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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________
Commission File No. 0-28728
NetLive Communications, Inc.
(Exact name of Small Business Issuer as Specified in its Charter)
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Delaware 13-3848652
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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584 Broadway, New York, New York 10012
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(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code: (212) 343-7082
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class
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Common Stock, par value $.0001 per share
Common Stock Purchase Warrants
Indicate by a check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ---
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $10,256.
The aggregate market value of the issuer's voting stock held by
non-affiliates (based upon the per share closing price of $1.25 on June 15,
1998 and, for purposes of this calculation only, the assumption that all the
issuer's directors, officers and 10% beneficial shareholders are affiliates)
was approximately $2,279,469.
The number of shares outstanding of the issuer's Common Stock, par value
$.0001 per share, as of June 15, 1998 was 2,950,000.
The Exhibit Index appears on page 26.
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NETLIVE COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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PART I
Item 1 Description of Business.................................... 3
Item 2 Description of Property.................................... 13
Item 3 Legal Proceedings.......................................... 13
Item 4 Submission of Matters to a Vote of Security Holders........ 14
PART II
Item 5 Market for Common Equity and Related Stockholder Matters... 14
Item 6 Management's Discussion and Analysis or Plan of Operations. 17
Item 7 Financial Statements....................................... 20
Item 8 Accounting and Financial Disclosure........................ 21
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act. 21
Item 10 Executive Compensation..................................... 21
Item 11 Security Ownership of Certain Beneficial Owners and
Management................................................. 21
Item 12 Certain Relationships and Related Transactions............. 22
Item 13 Exhibits and Reports on Form 8-K........................... 22
EXHIBIT INDEX 26
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THIS FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
U.S. SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE UNKNOWN
RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES
TO BE MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. IN
ASSESSING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO
READ CAREFULLY ALL RISK FACTORS AND CAUTIONARY STATEMENTS CONTAINED IN THIS
FORM 10-KSB AND IN OTHER FILINGS MADE BY THE NETLIVE COMMUNICATIONS, INC. WITH
THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
A. RECENT DEVELOPMENTS
NetLive Communications, Inc. (the "Company" or "NetLive"), a development stage
company, was incorporated on August 23, 1995 in the State of Delaware. As part
of its marketing efforts in the fiscal year ended March 31, 1998, the Company
approached a number of potential end users to enter into agreements to beta
test the development version of the Company's Internet call center software
technology, to fund custom features as required, and to subsequently purchase
commercial versions of the Company's products, when and if successfully
developed. These efforts, like the Company's efforts to establish strategic
partnerships for joint product distribution, were unsuccessful. The Company
lacked sufficient resources to mount a sustained advertising and expanded
marketing campaign, or to continue product development without external
funding.
As the Company's financial reserves dwindled, the Company attempted to raise
additional financing through various means and attempted to improve liquidity
by staff reductions and curtailing expenses. The Board determined that the
prospect of licensing its Internet call center software technologies or
otherwise generating sufficient cash in the time available was unlikely.
Accordingly, after evaluating multiple possibilities, on March 11, 1998, the
Company entered into a non-binding letter of intent with an affiliate of Newton
Grace Pty. Ltd. ("Newton Grace"). Under the terms of the proposed transaction,
the stockholders of the affiliate would exchange all of their shares in the
affiliate for a combination of shares of common stock and convertible preferred
stock, representing a substantial majority of the common stock, of NetLive.
To preserve resources, the Board decided that it was necessary to terminate all
employees other than those who would be instrumental in completing the Newton
Grace transaction or another similar transaction. Accordingly, on March 13,
1998 the Company laid-off the vast majority of its non-executive staff and
ceased its historic business operations. The description of the Company's
business and operations set forth throughout this Form 10-
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KSB is qualified by reference to the information contained in this Item 1(A).
During the next three months, the Company concentrated on winding up its
operations, negotiating settlement agreements with departing personnel and
others, and conducting due diligence on, and negotiating with the principals
of, Newton Grace. As a result of various tax considerations and ongoing
negotiations, the stock-for-stock transaction contemplated in the letter of
intent was modified.
On June 22, 1998, NetLive Communications, Inc. (the "Company") and its
newly-formed Australian subsidiary, Linda Industries Pty Limited ("LIP"),
entered into a Stock Purchase and Reorganization Agreement ("Purchase
Agreement"), dated as of June 22, 1998, with Playbyrne Investments Pty Limited,
Budbox Pty Limited, Newton Grace, Intercorp Group Pty Limited, Hallendon Pty
Limited, Geoffrey Russell Player and Vicki Gaye Player (collectively the
"Purchasers"). Pursuant to the Purchase Agreement, the Company has agreed, in
general, to acquire certain of Newton Grace's operating assets (excluding its
cash, trademarks and certain receivables) (collectively, the "Assets"), subject
to the assumption of certain liabilities, for an aggregate purchase price of
Australian Dollars (AUD) $19,000,000. Newton Grace is an Australian corporation
engaged in the consumer electric goods business.
Under the Purchase Agreement, the Company has also agreed, among other things,
to (a) use its best efforts to effect a reverse stock split of approximately
3.4-for-1 (the "Split") and (b) issue 8 million shares of common stock ("Common
Stock"), subject to adjustment, and 1 million shares of non-voting Series A
Preferred Stock ("Preferred Stock"), in each case post-Split, to Newton Grace
and certain of its affiliates and other entities for an aggregate purchase
price of (AUD) $10,000,000.
Immediately upon receipt of the funds from the sale of stock, the Company will
use part of such capital contribution to capitalize its newly-formed subsidiary
by purchasing 1,666,667 shares of LIP in exchange for (AUD) $1,666,667 and by
loaning (AUD) $3,333,333 to LIP, to be evidenced by a promissory note. It is
anticipated that LIP will immediately thereafter acquire substantially all of
Newton Grace's assets (excluding its trademarks, cash and certain receivables),
subject to the assumption of certain of its liabilities, for an aggregate of
(AUD) $19,000,000. The purchase price will be composed of the following: (i)
the (AUD) $5,000,000 invested and loaned by the Company as described above,
(ii) (AUD) $10,000,000 in cash derived from a loan from the National Australia
Bank to LIP, currently being negotiated, and (iii) (AUD) $4,000,000 to be paid
by LIP over time, which is to be evidenced by a promissory note.
Contemporaneously therewith, pursuant to the various trademark assignments, it
is anticipated that the Company will use the balance of the capital contributed
by the Purchasers to acquire all of the trademarks from Newton Grace for (AUD)
$5,000,000 in cash. Such trademarks will be immediately licensed, pursuant to
the license agreements, to LIP, which will pay license fees to the Company for
the use thereof.
The transactions contemplated by the Purchase Agreement (collectively the
"Transaction") are subject to, among other things, all of the parties
completing their due
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diligence, the negotiation and execution of certain agreements, and the Company
obtaining stockholder and regulatory approvals.
The description of the Transaction is qualified in its entirety by reference to
the full text of the Purchase Agreement, which was filed in a Form 8-K filed by
the Company with the Securities Exchange Commission ("SEC") on June 30, 1998
and is incorporated herein by reference. When and if the Transaction is
consummated, it would result in the acquisition of a significant amount of
assets of, and a change in control of, the Company.
B. OVERVIEW OF HISTORICAL BUSINESS
Prior to March 31, 1997, the Company was developing live, one-on-one
videoconferenced entertainment, educational and counseling services over the
Internet and technologies designed to deliver such content services to
consumers. After March 31, 1997, the Company shifted its focus to concentrate
principally on developing Internet call center software technologies to license
to businesses. The Company hoped to take advantage of the convergence of the
rapid expansion and increasing technological sophistication of the call center
industry and the widespread growth of the Internet as a communications medium.
The Company thus expanded and modified the development of the routing,
tracking, billing and database components of its Internet technology as well as
developed additional features, such as shared browsing.
The Company's systems sought to allow World Wide Web consumers to be connected
directly to call center customer service representatives ("CSRs"), with whom
they could simultaneously communicate and share data over the Internet on a
single phone line connection. It was intended that computer users would be
able, through the Company's technology, to click on an Internet link or icon on
a World Wide Web page to connect them to a CSR through either an Internet
voice, video or text chat connection. The Company's management ("Management")
expected that the CSR would then share a browser or other application with the
customer, enabling the CSR to direct the customer to a Web page with the
appropriate data. Management anticipated that the CSR would be able to access
product support information, scripting and customer information from existing
client databases and to provide a variety of supplemental information to the
consumer, including pricing, account and multimedia product information.
Although the Company planned to support voice, video and data communications
through its systems, the Company anticipated that many applications of its
systems by its business clients would be without a video component.
The Company was developing the routing, tracking, billing and database
components of its Internet technology as well as developing additional
features, such as shared browsing. Such technology was planned to provide
advanced software solutions that Management hoped would assist businesses in
maximizing their marketing and customer service capabilities through the
powerful qualities of the Internet. Management believed that the Company's
systems would allow consumers to be connected directly to CSRs with whom they
could simultaneously communicate and share data over the Internet on a single
phone line connection.
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In light of the lack of development of the Internet infrastructure sufficient
to allow commercial grade video, the reluctance in the Internet community to
pay for content and the Company's limited resources, in the first quarter of
fiscal 1998, the Company de-emphasized the development of its video-based
Internet content services. Accordingly, the Company suspended indefinitely the
development of its projected HolisticVisions, TutorNet, TherapyNet, FantasyNet,
ModelNet, WebClinic and CookNet services. The Company also suspended
indefinitely the development of its PsychicNet service in the third quarter of
fiscal 1998, because Management questioned its strategic value and because of
the Company's increasingly limited resources.
During this time, NetLive increased its emphasis on designing and developing
Internet software systems that link businesses seeking to provide real-time,
live interaction on the Internet with consumers. The Company planned to support
voice, video and data communications through its systems which the Company
planned to sell to call centers. The Company anticipated that its WebCenter
technology would provide CSRs with access to product support information,
scripting and customer information from existing client databases. NetLive
planned that, after the second stage of development, its technology would be
interoperable with public switched telephone network calls so that CSRs could
handle both Internet "calls" and regular telephone calls.
