<PAGE>
As filed with the Securities and Exchange Commission on April 15, 1998.
Registration No. 333-43443
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NETVALUE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
7319
(Primary Standard Industrial Classification Number)
23-2855659
(I.R.S. Employer Identification Number)
1960 Bronson Road, Building No. 2
Fairfield, Connecticut 06430
(203) 319-7000
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Michael A. Clark, President
1960 Bronson Road, Building No. 2
Fairfield, Connecticut 06430
(203) 319-7000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies to:
<TABLE>
<CAPTION>
<S> <C>
Michael C. Forman, Esquire Steve Wasserman, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP Bernstein & Wasserman
1401 Walnut Street 950 Third Avenue
Philadelphia, Pennsylvania 19102 New York, New York 10022
(215) 568-6060 (212) 826-0730
</TABLE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration
Statement.
-----------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
====================================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities To Be Amount To Be Offering Price Per Aggregate Offering Registration
Registered Registered Share Price Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 3,450,000 (1) $5.00 (2) $17,250,000 $5,088.75(3)
====================================================================================================================================
</TABLE>
(1) Includes underwriter's over-allotment option.
(2) Estimated solely for purposes of calculating registration fee.
(3) $4,071.00 was previously paid at the time of the initial
filing of the Registration Statement.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
NETVALUE, INC.
CROSS-REFERENCE TABLE
Pursuant to Item 501(b) of
Regulation S-K
<TABLE>
<CAPTION>
Item No. Form S-1 Caption Prospectus Caption
- -------- ---------------- ------------------
<S> <C> <C>
Item 1 Forepart of the Registration Facing Page of Registration Statement;
Statement and Outside Front Cover Cross Reference Sheet; Outside Front
Page of Prospectus Cover Page of Prospectus
Item 2 Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages of Prospectus; Available
Information
Item 3 Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings to Fixed
Charges
Item 4 Use of Proceeds Prospectus Summary: Use of Proceeds
Item 5 Determination of Offering Price Risk Factors; Underwriting
Item 6 Dilution Dilution
Item 7 Selling Security Holders Not Applicable
Item 8 Plan of Distribution Underwriting
Item 9 Description of Securities to be Outside Front Cover Page of
Registered Prospectus; Prospectus Summary;
Market Price of and Dividends on the
Common Stock and Related
Shareholder Matters; Description of
Capital Stock
Item 10 Interests of Named Experts and Legal Matters; Experts
Counsel
Item 11 Information with Respect to the Prospectus Summary; Risk Factors; Market Price
Registrant of and Dividends on Common Stock and Related
Shareholder Matters; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business; Management;
Certain Transactions; Capital Stock
Item 12 Disclosure of Commission Position Not Applicable
on Indemnification for Securities
Act Liabilities
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED APRIL ________, 1998
PROSPECTUS
3,000,000 SHARES
NETVALUE, INC.
COMMON STOCK
netValue, Inc. ("netValue" or the "Company") hereby offers 3,000,000
shares of common stock, $.001 par value per share ("Common Stock"). It is
currently anticipated that the initial public offering price will be $5.00 per
share. See "Underwriting" for factors to be considered in determining the
initial public offering price.
Prior to this offering of Common Stock (the "Offering"), there has
been no public market for the Common Stock, and there can be no assurance that
an active market for the Common Stock will develop after completion of the
Offering. The Company has applied for quotation of the Common Stock on The
NASDAQ SmallCap (the "SmallCap") Market. There is no assurance that NASDAQ
will approve the Company's initial application to the SmallCap or, if it is
approved, that the Company's listing will be maintained.
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF
FOR A DISCUSSION OF CERTAIN MATTERS THAT PROSPECTIVE PURCHASERS SHOULD
CAREFULLY CONSIDER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C>
=================================================================================================================================
Underwriting Discounts
Price to Public and Commissions(1) Proceeds to Company(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share . . . . . . . . . . . . . . . $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Total(3) . . . . . . . . . . . . . . . $ $ $
=================================================================================================================================
</TABLE>
(1) Does not include additional compensation to be paid to J.B. Sutton
Group, LLC (the "Underwriter") in the form of (i) a nonaccountable
expense allowance of $450,000 ($517,500 if the over-allotment option
referred to in footnote 3 is exercised in full), (ii) the value of
an option entitling the Underwriter to purchase up to 300,000 shares
of Common Stock at a price equal to 120% of the offering price per
share, exercisable for a period of 18 months commencing on the date
of this Prospectus, or (iii) the payment of $10,000 per month for a
period of 18 months, commencing on the date of this Prospectus,
representing the full amount due under a consulting arrangement
pursuant to which the Underwriter is to render investment banking
advice to the Company. The Company has agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be
$300,000, not including the Underwriter's nonaccountable expense
allowance and investment banking fees described in footnote 1 above.
