net book value of the net assets of this segment. We received $39,700 in cash and 181,176 shares of the purchaser's common stock recorded at a value of approximately $2.47 per share. We estimated the fair value of the stock based on our assessment of the buyers business prospects and the value of the assets we sold to them. At the time of the sale, which closed in September 2000, the purchaser had in place temporary financing and had initiated efforts to obtain permanent financing. Due to the specific circumstances surrounding the purchaser and the overall valuation environment for early-stage technology companies at the end of 2000, we reviewed the recorded value of these shares and determined that their value was likely to be permanently impaired. The additional funding did not materialize and in February 2001, the purchaser closed its business. As a result, we determined that the fair market value as of December 31, 2000, was zero, and that the decline in value was not temporary. Accordingly, we recorded a charge to earnings totaling $448,172 for the year ended December 31, 2000. The sale of this segment is reflected as a sale of discontinued operation in our consolidated financial statements. Accordingly, the revenues, costs and expenses of these discontinued operations have been excluded from the respective captions in the Consolidated Statement of Operations and have been reported as "Loss from discontinued operations, net of taxes," for all years presented. Summarized financial information for the discontinued operations is as follows (Note: 2000 amounts include activity through September 12, 2000 only):
Years Ended December 31, ----------------------------------------------- 2000 1999 -------------------- ------------------- Net revenues $ 73,092 $ 751,087 Cost of revenues and operating expenses 276,364 830,863 Net loss from discontinued operations (203,272) (79,776)
10 Minority Interest: Minority interest arises from the allocation of losses in our Jabber.com subsidiary to its minority stockholders. During 2000, we granted Jabber.com common stock to three Company officers and other third parties for services rendered and to be rendered which vest over time, from the date of issuance through September 2002. We allocate a portion of Jabber.com's net losses to the minority stockholders to the extent of their share in net assets of Jabber. For the year ended December 31, 2000, we allocated $276,337 of Jabber.com's losses to its minority stockholders. If, in future periods, Jabber.com sell stock to parties other than Webb, we will allocate additional Jabber.com losses to minority stockholders. Net Loss Applicable to Common Stockholders: Net loss allocable to common stockholders was $48,853,667 for the year ended December 31, 2000, compared to $21,866,012 for the year ended December 31, 1999. We recorded non-cash expenses for the following items:
Year Ended December 31, --------------------------------------------- 2000 1999 ------------------- ------------------- (As Restated - See Note 23 to Notes to Consolidated Financial Statements) Amortization of intangible assets and goodwill $ 8,347,207 $ 2,523,351 Impairment loss 8,168,904 - Stock and warrants issued for services 1,478,232 1,814,682 Customer acquisition costs - 941,684 Amortization of discount and placement fees to interest expense and non-cash interest related to the 10% convertible note payable 943,929 2,137,279 Write-of of investment in common stock 448,172 - Preferred stock dividends 373,126 272,663 Accretion of preferred stock 11,660,000 4,316,254 ---------------- ---------------- Total $31,419,570 $12,005,913 ================ ================
The increase in losses reflect losses from Jabber.com totaling $7,600,756 for the year ended December 31, 2000, and expenses in the sales and marketing, product development, and general and administrative areas that have increased at a faster rate than revenues. This is due to the time-lag associated with product development and market introduction as well as the long sales cycle for most of our products and services. We expect to continue to experience increased operating expenses during 2001, from Jabber.com and as we continue to develop new product offerings and the infrastructure required to support our anticipated growth. We expect to report operating and net losses for 2001 and for one or more years thereafter. 11 Twelve Months Ended December 31, 1999 and 1998. Revenues: Components of net revenues from continuing operations and cost of revenues are as follows:
Year Ended December 31, ----------------------------------------------- 1999 1998 ------------------- -------------------- Net revenues: Licenses $ 392,810 $ 97,892 Services 682,877 160,673 Hardware and software 117,509 1,103,717 ------------------- -------------------- Total net revenues 1,193,196 1,362,282 ------------------- -------------------- Cost of revenues Cost licenses 382,951 215,142 Cost of services 886,652 65,315 Cost of hardware and software 94,155 905,234 ------------------- -------------------- Total cost of revenues 1,363,758 1,185,691 ------------------- -------------------- Gross margin $ (170,562) $ 176,591 =================== ====================
License revenues represent fees earned for granting customers licenses to use our software products and services and are calculated on the usage of our products based on a fixed amount or on a per consumer basis or as a portion of revenues our customers earn from consumers. Our net revenues from software license fees were $392,810 for the year ended December 31, 1999, which represents an increase of 301.3% when compared with the year ended December 31, 1998. The increase is primarily due to fees earned from Switchboard, Inc. in the form of quarterly guaranteed minimum revenue and from a 192% increase in revenues from Re/Max International, Inc. Services revenues consists principally of revenue derived from professional services for the customization of our software to customer specifications, assisting our customers in configuring and integrating our software applications, network engineering fees and hosting fees as well as fees for ongoing maintenance, which consists of unspecified product upgrades and enhancements on a when-and-if-available basis. Our net revenues from services were $682,877 for the year ended December 31, 1999, which represents an increase of 325.0% when compared with the year ended December 31, 1998. The increase is primarily due to fees we earned for developing and integrating our local directory software for Switchboard, Inc. In addition, during July 1999, we sold two customer contracts to an unrelated third party, including related computer hardware, for approximately $270,000. We provided services and equipment under the terms of the original contracts enabling our customers to provide Internet access to their end users. We recorded $138,504 of service revenue for the year ended December 31, 1999 related to providing services to the purchaser of these two contracts. We recognized revenue from these contracts totaling approximately $6,000 for the year ended December 31, 1999. Revenues from hardware and software include the resale of computer hardware and third party software to customers generally in connection with implementing our local directory/enterprise products and services. During the second quarter of 1998, we changed our pricing structure whereby we supplied any required equipment and the products and services. Consequently the customer was not required to pay any significant fees upon the delivery of such items. Our net revenues from the resale of hardware and software was $117,539 for the year ended December 31, 1999 compared to $1,103,717 for the year ended December 31, 1998. During 1999, we sold equipment to customers with whom we had existing contracts to provide equipment. Cost of Revenues: Cost of revenues as a percentage of net revenues from continuing operations was 114.3% for the year ended December 31, 1999 compared to 87.0% for the year ended December 31, 1998. 12 License revenues - Cost of license revenues consists of compensation costs associated with assisting our customers in delivering our services to end users, third party content software license fees, and third party transaction fees. Cost of license revenues were $382,951 for the year ended December 31, 1999, or 97.5% of net license revenues, as compared to $215,142 for the year ended December 31, 1998, or 219.8% of 1998 net license revenues. The absolute dollar increase was primarily attributable to the amortization of a one-year third party software license we purchased to integrate directory functionality into our products. Service revenues - Cost of service revenues consists of compensation costs and consulting fees associated with performing custom programming, installation and integration services for our customers and support services as well as costs for hosting services which consist of costs to operate our network operating center. Cost of service revenues were $886,652 for the year ended December 31, 1999, or 129.8% of net service revenues, as compared to $65,315 for the year ended December 31, 1998, or 40.7% of 1998 net service revenues. The increases in costs were due to providing professional services for two new customers at lower margins as the contracts specify future revenue sharing arrangements or were entered into to establish strategic alliances. We also incurred costs to operate our network operating center, which we began operating during the second quarter of 1999, including costs associated with delivering Internet access and content to the customers of our cable operator distribution partners. We constructed the network operating center to accommodate our current customer base, our contract backlog and our projected future growth. Consequently, during 1999, the cost to operate the network operating center out paced our current revenues resulting in a lower gross margin. Hardware and software revenues - Cost of hardware and software revenues consists of computer and third-party software purchased for resale to distribution partners. Cost of hardware and software revenue was 80.1% of hardware and software net revenues for the year ended December 31, 1999 compared to 82.0% of hardware and software net revenues for the year ended December 31, 1998. Cost of hardware and software revenues as a percentage of net revenues decreased slightly between periods because we sold equipment to existing customers at somewhat lower margins during 1998. Operating Expenses: Sales and marketing expenses consist primarily of employee compensation, advertising, trade show expenses, and costs of marketing materials. Sales and marketing expenses were $1,726,004 for the year ended December 31, 1999, or 144.7% of net revenues as compared to $2,479,029, or 182.0% of net revenues for the year ended December 31, 1998. The decrease in absolute dollars was primarily attributable to (i) a net decrease of six employees; (ii) the phase out of our international marketing efforts; and (iii) a decrease in advertising dollars as a result of our focus on distribution partners (rather than on consumers). These decreases were partially off-set by an increase in trade show expenses, and new product support materials for our local directory/enterprise products. Product development expenses consist primarily of employee compensation and programming fees relating to the development and enhancement of the features and functionality of our AccelX services. Product development expenses were $2,891,569 for the year ended December 31, 1999, or 242.3% of net revenues as compared to $1,264,287, or 92.8% of net revenues for the year ended December 13, 1998. During 1999, all product development costs were expensed as incurred. We capitalized $281,775 of development costs during 1998, which were written off to depreciation and amortization expense during 1998. The increase in absolute dollars was due primarily to (i) an increase in technology personnel from 12 to 31 and an increase in contract labor to support the continued development of our products; and (ii) an increase in third party software maintenance and support costs. General and administrative expenses consist primarily of employee compensation, consulting expenses, fees for professional services, and the non- cash expense of stock and warrants issued for services. General and administrative expenses were $6,311,544 for the year ended December 31, 1999, or 529.0% of net revenues as compared to $5,668,795, or 416.1% of net revenues for the year ended December 31, 1998. The increase in absolute dollars was primarily attributable to (i) an increase in compensation costs; (ii) increases in legal and 13 accounting fees generally associated with regulatory filings; (iii) increases in office rent expense; (iv) increases in investor relation expenses; and (v) costs incurred associated with operating the Durand Communications California office through November 1999. These increases were partially offset by a decrease in non-cash expenses for stock and options we issued for services and a decrease in fees we paid to consultants. Customer acquisition costs consist of the value of warrants to purchase our common stock we issued to customers in connection with customer contracts for our products and services. We expense the value of warrants on the date of issuance unless the related contract specifies minimum guaranteed revenues. Customer acquisition costs were $941,684 for the year ended December 31, 1999, or 78.9% of net revenues as compared to $560,824, or 41.2% of net revenues for the year ended December 31, 1998. During 1999, we issued warrants to three customers to purchase an aggregate of 161,667 shares of our common stock. Depreciation and amortization was $2,902,523 for the year ended December 31, 1999, compared to $650,202 for the year ended December 31, 1998, which included approximately $403,000 of capitalized development costs that we wrote- off during 1998. We recorded more depreciation expense in 1999 as a result of an increase in fixed assets primarily from construction of our network operating center and computer hardware and third party software to support the launch of our AccelX services, two new e-banking customers, and computer equipment to support our product development team. We also began amortizing the intangible assets and goodwill we acquired in the Durand Communications and NetIgnite acquisitions and recorded $2,523,351 of amortization expense in 1999. Other Income and Expenses: Interest income was $225,712 for the year ended December 31, 1999, compared to $146,830 for the year ended December 31, 1998. During 1999, we also recorded $22,050 of interest income from our note receivable from Durand Communications. Interest expense was $2,352,062 for the year ended December 31, 1999, compared to $7,024 for the year ended December 31, 1998. During 1999, we recorded $2,311,252 of interest expense related to the 10% convertible note payable we issued in August 1999, including (i) $173,973 of cash interest expense and (ii) non-cash charges of $2,092,137 related to amortization of the beneficial conversion feature and the discount recorded for the issuance of a common stock purchase warrant; and (iii) $45,142 related to the amortization of financing fees. Discontinued Operations: In September 2000, we sold our e-banking business segment to a privately held company. Consequently, the sale of this segment is reflected as a sale of discontinued operation in our consolidated financial statements. Accordingly, the revenues, costs and expenses of these discontinued operations have been excluded from the respective captions in the Consolidated Statement of Operations and have been reported as "Loss from discontinued operations, net of taxes," for all years presented as summarized in the following table: Year Ended December 31, ---------------------------------- 1999 1998 --------------- -------------- Net revenues $751,087 $ 227,098 Cost of revenues and operating expenses 830,863 536,621 Loss from operations (79,776) (309,523) Net Loss Applicable to Common Stockholders: Net losses allocable to common stockholders were $21,866,012 for the year ended December 31, 1999, compared to $15,762,372 for the year ended December 31, 1998. We recorded non-cash expenses for the following items: 14
Year Ended December 31, --------------------------------------------- 1999 1998 ------------------- ------------------- SAmortization of intangible assets and goodwill $ 2,523,351 $ - Customer acquisition costs 941,684 560,824 Amortization of beneficial conversion, discount and placement fees to interest expense related to the 10% convertible note payable 2,137,279 - Stock and warrants issued for services 1,814,082 2,309,804 Preferred stock dividends 272,663 329,120 Accretion of preferred stock 4,316,254 4,816,989 ------------------- ------------------- Total $12,005,913 $8,016,737 =================== ===================
The increase in losses reflect expenses in sales and marketing, product development, and general and administrative areas that have increased at a faster rate than revenues. This is due to the time lag associated with product development and market introduction as well as the long sales cycle for most of our products and services. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, we had cash and cash equivalents of $4,856,686 and working capital of $2,880,961. We financed our operations and capital expenditures and other investing activities during 2000 primarily through the sale of securities (See Notes 8 and 10 of Notes to Consolidated Financial Statements for information regarding these sales of securities). We used $15,633,783 in cash to fund our operations for the year ended December 31, 2000, compared to $8,603,881 for the year ended December 31, 1999. The increase in net cash used resulted primarily from (i) cash used by the operations of Jabber.com which totaled approximately $5.2 million, (ii) an increase in costs paid for continued development of our products and services; (iii) increased direct costs and support costs associated with increased head count; (iv) payment of 1999 performance bonuses in the first quarter of 2000; and (v) costs incurred in 2000 associated with opening European markets. We used an additional $2,315,784 in cash for investing activities, including $2,138,370 for purchases of property and equipment, during the year ended December 31, 2000, compared to $2,388,592 during the year ended December 31, 1999. In order to maintain operations and business and product development efforts at planned levels for both our AccelX and Jabber.com businesses, we will need to raise additional capital by the middle of fiscal 2001. The timing of the need for this capital has been accelerated due to our continuing to internally fund the development of our Jabber.com business. We believe that our cash and cash equivalents and working capital at December 31, 2000, plus the net proceeds of the offering of $2.5 million of preferred stock that we completed during February 2001, will be adequate to sustain our operations to June 2001. In addition to the remaining $2.5 million expected to be raised pursuant to the preferred stock financing, we are in active discussions with strategic and institutional investors for additional funding. However, the conditions required to be satisfied for the preferred stock investor to be obligated to purchase the remaining $2.5 million of preferred stock may not be met and we have no commitments for any additional funding. There can be no assurances that the discussions for additional investments will be successful, or if successful, that the terms of any additional investments will be acceptable to us. If we are not successful in obtaining funding in appropriate amounts or at appropriate terms, we would consider significant reductions in our operations and the sale of all or a portion of our interest in our Jabber.com subsidiary. Any such reduction in either our operations or business and development efforts or the sale of our interest in Jabber.com could have a material adverse affect on our operating results and financial condition. In its report accompanying the 15 audited financial statements, Arthur Andersen LLP expressed substantial doubt about our ability to continue as a going concern. EXPOSURE TO FOREIGN CURRENCY RISK During 2000, we expanded our operations to include customers located in Europe and we opened an office in Amsterdam. As a result, we are subject to exposure resulting from changes in the Euro (our subsidiary's functional currency) and other currencies related to the United States dollar. Further, from time to time, we may agree to accept a receivable denominated in currencies other than our functional currencies (i.e., the United States Dollar and the Euro). During 2000, we recorded $130,357 of transaction loss related to exchange rate changes between the Euro and the U.S. Dollar on a receivable from a customer denominated in the Euro. 16 Item 7. FINANCIAL STATEMENTS WEBB INTERACTIVE SERVICES, INC. ------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