Management anticipated that the Company's WebCenter call center software, if
and when marketed, would be integrated with its customers' web sites so as to
enable a seamless live interaction with an available CSR. The Company's systems
were designed to provide queuing and intelligent routing of such Internet
calls, so that in-house or service agency call centers could conduct multiple
sales and marketing campaigns. The systems were designed to be fully
"scaleable," namely, to be able to handle very large numbers of customers and
CSRs. The Company also planned to offer quantitative and qualitative monitoring
of calls to and from the call center. NetLive planned to develop a full
customer interaction management set of programs ("suite"), which would support
customer service, help desk, quality assurance, sales and marketing programs
and internal help desk functions. The Company's goal was to develop technology
that would conform to all relevant telecommunications and Internet industry
standards and would be interoperable with certain major database software,
operating systems and automatic call distributors. The Company was planning, as
the second stage of its call center systems, the development of MultiCenter,
which would expand its technology to permit the transmission of Internet calls
and telephone calls across a single system.
Management believed that NetLive's products, if and when marketed, would be the
next step in the evolution of the call center, bringing live multimedia
interaction to this powerful sales, marketing and customer service vehicle.
Management anticipated that, like traditional telephone call center
applications, Internet call centers would improve productivity and customer
management efforts by integrating the flow of critical information. With the
explosive growth of the Internet, a critical mass of prime consumers are
accessible through digital media, and a significant investment is being made in
Internet-enabled electronic commerce. The Company anticipated that the growth
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of automated electronic services, such as travel, financial and product mail
order Web sites, would be accompanied by the demand for concurrent real-time
customer interaction. Demand for real-time interaction would be fueled by the
increasing bandwidth of the Internet and the greater availability of
interoperable multimedia client-side programs, such as Microsoft's NetMeeting
and Netscape's LiveMedia, bundled with popular operating systems and browsers.
The increasing demand for such communications would require commercial users of
these technologies to maintain Internet call center systems to provide
standardized quality of service, full access to relevant customer or product
information, customer tracking and efficient resource allocation.
Although their commercial versions were ultimately never developed, the Company
believed that the systems it was developing would offer several advantages over
existing technology. Foremost, it would allow a company greater contact with
customers already visiting its Web site, who seek further information about
such company's products or services. Such customers would be able to
efficiently receive personalized communications, thereby improving sales and
marketing as well as customer service functions. This method of customer
contact would have greater efficiency because the Internet allows a more
diverse flow of information than is provided by the telephone. Routing to the
appropriate CSR with the aid of the Company's products also would be more
refined because of the opportunity for greater customer input across the
Internet. In addition, the Company's technology was designed to operate over a
single phone line so that a customer, already connected to the Web, did not
have to relinquish access to the information on the Web site that brought about
his or her inquiry. Finally, by integrating its technology with NetMeeting,
Microsoft's Internet telephone, video and document sharing application, the
Company anticipated that it would benefit from the expected large number of
NetMeeting users with compatible Internet phone capabilities.
The Company's WebCenter and PsychicNet systems existed only as development
versions; the MultiCenter system was being planned by the Company, and neither
a design nor a development version was produced. Due to insufficient Company
resources, commercial versions of these systems were never produced,
commercially tested, marketed or sold by the Company, and therefore no revenues
were generated from the sale thereof.
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C. INDUSTRY BACKGROUND
Developed over 25 years ago, the Internet is a global web of computer networks
that allows personal computer users to access a variety of information and
services. The Internet was developed for use by academic institutions, the
Department of Defense and government agencies primarily for obtaining remote
access to host computers, for transferring files, and for sending and receiving
e-mail. This early Internet usage has changed substantially. The Company
believes that the number of commercial domains on the Internet has surpassed
the number of government and academic domains. The Internet has been
experiencing rapid growth as industry and individuals discover its substantial
information access abilities.
Converging with the growth of the Internet and its audio and video applications
is the growth of telephone call centers. Over the past ten years, businesses
and other organizations have increasingly used dedicated centers for processing
and managing high volumes of incoming and outgoing telephone traffic. Call
centers have been used extensively in such fields as credit card and consumer
collections, catalog sales, telemarketing and customer service. In these call
centers, activities such as placing and receiving telephone calls are linked to
the computer functions of database management to capture, store and report on
relevant customer information. As the importance of the call center has
increased and as more functions and capabilities have been combined, a parallel
industry has emerged to create and support the systems, software and services
that are designed to make these call centers efficient, effective and well
matched to the broader corporate mission of the enterprise. Frost & Sullivan, a
market research firm in Mountain View, California, estimates that the market
for call center hardware and software was $1.69 billion in 1991 and expects it
to exceed $10.0 billion by 2001.
Call center systems generally include specialized applications software which
allows organizations to conduct inbound or outbound calling activities, manage
system resources, monitor call center capacity and provide system usage and
other reporting capabilities. These applications have historically been
developed for centralized, mainframe-based information systems. These legacy
applications were often very expensive to install and did not offer sufficient
flexibility to allow customization or to adapt to an organization's changing
requirements. In addition, these applications did not provide high levels of
scaleability or interoperability with an organization's other information
systems. Recently, call center technology has joined the more general migration
from mainframe-based legacy systems to distributed computing systems based on
open systems and client/server architecture. This development has allowed
companies to incorporate leading hardware and software products from multiple
vendors into more advanced and productive call center systems.
D. PRODUCTS AND SERVICES
1. WEBCENTER - It was intended that NetLive's WebCenter system would allow
consumers to be connected directly to live CSRs over the Internet without the
need for a
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call-back. The user and CSR could then talk or use text chat and simultaneously
share visuals and applications over a single phone line. NetLive anticipated
that its WebCenter would be an Internet call center call management system that
intelligently queues incoming Internet calls, routes Internet calls to CSRs,
integrates customer data and handles tracking and billing information. The
Company anticipated working with clients to customize and integrate NetLive's
software products, once developed, with existing information systems.
The planned WebCenter system was composed of three components that were being
designed to work together to permit efficient handling of real-time Internet
originated multimedia communications: an Internet call routing system, an
operator phone and a set of administrative management and analysis tools. It
was intended that users of NetLive's Internet call centers would be able to
manage incoming and outbound Internet calls efficiently and consistently across
the Internet.
The Internet call routing system was designed to accept and direct requests for
calls placed from an Internet web site. Management anticipated that the system
woud enable a web site visitor to initiate a real-time contact with a CSR with
a single click on an Internet link. The system would automatically evaluate the
call request and intelligently route the inquiry to the requested or next
available CSR by maintaining an internal database of CSRs and applying a
routing rule set. Management anticipated that the call routing system could be
integrated seamlessly into an existing web site's automated customer service
capabilities and was designed to make customer information available to CSRs.
The operator phone was a software application which was designed to allow CSRs
to receive calls, access customer information from either the Internet or from
internal databases, utilize custom scripts and carry out customer service
initiatives. Management expected that the operator phone would provide a high
level of computer-telephone integration to enable data-driven help desk and
sales force automation.
Management anticipated that the administrative management software would
comprise a standard set of reporting, monitoring and analysis tools which
provided real-time and summary information about the performance of the call
center.
2. MULTICENTER - The Company planned, as the second stage of development of its
systems, to expand its technology to permit the transmission of Internet calls
and telephone calls across a single system. This would enable call centers to
use a single set of CSRs to handle calls from these separate mediums, thereby
maximizing labor pool efficiency. The Company also intended, as a further
enhancement to this system, to develop software to enable call centers to blend
inbound and outbound campaigns. Management anticipated that, if successfully
implemented, this would permit further efficiency for the allocation of CSR
resources and the minimization of CSR "down time." The open, modular
architecture of the WebCenter system would permit customers to upgrade, for an
added fee, to the multiple medium functionality of MultiCenter.
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Although planned, the Company never produced a design or a development version
of its MultiCenter systems. Due to insufficient resources, commercial versions
of these systems were never produced, tested, marketed or sold by the Company,
and therefore no revenues were generated from the sale thereof.
3. CUSTOMER SUPPORT - NetLive believed that customer service and support are an
integral part of its service offerings. Service capability, availability and
responsiveness were expected to play an important role in marketing and selling
its products, particularly as the technological complexity of its products
increased.
Management anticipated that it would earn system and software support fees by
providing ongoing support for its products. It expected to provide training and
support both at its facilities and at the customer's site. The Company expected
to offer a full range of product support options, including telephone support
from "normal business hours" to "24 hours a day" and on-site response. It was
expected that customer support representatives would be able to service
customer call center systems on a remote basis from the Company's headquarters
in New York. The Company expected to earn other fees by providing, upon
customer request, certain special services, such as system relocation and
additional training.
Although the Company met with, and gave demonstrations of its WebCenter systems
to, dozens of prospective customers, no such prospective customer agreed to a
test installation of the systems or to purchase the systems. As such, no
customer support department was ever developed.
4. PSYCHICNET - It was intended that Company would continue to develop a live,
videoconferenced psychic service on the Internet. The Company anticipated that
a consumer, using the Company's technology, would be able to connect through
the Internet to a professional psychic to provide live videoconferenced psychic
advice including tarot card readings, astrological chart analysis and general
psychic guidance. The Company planned to incorporate computer generated special
visual and audio effects to enhance the nature of the service. It was intended
that PsychicNet customers would be able to actually see the results of their
personalized astrological and tarot card readings on their computer screen. The
user would be billed on a flat fee or a per-minute basis for the reading.
After March 31, 1997, the Company decided against hiring, training and managing
professional psychics for and marketing this service; instead the Company
sought a strategic partner to provide such functions. While NetLive identified
and negotiated with a potential partner, no partnerships were ever consummated.
The Company suspended indefinitely the development of its PsychicNet service in
the third quarter of fiscal 1998, because Management questioned its strategic
value and because of the Company's increasingly limited resources.
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E. MARKETING AND SALES
In order to facilitate and accelerate the acceptance of the Company's
technology, as well as enhance marketing and distribution of its products and
systems, NetLive sought to establish a number of strategic alliances with
various call center software and hardware industry leaders, high-end
integrators, re-sellers and other third party distributors. In July 1997, the
Company hired a Director of Marketing, on a part-time basis, to forge such
alliances in order to facilitate distribution of the Company's technology,
products and systems.
Another important element of the Company's distribution strategy was to
dedicate certain marketing department personnel toward end users in service
agency call centers or in-house call centers in key vertical markets. The
Company intended to develop an in-house sales force in order to focus its sales
efforts on direct sales to end-users and distributors. Generally, the sales
cycle begins with the generation of a sales lead, which will be followed by
qualification of the lead, an analysis of the customer's needs, multiple
presentations and/or product demonstrations to the prospective customer, and
ends with contract negotiation and commitment. The Company planned to focus
initial sales efforts on senior personnel in the prospective customer's
information technology department and line management executives in the
functional areas relevant to the application. While the sales cycle varies
substantially from customer to customer, it was expected that it would
typically require four to nine months.