(3) The Company has granted the Underwriter an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to
450,000 additional shares on the same terms and conditions as set
forth above solely to cover over-allotments, if any. If the option
is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."
<PAGE>
The shares of Common Stock are being offered by the Underwriter on a
firm commitment basis, subject to a declaration by the Securities and Exchange
Commission (the "Commission") that the registration is effective, as specified
herein, and subject to receipt and acceptance by the Underwriter and its right
to reject any order in whole or part and to prior sale, withdrawal or
cancellation of the offer without notice. It is expected that delivery of the
shares of Common Stock will be made at the offices of J.B. Sutton Group, LLC
in Great Neck, New York, on or about __________, 1998.
--------------
J.B. Sutton Group, LLC
1010 Northern Boulevard, Suite 214
Great Neck, New York 11021
(516) 498-2100 (Telephone)
(516) 498-2198 (Facsimile)
The date of this Prospectus is
1
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 (such
registration statement, as the same may be amended and together with all
exhibits and schedules thereto, the "Registration Statement") with the
Commission under the Securities Act with respect to the securities offered
hereby. As permitted by the rules and regulations of the Commission, this
prospectus (the "Prospectus") does not contain all of the information
contained in the Registration Statement. For further information regarding
both the Company and the securities offered hereby, reference is made to the
Registration Statement, which may be inspected without charge at the public
reference facilities of the Commission's Washington, D.C. office, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and its regional office located
at 7 World Trade Center, Suite 1300, New York, NY 10048. Copies may be
obtained from the Washington D.C. office public reference library upon request
and payment of the prescribed fee. Such reports and other information can be
reviewed through the Commission's Electronic Data Gathering Analysis and
Retrieval System, which is publicly available through the Commission's web
site (http://www.sec.gov).
The Company will furnish to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited financial statements for the first three quarters of each year. The
Company is not currently subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information, including "Risk Factors" and the financial statements
and notes thereto, appearing elsewhere in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety. Unless otherwise
indicated, all information contained in this Prospectus, including share and
per share data, assumes (i) no exercise of the Underwriter's over-allotment
option or any other options or warrants outstanding as of the date hereof and
(ii) no conversion of any preferred stock outstanding as of the date hereof.
See "Description of Capital Stock."
The Company
netValue is a development stage company which provides electronic
commerce and database marketing services to Internet advertisers and
publishers. The Company's first product, Coupons Online(SM), allows marketers to
deliver targeted, secure coupons and other incentives to consumers from any
Internet web site. Consumers use the Company's web-browser plug-in software to
access and print coupon offers and other promotions from the web sites of
Internet advertisers and publishers ("Customers"). The Company's systems
provide online targeting and validation for each consumer and coupon. In July
1997, the Company commenced commercial operations of its Coupons Online(SM)
service.
The Company's second product, i-Value(SM), is a service to which
consumers subscribe to receive periodic "electronic packages" of incentives
delivered to their personal computers. Promotional offers can be individually
tailored to each consumer's product preferences and shopping habits. The
Company provides its Customers with consumer software, targeting, validation
and reporting services. The Company expects to commercially launch its
i-Value(SM) program in the third quarter of 1998.
The Company expects its principal customers and sources of revenue
to be national, regional and local retailers, manufacturers of consumer
products, service providers and online publishers. The Company's revenues are
expected to be generated through a combination of software licensing,
promotion set-up and transaction fees.
The Company was incorporated as a Delaware corporation on July 16,
1996 and is the successor by merger (the "Merger") to Coupons Online, L.L.C.
("COL"), a New Jersey limited liability company formed in December 1994
("COL"). See "Certain Transactions - The Merger." All references in this
Prospectus to the "Company" with respect to periods prior to July 16, 1994 are
to COL. The Company's address is 1960 Bronson Road, Building No. 2, Fairfield,
Connecticut 06430. Its phone number is (203) 319-7000. The Company's web site
is located at www.netvalueinc.com.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company............................ 3,000,000 shares
Common Stock outstanding before the Offering(1)................ 10,718,756 shares
Common Stock to be outstanding after the Offering(1)........... 13,718,756 shares
Use of proceeds by the Company................................. The Company plans to use the net proceeds from this
Offering, estimated to be $12,750,000, in the following
approximate amounts: $4,488,000 to repay short term
notes payable including interest, $1,630,000 to repay
outstanding accounts payable due and $6,632,000 to
provide funds for working capital and general corporate
purposes. See "Use Of Proceeds."