Page ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2000 and 1999 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000 and 1999 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000 and 1999 F-6-F-7 Notes to Consolidated Financial Statements F-8
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Webb Interactive Services, Inc.: We have audited the accompanying consolidated balance sheets of WEBB INTERACTIVE SERVICES, INC. (a Colorado corporation), and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Webb Interactive Services, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, among other factors, the Company has incurred significant and recurring losses from operations and its operations have used substantial amounts of cash. Such losses are expected to continue in the near future. To fund such operating losses, the Company will require additional capital and the availability of such capital is uncertain. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Denver, Colorado March 1, 2001. F-2 WEBB INTERACTIVE SERVICES, INC. CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 2000 1999 ------------- ------------- (As Restated - See Note 23) ASSETS Current assets: Cash and cash equivalents $ 4,856,686 $ 4,164,371 Restricted cash 525,000 - Accounts receivable, net (Note 2) 469,639 76,806 Prepaid expenses 301,657 399,217 Notes receivable from Company officers (Note 3) 198,444 - Net current assets of discontinued operations (Note 15) - 30,326 Short-term deposits 370,522 444,545 ------------ ------------ Total current assets 6,721,948 5,115,265 Property and equipment, net (Note 4) 2,830,132 1,668,599 Intangible assets, net of accumulated amortization of $10,870,312 and $2,523,351, respectively (Notes 13 and 14) 6,001,667 12,503,047 Net long-term assets of discontinued operations (Note 15) - 683,890 Deferred financing costs 815,301 2,649,517 Other assets 51,689 4,216 ------------ ------------- Total assets $ 16,420,737 $ 22,624,534 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital leases payable (Note 5) $ 227,876 $ 108,525 Accounts payable and accrued liabilities 2,142,731 771,417 Accrued salaries and payroll taxes payable 1,232,844 936,849 Accrued interest payable 63,014 126,028 Customer deposits and deferred revenue 174,522 44,882 Net current liabilities of discontinued operations (Note 15) - 375,512 ------------ ----------- Total current liabilities 3,840,987 2,363,213 Capital leases payable (Note 5) - 115,493 10% convertible note payable, net of discount of $295,676 and $947,710, respectively (Note 7) 2,358,434 4,052,290 Commitments and contingencies Stockholders' equity Preferred stock, no par value, 5,000,000 shares authorized: Series B-2 convertible preferred stock, 978 and none shares issued and outstanding, respectively 912,286 - 10% redeemable, convertible preferred stock, 10% cumulative return; none and 85,000 shares issued and outstanding, respectively, including dividends payable - 1,020,295 of none and $170,295, respectively Common stock, no par value, 60,000,000 shares authorized, 10,354,473 and 7,830,028 shares issued and outstanding, respectively 85,506,004 49,513,769 Warrants and options 15,450,237 8,612,322 Deferred compensation (154,774) (412,707) Accumulated other comprehensive income 1,371 - Accumulated deficit (91,493,808) (42,640,141) ------------ ------------ Total stockholders' equity 10,221,316 16,093,538 ------------ ------------ Total liabilities and stockholders' equity $ 16,420,737 $ 22,624,534 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-3 WEBB INTERACTIVE SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------ 2000 1999 ------------ ------------ (As Restated - See Note 23) Net revenues $ 4,014,393 $ 1,193,196 Cost of revenues 3,510,504 1,363,758 ------------ ------------ Gross margin 503,889 (170,562) ------------ ------------ Operating expenses: Sales and marketing 3,039,673 1,726,004 Product development 5,376,972 2,891,569 General and administrative 10,341,650 6,311,544 Customer acquisition costs - 941,684 Depreciation and amortization 9,155,123 2,902,523 Impairment loss (Note 14) 8,168,904 - ------------ ------------ 36,082,322 14,773,324 ------------ ------------ Loss from operations (37,096,878) (14,943,886) Interest income 731,808 225,712 Interest expense (1,124,011) (2,352,062) Loss on foreign currency transactions (130,357) - Loss on write-off of investment in common stock (448,172) - Loss on disposition of property and equipment (344,341) - Equity in loss of subsidiary - (127,083) ------------ ------------ Net loss from continuing operations (36,893,506) (17,197,319) Loss from discontinued operations (Note 15) (203,372) (79,776) ------------ ------------ Net loss before minority interest (37,096,878) (17,277,095) Minority interest in losses of subsidiary 276,337 - ------------ ------------ Net loss (36,820,541) (17,277,095) Preferred stock dividends (Note 8) (373,126) (272,663) Accretion of preferred stock to stated value (Note 8) (11,660,000) (3,157,691) Accretion of preferred stock for beneficial conversion feature in excess of stated value (Note 8) - (1,158,563) ------------ ------------ Net loss applicable to common stockholders $(48,853,667) $(21,866,012) ============ ============ Net loss applicable to common stockholders from continuing operations per share, basic and diluted $ (5.37) $ (3.30) ============ ============ Net loss applicable to common stockholders per share from discontinued operations, basic and diluted $ (0.02) $ (0.01) ============ ============ Net loss applicable to common stockholders per share, basic and $ (5.39) $ (3.31) diluted ============ ============ Weighted average shares outstanding, basic and diluted 9,060,437 6,610,836 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-4 WEBB INTERACTIVE SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 (As Restated - See Note 23) AND 1999
Preferred Stock Common Stock Warrants and ------------------------ ------------------------ Shares Amount Shares Amount Options ---------- ------------ ---------- ------------ ------------ Balances, December 31, 1998 246,400 $ 4,101,336 4,642,888 $16,410,300 $ 2,281,832 Stock issued in private placement of preferred stock 5,000 5,000,000 - - - Offering costs - (384,500) - - - Beneficial conversion feature of preferred stock - (3,931,754) - 3,931,754 - Preferred stock dividends - 125,638 - - - Common stock and common stock warrants issued in connection with DCI merger - - 947,626 9,239,358 2,158,837 Common stock issued in connection with NI merger - - 71,429 984,400 - Preferred stock and dividends converted to common stock (166,400) (8,206,679) 904,981 8,206,679 - Preferred stock beneficial conversion feature on dividends paid through the issuance of common stock - - - 147,025 - Convertible notes payable converted to common stock - - 82,402 894,879 - Exercises of stock options and warrants - - 1,144,205 7,197,462 (1,846,830) 10% note payable beneficial conversion feature - - - 1,967,522 - Common stock warrant issued in connection with 10% note payable - - - - 3,383,800 Accretion of preferred stock to stated value - 3,157,691 - - - Accretion of preferred stock for beneficial conversion feature in excess of stated value - 1,158,563 - - - Stock and stock options issued for services and to customers - - 36,497 534,390 2,634,683 Deferred compensation - - - - - Net loss - - - - - Comprehensive Income - - - - - ---------- ------------ ---------- ------------ ------------ Balances, December 31, 1999 85,000 1,020,295 7,830,028 49,513,769 8,612,322 Series B-2 preferred stock issued in private placement 12,500 12,500,000 - - - Cash offering costs - (840,000) - - - Value of warrants issued for common stock - (8,622,986) - - 8,622,986 Beneficial conversion feature of preferred stock - (3,037,014) - 3,037,014 - Accretion of preferred stock to stated value - 11,660,000 - - - Preferred stock dividends - 2,733 - - - Beneficial conversion feature on 10% preferred stock dividends converted to common stock - - - 370,393 - Conversion of preferred stock and dividends to common stock (96,522) (11,770,742) 1,231,438 11,770,742 - Conversion of 10% note payable to common stock - - 248,262 803,569 - Common stock and common stock warrants issued in connection with Update acquisition - - 278,411 8,630,741 1,364,676 Exercise of warrants and options - - 751,334 11,132,885 (3,892,442) Stock and stock options issued for services - - 15,000 246,891 519,554 Deferred compensation - - - - 223,141 Other comprehensive income - - - - - Net loss - - - - - Comprehensive income - - - - - ---------- ------------ ---------- ----------- ------------ Balances, December 31, 2000 978 $ 912,286 10,354,473 $85,506,004 $ 15,450,237 ========== ============ ========== =========== ============ Accumulated Other Deferred Accumulated Comprehensive Comprehensive Stockholders Compensation Deficit Income Income Equity -------------- ------------- ------------- ------------ ------------ Balances, December 31, 1998 $ - $ (20,774,129) $ - $ - $ 2,019,339 Stock issued in private placement of preferred stock - - - - 5,000,000 Offering costs - - - - (384,500) Beneficial conversion feature of preferred stock - - - - - Preferred stock dividends - (125,638) - - - Common stock and common stock warrants issued in connection with DCI merger - - - - 11,398,195 Common stock issued in connection with NI merger - - - - 984,400 Preferred stock and dividends converted to common stock - - - - - Preferred stock beneficial conversion feature on dividends paid through the issuance of common stock - (147,025) - - - Convertible notes payable converted to common stock - - - - 894,879 Exercises of stock options and warrants - - - - 5,350,632 10% note payable beneficial conversion feature - - - - 1,967,522 Common stock warrant issued in connection with 10% note payable - - - - 3,383,800 Accretion of preferred stock to stated value - (3,157,691) - - - Accretion of preferred stock for beneficial conversion feature in excess of stated value - (1,158,563) - - - Stock and stock options issued for services and to customers - - - - 3,169,073 Deferred compensation (412,707) - - - (412,707) Net loss - (17,277,095) - (17,277,095) (17,277,095) ------------ Comprehensive Income - - - (17,277,095) - ============ -------------- -------------- ------------- ------------- Balances, December 31, 1999 (412,707) (42,640,141) - - 16,093,538 Series B-2 preferred stock issued in private placement - - - - 12,500,000 Cash offering costs - - - - (840,000) Value of warrants issued for common stock - - - - - Beneficial conversion feature of preferred stock - - - - - Accretion of preferred stock to stated value - (11,660,000) - - - Preferred stock dividends - (2,733) - - - Beneficial conversion feature on 10% preferred stock dividends converted to common stock - (370,393) - - - Conversion of preferred stock and dividends to common stock - - - - - Conversion of 10% note payable to common stock - - - - 803,569 Common stock and common stock warrants issued in connection with Update acquisition - - - - 9,995,417 Exercise of warrants and options - - - - 7,240,443 Stock and stock options issued for services 711,787 - - - 1,478,232 Deferred compensation (453,854) - - - (230,713) Other comprehensive income - - 1,371 1,371 1,371 Net loss - (36,820,541) - (36,820,541) (36,820,541) ------------ Comprehensive income - - - $(36,819,170) - -------------- -------------- ------------- ============ ------------- Balances, December 31, 2000 (As Restated - See Note 23) $ (154,774) $ (91,493,808) $ 1,371 $ 10,221,316 ============== ============== ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-5 WEBB INTERACTIVE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------- 2000 1999 -------------- -------------- (As Restated - See Note 23) Cash flows from operating activities: Net loss $(36,820,541) $(17,277,095) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 9,506,483 3,211,532 Impairment loss 8,168,904 - Minority interest in losses of subsidiary (276,337) - Stock and stock options issued for services and to customers 1,478,232 2,756,366 Loss on sale and disposal of property and equipment 344,341 249,468 Notes payable issued for interest on 10% convertible note payable 154,110 - Bad debt expense 147,882 - Write-off of investment in common stock 448,172 - Accrued interest income on notes receivable (2,617) - Provision for excess and obsolete inventory - 55,126 Accrued interest income on advances to DCI - (46,379) Reduction in note receivable for services received from DCI - 368,643 Loss from investment in subsidiary - 127,083 Interest expense on 10% convertible note from beneficial conversion feature - 1,967,522 Amortization of 10% convertible note payable discount 198,744 124,615 Amortization of 10% convertible note payable financing costs 591,075 45,142 Changes in operating assets and liabilities: Increase in restricted cash (525,000) - (Increase) decrease in accounts receivable (510,391) 41,458 (Increase) decrease in prepaid expenses 97,560 (302,083) Decrease (Increase) in short-term deposits and other assets 26,550 (342,985) Increase (decrease) in accounts payable and accrued liabilities 1,281,917 (490,049) Increase in accrued salaries and payroll taxes payable 173,506 690,832 (Decrease) increase in accrued interest payable (63,014) 107,333 (Decrease) increase in customer deposits and deferred revenue (53,360) 109,590 ------------ ------------ Net cash used in operating activities (15,633,784) (8,603,881) ------------ ------------ Cash flows from investing activities: Cash acquired in business combinations - 32,484 Proceeds from the sale of property and equipment 10,279 133,137 Net proceeds from sale of discontinued operation 8,134 - Purchase of property and equipment (2,138,370) (1,692,532) Notes receivable from Company officers (195,827) - Cash advances to DCI - (593,649) Payment of acquisition costs - (27,468) Investment in equity method investee - (240,564) ------------ ------------ Net cash used in investing activities (2,315,784) (2,388,592) ------------ ------------ Cash flows from financing activities: Payments on capital leases and convertible notes payable (259,931) (124,443) Proceeds from issuance of series B preferred stock and warrants 12,500,000 - Proceeds from issuance of 10% convertible note payable and warrant - 5,000,000 Proceeds from exercise of stock options and warrants 7,240,443 5,350,632 Proceeds from issuance of series C preferred stock - 5,000,000 10% convertible note payable financing costs - (383,184) Series B preferred stock and warrant offering costs (840,000) (384,500) ------------ ------------ Net cash provided by financing activities 18,640,512 14,458,505 ------------ ------------ Net increase in cash and cash equivalents 690,944 3,466,0 Effect of foreign currency exchange rate charges on cash 1,371 - Cash and cash equivalents, beginning of year 4,164,371 698,339 ------------ ------------ Cash and cash equivalents, end of year $ 4,856,686 $ 4,164,371 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-6 WEBB INTERACTIVE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31, --------------------------------- 2000 1999 -------------- -------------- (As Restated - See Note 23) Supplemental disclosure of cash flow information: Cash paid for interest $ 168,943 $ 59,056 Supplemental schedule of non-cash investing and financing activities: Common stock and warrants issued in business combinations $ 9,995,417 $ 12,382,595 Accretion of preferred stock to stated value 11,660,000 3,157,691 Accretion of preferred stock for beneficial conversion feature in excess of stated value - 1,158,563 Preferred stock dividends paid in common stock 373,126 272,663 Preferred stock and prior period cumulative and dividends converted to common stock 11,770,742 8,206,679 10% note payable converted to common stock 803,569 - Common stock received from sale of e-banking business 448,172 - Convertible notes payable converted to common stock - 894,879 Capital leases for equipment 263,788 195,405