In addition to direct contact with potential customers and partners, it was
intended that the Company's in-house marketing and sales efforts would include
direct mail, advertising, other marketing campaigns and exhibiting at industry
trade shows to generate sales and educate potential customers as to the
features, functionality, cost effectiveness and other benefits of NetLive's
technology, products and systems. In addition, Management planned to allow
prospective customers on the Company's site on the World Wide Web to obtain
information about its products and services and have live interactions with
NetLive staff members using the Company's technology. The Company's marketing
department also was responsible for providing input into the Company's ongoing
product development efforts based on client feedback and market data.
As part of its marketing efforts in the fiscal year ended March 31, 1998, the
Company approached a number of potential end users to enter into agreements to
beta test the development version of the Company's Internet call center
software technology, to fund custom features as required, and to subsequently
purchase commercial versions of the Company's products, when and if
successfully developed for commercial use. These efforts, like the Company's
efforts to establish strategic partnerships for joint product distribution,
were unsuccessful. The Company lacked sufficient resources to mount a sustained
advertising and expanded marketing campaign, or to continue product development
without external funding.
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F. COMPETITION
The market for Internet-enabled call center technology is just emerging. The
Company expected to compete with eFusion, Inc., Netspeak Corp., Intervoice,
Teloquent Communications Corp., NetiPhone, Vocaltec, Lucent and others, who
currently provide or are developing Internet-enabling call center technology
with direct voice, video and data links over the Internet. The Company expected
further competition from existing software and hardware vendors to telephone
call centers, some of whom currently provide Internet technology that allows a
company, when prompted by a visitor to its Web site, to place a call back to
customers over a second telephone line. The market for call center technology
is intensely competitive, highly fragmented and subject to rapid change. Among
the Company's potential competitors were also a number of large hardware and
software companies that may develop or acquire products that compete with the
Company's products. Many of the Company's expected competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they have been able to respond more quickly to new or
emerging technologies and changes in customer requirements, and to devote
greater resources to the development, promotion, sale and support of products
than the Company could.
G. GOVERNMENT REGULATION
At present, there are few laws or regulations that specifically address access
to or commerce on the Internet. The increasing popularity and use of the
Internet, however, enhances the risk that the government of the United States
will seek to regulate computer telephony and the Internet with respect to,
among other things, user privacy, pricing, and the characteristics and quality
of products and services.
In March 1996, the America's Carriers Telecommunication Association (the
"ACTA"), a group of telecommunications common carriers, filed a petition (the
"ACTA Petition") with the Federal Communications Commission (the "FCC") arguing
that providers of computer software products that enable voice transmission
over the Internet (Internet "telephone" services) are operating as common
carriers without complying with various regulatory requirements and without
paying certain charges required by law. The ACTA Petition argues that the FCC
has the authority to regulate both the Internet and the providers of Internet
"telephone" services and requests that the FCC declare its authority over
interstate and international telecommunications services using the Internet,
initiate rule-making proceedings to consider rules governing the use of the
Internet for the provision of telecommunications services, and order providers
of Internet "telephone" software to immediately cease the sale of such
software.
H. PROPRIETARY RIGHTS
The Company relied on a combination of copyright, trade secret and trademark
laws, confidentiality procedures and contractual provisions to protect its
proprietary rights in its products and technology. The Company did not rely
upon patent protection or expect to seek patents on any aspects of its
technology.
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I. EMPLOYEES
None of the Company's employees are covered by a collective bargaining
agreement. The Company believes that its labor relations are good. As of July
3, 1997, the Company employed 15 persons, including 8 software engineers in
research and development, 2 employees in marketing and sales and 5
administrative personnel. Of such 15 persons, 12 persons were full-time, 2
persons were part-time and 1 was on unpaid leave of absence. As of June 15,
1998, the Company employed 2 full-time persons, namely, Messrs. Kharitonov and
Schwartz, and 1 part-time bookeeper. The decrease is due to the cessation of
the Company's active operations, and its desire to conserve its resources and
focus efforts on the planned transaction with Newton Grace.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices comprise approximately 3,500 gross square feet
and are located at 584 Broadway, New York, New York. The Company occupies two
offices at such location pursuant to separate leases that both expire on
November 30, 1998. One lease, covering approximately 1,500 gross square feet,
requires the Company to pay $1,952 per month for the balance of the lease term.
The second lease, covering approximately 2,000 gross square feet, requires the
Company to pay $2,136 per month for the balance of the lease term. The Company
believes that its facilities are more extensive than its current level of
operations warrant. Moreover, as Newton Grace has indicated that it does not
anticipate using the facilities after the Transaction is consummated, the
Company is attempting to negotiate an early termination of such leases.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, and its property is not the subject of, any
material pending legal proceeding requiring disclosure hereunder.
A complaint has been filed by the Company's former CEO, President and Director,
Laurence Rosen in the Supreme Court of the State of New York, captioned
Laurence Rosen, on behalf of the Shareholders of NetLive Communications, Inc.,
v. Michael Kharitonov et al.; Index No. 9898-602056 (the "Action"), against the
current members of the Board. The Action contains various allegations including
breach of fiduciary duty and misappropriation of corporate assets against such
Board members and seeks monetary damages, injunctive relief and recovery of
plaintiff's costs. Following the filing of the Action, the Board conducted a
review of the matters alleged and unanimously determined that the allegations
were meritless. The members of the Board intend to vigorously defend the Action
and have requested, pursuant to their indemnification agreements with the
Company, that the Company advance the expenses required to defend the Action.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of the date of this Form 10-KSB, the Company's Common Stock and Common Stock
Purchase Warrants are traded on The Nasdaq SmallCap Market under the symbols
"NETL" and "NETLW", respectively.
The following table sets forth the high and low closing bid prices for the
Company's Common Stock and Common Stock Purchase Warrants since the Company's
initial public offering in August 1996, as reported by the Nasdaq SmallCap
Market. The quotes represent "inter-dealer" prices without adjustment or retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
14
<PAGE>
COMMON STOCK
Quarter Ended High Low
- ------------- ---- -----
September 30, 1996 7.500 5.125
December 31, 1996 7.750 4.750
March 31, 1997 7.531 6.750
June 30, 1997 6.875 6.000
September 30, 1997 6.250 5.344
December 31, 1997 6.125 1.375
March 31, 1998 3.375 0.500
June 30, 1998 2.750 1.000
COMMON STOCK PURCHASE WARRANTS
Quarter Ended High Low
- ------------- ---- -----
September 30, 1996 2.500 1.000
December 31, 1996 1.938 1.000
March 31, 1997 1.875 1.094
June 30, 1997 1.563 0.875
September 30, 1997 1.250 0.625
December 31, 1997 1.563 0.750
March 31, 1998 1.563 0.438
June 30, 1998 1.250 0.500
The Company believes that as of June 24, 1998, there were 39 holders of record
of the Common Stock and as of August 14, 1997, there were approximately 700
beneficial owners. The Company has no reason to believe that the number of
beneficial owners has changed materially since that date.
The holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board, out of funds legally available therefor. To date, the
Company has never declared or paid any dividends, cash or otherwise, on the
Common Stock. The payment of dividends, if any, in the future is within the
discretion of the Board. In light of the Company's current lack of earnings and
revenues, its low level of capital and its overall financial condition, the
Board believes that is unlikely that it would declare any dividends in the
foreseeable future.
On February 26, 1998, the Company received a letter from The NASDAQ Stock
Market, Inc. ("NASDAQ") stating its intention to de-list the Company on March
16, 1998 if the Company did not request a temporary exception to the new
listing requirements. On March 25, 1998, the Company requested such an
exception and provided to NASDAQ a plan for achieving compliance with the
NASDAQ listing
15
<PAGE>
requirements. Such plan was based largely upon the Company's planned
transaction with Newton Grace. In a letter dated April 14, 1998, NASDAQ denied
the Company's request for a temporary exception to the listing requirements. On
April 17, 1998, the Company requested an appeal to NASDAQ's decision. The oral
hearing for such appeal was held on July 2, 1998. A decision has not yet been
rendered.
The Company does not currently satisfy the NASDAQ listing requirements, and
there can be no assurance that the Company will not be de-listed after the July
2, 1998 hearing. The Company believes that there is substantial likelihood that
it will be de-listed. In the event that the Company is de-listed, trading, if
any, in the Company's securities would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." As a consequence of such de-listing, an investor
would likely find it more difficult to dispose of, or to obtain quotations as
to, the price of the Company's securities. Also, if the Company's securities
were to become subject to the regulations applicable to penny stocks, as to
which there is also a substantial likelihood, the market liquidity for the
securities would be severely affected, limiting the ability of broker-dealers
to sell the securities and the ability of stockholders to sell their securities
in the secondary market. There is no assurance that trading in the Company's
securities will not be subject to these or other regulations that would
adversely affect the market for such securities.
In the absence of the Common Stock being quoted on NASDAQ or the Company's
having $2,000,000 in stockholders' equity, trading in the Common Stock would be
covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), for non-NASDAQ and non-exchange listed
securities. Under such rule, broker-dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share. The
Commission has adopted regulations that generally define a "penny stock" to be
any equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions.
Such exceptions include an equity security listed on NASDAQ, and an equity
security issued by an issuer that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average revenue of at
least $6,000,000 for the preceding three years. Unless an exception is
available (and none currently appears applicable), the regulations require the
delivery, prior to any transaction involving a penny stock, of a risk
disclosure schedule explaining the penny stock market and the risks associated
therewith. As described above, there is a significant risk that the Company's
securities will be de-listed by NASDAQ in the near future. Accordingly, if the
Company's securities were to become subject to the regulations applicable to
penny stocks, the market liquidity for the securities would be severely
affected, limiting the ability of broker-dealers to sell the securities. There
is no assurance that trading in the Company's securities will not be subject to
these or other regulations that would adversely affect the market for such
securities.
16
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
Plan Of Operation
The Company, a development stage company, was incorporated on August 23, 1995
in the State of Delaware. The Company was developing live, one-on-one
videoconferenced entertainment, educational and counseling services over the
Internet and technologies designed to deliver such content services to
consumers. After March 31, 1997, the Company shifted its focus to concentrate
principally on developing Internet call center software technologies to license
to businesses. On or about March 13, 1998, the Company ceased all operations
other than the activities required to complete its planned transaction with
Newton Grace.