</TABLE>
- -----------------------
(1) Does not include 450,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 2,930,500
shares of Common Stock issuable upon the exercise of outstanding
options and warrants, 1,556,250 shares of Common Stock issuable to
Rozel International Holdings Limited ("Rozel") upon the conversion
of 124,500 shares of Series A Preferred Stock, and 10,000 shares of
Common Stock issuable to Golden Eagle Partners, a creditor of the
Company.
-3-
<PAGE>
Summary of Selected Financial Data
The following summary of selected financial data should be read in
conjunction with the financial statements and notes thereto appearing
elsewhere herein.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended December 31, December 16, 1994
----------------------- (inception) through
1995 1996 1997 December 31, 1997
---- ---- ---- -------------------
Statement of Operations
Data (1)
Loss from operations $(746,945) $(3,316,522) $(7,563,999) $(11,644,608)
Other income (expense) (615) 2,428 (752,598) (750,785)
Net loss $(747,560) $(3,314,094) $(8,316,597) $(12,395,393)
December 31, 1997
--------------------
Actual Pro Forma (4) As Adjusted (3) (5) (6)
------------ ------------- -----------------------
Balance Sheet Data
Working capital (deficit) $(5,488,247) $162,681 $7,056,032
Total assets 2,048,381 8,093,206
Total liabilities 6,535,649 (162,681) 254,968
Notes payable and accrued interest (2) 4,345,681 142,319 ---
Stockholders' equity (deficit) (4,487,268) 162,681 7,838,238
</TABLE>
(1) The historical financial data for the period from January 1, 1996 to
September 18, 1996 and for the years prior to 1996 represents
historical financial data for COL (predecessor to the Company). See
Notes 1 and 2 of Notes to Financial Statements.
(2) Notes payable and accrued interest amounts are included in the Total
liabilities line item.
(3) "As Adjusted" reflects the actual balances as of December 31, 1997
for each captioned item included under Balance Sheet Data, plus the
sum of the Pro Forma and "As Adjusted" Transactions.
(4) Includes additional 1998 borrowings, 1998 proceeds from the sale of
preferred stock and the proceeds from the IQ licensing agreement,
collectively used to fund deficits accumulated during the development
stage (a component of stockholders' equity (deficit)) and the payment
of the Company's existing obligations, as reflected in the following
tabular presentation. See Pro Forma Transaction table below.
(5) Adjusted to reflect repayment of certain notes payable, accrued
interest and other liabilities arising from the sale of the shares of
Common Stock offered hereby and the application of the net proceeds
thereof as reflected in the following tabular presentation, and as
described under "Use of Proceeds." See "As Adjusted" Transctions table
below.
(6) Does not include 450,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 2,930,500 shares
of Common Stock issuable upon the exercise of outstanding options and
warrants, 1,556,250 shares of Common Stock issuable to Rozel upon the
conversion of 124,500 shares of Series A Preferred Stock, and 10,000
shares of Common Stock issuable to Golden Eagle Partners, a creditor
of the Company. See "Use of Proceeds," "Capitalization" and
"Underwriting."
-4-
<PAGE>
Pro Forma Transactions
----------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) Total
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working
capital
(deficit) (50,000) 1,020,000 1,250,000 (2,500) (1,912,500) (142,319) 162,681
Total assets 700,000 1,020,000 1,250,000 (750,000) (307,500) (1,912,500) 0
Total
liabilities 750,000 (750,000) (305,000) 142,319 (162,681)
Notes payable
and accrued
interest 750,000 (750,000) 142,319 142,319
Stockholders'
equity
(deficit) (50,000) 1,020,000 1,250,000 (2,500) (1,912,500) (142,319) 162,681
</TABLE>
(a) Proceeds of borrowings from independent party and related financing fee
of $50,000.
(b) Proceeds from sale of preferred stock.
(c) Proceeds from IQ licensing agreement.
(d) Loan obligation paid from proceeds of the IQ licensing agreement and
repayment of $13,750 of interest with common stock.
(e) Obligations incurred and paid and common stock issued pursuant to the IQ
licensing agreement.
(f) Remaining proceeds of (a), (b) and (c) utilized to fund deficits
accumulated during the development stage.
(g) Accrued interest on notes payable incurred on the Company's
obligations prior to the receipt of proceeds from the sale of the
shares of Common Stock offered hereby.