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-7 WEBB INTERACTIVE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Webb Interactive Services, Inc. (with its subsidiaries collectively referred to as the "Company" or "Webb"), was incorporated on March 22, 1994, under the laws of Colorado, and principal operations began in 1995. We develop next generation Internet applications for unlocking the potential of local market e-commerce, including the development of XML-based technologies that facilitate buyer-seller interaction and enable individuals and local businesses to easily manage their Web-based communications. In addition, in July 2000, we formed a majority owned subsidiary, Jabber.com, Inc. ("Jabber.com"). Jabber.com is engaged in the early stages of several projects that are implementing the Jabber.org XML-based open-source instant messaging platform for portal services, enterprise messaging, financial services applications and enhanced mobile and telephony integration. During 2000 and 1999, we consummated our acquisitions of Update Systems, Inc. ("Update"), NetIgnite, Inc. ("NI") and Durand Communications, Inc. ("DCI"), respectively. Their shareholders exchanged all of their shares for shares of Webb common stock in business combinations that were recorded using the purchase method of accounting. The accompanying consolidated financial statements reflect the results of operations of these acquisitions from the date of consummation of the acquisitions. The consideration paid in excess of the fair market value of the tangible assets acquired was recorded as intangible assets and goodwill. On September 16, 2000, we sold our e-banking business to a privately held company for cash and stock. The accompanying consolidated financial statements reflect the sale of this segment as a discontinued operation. We derive revenues principally from licenses of our software; professional services fees for customization of our software, assisting our customers to configure and integrate our software applications; and hosting and support services. Prior to June 1999, we also earned revenues from the sale of design and consulting services for Website development, network engineering services, mark-ups on computer hardware, third-party software sold to customers, maintenance fees charged to customers to maintain computer hardware and Websites, training course fees, and monthly fees paid by customers for Internet access which we provided. We have not been profitable since inception. Our ability to become profitable depends on the ability to market our products and services and generate revenues sufficient to exceed our expenses. The success of our revenue model will depend upon many factors including the success of our distribution partners in marketing their products and services; and the extent to which consumers and businesses use our services and conduct e-commerce transactions and advertising utilizing our services. Because of the new and evolving nature of the Internet, we cannot predict whether our revenue model will prove to be viable, whether demand for our products and services will materialize at the prices we expect to charge, or whether current or future pricing levels will be sustainable. We are also highly dependent on certain key personnel. At December 31, 2000, we had $4,856,686 in cash and cash equivalents and $2,423,579 in working capital. We have expended significant funds to develop our current product offerings and we anticipate increased operating expenses and research and development expenditures in 2001, which are necessary for us to further develop and market our products as well as to achieve market acceptance of our products in sufficient quantities to achieve positive cash flow from operations. Our continued viability depends, in part, on our ability to obtain additional profitable customer contracts and to obtain additional capital through debt or equity financing sufficient to fund our expected operations. We believe that our cash and cash equivalents and working capital plus the proceeds from the preferred stock private placement that was completed during February 2001 (See Note 22), will be adequate to sustain our operations through May 2001. In F-8 addition to the remaining $2.5 million expected to be raised pursuant to the preferred stock financing, we are in active discussions with strategic and institutional investors for an additional $10 million of financing which we believe would be sufficient to fund our operations through at least the first quarter of 2002. However, we have no commitments for the $10 million financing and the conditions to the private investor's obligation to purchase the additional $2.5 million worth of our preferred stock may not be satisfied. Therefore, there can be no assurances that either of these financings will be completed, or if completed, that the terms of any such financings will be acceptable to us. If we are not successful in obtaining funding in appropriate amounts or at appropriate terms, we would consider significant reductions in our operating activities and the sale of all or a portion of our interest in our Jabber.com, Inc. subsidiary. As a result of our continuing operating losses and limited working capital to fund expected operating losses, substantial doubt exists about Webb's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should Webb be unable to continue as a going concern. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Webb and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The net loss attributable to the minority stockholders' interests which relates to our Jabber.com subsidiary, is recorded based upon the minority interest share in the net assets of Jabber.com. Revenue Recognition Webb generates revenues from the license of its software products and from professional service arrangements. Software license revenue is recognized in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") and related interpretations, and amendments as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants. The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") in December 1999. As amended, SAB 101 provides further interpretive guidance for publicly traded companies on the recognition, presentation, and disclosure of revenue in the accompanying financial statements. In June 2000, the SEC issued SAB No. 101B, delaying the implementation of SAB 101 until the fourth quarter of 2000. The provisions of SAB 101 had no material impact on Webb's revenue recognition policies and presentation as reflected in the accompanying consolidated financial statements. We recognize revenue on software arrangements only when persuasive evidence of an agreement exists, customer acceptance, if any, has occurred, delivery has occurred, our fee is fixed or determinable, and collectibility is probable. Under certain circumstances, software license revenue is deferred until all criteria of SOP 97-2 are met. Certain arrangements contain provisions, which result in the recognition of revenue from software licenses ratably over the term of the contract. In instances where we charge monthly license fees, revenue is recognized on a month-by-month basis as the fees are determined and become collectable. Revenue from professional services billed on a time and materials basis is recognized as the services are performed and amounts due from customers are deemed collectible and are contractually non-refundable. Revenue from fixed price long-term contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, or if we are unable to make sufficiently accurate estimates of costs at the outset of the arrangement, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue. Revenue from maintenance and support agreements is recognized on a straight-line basis over the term of the related support and maintenance agreement. We follow the provisions of EITF 00-3, "Application of AICPA SOP 97-2, `Software Revenue Recognition,' to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware," for software arrangements that include provisions for hosting. Under the EITF consensus, if the customer has the contractual right to take possession of the software at anytime during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software, then the software portion of the arrangement is accounted for under SOP 97-2. If the customer does not have this right, then the fee for the entire arrangement is recognized on a straight-line basis over the life of the related arrangement. F-9 For software arrangements with multiple elements, we apply the residual method prescribed by SOP 98-9. Revenue applicable to undelivered elements, principally software maintenance, training, hosting and limited implementation services, is deferred based on vendor specific objective evidence ("VSOE") of the fair value of those elements. VSOE is established by the price of the element when it is sold separately (i.e., the renewal rate for software maintenance and normal prices charged for training, hosting and professional services). Revenue applicable to the delivered elements is deemed equal to the remainder/residual amount of the fixed arrangement price. Assuming none of the undelivered elements are essential to the functionality of any of the delivered elements, we recognize the residual revenue attributed to the delivered elements when all other criteria for revenue recognition for those elements have been met. We believe our current revenue recognition policies and practices are consistent with the provisions of SOP 97-2, as amended by SOP 98-4 and SOP 98-9, which were issued by the American Institute of Certified Public Accountants, as well as other related authoritative literature. Implementation guidelines for these standards, as well as potential new standards, could lead to unanticipated changes in our current revenue recognition policies. Such changes could affect the timing of our future revenue and results of operations. Business Combinations Business combinations that have been accounted for under the purchase method of accounting include the results of operations of the acquired businesses from the date of acquisition. We recorded the assets and liabilities of the companies we acquired at their estimated fair values on the date of acquisition (See Note 13). Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Webb's management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities, 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. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include highly liquid investments with original maturities of 90 days or less that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial instruments. Restricted cash includes cash certificates of deposits for collateral on our office lease lease totalling $525,000 as of December 31, 2000. Concentration of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We have no significant off balance-sheet concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. We maintain our cash in the form of demand deposits with financial institutions that we believe to be of high credit quality. We perform ongoing evaluations of our customers' financial condition and generally do not require collateral. Allowances for uncollectible accounts receivable are determined based upon information available and historical experience. Accounts receivable are shown net of allowance for doubtful accounts totalling $151,882 and $4,000 as of December 31, 2000 and 1999, respectively. F-10 As discussed in Note 17, three customers in both 2000 and 1999 account for more than 10% each of 2000 and 1999 revenues, and three and four customers account for more than 10% each of accounts receivable as of December 31, 2000 and 1999, respectively. Property and Equipment Property and equipment is stated at cost or estimated fair value upon acquisition and depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, generally ranging from three to seven years. Maintenance and repairs are expensed as incurred and improvements are capitalized. Long-Lived Assets, Intangible Assets and Goodwill In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS 121"), we evaluate the carrying value of our long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell the assets. Intangible assets and goodwill are being amortized on a straight-line basis over their estimated economic lives of three years. Subsequent to acquisitions which result in intangible assets and goodwill, we continually evaluate whether later events and circumstances have occurred that indicate the remaining useful life of the intangible assets and goodwill may warrant revision or that the remaining balance may not be recoverable. When factors indicate that intangible assets and goodwill should be evaluated for possible impairment, we use an estimate of the undiscounted cash flows over the remaining life of the intangible assets and goodwill in measuring whether the intangible assets and goodwill are recoverable. We recorded amortization expense totalling $8,347,207 and $2,523,351 for the years ended December 31, 2000 and 1999, respectively. We also recorded an impairment loss on certain intangible assets and goodwill for the year ended December 31, 2000, totalling $8,168,904 (See Notes 13 and 14). As of December 31, 2000, approximately $290,000 of our intangible assets consisted of goodwill. We will continue to evaluate the carrying value of the remaining intangible assets for possible impairment. Such a review may indicate further impairment that would require us to record additional impairment losses in future periods and those losses could be substantial. Cost of Revenues ---------------- Cost of revenues include nominal direct cost of delivering software, direct labor costs for maintenance and support and professional services, and an allocation of overhead costs. Capitalized Software Development Costs, Purchased Software Technology and Research and Development Costs Software development costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Capitalization of development costs of software products begins once the technological feasibility of the product is established. The establishment of technological feasibility is highly subjective and requires the exercise of judgment by Webb's management. Based on our product development process, technological feasibility is established upon completion of a detailed program design. Capitalization ceases when such software is ready for general release, at which time amortization of the capitalized costs begins. We have determined that the time between technological feasibility and general release is short, consequently, we have not capitalized software development costs but expensed those costs as incurred. Product development costs relating principally to the design and development of software products are generally F-11 expensed as incurred. The cost of developing routine software enhancements is expensed as incurred. Intangibles, net in the accompanying consolidated balance sheets include amounts allocated to software products acquired in business combinations. These costs are being amortized over three years. Remaining unamortized costs were $5,711,616 and $9,965,564 as of December 31, 2000 and 1999, respectively. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, trade and notes receivable, and the 10% note payable. As of December 31, 2000 and 1999, the carrying values of such instruments approximated their fair values. Based upon interest rates currently available for debt with comparable terms and characteristics, the fair value of the 10% note payable is estimated to be $1,953,612. Foreign Currencies The functional currency of our foreign subsidiary is the Euro. Assets and liabilities of this subsidiary are translated to U.S. dollars at year-end exchange rates, and income statement items are translated at the exchange rates present at the time such transactions arise. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income. Gains and losses resulting from foreign currency transactions are included in income. Transactions demonimated in currencies other than the Euro are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in foreign currency transaction gains and losses which are reflected in income as unrealized (based on period-end translation) or realized (upon settlement of the transaction). Unrealized transaction gains and losses applicable to permanent investments by Webb in its foreign subsidiary are included as cumulative translation adjustments, and unrealized translation gains and losses applicable to short-term intercompany receivables from or payables to Webb and its foreign subsidiary are included in income. Customer Acquisition Costs Costs to acquire customers, including the issuance of our securities, are capitalized if the related customer contract contains guarantees of minimum revenue that support the amount paid. Such capitalized costs are amortized over the term the guaranteed revenue is recognized. When the contract does not provide for guaranteed revenue or counter-party performance obligations, acquisition costs are expensed when incurred and are reflected as operating expenses in the captioned labeled "Customer Acquisition Costs" in the accompanying Consolidated Statements of Operations. Prior to July 1999, we issued warrants to purchase our common stock to four customers and recorded the warrants as customer acquisition costs (See Note 16). As a matter of general business practice, we do not enter into transactions with our customers in which we incur customer acquisition costs. Income Taxes The current provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax F-12 assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. Our deferred tax assets have been reduced by a valuation allowance to the extent it is more likely than not that some or all of the deferred tax assets will not be realized (See Note 18). Stock-Based Compensation Employee stock option plans and other employee stock-based compensation arrangements are accounted for in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related interpretations. As such, compensation expense related to employee stock options is recorded if, on the measurement date, the fair value of the underlying stock exceeds the stock option exercise price. We adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma disclosures for employee stock grants made in 1996 and future years as if the fair-value-based method of accounting in SFAS 123 had been applied to these transactions. Equity instruments issued to non-employees are accounted for in accordance with SFAS 123 and related interpretations. Certain grants of warrants require the use of variable plan accounting whereby the warrants are valued using the Black-Scholes option pricing model at the date of issuance and at each subsequent reporting date with final valuation on the vesting date. Such instruments can result in substantial volatility in our results of operations until they are vested. We record deferred compensation expense based on the calculated values as of December 31, 2000 and 1999, and record expense over the vesting term of the warrant. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44"). The Interpretation clarifies the application of APB No. 25 for certain issues related to equity based instruments issued to employees. We adopted the provisions of FIN No. 44 in July 2000. There was no significant impact on our financial position or results of operations as a result of the application of FIN No. 44. Net Loss Per Common Share Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic net loss per share is computed by dividing net loss applicable to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. As a result of our net losses, all potentially dilutive securities, as indicated in the table below, would be anti- dilutive and are excluded from the computation of diluted loss per share, and there are no differences between basic and diluted per share amounts for all years presented. December 31, -------------------------------- 2000 1999 -------------- ------------- Stock options 4,128,070 2,770,055 10% convertible note payable 263,566 496,524 Warrants and underwriter options 729,318 923,918 Series B-2 preferred stock 95,844 - 10% preferred stock - 102,030 ------------- ------------ Total 5,216,798 4,292,527 ============= ============ The number of shares excluded from the earnings per share calculation because they are anti-dilutive, using the treasury stock method were 2,222,989 and 1,489,286 for the years ended December 31, 2000 and 1999, respectively. F-13 Comprehensive Income (Loss) Comprehensive income (loss) includes net earnings (loss) and other non-owner changes to stockholders' equity not reflected in net income (loss) applicable to common stockholders. The components of accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets, consists of cumulative translation adjustment from assets and liabilities of our foreign subsidiary. Accounting for the Costs of Computer Software Developed or Obtained for Internal Use Effective January 1, 1999, we adopted the provisions of Statement of Position 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use" ("SOP 98-1"). This statement establishes standards for the capitalization of costs related to internal use software. In general, costs incurred during the development stage are capitalized, while the costs incurred during the preliminary project and post-implementation stages are expensed. During the year ended December 31, 2000, we capitalized $113,657 of costs associated with the implementation of our accounting system. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - An amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 delayed the effective date of SFAS 133 to financial quarters and financial years beginning after June 15, 2000. We historically have not entered into arrangements that would fall under the scope of SFAS 133. Reclassifications Certain reclassifications to prior year financial statements have been made to conform to the current year's presentation. (3) NOTES RECEIVABLE FROM COMPANY OFFICERS During 2000, the Company loaned a total of $195,827 to two officers of the Company pursuant to demand notes with full recourse bearing interest at 8% per annum. Interest is payable monthly commencing July 1, 2000. (4) PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31, ------------------------------- 2000 1999 ------------- ------------- Computer equipment $ 1,518,443 $ 1,663,927 Office furniture and equipment 480,514 222,494 Purchased software 1,298,139 807,283 Leasehold improvements 496,453 66,657 ------------ ------------- 3,793,549 2,760,361 Less accumulated depreciation (963,417) (1,091,762) ------------ ------------- Net property and equipment $ 2,830,132 $ 1,668,599 ============ ============= Certain office equipment, computer equipment and software is pledged as collateral for capital leases payable (See Note 5). During the year ended December 31, 2000, we recorded losses on disposition of property and equipment totalling $344,341 for the year ended December 31, 2000, primarily from the relocation of our offices and the write- off of unamortized leasehold improvements, including the cost of our computer center build-out, and disposed of existing office furnishings and equipment. F-14 Computer equipment, office equipment, and software is depreciated over three to five years, office furnishings over seven years, and leasehold improvements over the shorter of its economic life or the life of the lease. Depreciation expense totalled $1,159,522 and $553,411 for the years ended December 31, 2000 and 1999, respectively. (5) CAPITAL LEASES PAYABLE Capital leases payable consist of the following:
December 31, --------------------------------- 2000 1999 -------------- -------------- Capital lease payable in quarterly principal and interest payments of $33,778, for eight quarters beginning January 1, 2000, effective interest rate of 15.06%, secured by cash certificate of deposit $ 119,721 $ - Capital lease payable in quarterly principal and interest payments of $22,994, for eight quarters beginning January 1, 2000, effective interest rate of 16.47%, secured by cash certificate of deposit 83,682 160,405 Capital lease payable in monthly principal and interest payments of $2,828, for thirty-six months beginning November 1, 1998, effective interest rate of 16%, secured by software 24,473 58,261 Capital lease payable in monthly principal and interest payments of $624, for twenty-four months beginning May 1, 1998, effective interest rate of 12.3%, secured by computer equipment - 2,957 Capital lease payable in monthly principal and interest payments of $195, for thirty-six months beginning March 10, 1998, effective interest rate of 22%, secured by office equipment - 2,395 ------------ ----------- 227,876 224,018 Less current portion (227,876) (108,525) ------------ ----------- $ - $ 115,493 ============ ===========
Future minimum lease payments under capital leases as of December 31, 2000 are as follows: 2001 $ 260,364 Less amount representing interest (32,488) ------------- $ 227,876 ============= The net book value of assets under capital lease totalled $374,114 and $239,296 for the years ended December 31, 2000 and 1999, respectively. (6) CONVERTIBLE NOTES PAYABLE On June 30, 1999, the date the merger with DCI was consummated, we assumed DCI convertible notes payable totalling $606,894 which were convertible at any time at the election of the holders into a number of our common shares at a conversion price equal to $9.61 per share, which was the fair value of our common stock on the date the merger was announced. Subsequent to the agreement to acquire DCI (See Note 13), we issued convertible notes payable to DCI creditors totalling $335,991. The notes were convertible anytime at the election of the holder into a number of our common shares at conversion prices equal to the greater of $9.75 or the closing bid price on the conversion date. During 1999, holders of the convertible notes payable converted $894,879 of principal and accrued interest payable into 82,402 shares of our common stock at conversion prices per share ranging from approximately $9.61 to $14.75 as summarized in the following table: F-15
Common Note Payable Stock And Accrued Common Stock Conversion Interest Shares Price per Conversion Date Converted Issued Share ---------------------------------- -------------- ------------- ------------- July 15, 1999 $236,509 16,034 $14.75 September 27, 1999 144,150 15,000 9.61 September 28, 1999 49,011 5,100 9.61 September 29, 1999 112,437 11,700 9.61 September 30, 1999 50,938 5,000 10.19 October 1, 1999 106,250 10,000 10.63 October 4, 1999 78,501 7,753 10.13 October 5, 1999 15,684 1,600 9.61 to 10.13 October 7, 1999 72,308 7,231 10.00 October 15, 1999 29,091 2,984 9.75 -------------- ------------- Total $894,879 82,402 ============== =============
(7) 10% CONVERTIBLE NOTE PAYABLE On August 25, 1999, we entered into a Securities Purchase Agreement and executed a $5,000,000 three-year 10% Convertible Promissory Note (the "10% note payable"). We received net proceeds totalling $4,616,816 after deducting $383,184 in financing costs. The financing costs were recorded as a deferred asset and are being amortized as additional interest expense over the term of the 10% note payable. In order to facilitate the sale of our series B preferred stock, the terms of the 10% note payable agreement were amended on December 18, 1999. The material amendments to the 10% note payable and the warrant were as follows: (i) to set the conversion price for the 10% note payable at $10.07 per share until March 22, 2000; (ii) to eliminate the variable conversion price feature of the 10% note payable (iii) to enable us to require the conversion of one-half of the principal amount of the 10% note payable upon certain events; (iv) to eliminate certain of our rights to pre-pay the 10% note payable; (v) in the event that we force the conversion of one-half of the principal amount of the 10% note payable, to permit the holder to elect to have the interest thereafter due and payable on the 10% note payable paid in shares of our common stock or additional Notes Payable ("PIK notes") with terms similar to the 10% note payable; and (vi) to provide for the amendment in the exercise price of the warrant on September 30, 2000, if the market price of our common stock was then less than $11.44. The 10% note payable was initially convertible into shares of our common stock at a conversion price of $10.07 per share. The conversion price is subject to anti-dilution protection in the event we issue common stock at prices less than the conversion price for the 10% note payable or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. As a result of the private placement of preferred stock we completed in February 2001, the conversion price was reset to $2.50 per share. As a result, we will record non-cash interest expense totalling $2,394,234 in the first quarter of 2001 (See Note 22). If the conversion price is further reduced, we may be required to record additional charges against income and such charges may be significant. On February 18, 2000, the holder converted $2,500,000 of the $5,000,000 outstanding 10% note payable into 248,262 shares of our common stock at a conversion price of $10.07 per share. We may prepay the 10% note payable at any time after August 25, 2000, if the closing bid price for our common stock for 20 consecutive trading days is at least 200% of the conversion price then in effect. The redemption price would equal 115% of the face amount of the 10% note payable, plus accrued and unpaid interest. F-16 The 10% note payable bears interest at the rate of 10% per annum. During the years ended December 31, 2000 and 1999, we recorded interest expense totalling $1,006,943 and $2,311,252, respectively, as summarized in the following table:
Year Ended December 31, -------------------------------- 2000 1999 -------------- ------------- (As Restated - See Note 23) Interest paid with principal-in-kind notes $ 154,110 $ - Amortization of discount 198,744 124,615 Amortization of financing costs 591,075 45,142 Beneficial conversion feature - 1,967,522 -------------- ------------- Total non cash interest expense 943,929 2,137,279 Interest expense payable in cash 63,014 173,973 -------------- ------------- Total 10% note payable interest expense $1,006,943 $ 2,311,252 ============== =============
Due to the conversion feature associated with the 10% note payable, we accounted for a beneficial conversion feature as additional interest expense. Based on accounting principles generally accepted in the United States, the computed value of the beneficial conversion feature totalling $1,967,522 was initially recorded as a reduction of the 10% note payable and an increase to additional paid-in capital on the date of issuance, even though the 10% note payable was not then convertible and was subject to redemption prior to the date that it first became convertible. The beneficial conversion feature reduction to the 10% note payable was amortized as additional interest expense from the date of issuance to the earliest date of conversion, which was during the fourth quarter of 1999. The holder of the 10% note payable was initially granted a five-year warrant for 136,519 shares exercisable at $11.44 per share (the "10% note payable warrant"). In connection with the amendment in December 1999, the holder was granted an additional warrant for 136,519 shares exercisable initially at $18.51 per share (the "series B preferred stock warrant") as follows: 10% Note Payable Warrant- We valued the warrant utilizing the Black-Scholes option pricing model using the following assumptions: Recorded value $1,072,325 Exercise price $11.44 Fair market value of common stock on grant date $10.13 Option life 5 years Volatility rate 104% Risk free rate of return 6% Dividend rate 0% The fair value of the 10% note payable warrant was recorded as a discount to the 10% note payable and is being amortized as additional interest expense over the term of the 10% note payable. We recorded additional interest expense related to this warrant totalling $198,744 and $124,615 for the years ended December 31, 2000 and 1999, respectively. Upon conversion of half of the outstanding 10% note payable balance, the remaining unamortized discount was correspondingly reduced. On February 18, 2000, the holder exercised the note payable warrant to purchase 136,519 shares of our common stock for which we received net proceeds totalling $1,468,070. F-17 Series B Preferred Stock Warrant- In connection with the amendement to the 10% note payable, in December 1999, we issued the note holder a five-year warrant to purchase 136,519 shares of our common stock at an initial exercise price of $18.506 per share in consideration for the note holder's agreement to exchange the note for an amended note with terms more favorable to us. We recorded the fair value of this warrant totalling $2,311,475 as additional consideration to the note holder. Accordingly, we recorded a deferred financing asset, which is being amortized to interest expense from the date of issuance to the maturity date of the 10% note payable. We recorded additional non-cash interest expense for the amortization of these deferred financing costs totalling $518,373 for the year ended December 31, 2000. In addition, as a result of the conversion of one-half of the 10% note payable in February 2000, we correspondingly recorded a reduction to deferred financing costs in the amount of $1,082,694 of. We initially valued the warrant utilizing the Black-Scholes option pricing model using the following assumptions: Recorded value $ 2,311,475 Exercise price $ 18.506 Fair market value of common stock on valuation date $ 21.06 Option life 5 years Volatility rate 104% Risk free rate of return 6% Dividend rate 0% In accordance with the original terms of the Series B preferred stock warrant, the exercise price was reset on September 29, 2000, to $10.264 per share, the average closing bid price of our common stock for the 20 trading days ended on September 29, 2000. As a result of the reset of the exercise price, we recorded additional expense totalling $110,302 for the year ended December 31, 2000. We valued the warrant utilizing the Black-Scholes option pricing model using the following assumptions:
Valuation Date ------------------------------------------- September 29, 2000 December 18, 1999 ------------------- ------------------- Exercise price $10.26425 $18.51 Fair market value of common stock on valuation date $8.625 $21.06 Option life 5 years 5 years Volatility rate 104% 104% Risk free rate of return 6% 6% Dividend rate 0% 0%
The original value of the warrant was recorded as a deferred private placement cost related to the sale of our series B preferred stock (See Note 8). The number of common shares issuable upon exercise and the exercise price are subject to anti-dilution protection in the event we issue common stock at prices less than the current exercise price for the warrant or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. As a result of the private placement we completed in February 2001, the exercise price was reset to $9.33431 per share and the number of common shares issuable upon exercise of the warrant was reset to 150,116. Based on the anti-dilution provision of the warrant, we will record non-cash expense totalling $31,932 in the first quarter of 2001 (See Note 22). If the conversion price is further reduced, we may be required to record additional charges against income and such charges may be significant. F-18 (8) PREFERRED STOCK Preferred stock consists of the following-
Series B-2 Preferred Stock Series B Preferred Stock 10% Preferred Stock ----------------------------- ----------------------------- --------------------- Shares Amount Shares Amount Shares Amount ----------------------------- ----------------------------- ---------------------- Balances, December 31, 1998 - $ - - $ - 245,000 $ 2,691,172 Stock issued in private placement - - - - - - Offering costs - - - - - - Beneficial conversion feature of preferred stock - - - - - - Preferred stock dividends - - - - - 94,216 Preferred stock and dividends converted to common stock - - - - (160,000) (1,765,093) Accretion of preferred stock to stated value - - - - - - Accretion of preferred stock for beneficial conversion feature in excess of stated value - - - - - - --------- ---------- ------------ ----------- ---------- ----------- Balances, December 31, 1999 - - - - 85,000 1,020,295 Stock issued in private placement - - 12,500 12,500,000 - - Cash offering costs - - - (840,000) - - Value of warrants issued for common stock - - - (8,622,986) - - Beneficial conversion feature of preferred stock - - - (3,037,014) - - Preferred stock dividends - - - - - 2,733 Exchange of series B preferred stock for series B-2 preferred stock 12,500 11,660,000 (12,500) (11,660,000) - - Preferred stock and dividends converted to common stock (11,522) (10,747,714) - - (85,000) (1,023,028) Accretion of preferred stock to stated value - - - 11,660,000 - - --------- ----------- ------------ ------------ ---------- ---------- Balances, December 31, 2000 978 $ 912,286 - $ - - $ - ========= =========== ============ ============ ========== =========== Series C Preferred Stock Series A Preferred Stock Total Preferred Stock ----------------------------- ---------------------------- -------------------------- Shares Amount Shares Amount Shares Amount ----------------------------- ---------------------------- -------------------------- Balances, December 31, 1998 - $ - 1,400 $ 1,410,164 246,400 $ 4,101,336 Stock issued in private placement 5,000 5,000,000 - - 5,000 5,000,000 Offering costs - (384,500) - - - (384,500) Beneficial conversion feature of preferred stock - (3,931,754) - - - (3,931,754) Preferred stock dividends - 29,121 - 2,301 - 125,638 Preferred stock and dividends converted to common stock (5,000) (5,029,121) (1,400) (1,412,465) (166,400) (8,206,679) Accretion of preferred stock to stated value - 3,157,691 - - - 3,157,691 Accretion of preferred stock for beneficial conversion feature in excess of stated value - 1,158,563 - - - 1,158,563 --------- ----------- ------------ ------------ ---------- ----------- Balances, December 31, 1999 - - - - 85,000 1,020,295 Stock issued in private placement - - - - 12,500 12,500,000 Cash offering costs - - - - - (840,000) Value of warrants issued for common stock - - - - - (8,622,986) Beneficial conversion feature of preferred stock - - - - - (3,037,014) Preferred stock dividends - - - - - 2,733 Exchange of series B preferred stock for series B-2 preferred stock - - - - - - Preferred stock and dividends converted to common stock - - - - (96,522) (11,770,742) Accretion of preferred stock to stated value - - - - - 11,660,000 ---------- ------------ ------------- ------------- ----------- ------------ Balances, December 31, 2000 (As Restated - See Note 23) - $ - - $ - 978 $ 912,286 ========== ============ ============= ============= =========== ============
F-19 During 2000 and 1999, we entered into several private placements in which we sold shares of our convertible preferred stock, including common stock purchase warrants, to a limited number of investors. We recorded the value of the warrants upon each issuance, using the Black-Scholes option pricing model, as a reduction of the preferred stock offering. In general, the terms of the preferred stock grant the holders the right to convert the preferred stock into shares of our common stock at specified conversion prices. In each issuance of preferred stock, the conversion price has included a beneficial conversion feature because the value of the common stock resulting from a theoretical conversion of the preferred stock on the issuance date is greater than the allocated value of the preferred stock, which is referred to as a "beneficial conversion feature" in the accompanying consolidated financial statements. Accounting principles generally accepted in the United States require us to record the beneficial conversion feature, the value of warrants and, in most instances, the cash offering costs as additional preferred stock dividends. This non-cash charge to net loss applicable to common stockholders is labeled "Accretion of preferred stock to stated value" in the accompanying financial statements. In some instances, the beneficial conversion is greater than the total proceeds we received from the sale of the preferred stock. In those instances, the amount in excess of the value of the preferred stock has been recorded as additional preferred stock dividends as well. This non-cash expense is labeled "Accretion of preferred stock for beneficial conversion feature in excess of stated value" in the accompanying financial statements. The table presented below summarizes our preferred stock transactions during 2000 and 1999, with details of each transaction summarized under the preferred stock captions which follow.