In the first quarter of fiscal 1998, the Company realized additional revenues
from its market test of the Jeane Dixon pay-per-call telephone service, which
concluded in March 1997. The test comprised print advertising of the service in
several leading women's and psychic phenomenon magazines, as well as in several
newspapers that published Ms. Dixon's syndicated horoscope column. Assuming a
chargeback rate of 25%, the current standard in the psychic 900 line industry,
the service experienced a gross margin loss of approximately 72% percent
through February 1997. The Company attributes the unprofitability of this
service in part to the death of Mrs. Dixon on January 27, 1997 as well as the
saturation of the psychic pay-per-call market. Based on this test, the Company
concluded that the Jeane Dixon pay-per-call telephone service would not be a
profitable area for the Company, which thus terminated its audiotext operations
in the first quarter of fiscal 1998.
During the year ended March 31, 1998, the Company sought strategic alliances
and joint ventures that complemented the Company's overall business strategy.
Based on this strategy, the Company directed a significant percentage of its
capital reserves towards operating expenses and towards non-operating expenses
associated with business development. Net losses were $2,498,030 during the
fiscal year ended March 31, 1998, as compared to $2,045,459 during the year
ended March 31, 1997. Net loss per share was $0.85 during the fiscal year ended
March 31, 1998, as compared to $0.75 during the year ended March 31, 1997.
The Company anticipates that during the next six months it will continue its
efforts to consummate its contemplated series of transactions with Newton
Grace, as described in Item 1 hereof, and if and when such transactions close,
operate the business currently known as Newton Grace.
The Company has incurred net losses since inception through the quarter ended
March 31, 1998. As of March 31, 1998, the Company had an accumulated deficit
during the
17
<PAGE>
development stage of $4,786,618. There can be no assurance that the Company
will achieve or maintain profitability.
The Company does not currently satisfy the NASDAQ listing requirements and has
requested from the NASD a temporary exception to the listing requirements. The
status of the Company's listing with NASDAQ, the Company's dealings with NASDAQ
and certain of the risks arising from a delisting of the Company's securities
are described more fully in Item 5 hereof.
Research and Development
Research and development expenses consist primarily of salaries of software
development staff. There were no research and development expenses from August
23, 1995 (date of inception) through March 31, 1996. The research and
development expenses in the fiscal year March 31, 1997 were primarily
attributable to staffing costs. In the year ended March 31, 1998, the Company
capitalized its software development costs based on the conclusion that it had
achieved technological feasibility during the first quarter of the year ended
March 31, 1998. During the fourth quarter of fiscal 1998, the Company
terminated the employment of all of its software engineers and ceased the
development of the Company's Internet call center software systems. During
March 1998, all software development costs capitalized were expensed.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of expenses for
administration, office operations, finance and general management activities,
including legal, accounting and other professional fees. Selling, general and
administrative expenses were $2,508,286 for the fiscal year ended March 31,
1998, as compared to $2,053,148 (including research and development expenses)
for the year ended March 31, 1997.
The Company experienced an unanticipated material increase in selling, general
and administrative expenses during the first two quarters of fiscal 1998, which
was largely attributable to a severance payment to its former CEO Laurence
Rosen, the increased legal costs arising from a threatened proxy contest by May
Davis Group, Inc. ("May Davis"), the underwriter for the Company's initial
public offering, and affiliated parties and the filing of the Company's first
10-KSB and proxy statement. Following extensive negotiations, the Company
entered into a Settlement and Voting Agreement with May Davis and such parties
on June 12, 1997, which was amended on September 23, 1997.
Included in Selling, General and Administrative expenses are salaries
aggregating $545,287 for fiscal 1998, as compared to $329,519 for fiscal 1997.
Such increase is attributable to the salaries of the administrative staff,
which had been expanded.
Interest Expense, Financing Costs and Interest Income
18
<PAGE>
Interest expense and financing costs consists of interest incurred on equipment
financing and financing costs incurred in connection with the March 1996
private placement of debt securities. Such debt securities were re-paid in May
1996. At the date of payment, the Company recorded a financing charge of
approximately $165,000. Interest expense and financing costs were $1,167 during
the fiscal year ended March 31, 1998, as compared to $190,934 for the fiscal
year ended March 31, 1997. Interest and dividend income was $83,760 during the
fiscal year ended March 31, 1998, as compared to $113,686 for the fiscal year
ended March 31, 1997. Such sums represents interest earned on investments of
the proceeds from the initial public offering.
Provision for Income Taxes
The Company has no provision for income taxes for all periods presented since
it incurred net losses for such periods.
Liquidity and Capital Resources
The Company's cash and cash equivalents and marketable securities aggregated
$512,860 at March 31, 1998, as compared to $3,017,784 at March 31, 1997. Net
cash used in operations was $2,439,395 for the fiscal year ended March 31,
1998, as compared to $1,534,479 for the fiscal year ended March 31, 1997. The
increase in net cash used in operations from period to period was primarily
attributable to the costs from expansion of operations.
Net cash provided by (used in) investing activities was $2,525,812 for the
fiscal year ended March 31, 1998, as compared to ($3,062,545) for the fiscal
year ended March 31, 1997. The increase in net cash provided by investing
activities was primarily due to the proceeds from sales of available-for-sale
securities to fund the Company's operating losses.
The Company had no cash funds from financing activities for the fiscal year
ended March 31, 1998, as compared to $4,469,587 for the fiscal year ended March
31, 1997. During the year ended March 31, 1997, the Company received the
proceeds of its initial public offering. The uses of cash during the fiscal
year ended March 31, 1998 were financed mainly by the sale in August 1996, of
950,000 shares of common stock and 730,000 warrants to purchase common stock
which resulted in proceeds of approximately $4.2 million, net of offering
expenses, as well as the sale, in May 1996 of 200,000 shares of common stock in
a private placement which resulted in proceeds of approximately $376,000, net
of offering expenses.
In the third and fourth quarters of fiscal 1998, the Company made efforts to
improve its financial position. The Company developed a multi-faceted cost
reduction plan including staff reductions and curtailment of outside services.
Such efforts to improve liquidity included attempts to raise additional
financing.
Following the Company's execution of a letter of intent with an affiliate of
Newton
19
<PAGE>
Grace, in the fourth quarter of fiscal 1998 and the first quarter of fiscal
1999 the Company negotiated the settlement of certain severance obligations and
contingent liabilities. Such actions included the settlement of the lawsuit
brought by Merrill New York Company ("Merrill") against the Company. Such
lawsuit arose from a dispute over the bill relating printing services performed
by Merrill in conjunction with the Company's initial public offering. The
Company paid Merrill $55,000 in settlement of the action. In addition, on March
16, 1998, in the Company paid Vladislav Rysin $115,000 in full settlement of
the Company's obligations to Mr. Rysin under his employment agreement. As part
of such settlement, Mr. Rysin's options on Company common stock were cancelled.
The parties exchanged mutual releases. Finally, on April 10, 1998, the Company
paid Derrick Chen $27,500 in full settlement of the Company's obligations to
Mr. Chen under his severance agreement with the Company.
The Company believes that its existing cash and marketable securities will be
sufficient to fund the Company's operations until the Transaction is
consummated. Unless the Transaction is completed on or about September 30, 1998
or the Company enters into another business combination or other transaction
with an entity with sufficient liquid resources in the near future, there can
be no assurance that the Company's capital resources will be sufficient to meet
its operating needs, in which case material adverse consequences would result.
There is a substantial likelihood that such consequences would involve
liquidation of the Company, which would likely result in loss to investors of
all or a substantial portion of their investment.
The Company does not expect any purchase of plant or significant equipment
during fiscal 1999.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required pursuant to this Item 7 are included in this
Form 10-KSB on the following pages:
Independent Auditor's Report F-1
Balance Sheet at March 31, 1998 F-2
Statement of Operations for the years ended March 31, 1998
and March 31, 1997 and for the period from August 23, 1995
(date of inception) to March 31, 1998 F-3
Statement of Stockholders' Equity for the period from
August 23, 1995 (date of inception) to March 31, 1998 F-4 - F-5
Statement of Cash Flows for the years ended
20
<PAGE>
March 31, 1998 and March 31, 1997, and for the period
from August 23, 1995 (date of inception) to March 31, 1998 F-6
Notes to Financial Statements F-7 - F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information set forth under the captions "Management" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" are to be included in
either the Company's definitive Proxy Statement relating to the 1998 Annual
Meeting of Stockholders or in an amendment to this Form 10-KSB, which is to be
filed pursuant to Regulation 14A within 120 days after the close of the fiscal
year covered by this report and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under the captions "Directors' Compensation",
"Executive Compensation" and "Certain Relationships and Related Transactions"
are to be included in either the Company's definitive Proxy Statement relating
to the 1998 Annual Meeting of Stockholders or in an amendment to this Form
10-KSB, which is to be filed pursuant to Regulation 14A within 120 days after
the close of the fiscal year covered by this report and is incorporated herein
by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership Of Certain
Beneficial Owners and Management" to be included in either the Company's
definitive Proxy Statement relating to the 1998 Annual Meeting of Stockholders
or in an amendment to this Form 10-KSB, which is to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year covered by
this report and is incorporated herein by reference.
21
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships and Related
Transactions" to be included in either the Company's definitive Proxy Statement
relating to the 1998 Annual Meeting of Stockholders or in an amendment to this
Form 10-KSB, which is to be filed pursuant to Regulation 14A within 120 days
after the close of the fiscal year covered by this report and is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Number Name of Exhibit
- ------- ---------------
1.1 Underwriting Agreement (1)
2.1 Stock Purchase and Reorganization Agreement (10)
3.1 Articles of Incorporation, as amended to date(1) (6)
3.2 By-Laws (1) (2) (7)
4.1 Form of Underwriter's Warrant(1)
4.2 Form of Financial Advisory and Investment Banking Agreement with
the Underwriter(1)
4.3 Form of Common Stock Certificate(1)
4.4 Form of Common Stock Purchase Warrant(1)
4.5 Form of Common Stock Purchase Warrant used for Bridge Loans(1)
4.6 Form of Warrant Agreement(1)
10.1 Employment Agreement with Laurence Rosen(1)
10.2 Employment Agreement with Michael Kharitonov(1)
10.3 Employment Agreement with Jeffrey Wolf, as amended(1)
10.4 Amendment No. 1 to Employment Agreement with Michael Kharitonov(1)
10.5 Employment Agreement with Vladislav Rysin(1)
10.6 License Agreement with Jeane Dixon(1)
10.7 Company's 1996 Incentive Stock Option Plan (1)(9)
10.8 NetLive Communications, Inc. Performance Share Program and
Performance Share Program Trust(3)
10.9 Settlement and Voting Agreement, dated as of June 12, 1997,
among the Company, May Davis Group, Inc. et al.(4)
10.10 Letter agreement, dated as of June 12, 1997, between the Company
and Gary Rogers(4)
10.11 Severance Agreement, dated as of June 12, 1997, between the
Company and Laurence M. Rosen and exhibits thereto including the
Consulting Agreement.(4)
10.12 Amendment to Settlement and Voting Agreement, dated
as of September 23, 1997, by and among the Company, May Davis
Group, Inc. et al. (5)
22
<PAGE>
10.13 Amendment to Underwriting Agreement, dated as of September 23,
1997, by and between the Company and May Davis Group, Inc. (5)
10.14 Letter Agreement, dated as of September 23, 1997, by and between
the Company and Gary Rogers (5)
10.15 Company's 1997 Stock Option Plan (8)
27.1 Financial Data Schedule (11)
- -----------------
(1) Filed with the Company's Registration Statement filed on Form SB-2 (File
No. 333-4057).