"As Adjusted" Transactions
--------------------------
<TABLE>
<CAPTION>
Total Actual
at December
31, 1997
Plus Pro
Forma
Amounts (a) (b) (c) (d) (e) Total
------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital
(deficit) (5,325,566) 12,750,000 (368,402) 7,056,032
Total assets 2,048,381 12,750,000 (4,488,000) (368,402) (218,773) (1,630,000) 8,093,206
Total liabilities 6,372,968 (4,488,000) (1,630,000) 254,968
Notes payable and
accrued interest 4,488,000 (4,488,000) 0
Stockholders' equity
(deficit) (4,324,587) 12,750,000 (368,402) (218,773) 7,838,238
</TABLE>
(a) Receipt of gross proceeds from the sale of 3,000,000 shares of common
stock offered by the Company at an assumed offering price of $5.00 per
share less receipt of offering costs of $2,250,000.
(b) Repayment of notes payable and accrued interest.
-5-
<PAGE>
(c) Includes prepaid financing fees assumed to be accreted upon the
repayment of certain notes payable at December 31, 1997 until the
expected date of repayment, which approximates the date of
consummation of the Offering.
(d) Reclassification of deferred offering costs to equity resulting from
the completion of the Offering.
(e) Payment of delinquent vendor payables at December 31, 1997.
-6-
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking" statements regarding
potential future events and developments affecting the business of the
Company. Such statements relate to, among other things, (i) competition for
customers for its products and services; (ii) the uncertainty of developing or
obtaining rights to new products that will be accepted by the market and the
timing of the introduction of new products into the market; and (iii) other
statements about the Company's role in the online services industry. Such
forward-looking statements include those preceded by, followed by or that
include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates," or similar expressions.
The Company's ability to predict the results or the effect of any
pending events on the Company's operating results is inherently subject to
various risks and uncertainties, including: (i) competition for users of the
Company's products and services; (ii) the risks of doing business via the
Internet; (iii) the uncertainty of developing or obtaining rights to new
products and services that will be accepted by the market; and (iv) the
effects of government regulations on the Company's business. Actual results in
all likelihood will differ from those projected in the forward-looking
statements included in this Prospectus, and such differences may be material.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk and
should be considered only by persons who can afford the loss of their entire
investment. The following risk factors should be considered carefully, in
addition to the other information contained in this Prospectus, in evaluating
the Company and its business prospects and an investment in the Common Stock.
RISKS RELATED TO THE COMPANY
Development Stage Company With Limited Operating History
The Company was formed on July 16, 1996 and is the successor by merger
(the "Merger") to Coupons Online, L.L.C. ("COL") which was formed in December
1994. See "Certain Transactions - The Merger." Since its formation, the
Company has been in the development stage and its activities have been
primarily limited to developing and promoting Coupons Online(SM) and
i-Value(SM), its online targeted incentive distribution programs
(collectively, the "Programs"). For a more complete description of the
Programs, see "Business." Accordingly, the Company has an extremely limited
operating history upon which an evaluation of the Company's prospects can be
made. The Company's prospects must be considered in light of the risks,
expenses and difficulties encountered by a development stage company. There is
currently no basis upon which to assume that the Company's products and
services will prove financially profitable or generate more than nominal
operating revenues. Until sufficient cash flow is generated from operations,
the Company will have to utilize its capital resources or external sources of
funding, if available, to satisfy its working capital needs and/or to make the
required payments on the Company's outstanding indebtedness. See "Need for
Additional Financing." There can be no assurance that the Company will be able
to continue to sell additional equity securities or enter into additional debt
financings. If the Company fails to generate increased revenues and/or fails
to sell additional securities, investors may lose all or a substantial portion
of their investment.
Significant Cumulative Operating Losses
From inception through the date hereof, the Company has generated
funds primarily through the sale of its securities and debt financing
transactions. Since its inception, the Company has generated nominal revenues
from operations. For the years ended December 31, 1995, December 31, 1996 and
December 31, 1997, the Company incurred net losses of $747,560, $3,314,094 and
$8,316,597 respectively. From its inception on December 16, 1994 through
December 31, 1997, the Company has incurred an accumulated deficit of
$12,395,393. Operating losses are anticipated to continue through at least
December 31, 1998. See "Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." There can be no
assurance that the Company will be able to continue to sell additional equity
securities or enter into additional debt financings. If the Company fails to
generate increased revenues and/or fails to sell additional securities,
investors may lose all or a substantial portion of their investment.
-7-
<PAGE>
Auditor Report Modification for Going Concern
From inception through the date hereof, the Company has generated
funds primarily through the sale of its equity and debt securities. L.J.