Preferred Conversion Beneficial Total Stock Shares Gross Price Per Conversion Accretion Date of Issuance Series Issued Proceeds Share Feature Expense ------------------- --------- --------- ----------- ----------- ---------- ---------- February 18, 2000 Series B 12,500 $12,500,000 $ 20.00 $3,037,014 $11,660,000 September 27, 2000 Series B-2 12,500 None 10.20408 - - January 11, 1999 Series C 3,000 3,000,000 8.59 to 3,914,063 4,158,563 11.13 June 18, 1999 Series C 2,000 2,000,000 8.59 to 17,691 157,691 11.13
As of December 31, 2000, 978 shares of our series B-2 preferred stock remained outstanding. Series B Preferred Stock- On February 18, 2000, we completed a private placement that resulted in gross proceeds of $12,500,000. The placement was made pursuant to a securities purchase agreement entered into on December 31, 1999. We sold 12,500 shares of our series B convertible preferred stock (the "series B preferred stock"), including warrants to purchase 343,750 shares of our common stock. We received net proceeds totalling approximately $11,660,000 after deducting approximately $840,000 in offering costs. The series B preferred stock was convertible into shares of our common stock, initially at $20.00. The conversion rate for the series B preferred stock was subject to a potential reset on November 12, 2000, based on the then market value for our common stock. F-20 We also issued five-year warrants to purchase 343,750 shares of our common stock with the series B preferred stock, valued at $8,622,986, determined based on the relative fair value of the warrants using the Black-Scholes option pricing model, and the net proceeds we received. The warrants entitle the holder to purchase one share of our common stock for a purchase price initially set at $20.20, which was equal to 101% of the initial conversion price of the preferred stock, at any time during the five-year period commencing on February 18, 2000. The exercise price for the warrants is subject to being reset based upon future market prices for our common stock every 90 days commencing May 17, 2000, until January 20, 2003. If the current exercise price is higher than the current market price (the lower of the average closing bid prices for the 10-day period ending on such date or the closing bid price on such date), the exercise price will be reset to the market price. As detailed below, the exercise price has been reset at each such date and, as a result, we recorded additional compensation expense totalling $379,436 for the year ended December 31, 2000. The warrants were valued and the expense charges determined utilizing the Black-Scholes option pricing model using the following assumptions:
2000 Valuation Date --------------------------------------------------------------------- February 18 May 17 August 18 November 14 ------------- ------------- ------------- -------------- Exercise price $20.20 $13.00 $8.875 $3.875 Fair market value of common stock on grant or redetermination date $66.88 $13.00 $8.875 $3.875 Option life 5 years 5 years 5 years 5 years Volatility rate 120% 120% 120% 120% Risk free rate of return 6.7% 6.7% 6.7% 6.7% Dividend rate 0% 0% 0% 0%
The exercise price is subject to anti-dilution protection in the event we issue common stock at prices less than the current exercise price for the warrants or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. As a result of the private placement we completed in February 2001, the exercise price was reset to $3.75374 per share. Based on the anti-dilution provision of the warrant, we will record non-cash expense totaling $2,264 in the first quarter of 2001 (See Note 22). If the conversion price is further reduced, we may be required to record additional charges against income and such charges may be significant. Due to the conversion feature associated with the series B preferred stock, we accounted for a beneficial conversion feature as an additional preferred stock dividend. The computed value of the beneficial conversion feature of $3,037,014 was limited to the relative fair value of the series B preferred stock, and was initially recorded as a reduction of the series B preferred stock and an increase to additional paid-in capital. The beneficial conversion feature reduction to the series B preferred stock was accreted on the date of issuance, as additional preferred stock dividends, by recording a charge to income applicable to common stockholders from the date of issuance to the earliest date of conversion. The difference between the stated value of $1,000 per share totalling $11,660,000 and the recorded value on February 18, 2000, was accreted as a charge to income applicable to common stockholders on the date of issuance (the date on which the series B preferred stock was first convertible) and was comprised of the following (as restated): Beneficial conversion feature $3,037,014 Relative fair value of common stock warrants 8,622,986 F-21 ----------- Total accretion recorded $11,660,000 =========== Series B-2 Preferred Stock- On September 27, 2000, we executed exchange agreements with the holders of our series B preferred stock whereby we redeemed all of the outstanding series B convertible preferred stock in exchange for 12,500 shares of our series B-2 convertible preferred stock (the "series B-2 preferred stock") that has a stated value of $1,000 per share. The series B-2 preferred stock was convertible into shares of our common stock at $10.20408 per share (1,225,000 shares in the aggregate) by the holders at any time, so long as the conversion would not result in the holder being a beneficial owner of more than 4.99% of our common stock. On December 31, 2000, the series B preferred stock was subject to an automatic conversion feature, subject to the 4.99% limitation, pursuant to which 10,522 shares were converted into 1,031,136 shares of our common stock. The remaining 978 outstanding shares will be automatically converted into shares of our common stock at the end of each subsequent 30-day period, subject to the 4.99% limitation. The conversion price is subject to anti-dilution protection in the event we issue common stock at prices less than the conversion price for the series B- 2 preferred stock or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. As a result of the private placement we completed in February 2001, the conversion price was reset to $2.50 per share. Based on the anti-dilution provision of the warrant, we will record non-cash expense totalling $886,068 in the first quarter of 2001 (See Note 22). If the conversion price is further reduced, we may be required to record additional charges against income and such charges may be significant. During 2000, investors converted 11,522 shares of the series B-2 preferred stock into 1,129,136 shares of our common stock at a conversion price of $10.20408 as summarized in the following table:
Number of Shares -------------------------------- Series B-2 Preferred Common Stock Conversion Date Stock ---------------------------------------------------- -------------- ------------- December 12, 2000 1,000 98,000 December 31, 2000 10,522 1,031,136 -------------- ------------- Total 11,522 1,129,136 ============== =============
The series B-2 preferred stock has preference if we were to liquidate, dissolve or wind-up our business, whether voluntary or otherwise. In these events, after we paid our debts and other liabilities, the holders of the series B-2 preferred stock would be entitled to receive $1,000 per share from our remaining net assets, before any distribution to the holders of our common stock. The series B-2 preferred stock is also redeemable in certain circumstances, including a change in control of Webb. Without some failure on our part, the holders of the series B-2 preferred stock can not unilaterally require redemption. Series C Preferred Stock- On January 11, 1999, we completed a private placement of preferred stock that resulted in gross proceeds of $3,000,000. We sold 3,000 shares of our 4% series C cumulative, convertible, redeemable preferred stock (the "series C preferred stock"). We received net proceeds totalling $2,755,500 after deducting $244,500 in offering costs. In addition, we also issued a warrant that entitled the holder to purchase, at a price of $1,000 per share, up to 2,000 shares of our series C preferred stock. This warrant also granted us the right to require the holder to exercise such warrant. On June 18, 1999, we exercised this right and sold 2,000 shares of the series C preferred stock for net proceeds of $1,860,000 after deducting $140,000 in offering costs. F-22 The series C preferred stock specified a 4% per annum cumulative, non-compounding dividend based on the stated value of $1,000 per share. Each share of series C preferred stock was convertible, at the option of the holder thereof, at any time after February 1, 1999, into the number of shares of our common stock equal to $1,000 divided by the lesser of (i) 140% of the closing bid price of our common stock on the date of the issuance of the series C preferred stock being converted (initially $20.48), or if less and if the conversion is occurring at least 120 days after the issuance of the series C preferred stock being converted, 100% of the closing bid price of our common stock on the trading day closest to the date that is 120 days after the series C preferred stock that is being converted was issued or (ii) the average of the five lowest closing bid prices of our common stock during the 44 consecutive trading days immediately preceding the conversion of the series C preferred stock conversion date. Due to the conversion feature associated with the series C preferred stock, we accounted for the beneficial conversion feature as an additional preferred stock dividend. The computed value of the beneficial conversion feature of $3,931,754 was initially recorded as a reduction of the series C preferred stock and an increase to additional paid-in capital. The beneficial conversion feature reduction to the series C preferred stock was accreted, as additional preferred stock dividends, by recording a charge to income applicable to common stockholders from the date of issuance to the earliest date of conversion. We also recorded annual dividends of $40 per share as a reduction of income applicable to common stockholders totaling $29,121 for the year ended December 31, 1999. The difference between the stated redemption value of $1,000 per share and the recorded value on January 11, 1999, and June 18, 1999 (the dates upon which the series C preferred stock were issued) totalling $4,316,254 (which includes $1,158,563 of accretion of preferred stock for the beneficial conversion feature in excess of the stated value) was accreted as a charge to income applicable to common stockholders on the date that the series C preferred stock was first convertible, which occurred in the first and second quarters of 1999, respectively, and was comprised of the following:
Closings ---------------------------------------- June 18, 1999 January 11, 1999 ----------------- ------------------ Beneficial conversion feature $ 17,691 $ 3,914,063 Series C preferred stock offering costs 140,000 244,500 ----------------- ------------------ Total accretion recorded $ 157,691 $ 4,158,563 ================= =================
During 1999, the investor converted all of the 5,000 shares of the series C preferred stock, including accrued dividends payable of $29,121 into 480,508 shares of our common stock at conversion prices per share ranging from approximately $8.59 to $11.13 as summarized in the following table:
Number of Shares Common --------------------------------- Stock Series C Conversion Preferred Common Price per Conversion Date Stock Stock Share --------------------------------- -------------- -------------- ------------- February 10, 1999 1,500 140,157 $10.74 February 11, 1999 500 46,724 10.74 February 26, 1999 500 45,683 11.00 July 6, 1999 1,000 90,843 11.13 July 20, 1999 700 63,141 11.13 August 25, 1999 150 17,597 8.59 September 7, 1999 650 76,363 8.59 -------------- -------------- Total 5,000 480,508 ============== ==============
10% Preferred Stock- In December 1997 and March 1998, we sold a total of 267,500 shares of our 10% cumulative, convertible, redeemable preferred stock (the "10% preferred stock") in a private placement. Each share of 10% preferred stock F-23 was convertible at any time after September 30, 1998, at the election of the holder thereof, into the number of shares of our common stock equal to $10 divided by the lesser of (i) $10 or (ii) 80% of the average per share closing bid price of our common stock for the five trading days immediately preceding the 10% preferred stock conversion date. During 2000, holders of our 10% preferred stock converted 85,000 shares, including accrued dividends payable of $173,028, into 102,302 shares of our common stock with conversion prices per share of $10.00. During 1999, holders of our 10% preferred stock converted 160,000 shares, including accrued dividends payable of $165,093, into 177,106 shares of our common stock with conversion prices ranging from approximately $9.46 to $10.00.
Number of Shares Common --------------------------------- Stock 10% Conversion Preferred Common Price per Conversion Date Stock Stock Share ---------------------------------- -------------- ------------- ------------- January 5, 1999 10,000 11,590 $ 9.46 January 7, 1999 10,000 11,039 9.98 January 14, 1999 5,000 5,422 10.00 January 15, 1999 60,000 66,248 10.00 January 19, 1999 10,000 10,858 10.00 January 20, 1999 25,000 27,636 10.00 January 28, 1999 10,000 11,077 10.00 February 2, 1999 20,000 22,083 10.00 February 25, 1999 10,000 11,153 10.00 January 11, 2000 80,000 96,240 10.00 February 14, 2000 5,000 6,062 10.00 ------------- ------------- Total 245,000 279,408 ============= =============
(9) STOCK OPTION PLANS We have stock option plans for directors, officers, employees and other third parties, which provide for nonqualified and incentive stock options. In addition to the 1995 Stock Option Plan, which provides for the issuance of options for up to 4,500,000 shares of common stock, during 2000, we adopted a second plan, the 2000 Stock Option Plan, which provides for the issuance of options for up to 1,000,000 shares of common stock (collectively the "plans"). The options vest over various terms with a maximum vesting period of 42 months and expire after a maximum of ten years from the date of grant. At December 31, 2000, there were options for 4,128,070 shares of common stock outstanding and options for 1,027,839 shares of common stock were vested, with 155,435 options available for future grants under the plans. A summary of the status of the plans as of December 31, 2000 and 1999 and changes during the years then ended is presented in the tables and narrative below:
2000 1999 -------------------------------- -------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price --------------- ------------- ---------------- -------------- Outstanding at beginning of year 2,770,055 $10.31 1,758,665 $5.93 Granted 2,259,332 15.48 2,101,897 12.03 Exercised (251,842) 7.13 (452,773) 2.71 Forfeited and canceled (649,475) 14.68 (637,734) 9.24 --------------- ----------------
F-24 Outstanding at end of year 4,128,070 $12.65 2,770,055 $10.32 ============== ========== ============ ========== Exercisable at end of year 1,027,839 $10.47 468,861 $ 7.62 ============== ========== ============ ========== Weighted average fair value of options granted during year $ 11.38 $ 8.83 ============== ============
The status of total stock options outstanding and exercisable under the plans as of December 31, 2000 is as follows:
Stock Options Outstanding Stock Options Exercisable ------------------------------------ --------------------------------------- Weighted Average Weighted Weighted Remaining Weighted Average Range of Average Contractual Average Remaining Exercise Number of Exercise Life Number of Exercise Contractual Prices Shares Price (Years) Shares Price Life (Years) ---------------- ------------ ------------ ----------- ------------ ----------- ------------- $ 1.63 - 4.08 616,739 2.10 6.9 61,500 2.96 5.4 4.09 - 10.23 1,552,426 8.45 6.1 592,262 8.26 4.7 10.24 - 25.60 1,517,505 13.59 5.8 347,410 13.83 5.0 25.61 - 58.25 441,400 39.09 6.1 26,667 33.18 6.1 ------------ ------------ 4,128,070 $12.65 6.2 1,027,839 $10.47 5.3 ============ ======== ====== ============ ======= =======
During 2000, Webb's subsidiary, Jabber.com, adopted the 2000 Jabber Stock Option Plan (the "Jabber plan") for directors, officers, and employees that provide for the issuance of up to 3,000,000 nonqualified and incentive stock options for Jabber.com common stock. The options vest over various terms with a maximum vesting period of 36 months and expire after a maximum of ten years from the date of grant. At December 31, 2000, there were options for 1,258,773 shares of common stock outstanding and options for 70,140 of common stock were vested with options for 1,741,227 shares of common stock available for future grants under the Jabber plan. A summary of the status of the Jabber plan as of December 31, 2000, and changes during the year then ended is presented in the tables and narrative below:
2000 -------------------------------- Weighted Average Exercise Price Shares --------------- --------------- Outstanding at beginning of year - - Granted 1,336,949 $1.50 Exercised - - Forfeited and canceled (78,176) 1.50 --------------- Outstanding at end of year 1,258,773 1.50 =============== ========= Exercisable at end of year 70,140 $1.50 =============== ========= Weighted average fair value of options granted during year $0.18 ===============
During January 2001, Jabber.com granted options for an additional 1,100,000 shares of Jabber.com common stock under the Jabber plan at an exercise price of $0.75 per share. Pro Forma Fair Value Disclosures F-25 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2000 and 1999, respectively: risk-free interest rate of 6.05 and 5.68 percent; no expected dividend yields; expected lives of 3 years; and expected volatility of 122 and 118 percent, respectively. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of options granted. Cumulative compensation costs recognized in pro forma net loss applicable to common stockholders with respect to options that are forfeited prior to vesting are adjusted as a reduction of pro forma compensation expense in the period of forfeiture. Had compensation cost for options granted been determined consistent with SFAS 123, our net loss applicable to common stockholders and net loss applicable to common stockholders per common and common equivalent share would have been increased to the following pro forma amounts:
2000 1999 ---------------------------------------------- ---------------------------------------------- As Reported Pro Forma As Reported Pro Forma ------------------- ------------------- ------------------- ------------------- Net loss applicable to common stockholders $(48,853,667) $(58,784,188) $(21,866,012) $(24,897,608) =================== =================== =================== =================== Net loss applicable to common stockholders per share-basic and diluted $ (5.39) $ (6.49) $ (3.31) $ (3.77) =================== =================== =================== ===================
(10) WARRANTS AND OPTIONS FOR COMMON STOCK ISSUED OUTSIDE THE STOCK OPTION PLANS We have issued common stock purchase warrants and options outside our stock option plans ("warrants") in connection with the sale of securities, business acquisitions and services rendered to the Company. The following table sets forth outstanding warrants as of December 31, 2000 and 1999, as well as common stock issued as a result of exercises for the years then ended.