(2) Amendment to Article II, Section 7 of the Company's By-laws filed with
the Company's Current Report on Form 8-K dated January 28, 1997.
(3) Filed with the Company's Current Report on Form 8-K dated February 27,
1997.
(4) Filed with the Company's Current Report on Form 8-K dated July 3, 1997
(5) Filed with the Company's Current Report on Form 8-K dated October 8, 1997
(6) Additional Articles IX, X and XI were filed with the Company's Current
Report on Form 10-QSB dated November 14, 1997.
(7) The amendment to Article III, Sections 1(a), 1(c), 6 and 9 and the
amendment to Article IV, Sections 1(b), 1(c) and 3 were filed with the
Company's Current Report on Form 10-QSB dated November 14, 1997.
(8) Filed with the Company's Current Report on Form 10-QSB dated November 14,
1997.
(9) Amended and corrected version filed with the Company's Current Report on
Form 10-QSB dated November 14, 1997.
(10) Filed with the Company's Current Report on Form 8-K dated June 30, 1998.
(11) Filed herewith.
(B) REPORTS ON FORM 8-K.
(1) A Form 8-K was filed by the Company on July 3, 1997. This filing
disclosed under Item 5 the Company's entry into a June 12, 1997
Settlement and Voting Agreement with May Davis Group, Inc., the
underwriter for the Company's initial public offering in August 1996, and
several of its affiliates. The filing also disclosed under Item 5 the
Company's entry into a June 12, 1997 Severance Agreement and
23
<PAGE>
ancillary agreements with Laurence Rosen, as well as the resignation of
Mr. Rosen as the Company's Chief Executive Officer, President, Chief
Financial Officer, Treasurer and as a member of the Company's Board of
Directors.
(2) A Form 8-K was filed by the Company on October 8, 1997. This filing
disclosed under Item 5 the Company's entry, as of September 23, 1997,
into (1) an amendment to the June 12, 1997 Settlement and Voting
Agreement with May Davis Group, Inc and several of its affiliates, (2) a
letter agreement with Gary Rogers, and (3) an amendment to the
Underwriting Agreement with May Davis Group, Inc.
(3) A Form 8-K was filed by the Company on March 25, 1998. This filing
disclosed under Item 5 the Company's entry into a letter of intent with
Linda Industries Pty. Ltd. dated March 11, 1998. The filing also
disclosed (1) that the Company was curtailing its current business
operations and was terminating the employment of all of its non-executive
employees, and (2) that the Company had received a notice from The NASDAQ
Stock Market, Inc. indicating that the Company's securities were
scheduled for delisting.
(4) A Form 8-K was filed by the Company on June 30, 1998. This filing
disclosed under Item 5 (1) the entry of the Company and its newly-formed
Australian subsidiary, Linda Industries Pty. Limited, into a Stock
Purchase and Reorganization Agreement with Playbyrne Investments Pty
Limited, Budbox Pty Limited, Newton Grace Pty Limited ("Newton Grace"),
Intercorp Group Pty Limited, Hallendon Pty Limited, Geoffrey Russell
Player and Vicki Gaye Player, dated June 22, 1998; and (2) that the
Company had curtailed its business operations and had terminated the
employment of all of its non-executive employees.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NETLIVE COMMUNICATIONS, INC.
Date: 7-14-98 By: /s/ Michael Kharitonov
----------------------------------
Michael Kharitonov, President and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
- ----------- ------ ------
Chairman of the Board,
/s/ Michael Kharitonov President, Chief
- ---------------------- Executive Officer July 14, 1998
Michael Kharitonov and Director
/s/ Andrew Schwartz Secretary, Treasurer,
- ---------------------- Chief Financial Officer, Vice July 14, 1998
Andrew Schwartz President of Finance and
Administration and Director
/s/ Adam Goldberg
- ---------------------- Director July 14, 1998
Adam Goldberg
/s/ Jeffrey Wolf
- ---------------------- Director July 14, 1998
Jeffrey Wolf
/s/ Marcel Yung
- ---------------------- Director July 14, 1998
Marcel Yung
25
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS:
Balance Sheet F-2
Statement of Operations F-3
Statement of Stockholders' Equity F-4 - F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7 - F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
NetLive Communications, Inc.
We have audited the accompanying balance sheet of NetLive Communications, Inc.
(a development stage company) as of March 31, 1998 and the related statements
of operations, stockholders' equity, and cash flows for each of the two years
in the period ended March 31, 1998 and for the period from August 23, 1995
(date of inception) to March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NetLive Communications, Inc.
as of March 31, 1998 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1998 and for the period
from August 23, 1995 (date of inception) to March 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has ceased its development of Internet call
center software technologies, changed its plan of operation and has had limited
operations and a deficit accumulated during the development stage that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 11.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 20, 1998, except for Note 12, as to
which the date is June 22, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------------
MARCH 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) $ 119,375
Marketable securities (Notes 1 and 3) 393,485
Prepaid expenses and other current assets 51,416
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 564,276
Property and Equipment Held for Sale (Notes 1 and 4) 10,000
Deferred Income Tax Asset, net of valuation allowance of $696,000 (Notes 1 and 7) -
Other Assets 14,798
======================================================================================================================
TOTAL ASSETS $ 589,074
======================================================================================================================
LIABILITY AND STOCKHOLDERS' EQUITY
Current Liability - accounts payable and accrued expenses $ 129,769
- ----------------------------------------------------------------------------------------------------------------------
Commitments (Note 8)
Stockholders' Equity (Notes 2, 5, 6 and 9):
Preferred stock - $.0001 par value; authorized 1,000,000 shares, none issued
Common stock - $.0001 par value; authorized 19,000,000 shares, issued
and outstanding 2,950,000 shares 295
Additional paid-in capital 5,245,628
Deficit accumulated during the development stage (4,786,618)
- ----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 459,305
======================================================================================================================
TOTAL LIABILITY AND STOCKHOLDERS' EQUITY $ 589,074
======================================================================================================================
The accompanying notes and independent auditor's report
should be read in conjunction with the financial statements
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
PERIOD FROM
AUGUST 23, 1995
YEAR ENDED YEAR ENDED (DATE OF INCEPTION)
MARCH 31, MARCH 31, TO MARCH 31,
1997 1998 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue (Note 1) $ 7,689 $ 10,256 $ 17,945
- ----------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses:
Salaries 329,519 545,287 1,035,520
Research and development (Note 1) 568,855 - 568,855
Professional fees 374,516 524,699 927,027
Payroll taxes and other employee benefits 65,929 68,281 134,210
Rent (Note 8) 48,478 29,224 87,426
Depreciation and amortization (Note 1) 28,547 54,657 87,931
Interest expense and financing costs 190,934 1,167 197,290
Interest and dividend income (Note 1) (113,686) (83,760) (197,446)
Impairment loss on property and equipment (Note 4) - 94,725 94,725
Impairment loss on capitalized software
development costs (Note 10) - 715,344 715,344
Severance costs (Note 8) 147,500 142,500 290,000
Other 412,556 416,162 863,681
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 2,053,148 2,508,286 4,804,563
- ----------------------------------------------------------------------------------------------------------------------
Net loss $(2,045,459) $(2,498,030) $(4,786,618)
======================================================================================================================
Basic loss per common share (Note 1) $ (.75) $ (.85) -
======================================================================================================================
Weighted-average number of common shares
outstanding (Note 1) 2,733,821 2,950,000 -
======================================================================================================================
The accompanying notes and independent auditor's report
should be read in conjunction with the financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM AUGUST 23, 1995 (DATE OF INCEPTION) TO MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED OFFERING
DEFICIT COSTS RELATING TO
COMMON STOCK ACCUMULATED COMMON STOCK
------------------ ADDITIONAL DURING THE DEFERRED ISSUED FOR PRICE
NUMBER PAID-IN DEVELOPMENT COMPEN- SERVICES RELATED STOCKHOLDERS' PER
DATE OF SHARES AMOUNT CAPITAL STAGE SATION TO INTENDED IPO EQUITY SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock for cash 9/02/95 837,140 $ 84 $ 6,666 - - - $ 6,750 $ .01
12/18/95 400,154 40 22,850 - - - 22,890 .06
1/11/96 3,349 - - - - - - -
2/01/96 41,857 4 49,996 - - - 50,000 1.19
Contributed property and
equipment and expenses
paid by stockholders,
contributed to the
Company (Note 9) - - 30,296 - - - 30,296 -
Issuance of common
stock for services
related to intended IPO 2/19/96 17,500 2 14,873 - - $(14,875) - .85
Issuance of common stock
in connection with private
placement (Note 5) 3/20/96 200,000 20 149,980 - - - 150,000 .75
Issuance of warrants in
connection with private
placement (Note 5) 3/20/96 - - 15,000 - - - 15,000 -
Net loss - - - $(243,129) - - (243,129) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 1,500,000 150 289,661 (243,129) - (14,875) 31,807 -
Issuance of common stock
in connection with
private placement
(Note 6) 5/09/96 200,000 20 376,009 - - - 376,029 2.50
Issuance of options to
purchase common stock
in connection with an
employment agreement
(Note 9) 5/19/96 - - 300,000 - $(212,500) - 87,500 -
Issuance of common stock
in connection with IPO
(Note 2) 8/12/96 950,000 95 4,302,558 - - 14,875 4,317,528 5.50
Issuance of common stock
to trustee under the
performance share program
(Note 9) 3/07/97 300,000 30 (30) - - - - -
Awards aggregating 106,000
shares of common stock to
employees under the
performance share program
(Note 9) 3/07/97 - - 728,750 - (716,604) - 12,146 6.875
Net loss - - - (2,045,459) - - (2,045,459) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 2,950,000 295 5,996,948 (2,288,588) (929,104) - 2,779,551
(continued)
The accompanying notes and independent auditor's report
should be read in conjunction with the financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM AUGUST 23, 1995 (DATE OF INCEPTION) TO MARCH 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED OFFERING
DEFICIT COSTS RELATING TO
COMMON STOCK ACCUMULATED COMMON STOCK
------------------ ADDITIONAL DURING THE DEFERRED ISSUED FOR PRICE
NUMBER PAID-IN DEVELOPMENT COMPEN- SERVICES RELATED STOCKHOLDERS' PER
DATE OF SHARES AMOUNT CAPITAL STAGE SATION TO INTENDED IPO EQUITY SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Award of 10,000 shares
of common stock to an
employee under the
performance share program 9/15/97 - - $ 60,000 - $(60,000) - - $6.00
Termination of awards
aggregating 101,233
shares of common stock
granted under the
performance share
program (Note 9) various - - (690,486) - 690,486 - - -
Termination of options to
purchase common stock 3/16/98 - - (120,834) - 120,834 - - -
Compensation expense - - - - 177,784 - $ 177,784 -
Net loss - - - $(2,498,030) - - (2,498,030) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 2,950,000 $295 $5,245,628 $(4,786,618) $ - 0 - $ - 0 - $ 459,305
===================================================================================================================================
The accompanying notes and independent auditor's report