December 31, 2000 December 31, 1999 --------------------------------- ------------------------------- Warrants and Options Exercise Common Stock Common Stock Issued in Connection Price Per Warrants Issued From Warrants Issued From With Expiration Date Share Outstanding Exercises Outstanding Exercises ---------------------- ------------------ ------------ ---------------- ---------------- -------------- ---------------- Series B preferred stock (See Notes 8 and 22) February 2004 $ 3.875 343,750 - - - 10% convertible note payable (See Notes 7 and 22) December 2005 10.264 136,519 136,519 273,038 - Customers (See Note 16) June and December 2002 8.77 to 9.19 220,162 11,667 231,829 - DCI merger (See Note January 2001 to 6.61 to 13) June 2003 10.16 21,523 113,856 157,951 44,740
F-26 Placement firm (See Note 11) March 2005 38.44 5,834 - - - VA Linux (See Note 11) October 2005 TBD 50,000 - - - Underwriter in IPO May 2001 8.10 1,530 102,361 106,700 3,300 Common stock private placement January 2000 2.25 - - 900 13,500 10% preferred stock (See Note 8) December 2000 15.00 - 35,000 53,500 - 5% preferred stock May 2001 16.33 - 100,000 100,000 - Series A preferred stock placement agent November 2003 5.71 - - - 20,000 IPO May 1999 9.00 - - - 473,192 Series A preferred stock November 2003 5.71 - - - 140,000 ---------- --------- --------- --------- Total 779,318 499,403 923,918 694,732 ========== ========= ========= =========
During 2000, holders of warrants exercised their right to purchase 503,874 shares of our common stock in which we received net proceeds totalling $5,443,315, after deducting $93,707 in commissions, as summarized in the following table:
Common Stock Exercise Common Proceeds Warrant Price Stock To the Warrant Exercised Exercised Per Share Issued Company ------------------- ------------------- ------------------- ------------------- ------------------- 10% preferred stock warrants 35,000 $15.00 35,000 $ 525,000 IPO representative warrants 105,170 8.10 102,361 736,047 Warrants issued in connection with the DCI merger 115,518 6.61 to 10.16 113,856 966,558 Warrant issued in connection with 5% preferred stock 100,000 16.33 100,000 1,633,000 Warrant issued to customer 11,667 9.75 to 9.94 11,667 114,640 Warrant issued to 10% convertible note holder 136,519 11.44 136,519 1,468,070 ------------------- ------------------- ------------------- 503,874 499,403 $ 5,443,315 =================== =================== ===================
During 1999, holders of warrants exercised their right to purchase 691,432 shares of our common stock in which we received net proceeds totalling $4,102,084, after deducting $17,387 in issuance costs, as summarized in the following table: F-27
Common Stock Exercise Common Proceeds Warrant Warrant Price Stock To the Exercised Exercised Per Share Issued Company --------- --------- --------- ------- ----------- IPO warrants 1,339,811 $9.00 473,192 $ 3,056,871 IPO representative warrants 3,300 8.10 3,300 26,730 Warrant issued in connection with series A preferred stock 140,000 5.71 140,000 779,400 Common stock warrants issued to placement 20,000 5.71 20,000 114,200 agent in series A preferred stock Warrants issued in connection with the DCI merger 78,577 8.94 to 10.16 44,740 121,238 Warrant issued in connection with private placement of common stock 13,500 2.25 13,500 30,375 ------------- ------------ ------------- 1,595,188 694,732 $ 4,128,814 ============= ============= ============
Included in the common stock issued in connection with the exercise of the IPO representative warrants and the warrants issued in connection with the DCI merger are 131,588 and 32,807 shares, respectively, issued to the holders as a result of utilizing the cashless exercise provision of the agreements for the exercise of 656,343 and 66,644 warrants, respectively. (11) STOCK BASED COMPENSATION EXPENSE During 2000 and 1999, we issued common stock, common stock purchase warrants and options in transactions described below and recorded expense as set forth in the following table.
Number of Shares or Deferred Warrants Compensation Issued Expense Expense ---------------------------- ------- ------- ------- 2000 Transactions- Issuance of common stock for financial services (A) 15,000 $ 246,891 $ - Grants of Jabber.com common stock (B) 912,500 276,337 - Warrant issued to placement firm (D) 5,834 176,443 - Option issued to advisory board . member (E) 2,500 729 395 Reset of exercise price for series B warrants (See Notes 8 and 22) - 379,597 - Reset of exercise price for 10% note payable warrant (See Notes 7 and 22) - 110,302 - Warrant issued to VA Linux (F) 50,000 30,000 -
F-28 Amortization of previous years deferred compensation - 257,933 154,379 -------------- -------------- --------------- 2000 Totals 985,834 $1,478,232 $ 154,774 ============== ============== =============== 1999 Transactions- Issuance of common stock for financial services (A) 30,000 $ 444,390 - Issuance of common stock for consulting services (C) 6,497 90,000 - Options issued to consultants (G) 58,168 461,661 - Options issued to DCI employees (H) - 205,861 304,180 Warrants issued to customers (See Note 10) 161,667 941,684 - Amortization of previous years deferred compensation - 612,770 108,527 -------------- -------------- --------------- 1999 Totals 256,332 $2,756,366 $ 412,707 ============== ============== ===============
We issued common stock in the following transactions- (A) On March 16, 2000, and November 5, 1999, we executed two-month and four- month consulting agreements, respectively, with a financial consulting firm to enhance our activities in corporate finance, mergers and acquisitions and investor relations. In connection with the agreements, we issued restricted shares of our common stock for services provided with respect to the 2000 grant and for a commencement bonus with respect to the 1999 grant, as follows:
March 16, 2000 November 5, 1999 ------------------- ---------------- Common shares issued 15,000 30,000 Date services provided or date of issuance March to April 2000 December 2, 1999 Fair market value on date services provided or on date of issuance $9.625 to $ 41.50 $ 14.81 Value of common stock $246,891 $444,390
We recorded expenses totalling $246,891 on the date the services were provided with respect to the 2000 grant and, expenses totalling $444,390 with respect to the 1999 grant, on the date of issuance for the commencement bonuses equal to the value of the common stock granted as the shares are not refundable to us. (B) During July and September 2000, we issued 912,500 shares of common stock of our subsidiary, Jabber.com, to employees of the subsidiary, an officer of the Company and members of the Jabber.com advisory boards. The shares vest over periods ranging from grant date to two years. We recorded deferred compensation totalling $523,700 and compensation expense totalling $276,337 during the year ended December 31, 2000, calculated based on the appraised value of the Jabber.com common stock. (C) In February 1999, we entered into a third consecutive six-month agreement with an individual to provide consulting services in his capacity as Webb's Chief Operating Officer and subsequent duties as Chief Financial Officer. Pursuant to the terms of the agreement, in addition to a monthly cash fee of $15,000, the consultant earned shares of our common stock determined by dividing $15,000 by the fair market value of the our common stock on the last trading day of the month. During the year ended December 31, 1999, we issued 6,497 shares of our common stock under this agreement valued in the aggregate at $90,000. We issued common stock purchase warrants/options in the following transactions- (D) In March 2000, we issued a five-year common stock purchase warrant to purchase 5,834 shares of our common stock at an exercise price of $38.44 per share to an employment agency in connection with a placement F-29 fee. The warrant vests one year from grant date. We valued the warrant at $176,443 utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $38.44 Fair market value of common stock on date of issuance $38.44 Option life 5 years Volatility rate 119% Risk-free rate of return 6.06% Dividend rate 0% (E) In April 2000, we granted an option to purchase 2,500 shares of our stock at $15.88 per share to an advisory board member. The option vests over three years from grant date. We applied variable plan accounting pursuant to SFAS 123 and related interpretation EITF 96-18, and valued the option at $1,124 utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $15.88 Fair market value of common stock on date of valuation $1.688 Option life 7 years Volatility rate 119% Risk-free rate of return 6.06% Dividend rate 0% (F) In October 2000, we became obligated to issue a five-year common stock purchase warrant for 50,000 shares of Jabber.com common stock to VA Linux for the integration on Jabber.com's products with those of VA Linux. The exercise price is to be determined at the earlier of third party financing of Jabber.com or the fair market fair determined by Jabber.com. Based on the appraised value of the warrant, we recorded expense totalling $30,000 for the year ended December 31, 2000. (G) During 1999, we granted stock options under the plan to several consultants in connection with agreements to provide Webb with services related to developing financing sources and strategic alliances as well as investor relations. The terms of the agreements range from approximately six months to three years. We issued in the aggregate options to purchase a total of 52,168 shares of our common sock at exercise prices ranging from $4.00 to $8.50. We applied variable plan accounting pursuant to SFAS 123 and related interpretation EITF 96-18, and valued these options at $461,661 utilizing the Black-Scholes option pricing model on the vesting dates using the following assumptions: Exercise price $4.00 to $8.50 Fair market value of common stock on grant date $5.50 to $16.25 Option life 1 to 7 years Volatility rate 95% to 104% Risk free rate of return 4.52% to 6.00% Dividend rate 0% Vesting period Date of grant to 3 years (H) On June 30, 1999, as a result of the consummation of the merger with DCI, we recorded the intrinsic value of options granted to DCI employees whereby the difference between the fair market value of our common stock on June 30, 1999 ($17.50 per shares) and the exercise price of the options ($7.63 per share) is expensed over the vesting period of the options. We recorded expense for these options totalling $205,861 for the year ended December 31, 1999. (12) NET REVENUES Net revenues from continuing operations consist of software license fees; service fees for professional services for software integration, configuration, custom programming, hosting and software support and F-30 maintenance; and computer hardware sales. Net revenues from continuing operations are comprised of the following:
Year Ended December 31, ------------------------------- 2000 1999 ------------- ------------ Net revenues: License $ 2,155,990 $ 392,810 Services 1,858,403 682,877 Hardware and third-party software - 117,509 ------------- ------------ Total net revenues $ 4,014,393 $ 1,193,196 ============= ============
During July 1999, we sold two customer contracts to an unrelated third party, including computer hardware, for approximately $270,000. We provided services and equipment under the terms of the original contracts enabling the customers to provide Internet access to their end users. We recorded $138,504 of service revenue for the year ended December 31, 1999 related to providing services to the purchaser of these two contracts and also recorded a gain on the sale of the equipment totalling $2,225. (13) ACQUISITIONS Update Systems, Inc. Effective January 7, 2000, we acquired the assets of Update Systems, Inc. ("Update"), a developer and provider of e-communication Internet business solutions, by issuing 278,411 shares of Webb common stock. In addition, outstanding Update options to purchase common stock were exchanged for 49,704 options to purchase Webb common stock. The acquisition of the assets was recorded using the purchase method of accounting whereby the consideration paid of $10,060,417 was allocated based on the fair values of the assets acquired with the excess consideration over the fair market value of tangible assets totalling $10,014,485 recorded as intangible assets. Total consideration for the merger was as follows: Value of common stock issued $ 8,630,741 Value of options issued 1,364,676 (a) Acquisition expenses 65,000 ------------- Total purchase price $10,060,417 ============= The purchase price was allocated to the assets acquired based on their fair market values as follows: Acquired property and equipment $ 45,932 Developed technologies, goodwill and other intangibles 10,014,485 ------------- Total assets acquired $10,060,417 ============= The transaction with Update resulted in intangible assets totalling $10,014,485 and was comprised of the following: Goodwill $ 5,560,417 Developed technologies and workforce 4,500,000 ------------ Total assets acquired $10,060,417 ============ These intangible assets are being amortized over their estimated economic lives of three years. (a) 49,704 options issued, which were valued using the Black-Scholes option pricing model using the following assumptions: Exercise prices $ 4.33 Fair market value of common stock on measurement date $29.50 Option lives 5 years Volatility rate 104% Risk-free rate of return 5.0% Dividend rate 0% F-31 At December 31, 2000, we determined, per an analysis of the estimated undiscounted cash flows related to the purchased intangibles during their remaining useful life, that the net book value of the assets exceeded the estimated undiscounted net cash flows, and therefore, in accordance with our policy, such assets were considered to be impaired. Accordingly, we recorded an impairment loss in accordance with SFAS 121, totalling $3,435,807, all of which was allocated to goodwill. The impairment charge was determined using estimated fair values, determined by the use of discounted estimated net cash flows. As of December 31, 2000, the remaining book value of the intangible assets totalled $3,240,516. We will continue to evaluate the carrying value of the remaining intangible assets for possible impairment. Such a review may indicate further impairment that would require us to record additional losses in future periods and those losses could be substantial (see Note 14). Durand Communications, Inc. On June 30, 1999, Durand Acquisition Corporation ("DAC"), a wholly owned subsidiary of Webb, completed a merger with DCI, a developer and marketer of Internet "community" building tools, by exchanging 947,626 shares of Webb common stock for all of the common stock of DCI at an exchange ratio of 2.46 shares of Webb common stock for each share of DCI's common stock. In addition, outstanding DCI options and warrants to purchase common stock were converted at the same exchange ratio into 242,293 options and warrants to purchase Webb common stock. The acquisition of the assets and liabilities was recorded using the purchase method of accounting whereby the consideration paid of $14,216,876 was allocated based on the fair values of the assets and liabilities acquired with the excess consideration over the fair market value of tangible assets totalling $14,132,445 recorded as intangible assets. We have determined that substantially all of the intangible assets acquired are represented by the value of the developed technology, workforce and goodwill acquired from DCI. Total consideration for the merger was as follows: Value of common stock issued $ 9,239,358 Value of warrants and options issued 1,504,349 (a) Liabilities assumed 2,190,566 (b) Acquisition expenses 1,282,603 ------------- Total purchase price $ 14,216,876 ============= The purchase price was allocated to the assets acquired based on their fair market values as follows: Cash and cash equivalents $ 23,739 Other current assets 23,708 Property and equipment 36,984 ------------- Total tangible assets acquired 84,431 Developed technologies, goodwill and other intangibles 14,132,445 ------------- Total assets acquired $ 14,216,876 ============= (a) 242,293 warrants and options issued, which were valued using the Black- Scholes option pricing model using the following assumptions: Exercise prices $4.30 to $20.33 Fair market value of common stock on measurement date $ 9.75 Option lives 1 to 9 years Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0% (b) The liabilities assumed by Webb included a $1,168,173 note payable and accrued interest from DCI to Webb which was forgiven at the consummation of the transaction. F-32 In connection with the merger, we issued a five-year warrant to a financial advisory firm to purchase 50,150 shares of our common stock at an exercise price of $8.85. We recorded $654,488 in acquisition costs for the warrant, which was valued using the Black-Scholes option pricing model utilizing the following assumptions: Exercise price $8.85 Fair market value of common stock on grant date $15.50 Option life 5 years Volatility rate 104% Risk free rate of return 5.0% Dividend rate 0% The transaction with DCI resulted in intangible assets totalling $14,132,445 (primarily developed technologies, workforce and goodwill). These intangible assets are being amortized over their estimated economic lives of three years. The results of operations of DCI are included in our results from the date of the DCI acquisition and all significant intercompany balances and transactions have been eliminated in consolidation. At December 31, 2000, we determined, per an analysis of the estimated undiscounted cash flows related to the purchased intangibles during their remaining useful life, that the net book value of the assets exceeded the estimated undiscounted net cash flows, and therefore, in accordance with our policy, such assets were considered to be impaired. Accordingly, we recorded an impairment loss in accordance with SFAS 121, totalling $4,733,097. The impairment charge was determined using estimated fair values, determined by the use of discounted estimated net cash flows. As of December 31, 2000, the