should be read in conjunction with the financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
AUGUST 23, 1995
YEAR ENDED YEAR ENDED (DATE OF INCEPTION)
MARCH 31, MARCH 31, TO MARCH 31,
1997 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,045,459) $(2,498,030) $(4,786,618)
Adjustments to reconcile net loss to net cash used in
operating activities:
Expenses paid by stockholders, contributed to the Company - - 12,006
Depreciation and amortization 28,547 54,657 87,931
Impairment loss on property and equipment - 94,725 94,725
Impairment loss on capitalized software development costs - 715,344 715,344
Amortization of deferred compensation expense 99,646 177,784 277,430
Amortization of debt issue costs and discount on notes payable 186,131 - 190,000
Changes in operating assets and liabilities:
Increase in prepaid expenses and other current assets (30,664) (18,981) (51,416)
Increase (decrease) in other assets (42,500) 35,314 (9,361)
Increase in capitalized software development costs - (715,344) (715,344)
Increase (decrease) in accounts payable and accrued expenses 269,820 (284,864) 129,769
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,534,479) (2,439,395) (4,055,534)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (75,799) (65,529) (156,031)
Acquisition of intangibles (1,920) - (6,140)
Purchase of available-for-sale securities (4,984,826) - (4,984,826)
Proceeds from sales of available-for-sale securities 2,000,000 2,591,341 4,591,341
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,062,545) 2,525,812 (555,656)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 4,737,057 - 4,816,697
Principal payments on obligations under capital leases (17,470) - (17,632)
Proceeds from issuance (repayment) of notes payable (250,000) - -
Debt issue costs - - (25,000)
Deferred offering costs - - (43,500)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,469,587 - 4,730,565
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (127,437) 86,417 119,375
Cash and cash equivalents at beginning of period 160,395 32,958 -
==============================================================================================================================
Cash and cash equivalents at end of period $ 32,958 $ 119,375 $ 119,375
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6,053 $ 1,167 $ 7,290
==============================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Contributed property and equipment - - $ 18,290
==============================================================================================================================
Capital lease obligations incurred - - $ 17,632
==============================================================================================================================
Common stock issued for services related to intended IPO - - $ 14,875
==============================================================================================================================
Common stock and stock options issued for employment
agreement and services $ 1,028,750 $ 60,000 $ 1,088,750
==============================================================================================================================
Termination of common stock and stock options granted
under the performance share program and employment
agreement - $ 811,320 $ 811,320
==============================================================================================================================
The accompanying notes and independent auditor's report
should be read in conjunction with the financial statements
F-6
</TABLE>
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. PRINCIPAL NetLive Communications, Inc. (a development stage company)
BUSINESS (the "Company") was incorporated on August 23, 1995 under
ACTIVITY AND the laws of the State of Delaware. The Company was
SIGNIFICANT developing live, one-on-one, videoconferenced
ACCOUNTING entertainment, educational and counseling services over the
POLICIES: Internet and technologies designed to deliver such content
services to consumers. Subsequent to March 31, 1997, the
Company shifted its focus to concentrate principally on
developing Internet call center software technologies to
license to businesses. During March 1998, the Company
ceased developing Internet call center software
technologies and shifted its focus to completing a merger
transaction with another entity (see Note 11).
Property and equipment was recorded at cost. Depreciation
was provided for by the straight-line method over the
estimated useful lives of the property and equipment (see
Note 4).
The Company recognizes revenue when services are provided.
Research and development expenses, consisting primarily of
salaries and consulting fees to support technology and
services content development, are expensed as incurred (see
Note 10).
The Company employs the liability method of accounting for
income taxes pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 109, under which method recorded
deferred income taxes reflect the tax consequences on
future years of temporary differences (differences between
the tax basis of assets and liabilities and their financial
amounts at year-end). The Company provides a valuation
allowance that reduces deferred tax assets to their net
realizable value.
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
The preparation of financial statements in accordance with
generally accepted accounting principles requires the use
of estimates by management.
In February 1997, the Financial Accounting Standards Board
(the "FASB") issued SFAS No. 128, Earnings per Share. SFAS
No. 128 requires dual presentation of basic earnings per
share ("EPS") and diluted EPS on the face of all statements
of earnings issued after December 15, 1997 for all entities
with complex capital structures. Basic EPS is computed as
net earnings divided by the weighted-average number of
common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from
common shares issuable through stock-based compensation
including stock options, restricted stock awards, warrants
and other convertible securities.
For purposes of this computation shares of common stock
issued for nominal consideration prior to the initial
filing of the Registration Statement relating to the
Initial Public Offering ("IPO") and shares issuable upon
the exercise of all
F-7
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
common stock purchase options outstanding issued for
nominal consideration, with exercise prices below the IPO
price, have been included in weighted-average number of
shares outstanding, since inception, utilizing the treasury
stock method. Common stock equivalents issued after the IPO
are not included in the weighted-average number of shares
since the effect would be antidilutive. The adoption of
SFAS No. 128 had no effect on the restatement of the net
loss per common share for the year ended March 31, 1997.
Diluted EPS is not presented since the effect would be
antidilutive.
Management determines the appropriate classification of
securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities
are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to
maturity.
The Company's debt securities, consisting of U.S.
government obligations, are classified as
available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and
losses, net of tax, reported in a separate component of
stockholders' equity. The amortized cost of debt securities
in this category is adjusted for amortization of premiums
and discounts to maturity. Such amortization is included in
interest and dividend income.
Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities
are included in investment income. The cost of securities
sold is based on the specific-identification method.
Dividends on securities classified as available-for-sale
are included in interest and dividend income.
During 1996, SFAS No. 123, Accounting for Stock-Based
Compensation, became effective for the Company. SFAS No.
123 prescribes the recognition of compensation expense
based on the fair value of options determined on the grant
date. However, SFAS No. 123 allows companies currently
applying Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, to continue using
that method. The Company has therefore elected to continue
applying the intrinsic value method under APB No. 25 and
therefore does not recognize compensation expense for
options granted, where options are granted at a price equal
to market value on the date of grant. For companies that
choose to continue applying the intrinsic value method,
SFAS No. 123 requires certain pro forma disclosures as if
the fair value method had been utilized. See Note 9 for
additional discussion.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, which is effective for the Company in
1998. The adoption of SFAS No. 130 will modify the format
the Company uses to report total nonowner changes in
stockholders' equity. These changes will be shown together
with net income in a new financial statement category
entitled "comprehensive income." Adoption of SFAS No. 130
will have no effect on the Company's financial position or
results of operations.
For comparability, certain March 31, 1997 amounts have been
reclassified, where applicable, to conform to the financial
statement presentation used at March 31, 1998.
F-8
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. INITIAL PUBLIC In August 1996, the Company completed an IPO of 950,000
OFFERING: shares of its common stock at $5.50 per share and 730,000
common stock purchase warrants for $.10 per warrant. The
net proceeds to the Company, after deducting underwriting
commissions and expenses of the offering of approximately
$1,100,000, were approximately $4,200,000. Additionally,
the Company received net proceeds of approximately $9,500
from the issuance of common stock purchase warrants and the
underwriters' warrant pursuant to an over-allotment option.
3. MARKETABLE At March 31, 1998, the fair value of the Company's
SECURITIES: available-for-sale securities aggregated $393,485, which
approximates cost. These securities, consisting of U.S.
government obligations, mature within one year. Realized
gains and losses are determined on the basis of specific
identification. During the years ended March 31, 1997 and
1998, sales proceeds on securities classified as
available-for-sale securities were $2,000,000 and
$2,591,341, respectively, with no significant gross
realized gains or losses recognized.
4. PROPERTY AND Due to the Company ceasing development of its Internet call
EQUIPMENT center software technologies, management estimates net
HELD FOR SALE: proceeds of $10,000 upon the sale of its property and
equipment. Accordingly, the Company recorded an impairment
loss of $94,725 during the year ended March 31, 1998 to
reduce the carrying amount to management's estimate of
fair value less estimated cost to sell.
5. NOTES PAYABLE: In March 1996, the Company completed a private placement
for which it received in the aggregate $250,000 and in
exchange issued 200,000 shares of common stock, 1,000,000
redeemable common stock purchase warrants and $250,000
aggregate principal amount of its 12% redeemable promissory
notes with interest payable upon repayment. The notes were
due and payable at the earlier of the completion of the
Company's proposed IPO, March 1998, or the date of closing
of a sale of securities by the Company in an amount of
$500,000 or greater, as defined. Accordingly, the notes
were repaid in May 1996 (see Note 6) and the Company
recorded a charge to operations of approximately $165,000.
In connection with this private placement, the Company
incurred costs amounting to $25,000.
In accordance with paragraph 16 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants, values were assigned to each part of the
transaction based on an allocation of the relative fair
values of the securities at the time of issuance. The fair
value of the promissory notes were based on a 24% discount
rate after effecting for the costs of the offering. The
fair value of the common stock was determined to be $2.50
per share which was the price at which 200,000 shares of
common stock were sold in May 1996 (see Note 6). The fair
value of the warrants was estimated at $.05 per warrant.