remaining book value of the intangible assets totalled $2,313,766. We will continue to evaluate the carrying value of the remaining intangible assets for possible impairment. Such a review may indicate further impairment that would require us to record additional losses in future periods and those losses could be substantial (see Note 14). NetIgnite, Inc. On March 10, 1999, we acquired a controlling interest in a newly formed company, NetIgnite 2, LLC ("NetIgnite"). NetIgnite was a development stage company that we formed with a predecessor company by the name of NetIgnite, Inc. ("NI"), the sole shareholder and founder of which was Perry Evans, the founder and past President of MapQuest.com. Webb was, as a result of this transaction, entitled to 99.5% of NetIgnite's operating income and approximately 60% of any proceeds upon the sale of NetIgnite. NI was entitled to .5% of NetIgnite's operating income and approximately 40% of any proceeds upon the sale of NetIgnite. Prior to June 2, 1999, we utilized the equity method of accounting for this subsidiary and recorded a loss from this investment totalling $127,083 for the year ended December 31, 1999. On June 2, 1999, we acquired the assets and liabilities of NI in exchange for 71,429 shares of Webb common stock valued at $984,400. The acquisition of these assets and liabilities was recorded using the purchase method of accounting whereby the consideration paid was allocated based on the fair values of the assets and liabilities acquired with the excess consideration totalling $893,953 recorded as an intangible asset, primarily developed technologies and goodwill. These intangible assets are being amortized over their estimated economic lives of three years. The results of operations of NetIgnite are included in our results from the date of the NI acquisition and all significant intercompany balances and transactions have been eliminated in consolidation. Pro Forma Results (Unaudited) The following unaudited tabulations present the pro forma effect of the business combinations on our results of operations for the year ended December 31, 1999, as if the transactions occurred on January 1 of the year in which each acquisition occurred, except that pro forma results include the results of Update Systems since its formation (February 24, 1999) and NetIgnite since its formation (March 10, 1999). Net revenues $ 1,932,491 Net loss applicable to common stockholders $(31,469,032) Loss applicable to common stockholders per share, basic and diluted $ (4.26) (14) IMPAIRMENT LOSS During the year ended December 31, 2000, we recorded an impairment loss in our AccelX business segment totalling $8,168,904 from the impairment of assets we purchased in connection with our acquisitions of F-33 DCI and Update. The impaired assets consisted of developed technology and goodwill as summarized in the following table:
DCI Update Total -------------- -------------- ------------- Developed technology $ 3,261,751 $ - $ 3,261,751 Goodwill 1,471,346 3,435,807 4,907,153 -------------- -------------- ------------- Total impairment loss $ 4,733,097 $ 3,435,807 $ 8,168,904 ============== ============== =============
In connection with the DCI and Update acquisitions, we purchased technology that has been incorporated into our current product offerings as well as our Jabber.com instant messaging technology. Based on a review of the acquired technology in combination with our evolving business plan, we determined that only a portion of such acquired technology is utilized in our current products. Further, substantially less revenue had been recorded from products incorporating the acquired technology than was originally expected and our current estimated revenues projected to be earned from the purchased technology is also less than previously believed. Because of these factors, which became apparent during the fourth quarter of 2000 in the context of an overall economic slowdown and its impact on our customers, coupled with substantial volatility in the capital and business environment and delays in purchasing decisions by most large aggregators of small business due in part to a reluctance to make significant investments in new Internet-related products and services, we determined that the carrying amount of the acquired intangibles should be assessed for impairment. As a result, we assessed impairment by comparing the estimated undiscounted net cash flows expected to be generated from our current product offerings which use the purchased technologies to their remaining net book values of the assets. Our analysis showed that such assets were in fact impaired. Accordingly, the impairment charge was recorded based upon the difference between the carrying amount and their estimated fair value of the assets, determined using the net present value of the estimated future cash flows. (15) DISCONTINUED OPERATIONS On September 12, 2000, our e-banking segment was sold to a privately held company for consideration valued at $487,873, which was approximately the same as the net book value of the net assets of this segment. We received $39,700 in cash and 181,176 shares of the purchaser's common stock recorded at an estimated value of approximately $2.47 per share. We estimated the fair value of the stock based on our assessment of the buyers business prospects and the value of the assets we sold to them. At the time of the sale, which closed in September 2000, the purchaser had in place temporary financing and was in the process of raising permanent financing. We believed, as did the purchaser, that due to an investment earlier in the year by a venture capital firm, that additional funding would occur which would support our estimated value. During the interim from September 2000, through December 31, 2000, the values for technology companies overall, and values for internet-based companies specifically, fell substantially. As a result, at December 31, 2000, we determined that the value of this stock was likely permanently impaired, and we began the process of determining what value, if any, should be carried at in our December 31, 2000, balance sheet. In January 2001, BNKR informed us that they were unable to close on the commitment for additional funding, and in February 2001, BNKR ceased operations. These post year-end events confirmed our belief at December 31, 2000, that these securities were permanently impaired, and we determined that they should be completely written off. The sale of this segment is reflected as a sale of discontinued operation in the accompanying consolidated financial statements. Accordingly, the assets and liabilities; and revenues, costs and expenses of this discontinued operation have been excluded from the respective captions in the Consolidated Balance Sheet and Consolidated Statement of Operations and have been reported as "Net current assets of discontinued operations," "Net assets of discontinued operations," "Net current liabilities of discontinued Operations," and as "Loss from discontinued operations, net of taxes," for all years presented. Net current assets of discontinued operations consists of the following:
December 31, ------------- 1999 ------------- Accounts receivable $ 30,326 ============= Net long-term assets of discontinued operations consists of the following: Property and equipment, net $ 683,890 ============= Net current liabilities of discontinued operations consists of the following: Accounts payable and accrued liabilities 192,512 Deferred revenue and customer deposits 183,000 ------------- Total net current liabilities of discontinued operations $ 375,512 =============
Summarized financial information for the discontinued operation is as follows (Note: 2000 amounts include activity through September 12, 2000 only): F-34 Year Ended December 31, ---------------------- 2000 1999 --------- --------- Net revenues $ 73,092 $ 751,087 Net loss from discontinued operations (203,372) (79,776) (16) CUSTOMER ACQUISITION COSTS During 1999, we granted warrants to three customers to purchase in the aggregate 161,667 shares of our common stock at exercise prices ranging from $9.19 to $9.94 per share. The warrants may be exercised at any time during the one-to-three-year periods from the date of issuance. On June 30, 1999, we issued a warrant to purchase 150,000 shares of our common stock to Switchboard, Inc. concurrent with the license agreement we entered into with them on the same date. The warrant vested on the date of issuance and there was no performance obligation associated with the issuance of the warrant. In 1998, we commenced a warrant issuance program, which was terminated in 1999, related to our broadband cable business in which we issued warrants for an aggregate of 11,667 shares to two cable operators during 1999. There were no performance obligations associated with the issuance of these warrants. Because these agreements did not contain minimum guaranteed revenues or performance obligations, we did not have any past transactions with these customers, and due to the start-up nature of these services and other uncertainties regarding these arrangements, we recorded expense for customer acquisition costs of $941,684 for the year ended December 31, 1999. We valued these options utilizing the Black-Scholes option pricing model using the following assumptions: Exercise prices $9.19 to $9.94 Fair market value of common stock on grant date $8.81 to $15.50 Option lives 1 to 3 Years Volatility rate 104% Risk free rate of return 5.0% to 6.0% Dividend rate 0% (17) MAJOR CUSTOMERS A substantial portion of our revenues is derived from a limited number of customers. Revenues to customers in excess of 10% of net revenues from continuing operations for the years ended December 31, 2000 and 1999, are as follows: Year Ended December 31, -------------------------------- 2000 1999 -------------- ------------- Customer A $ 1,450,872 $ - Customer B 650,488 - Customer C 532,585 500,000 Customer D 295,578 172,128 Customer E 43,940 138,504 Customer F - 122,120 Accounts receivable balances from customers in excess of 10% of the accounts receivable balance as of December 31, 2000 and 1999, are as follows: December 31, -------------------------------- 2000 1999 -------------- ------------- Customer A $ 147,409 $ - Customer F - 4,000 Customer G - 19,000 Customer H - 35,000 Customer I - 17,056 Customer J 48,999 - Customer K 145,362 - (18) INCOME TAXES The provision for income taxes includes the following: F-35 Year Ended December 31, -------------------------- 2000 1999 ----------- ----------- Current: Federal $ - $ - State - - ----------- ----------- Total current provision - - ----------- ----------- Deferred: Federal (6,796,927) (5,497,115) State (659,702) (533,543) Valuation allowance 7,456,629 6,030,658 ----------- ----------- Total deferred provision (benefit) - - ----------- ----------- Total provision $ - $ - =========== =========== The statutory federal income tax rate was 34% for the years ended December 31, 2000 and 1999. Differences between the income tax expense reported in the statements of operations and the amount reported by applying the statutory federal income tax rate to loss applicable to common shareholders before income taxes are as follows: Year Ended December 31, ----------------------------- 2000 1999 ------------ ------------ Benefit at statutory rate $(16,527,955) $ (7,434,444) Increase (decrease) due to: State income taxes (1,604,184) (721,578) Nondeductible expenses 10,675,510 2,125,364 Valuation allowance 7,456,629 6,030,658 ------------ ------------ Income tax provision $ - $ - ============ ============ Components of net deferred assets (liabilities) as of December 31, 2000 and 1999 are as follows: Year Ended December 31, --------------------------- 2000 1999 ---------- ---------- Current: Accrued liabilities and other reserves $ 409,837 $ 77,920 Deferred revenue 65,097 85,000 Non-current: Depreciation 29,247 21,788 Book amortization in excess of tax - 44,035 Net operating losses 19,063,673 11,882,482 ------------ ------------ Total net deferred tax assets 19,567,854 12,111,225 Valuation allowance (19,567,854) (12,111,225) ------------ ------------ Net deferred tax assets $ - $ - ============ ============ For income tax purposes, we have approximately $51,109,000 of net operating loss carryforwards that expire at various dates through 2020. The Tax Reform Act of 1986 contains provisions that may limit the net operating loss carryforwards available to be used in any given year in the event a significant change in ownership. Realization of net operating loss carryforwards is dependent on generating sufficient taxable income prior to the expiration dates. F-36 During 2000 and 1999, we increased our valuation allowance by $7,456,629 and $6,030,658, respectively, due mainly to uncertainty relating to the realizability of the 2000 and 1999 net operating loss carryforwards. The amount of the deferred tax assets considered realizable could be adjusted in the near term if future taxable income materializes. (19) RELATED PARTY TRANSACTIONS Legal Services Webb's vice-president of administration and corporate counsel, who began his employment with the Company in 1999, is also a partner in the law firm we retain for our legal services. We incurred $90,929 and $268,412 in legal fees to the law firm during the years ended December 31, 2000 and 1999, respectively. As of December 31, 2000 and 1999, our accounts payable balances included $10,000 and $8,013, respectively, payable to the law firm. (20) COMMITMENTS AND CONTINGENCIES Minimum future annual lease payments as of December 31, 2000 are as follows: 2001 $ 791,391 2002 623,077 2003 582,977 2004 599,148 2005 349,503 Thereafter - ----------- $ 2,946,096 =========== The total operating lease expense for the years ended December 31, 2000 and 1999 was $573,394 and $368,168, respectively. In November 1999, we entered into a three-year application service provider agreement whereby we pay approximately $12,000 per month for financial application software hosting services. The term of the agreement is for three years and we have the right to terminate the agreement at any time for a termination fee of 30% of the total remaining monthly payments. Total remaining payments under this agreement are expected to be approximately $280,000. Webb has entered into an employment agreement with Perry Evans and agreements with certain officers, including William R. Cullen, Lindley S. Branson, Gwenael Hagan and Andre Durand which take effect only if a change of control of 30% or more of our outstanding voting stock occurs. If a change of control occurs, these agreements provide for the continued employment (at similar responsibility and salary levels) of the employees for a period of three years after the change of control. During this three-year period, if we (or a successor entity) terminates the employee's employment without cause or if the employee terminates his employment for good reason, then we (or the successor entity) must pay a lump sum severance to the employees equal to three years salary (including bonus), accelerate the vesting of all outstanding options held by the employees and allow the employees to continue to participate in our benefit and welfare plans (or those of the successor entity) for a period of three years after the employment terminates. (21) BUSINESS SEGMENT INFORMATION Webb develops and supports products and services for local markets by providing an interactive framework of local commerce and community-based services comprised of publishing, content management, community-building and communications. In addition, our subsidiary, Jabber.com, is engaged in the early stages of several projects that are implementing the Jabber.org XML-based open-source instant messaging platform for portal F-37 services, enterprise messaging, financial services applications and enhanced mobile and telephony integration. We have two reportable business segments: AccelX and Jabber.com. AccelX consists of XML-based online commerce and communication solutions for small business, with a particular emphasis on local commerce interaction. Jabber.com consists of XML-based open-source Internet application products which incorporates instant messaging as a key application for commerce-oriented dialogs between businesses and consumers. December 31, ----------------------------- 2000 1999 ------------- ------------- (As Restated See note 23) Assets ------ AccelX $ 15,460,370 $ 21,910,318 Jabber.com 4,016,533 - Net assets of discontinued operations - 714,216 Eliminations (3,056,166) - ------------ ------------ Total assets $ 16,420,737 $ 22,624,534 ============ ============ Property and equipment, net --------------------------- AccelX $ 2,566,359 $ 1,668,599 Jabber.com 263,773 - ------------ ------------ Total $ 2,830,132 $ 1,668,599 ============ ============ Years Ended December 31, ----------------------------- 2000 1999 ------------- ------------- (As Restated See note 23) Net revenues from continuing operations --------------------------------------- AccelX $ 3,693,518 $ 1,193,196 Jabber.com 320,875 - ------------- ------------- Total net revenues from continuing operations $ 4,014,393 $ 1,193,196 ============= ============= Net loss from continuing operations ----------------------------------- AccelX $(36,256,467) $(17,197,319) Jabber.com (7,600,756) - Eliminations 6,963,717 - ------------- ------------- Total net loss from continuing operations $(36,893,506) $(17,197,319) ============= ============= Depreciation and amortization ----------------------------- AccelX $ 9,119,741 $ 2,902,523 Jabber.com 859,126 - Eliminations (823,744) - ------------- ------------- Total depreciation and amortization expense $ 9,155,123 $ 2,902,523 ============= ============= Property and equipment additions -------------------------------- AccelX $ 1,487,855 $ 1,272,113 Jabber.com 299,155 - Discontinued operations - 420,419 ------------- ------------- Total $ 1,787,010 $ 1,692,532 ============= ============= F-38 (22) SUBSEQUENT EVENT On February 28, 2001, pursuant to a securities purchase agreement, we completed a private placement that resulted in gross proceeds of $2,500,000. We sold 2,500 shares of our series