Accordingly, a value of $85,000 was assigned to the
promissory notes, a value of $150,000 was assigned to the
common stock and a value of $15,000 was assigned to the
warrants.
F-9
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The redeemable common stock purchase warrants are not
exercisable until two years from the effective date of the
IPO and expire three years from the effective date of the
IPO. Each warrant entitles the holder to purchase one share
of common stock for $5.50 per share. The Company may call
these warrants for redemption one year from the effective
date of the IPO, as defined.
6. PRIVATE During May 1996, the Company completed a private placement
PLACEMENT: offering of securities, whereby the Company issued 200,000
shares of common stock at an offering price of $2.50 per
share. Costs incurred in connection with the private
placement were approximately $124,000. A portion of the
proceeds from this private placement was used to repay
notes payable (see Note 5).
7. INCOME TAXES: The tax effects of loss carryforwards and the valuation
allowance that give rise to deferred tax assets at March
31, 1998 are as follows:
Net operating loss carryforwards $ 696,000
Less valuation allowance (696,000)
------------------------------------------------------------
DEFERRED TAX ASSETS $ - 0 -
============================================================
As of March 31, 1998, the Company had net operating loss
carryforwards available to offset future taxable income of
approximately $4,600,000 which expire in various years
through 2013. Between March 1996 and August 1996, the
Company completed an IPO and private offerings of
securities. Under Section 382 of the Internal Revenue Code
(the "Code") these activities effected an ownership change
and thus may severely limit, on an annual basis, the
Company's ability to utilize its net operating loss
carryforwards. The Company uses the lowest marginal U.S.
corporate tax rate of 15% to determine deferred tax amounts
and the related valuation allowance because the Company has
had no taxable earnings through March 31, 1998.
The reconciliation of income tax benefit resulting from
applying U.S. federal statutory tax rates to pretax loss
and the reported amount of income tax benefit is as
follows:
Year ended March 31, 1997 1998
------------------------------------------------------------
Tax benefit at federal
statutory rate of 15% $ 307,000 $ 381,000
Increases in valuation
allowance (304,000) (356,000)
Other (3,000) (25,000)
------------------------------------------------------------
$ - 0 - $ - 0 -
============================================================
8. COMMITMENTS: The Company leases office space under noncancelable
operating leases which expire during November 1998. The
leases are subject to escalations for the Company's share
of increases in real estate taxes.
F-10
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Minimum future obligation under the leases for the year
ending March 31, 1999 is $32,707.
Rent expense charged to operations for the years ended
March 31, 1997 and 1998 amounted to $48,478 and $29,224
(exclusive of $21,781 included in capitalized software
development costs), respectively.
The Company has entered into employment agreements with a
consultant and executive officers of the Company which
provide for compensation through August 31, 1998 as
follows:
Year ending March 31, 1999 $75,000
============================================================
During March 1998, the Company entered into a termination
and severance agreement with an executive officer of the
Company which provided for, among other matters, a
severance payment of $115,000 which was paid prior to March
31, 1998 (see Note 9).
9. STOCKHOLDERS' Effective March 5, 1996, the Company's board of directors
EQUITY: approved an approximate 837.14-for-1 stock split, whereby
the number of shares of outstanding common stock was
increased from 1,532 to 1,282,500. The stated par value of
each share was not changed from $.0001. A total of $130 was
reclassified from the Company's additional paid-in capital
account to the Company's common stock account. All share
and per share amounts have been restated to retroactively
reflect the stock split.
The cash cost of the contributed property and equipment and
expenses paid by stockholders aggregated $30,296.
Contributed property and equipment aggregating $18,290
which mainly consisted of computer and video equipment have
been recorded at the stockholders' cost. Expenses paid by
stockholders aggregating $12,006 consisted of consulting
expense, travel expense and other miscellaneous costs.
During February 1996, the board of directors of the Company
adopted the 1996 Stock Option Plan (the "1996 Plan") which
authorizes the granting to employees, officers and
directors of the Company options to purchase up to an
aggregate of 800,000 shares of common stock. Both
nonqualified options and options intended to qualify as
incentive stock options ("ISOs") under the Code of 1986, as
amended, may be granted under the 1996 Plan. ISOs granted
under the 1996 Plan may not be granted at a price less than
the fair market value of the common stock on the date of
the option grant, provided that the exercise price of such
option granted to a stockholder owning more than 10% of the
outstanding common stock of the Company may not be less
than 110% of the fair market value of the common stock on
the date of the option grant. The term of each option and
the manner of exercise are determined by a committee
appointed by the board of directors, but in no case can the
options be exercised in excess of 10 years beyond the grant
date, as defined.
In February 1996, the Company issued options to purchase an
aggregate of 260,000 shares of common stock outside the
Plan to certain executive officers, nonemployee directors
and consultants. The options will be exercisable at $2.50
F-11
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
per share of common stock. Options to purchase 130,000
shares of common stock are exercisable at the earlier of
five years from the date of grant or when the Company
achieves net income, as defined, of at least $1,250,000 for
a full fiscal year. Options to purchase the remaining
130,000 shares are exercisable one year from the date of
grant.
In March 1996, options to purchase 622,854 shares of common
stock at exercise prices ranging from $2.50 to $5.50 per
share were granted under the 1996 Plan. A portion of the
options become exercisable one year following the effective
date of the Company's IPO and the balance of the options
become exercisable incrementally every six months for a
three-year period.
In accordance with APB No. 25, no compensation expense has
been recorded on the option grants since the exercise price
of each option granted was the fair market value of the
common stock on the date of the option grant.
In May 1996, in connection with an employment agreement,
the Company issued options to purchase 100,000 shares of
common stock to an employee. In connection with the
issuance of the options, the Company recorded deferred
compensation of $300,000 to reflect the difference between
the fair market price of the stock and the exercise price
of the options at the date of issuance. The deferred
compensation was being amortized over three years, the term
of the employment agreement. During the years ended March
31, 1997 and 1998, the Company recorded charges to earnings
of $87,500 and $91,666, respectively, for amortization of
deferred compensation. In March 1998, in connection with
the employee's termination and severance agreement, these
options were canceled. Accordingly, the remaining
unamortized deferred compensation aggregating $120,834 was
reversed to additional paid-in capital.
During February 1997, the board of directors of the Company
adopted a restricted stock program which authorized the
establishment of a trust and contributed to the trust
300,000 shares of the Company's common stock that shall be
held therein, until distributed to employees, as defined.
Shares to be awarded in the name of the employee will have
all rights of a stockholder, subject to certain
restrictions or forfeitures. During March 1997, 106,000
shares of common stock were granted to certain employees.
The market value on the date of these grants was $728,750,
which had been recorded as deferred compensation and was
shown as a separate component of stockholders' equity.
Restrictions on these awards expire annually over a
five-year period. The deferred compensation was being
charged to selling, general and administrative expense over
the five-year vesting period. During September 1997, an
award for 10,000 shares of common stock was made to an
employee. The market value on the date of grant was $60,000
which had been recorded as deferred compensation and was
shown as a separate component of stockholders' equity. The
deferred compensation was being charged to selling, general
and administrative expenses over the 13-month vesting
period.
During the year ended March 31, 1998, previously issued
awards relating to 101,233 shares of common stock have been
forfeited due to employee departures in connection with the
ceasing of operations. Accordingly, the remaining
unamortized deferred compensation aggregating $690,486 was
reversed to additional paid-in capital. Compensation
charged to selling, general and
F-12
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
administrative expense was $12,146 and $86,118,
respectively, for the years ended March 31, 1997 and 1998.
During October 1997, the board of directors of the Company
adopted the 1997 Stock Option Plan (the "1997 Plan") which
authorizes the granting to employees, officers and
directors of the Company options to purchase up to an
aggregate of 600,000 shares of common stock. Both
nonqualified options and options intended to qualify as
ISOs under the Code of 1986, as amended, may be granted
under the Plan. ISOs granted under the Plan may not be
granted at a price less than the fair market value of the
common stock on the date of the option grant, provided that
the exercise price of such option granted to a stockholder
owning more than 10% of the outstanding common stock of the
Company may not be less than 110% of the fair market value
of the common stock on the date of the option grant. The
term of each option and the manner of exercise are
determined by a committee appointed by the board of
directors, but in no case can the options be exercised in
excess of 10 years beyond the grant date, as defined.
Although the compensation committee of the board of
directors has recommended the issuance of 350,000 stock
options to the Company's chairman of the board of
directors, no board of directors' action regarding such
options has been taken at the request of the Company's
chairman of the board of directors.
Presented below is a summary of stock option plans activity
for the periods shown:
Wtd.- Wtd.-
Avg. Avg.
Exercise Options Exercise
Options Price Exercisable Price
------------------------------------------------------------
Balance at
March 31, 1996 882,854 $3.42 - -
Granted 215,000 3.95 - -
Canceled (96,007) 3.91 - -
------------------------------------------------------------
Balance at
March 31, 1997 1,001,847 3.49 156,667 $3.07
Granted 45,250 3.83 -
Canceled/expired (185,091) 3.11 - -
============================================================
BALANCE AT
MARCH 31, 1998 862,006 $3.59 677,526 $3.77
============================================================
F-13
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table summarizes information for options
currently outstanding and exercisable at March 31, 1998:
Options Outstanding Options Exercisable
---------------------------- -------------------
Wtd.- Wtd.- Wtd.-
Avg. Avg. Avg.
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
-----------------------------------------------------------------
$1.50 20,000 10 yrs $1.50 20,000 $1.50
2.50 501,757 7 yrs 2.50 348,627 2.50
4.81 75,000 3 yrs 4.81 50,250 4.81
5.00 70,000 4 yrs 5.00 63,400 5.00
5.50 159,999 4 yrs 5.50 159,999 5.50
5.62 - 5.69 25,250 10 yrs 5.67 25,250 5.67
7.25 10,000 9 yrs 7.25 10,000 7.25
-----------------------------------------------------------------
$1.50 - $7.25 862,006 5 yrs $3.59 677,526 $3.77
=================================================================
The Company has elected, in accordance with the provisions
of SFAS No. 123, to apply the current accounting rules
under APB Opinion No. 25 and related interpretations in
accounting for stock options, and accordingly, has
presented the disclosure-only information as required by
SFAS No. 123. If the Company had elected to recognize
compensation cost based on the fair value of the options
granted at the grant date as prescribed by SFAS No. 123,
the Company's net loss and net loss per common share for
the years ended March 31, 1997 and 1998 would approximate
the pro forma amounts shown in the table below.
Year ended March 31, 1997 1998
----------------------------------------------------------------
Reported net loss $(2,045,459) $(2,498,030)
================================================================
Pro forma net loss $(2,314,309) $(2,611,780)
================================================================
Reported net loss per common share $ (.75) $ (.85)
================================================================
Pro forma net loss per common share $ (.85) $ (.89)
================================================================
F-14
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The fair value of options granted (which is amortized to
expense over the option vesting period in determining the
pro forma impact) is estimated on the date of grant using
the Black-Scholes option-pricing model with the following
weighted- average assumptions:
Year ended March 31, 1997 1998
----------------------------------------------------------------------------
Expected life of options 3 to 6 yrs 10 yrs
============================================================================
Risk-free interest rate 6.06% - 6.82% 7.5%
============================================================================
Expected volatility of NetLive
Communications, Inc. 49% 128%
============================================================================
Expected dividend yield on NetLive
Communications, Inc. - -
============================================================================
The weighted-average fair value of options
granted during the years ended March 31, 1997 and
1998 is as follows:
Year ended March 31, 1997 1998
----------------------------------------------------------------------------
Fair value of each option granted $ 1.25 $ 3.71
Total number of options granted 215,000 45,250
============================================================================
TOTAL FAIR VALUE OF ALL OPTIONS GRANTED $268,850 $167,878
============================================================================
In accordance with SFAS No. 123, the weighted-average fair
value of stock options granted is required to be based on a
theoretical statistical model using the preceding
Black-Scholes assumptions. In actuality, because the
Company's incentive stock options do not trade on a
secondary exchange, employees can receive no value or
derive any benefit from holding stock options under these
plans without an increase in the market price of the
Company. Such an increase in stock price would benefit all
stockholders commensurately.
10. CAPITALIZED Certain software development costs are capitalized in
SOFTWARE accordance with SFAS No. 86, Accounting for the Costs of
COSTS: Computer Software to Be Sold, Leased, or Otherwise
Marketed, and are stated at the lower of unamortized cost
or net realizable value. Capitalization of software
development costs begins upon the establishment of
technological feasibility and ends when the product is
available for general release to customers. The Company
determined that it achieved technological feasibility
during April 1997. Amortization of capitalized software
development costs shall start when the product is available
for general release to customers and will be provided at
the greater of the amount computed using (a) the ratio of
current gross revenue for a product to the total of current
and
F-15
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
anticipated future gross revenue or (b) the straight-line
method over the remaining estimated economic life of the
product. All other research and development expenses,
consisting primarily of salaries and consulting fees to
support technology and services content development, are
expensed as incurred.
In connection with the Company ceasing development of its
Internet call center software during March 1998, all
software development costs capitalized through March 1998
have been expensed.
11. GOING The Company is in the development stage, has ceased
CONCERN: developing its Internet call center software technologies,
has a limited operating history, has not generated
significant revenue through March 31, 1998 and has an
accumulated deficit at March 31, 1998. The Company devoted
substantially all of its efforts to financial planning,
raising capital, and research and development with respect
to Internet-related technology to be utilized in commercial
applications.
The Company's financial statements have been prepared on
the assumption that the Company will continue as a going
concern. Management is currently negotiating a reverse
merger transaction for accounting purposes with another
entity. If the merger cannot be consummated, another
strategic partner cannot be found, or additional financing
cannot be obtained, the Company would be materially and
adversely affected and there is substantial doubt about the
Company's ability to continue as a going concern. The
financial statements do not include any adjustments
necessary if the Company becomes unable to continue
operations for any reason.
12. SUBSEQUENT On June 22, 1998, the Company and a newly formed Australian
EVENT: subsidiary, Linda Industries Pty Limited ("LIP"), entered
into a Stock Purchase and Reorganization Agreement
("Purchase Agreement") with Newton Grace Pty Limited
("Newton Grace") and certain of its affiliates and other
entities (collectively the "Purchaser"). Pursuant to the
Purchase Agreement, the Company has agreed to acquire
certain of Newton Grace's operating assets (excluding its
trademarks, cash and certain receivables) (collectively the
"Assets"), subject to the assumption of certain
liabilities, for an aggregate purchase price of Australian
Dollars ("AUD") $19,000,000, as defined. Newton Grace is an
Australian corporation engaged in the consumer electric
goods business.
Pursuant to the Purchase Agreement, the Company has also
agreed, among other matters, to (a) use its best efforts to
effect a reverse stock split of approximately 3.4-for-1
(the "Split") and (b) issue 8,000,000 shares of
unregistered shares of common stock, subject to adjustment,
and 1,000,000 shares of a new nonvoting convertible Series
A preferred stock, in each case post-Split, to the
Purchaser for an aggregate purchase price of AUD
$10,000,000.
Immediately upon receipt of the funds from the sale of the
stock described above, the Company will use part of such
capital contribution to capitalize LIP by purchasing
1,666,667 shares of LIP in exchange for AUD $1,666,667 and
by loaning AUD $3,333,333 to LIP, to be evidenced by a
promissory note. It is anticipated that LIP will
immediately thereafter acquire the Assets, subject to the
F-16
<PAGE>
NETLIVE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
assumption of certain of its liabilities, for an aggregate
of AUD $19,000,000. The purchase price will include the
following: (i) the AUD $5,000,000 invested and loaned by
the Company as described above, (ii) AUD $10,000,000 in
cash derived from a loan from the National Australia Bank
to LIP, currently being negotiated, and (iii) AUD
$4,000,000 to be paid by LIP over time, which is to be
evidenced by a promissory note. Contemporaneously, it is
anticipated that the Company will use the balance of the
capital contributed by the Purchaser to acquire all of the
trademarks from Newton Grace for AUD $5,000,000 in cash.
Such trademarks will be immediately licensed, pursuant to
license agreements, to LIP, which will pay license fees to
the Company for the use thereof.
The transactions contemplated by the Purchase Agreement are
subject to, among other things, all of the parties
completing their due diligence, the negotiation and
execution of certain agreements, and the Company obtaining
stockholder and regulatory approvals.
Additionally, the Purchase Agreement provides for a
currency conversion ratio calculated at the exchange rate
of AUD $1.00 to U.S. $.70.
Assuming the transaction is completed, the Purchaser will
own approximately 89% of the Company's common stock and 90%
of the Company's common stock if all the preferred stock is
converted, assuming no issuances of common stock upon the
exercise of outstanding stock options or warrants. Since
the Purchaser will own a controlling interest in the
Company, the transaction is expected to be accounted for as
a "reverse acquisition" with Newton Grace deemed to be the
acquiring entity. The historical financial statements of
Newton Grace prior to the completion of the transaction are
contemplated to substitute for the historical financial
statements of the Company.
F-17
<PAGE>
NETLIVE COMMUNICATIONS, INC.
EXHIBITS TO FORM 10-KSB FOR
THE YEAR ENDED MARCH 31, 1998
EXHIBIT INDEX
Exhibit
Number Name of Exhibit
- ------- ---------------
1.1 Underwriting Agreement (1)
2.1 Stock Purchase and Reorganization Agreement (10)
3.1 Articles of Incorporation, as amended to date(1) (6)
3.2 By-Laws (1) (2) (7)
4.1 Form of Underwriter's Warrant(1)
4.2 Form of Financial Advisory and Investment Banking Agreement with
the Underwriter(1)
4.3 Form of Common Stock Certificate(1)
4.4 Form of Common Stock Purchase Warrant(1)
4.5 Form of Common Stock Purchase Warrant used for Bridge Loans(1)
4.6 Form of Warrant Agreement(1)
10.1 Employment Agreement with Laurence Rosen(1)
10.2 Employment Agreement with Michael Kharitonov(1)
10.3 Employment Agreement with Jeffrey Wolf, as amended(1)
10.4 Amendment No. 1 to Employment Agreement with Michael Kharitonov(1)
10.5 Employment Agreement with Vladislav Rysin(1)
10.6 License Agreement with Jeane Dixon(1)
10.7 Company's 1996 Incentive Stock Option Plan (1)(9)
10.8 NetLive Communications, Inc. Performance Share Program and
Performance Share Program Trust(3)
10.9 Settlement and Voting Agreement, dated as of June 12, 1997,
among the Company, May Davis Group, Inc. et al.(4)
10.10 Letter agreement, dated as of June 12, 1997, between the Company
and Gary Rogers(4)
10.11 Severance Agreement, dated as of June 12, 1997, between the
Company and Laurence M. Rosen and exhibits thereto including the
Consulting Agreement.(4)
10.12 Amendment to Settlement and Voting Agreement, dated as of
September 23, 1997, by and among the Company, May Davis Group, Inc.
et al. (5)
10.13 Amendment to Underwriting Agreement, dated as of September 23,
1997, by and between the Company and May Davis Group, Inc. (5)
10.14 Letter Agreement, dated as of September 23, 1997, by and between
the Company and Gary Rogers (5)
10.15 Company's 1997 Stock Option Plan (8)
27.1 Financial Data Schedule (11)
26
<PAGE>
- -----------------
(1) Filed with the Company's Registration Statement filed on Form SB-2 (File
No. 333-4057).
(2) Amendment to Article II, Section 7 of the Company's By-laws filed with
the Company's Current Report on Form 8-K dated January 28, 1997.
(3) Filed with the Company's Current Report on Form 8-K dated February 27,
1997.
(4) Filed with the Company's Current Report on Form 8-K dated July 3, 1997
(5) Filed with the Company's Current Report on Form 8-K dated October 8, 1997
(6) Additional Articles IX, X and XI were filed with the Company's Current
Report on Form 10-QSB dated November 14, 1997.
(7) The amendment to Article III, Sections 1(a), 1(c), 6 and 9 and the
amendment to Article IV, Sections 1(b), 1(c) and 3 were filed with
the Company's Current Report on Form 10-QSB dated November 14, 1997.
(8) Filed with the Company's Current Report on Form 10-QSB dated November 14,
1997.
(9) Amended and corrected version filed with the Company's Current Report on
Form 10-QSB dated November 14, 1997.
(10) Filed with the Company's Current Report on Form 8-K dated June 30, 1998.
(11) Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 119,375
<SECURITIES> 393,485
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 564,276
<PP&E> 10,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 589,074
<CURRENT-LIABILITIES> 129,769
<BONDS> 0
0
0
<COMMON> 295
<OTHER-SE> 459,010
<TOTAL-LIABILITY-AND-EQUITY> 589,074
<SALES> 0
<TOTAL-REVENUES> 10,256
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,496,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,167
<INCOME-PRETAX> (2,498,030)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,498,030)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,498,030)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