C-1 convertible preferred stock (the "series C-1 preferred stock"), including warrants to purchase 500,000 shares of our common stock. We received net proceeds totalling approximately $2,450,000 after deducting approximately $50,000 in offering costs. The series C-1 preferred stock is convertible into shares of our common stock at $2.50 per share. The conversion price is subject to anti-dilution protection in the event we issue common stock at prices less than the current conversion price for the preferred stock or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. If the conversion price is reduced, we may be required to record additional charges against income and such charges may be significant. In addition, subject to certain conditions, including the Securities and Exchange Commission declaring the associated Registration Statement effective, we have the right to sell 2,500 shares of our series C-2 convertible preferred stock (the "series C-2 preferred sock") to the investor for gross proceeds of $2,500,000. The initial conversion price of the series C-2 preferred stock will be equal to the least of 80% of the average closing bid price of our common stock for three trading days immediately preceding the issuance of the series C- 2 preferred stock, 80% of the closing bid price of our common stock on the trading day immediately preceding such issuance or $7.50 per share. If we consummate the sale of our series C-2 preferred stock, we will also issue a common stock purchase warrant to the investor. The number of shares issuable upon exercise of the warrant will be determined by the aggregate value of the series C-2 preferred stock divided by the initial conversion price multiplied by 20%. The exercise price of the warrant will be computed as the greater of 150% of the initial conversion price of the series C-2 preferred stock and the closing bid price on the trading day immediately preceding the issuance date. The issuance of the series C-2 preferred stock may result in significant charges to be recorded against net losses applicable to common stockholders. We also issued a three-year warrant to purchase 500,000 shares of our common stock in connection with the series C-1 preferred stock. The warrant entitles the holder to purchase our common stock for a purchase price of $3.75 per share. The exercise price of the warrant is subject to anti-dilution protection should certain events transpire such as subdivision or combination of our common stock, distributions to holders of our common stock, or consolidations or mergers with another corporation. If the exercise price is reduced, we may be required to record additional charges against income and such charges may be significant. The warrant was valued at $735,279 determined based on the relative fair value of the warrants utilizing the Black-Scholes option pricing model using the following assumptions: Exercise price $3.75 Fair market value of common stock on measurement date $3.00 Option life 3 years Volatility rate 120% Risk free rate of return 6.0% Dividend rate 0% Due to the conversion feature associated with the series C-1 preferred stock, we will recognize the beneficial conversion feature as an additional preferred stock dividend. The computed value of the beneficial conversion feature of $1,235,279 will be initially recorded as a reduction of the series C-1 preferred stock and an increase to additional paid-in capital. The beneficial conversion feature reduction to the series C-1 preferred stock will be accreted on the date of issuance, as additional preferred stock dividends, by recording a charge to income applicable to common stockholders from the date of issuance to the earliest date of conversion. The difference between the stated value of $1,000 per share totalling $2,500,000 and the recorded value on February 28, 2001, will be accreted as a charge to income applicable to common stockholders on the date of issuance (the date on which the series C-1 preferred stock was first convertible) and is comprised of the following: F-39 Beneficial conversion feature $ 1,235,279 Relative fair value of common stock warrants 735,279 ------------- Total accretion expense $ 1,970,558 ============= As a result of the issuance of the series C-1 preferred stock, in accordance with terms of the original agreements, the conversion prices for the 10% note payable and our series B-2 preferred stock as well as the exercise prices for the 10% note payable and series B preferred stock warrants were reset as indicated below: Conversion or Conversion or Exercise Price Exercise Price Immediately Immediately After Preceding Series Series C-1 C-1 Preferred Preferred Stock Stock Issuance Issuance ------------------------------------------------------------- ----------------- 10% convertible note payable $ 10.07 $ 2.50 Series B-2 preferred stock 10.20408 2.50 Series B common stock purchase warrants 3.875 3.75374 10% note payable common stock purchase warrant 10.264 9.33431 As a result of the reset provisions, we will record additional non-cash expenses in February 2001, totalling $3,314,498 as summarized below: 10% convertible note payable $ 2,394,234 Series B-2 preferred stock 886,068 Series B common stock purchase warrants 2,264 10% note payable common stock purchase warrant 31,932 ------------- Total expense $ 3,314,498 ============= With respect to the 10% convertible note payable and the series B-2 preferred stock, the non-cash expense represents an additional beneficial conversion feature calculated by multiplying the incremental number of common shares issuable upon conversion after the reset by the fair market value of our common stock on the issuance date of the series C-1 preferred stock as follows:
10% Convertible Series B-2 Note Payable Preferred Stock ------------------- ------------------- Value of security $2,654,110 $ 978,000 Conversion price before reset $ 10.07 $10.20408 Number of common shares issuable upon conversion before reset 263,566 95,844 Conversion price after reset $ 2.50 $ 2.50 Incremental number of common shares issuable upon conversion after reset 798,078 295,356 Fair market value of common stock on series C-1 preferred stock issuance date $ 3.00 $ 3.00 Additional beneficial conversion feature recognized as interest expense $2,394,234 Additional beneficial conversion feature recognized as a preferred stock dividend $ 886,068
With respect to the warrants, the non-cash expense was computed based on the difference of the warrant value immediately before the reset to the value immediately after the reset using the Black-Scholes option pricing model as indicated below:
Series B Common Stock Purchase 10% Note Payable Common Stock Purchase Warrant Warrant ---------------------------------------------- ---------------------------------------------- Immediately Immediately Preceding Immediately Preceding Immediately Reset After Reset Reset After Reset ------------------- ------------------- ------------------- ------------------- Common stock issuable upon exercise of 343,750 343,750 136,519 150,116 warrant Exercise price $ 3.85 $3.75374 $10.26425 $9.33431 Fair market value of common stock on date of $ 3.00 $ 3.00 $ 3.00 $ 3.00 issuance Option life 5 years 5 years 5 years 5 years Volatility rate 120% 120% 104% 104% Risk-free rate of 6.71% 6.71% 6.0% 6.0% return Dividend rate 0% 0% 0% 0% Calculated value $854,110 $856,374 $ 256,731 $288,663
F-40 (23) RESTATEMENT In December 1999, we issued a warrant to the holder of our 10% note payable in connection with amending the terms of our 10% note payable. This warrant was issued in connection with the sale of our series B preferred stock, which we completed in February 2000. We originally recorded the warrant, valued at $2,311,475, as a series B preferred stock offering cost. We have now determined that it is appropriate to re-characterize this warrant as additional consideration to the note holder, and have revised our accounting for this warrant to reflect it as a deferred financing asset related to the 10% note payable. Accordingly, the results of operations for periods after December 1999, have been restated to reflect such capitalization and amortization of the $2,311,475 as additional non-cash interest expense from the date of issuance to the date of maturity for the 10% convertible note payable, August 25, 2002. This restatement has no effect on previously reported cash flows from operations, investing activities, or financing activities. As a result of the re-characterization of the warrant as noted above, the relative fair value of the series B preferred stock and the warrant issued therewith was also affected, resulting in additional proceeds being allocated to warrants and an equal reduction in proceeds allocated to additional paid-in capital, with no net impact on total stockholder's equity. During July and September 2000, we issued 912,500 shares of common stock of our subsidiary, Jabber.com, to Jabber.com employees, an officer of Webb and members of the Jabber.com advisory boards for services provided to Jabber.com and to be rendered in future periods. Certain of the shares were vested immediately, and certain shares vest over a periods ranging from one month to two years. We recorded the estimated fair value of these shares and the related deferred compensation totalling $523,700 on the grant date. Through December 31, 2000, we recorded compensation expense totalling $276,337. In our previously reported results for the year ended December 31, 2000, we recorded minority interest on our balance sheet equal to the total value of the common stock and did not allocate any of Jabber.com's losses to the minority shareholders of Jabber.com. We have revised our accounting for the minority interest to reflect the minority share of Jabber.com's losses in an amount equal to the minority interest share of Jabber.com's net assets. This restatement and its impact on previously reported quarterly amounts are presented below. Condensed Consolidated Balance Sheet:
December 31, 2000 -------------------------------------------- As Filed As Restated ------------------- ------------------- ASSETS Current assets (Note 1) $ 6,264,566 $ 6,721,948 Other assets (Note 1) 9,340,870 8,883,488 Deferred financing costs (Note 2) 104,893 815,301 ------------------- ------------------- Total assets $ 15,710,329 $ 16,420,737 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ 6,199,421 $ 6,199,421 ------------------- ------------------- Minority interest in subsidiary (Note 5) 523,700 - ------------------- ------------------- Stockholders' equity: Preferred stock: 912,286 912,286 Common stock (Note 3) 85,986,641 85,506,004 Warrants and options (Note 4) 13,740,819 15,450,237 Deferred compensation (Note 5) (402,137) (154,774) Other accumulated comprehensive income 1,371 1,371 Accumulated deficit (91,251,772) (91,493,808) ------------------- ------------------- Total stockholders' equity 8,987,208 10,221,316 ------------------- ------------------- Total liabilities and stockholders' equity $ 15,710,329 $ 16,420,737 =================== ===================
F-41 Unaudited Condensed Consolidated Statement of Operations:
Year Ended December 31, 2000 -------------------------------------------- As Reported As Restated ------------------- ------------------- Loss from operations $ (35,578,433) $ (35,578,433) Interest income 731,808 731,808 Interest expense (605,638) (1,124,011) Loss on foreign currency transactions (130,357) (130,357) Loss on write-off of investment in common stock (448,172) (448,172) Loss on disposition of property and equipment (344,341) (344,341) ------------------- ------------------- Net loss from continuing operations (36,375,133) (36,893,506) Net loss from discontinued operations (203,372) (203,372) ------------------- ------------------- Net loss before minority interest (36,578,505) (37,096,878) Minority interest in losses of subsidiary - 276,337 ------------------- ------------------- Net loss (36,578,405) (36,820,541) Preferred stock dividends (373,126) (373,126) Accretion of preferred stock to redemption value (11,660,000) (11,660,000) ------------------- ------------------- Net loss applicable to common stockholders $ (48,611,631) $ (48,853,667) =================== =================== Net loss per share, basic and diluted $ (5.37) $ (5.39) =================== =================== Weighted average shares outstanding, basic and diluted 9,060,437 9,060,437 =================== ===================
Unaudited Condensed Consolidated Statement of Operations:
Three Months Ended March 31, 2000 -------------------------------------------- As Reported As Restated ------------------- ------------------- Loss from operations $ (5,346,648) $ (5,346,648) Interest income 161,887 161,887 Interest expense (174,990) (369,380) ------------------- ------------------- Net loss from continuing operations (5,359,751) (5,554,141) Net loss from discontinued operations (34,791) (34,791) ------------------- ------------------- Net loss (5,394,542) (5,588,932) Preferred stock dividends (373,126) (373,126) Accretion of preferred stock to redemption value (12,500,000) (12,500,000) ------------------- ------------------- Net loss applicable to common stockholders $ (18,267,668) $ (18,462,058) =================== =================== Net loss per share, basic and diluted $ (2.11) $ (2.13) =================== =================== Weighted average shares outstanding, basic and diluted 8,667,640 8,667,640 =================== ===================
F-42
Three Months Ended Six Months Ended June 30, 2000 June 30,2000 -------------------------------------------- -------------------------------------------- As Reported As Restated As Reported As Restated ------------------- ------------------- ------------------- ------------------- Loss from operations $ (7,118,958) $ (7,118,958) $ (12,465,584) $ (12,465,584) Interest income 283,486 283,486 445,373 445,373 Interest expense (172,961) (280,170) (347,951) (649,550) ------------------- ------------------- ------------------- ------------------- Net loss from continuing operations (7,008,433) (7,115,642) (12,368,162) (12,669,761) Net loss from discontinued operations (27,065) (27,065) (61,857) (61,857) ------------------- ------------------- ------------------- ------------------- Net loss (7,035,498) (7,142,707) (12,430,019) (12,731,618) Preferred stock dividends - - (373,126) (373,126) Accretion of preferred stock to redemption value - - (12,500,000) (12,500,000) ------------------- ------------------- ------------------- ------------------- Net loss applicable to common stockholders $ (7,035,498) $ (7,142,707) $ (25,303,145) $ (25,604,744) =================== =================== =================== =================== Net loss per share, basic and diluted $ (0.77) $ (0.78) $ (2.85) $ (2.88) =================== =================== =================== =================== Weighted average shares outstanding, basic and diluted 9,112,440 9,112,440 8,888,848 8,888,848 =================== =================== =================== ===================
Three Months Ended Nine Months Ended September 30, 2000 September 30,2000 -------------------------------------------- -------------------------------------------- As Reported As Restated As Reported As Restated ------------------- ------------------- ------------------- ------------------- Loss from operations $ (6,749,146) $ (6,749,146) $ (19,215,645) $ (19,215,645) Interest income 70,761 70,761 508,096 508,096 Interest expense (109,571) (217,958) (457,523) (867,509) Loss on disposal of property new equipment (348,081) (348,081) (340,043) (340,043) ------------------- ------------------- ------------------- ------------------- Net loss from continuing operations (7,136,037) (7,244,424) (19,505,115) (19,915,101) Net loss from discontinued operations (203,372) (203,372) (265,129) (265,129) ------------------- ------------------- ------------------- ------------------- Net loss (7,339,409) (7,447,796) (19,770,244) (20,180,230) Preferred stock dividends - - (373,126) (373,126) Accretion of preferred stock to redemption value - - (12,500,000) (12,500,000) ------------------- ------------------- ------------------- ------------------- Net loss applicable to common stockholders $ (7,339,409) $ (7,447,796) $ (32,643,370) $ (33,053,356) =================== =================== =================== =================== Net loss per share, basic and diluted $ (0.80) $ (0.81) $ (3.63) $ (3.67) =================== =================== =================== =================== Weighted average shares outstanding, basic and diluted 9,217,471 9,217,471 8,999,188 8,999,188 =================== =================== =================== ===================
Note 1: The net change in current assets and other assets represents a reclassification of $525,000 for restricted cash from short-term deposits and other assets as well as a reclassification of $67,618 from short-deposits to other assets. Note 2: The increase in deferred financing costs represents the value of the warrant of $2,311,475 less amortization expense from date of issuance through December 31, 2000, totalling $518,373 and a reduction of $1,082,694 related to the conversion of one-half of the 10% note payable in February 2000. F-43 Note 3: The decrease in common stock represents the $1,082,694 for the portion of the unamortized deferred financing costs taken against equity for conversion of one-half of the principal balance of the 10% note payable, offset by the $602,057 increase attributable to the beneficial conversion feature of the series B preferred stock after reallocation of the relative fair values of the securities issued in February 2000. Note 4: The increase in warrants and options represents the increase in the warrant to purchase common stock issued with the series B preferred stock of $1,709,418 after reallocation of the relative fair values of the securities. Note 5: The reduction in minority interest of $523,700 and deferred compensation of $247,363 at December 31, 2001, represents the allocation of the losses in Jabber.com to their minority shareholders equal to the minority interest share in the net assets of Jabber.com, which totalled $276,337 for the year ended December 31, 2001. F-44