Soldinger Associates, in its capacity as the Company's independent
accountants, has issued a report that includes a modification that indicates
that the Company's dependence on outside financing, negative working capital
and losses since inception raise substantial doubt about the Company's ability
to continue as a going concern. See "Financial Statements." There can be no
assurance that the Company will be able to sell additional equity securities
or enter into additional debt financings. If the Company fails to generate
increased revenues and/or fails to sell additional securities, the Company
will not have sufficient cash to meet the requirements of its business plan
and will cease to continue as a going concern. If the Company ceases to
continue as a going concern, investors will lose all or a substantial portion
of their investment.
Need for Additional Financing
In addition to the proceeds of this Offering, the Company anticipates
that it will need significant additional financing to support its operations
and satisfy its working capital needs. As of December 31, 1997, the Company
had a working capital deficit of $5,488,247. The amount of additional
financing required to fund the Company's operations and working capital needs
will depend upon the timing of the Company's expenditures to develop, test and
introduce new products and the availability of cash flow from the Company's
operations. Such financing may involve the issuance of debt or equity
securities, or a combination thereof. Any additional equity financing may
cause substantial dilution to the Company's book value per share and the
ownership percentage of the Company's current stockholders. There can be no
assurance that additional financing will be available to the Company at the
times or on terms desirable to the Company, or at all. The failure of the
Company to obtain such additional debt or equity financing would require the
Company to modify its business plan and could require the Company to cease
operations and liquidate. It is likely that a liquidation by the Company would
result in a total loss to the Company's stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Changes in Financial Position, Liquidity and Capital Resources."
No Assurance of Protection of Patents and Proprietary Technology
The Company's success may depend in part on its ability to obtain
patent protection for its technology, to preserve its trade secrets and to
operate without infringing on the proprietary rights of third parties. While
none of the Company's technology is patented, the Company has applied for a
patent entitled "Method and Distribution of Product Redemption Coupons." The
Company had initially received an indication from the United States Patent and
Trademark Office (USPTO) that certain of the claims of this application were
allowable but in February 1998 received a reversal on this indication. The
Company is currently preparing its response to this reversal which it plans to
submit in April 1998. See "Business - Patent and Trademark Protection." The
Company is using the technology that is the subject of this patent application
to operate the Programs.
The Company may file additional patent applications as it deems
appropriate. There can be no assurance that the patents applied for will be
reviewed timely, that any patents will issue or that any patents issued will
afford meaningful protection against competitors with similar technology or
that any patents issued will not be challenged by third parties. The Company
cannot be certain that others will not independently develop similar
technologies, duplicate the Company's technologies or design products or
methods around the Company's technologies, whether or not patented. At any
point in time, the Company may not have sufficient resources to maintain a
patent infringement lawsuit should anyone be found or believed to be
infringing upon its patents, if any. There also can be no assurance that the
technology ultimately used by the Company will be covered by any patent issued
from its pending patent application or other patent applications which it may
file.
Many patents and patent applications have been filed by third parties
with respect to online technology. The Company does not believe that its
technology infringes on the patent rights of third parties. However, there can
be no assurance that certain aspects of the Company's technology will not be
challenged by the holders of such patents or that the Company will not be
required to license or otherwise acquire from third parties the right to use
certain technology. The failure to overcome such challenges or obtain such
licenses or rights on acceptable terms could have a material adverse effect on
the Company. On April 1, 1998, the Company received a letter from a third
party indicating that the Company's Internet coupon distribution process might
be covered by a patent held by this third party. The Company
-8-
<PAGE>
has referred this matter to its patent counsel. Based on a preliminary review
of this patent, the Company's patent counsel has concluded that the Company
does not infringe upon this patent and patent counsel has indicated his
willingness to issue an opinion to this effect. See "Business - Patent and
Trademark Protection."
Many of the processes and much of the know-how important to the
Company's technology are dependent upon the skills, knowledge and experience
of its technical personnel, consultants and advisors and such skills,
knowledge and experience are not patentable. To help protect its rights, the
Company requires employees, significant consultants and advisors with access
to confidential and proprietary information to enter into confidentiality
agreements with the Company. There can be no assurance, however, that these
agreements will provide adequate protection for the Company's trade secrets,
know-how or proprietary information in the event of any unauthorized use or
disclosure.
The Company may be required to license or sublicense certain
technology or patents in order to commence or continue operations. There can
be no assurance that the Company will be able to obtain a license for any
technology that it may require to conduct its business or that, if obtainable,
such technology can be licensed at a reasonable cost and on other terms
satisfactory to the Company. The cost of obtaining and enforcing patent
protection and of protecting proprietary technology may involve a substantial
commitment of the Company's resources. Any such commitment may divert
resources from other areas of the Company.
Competition
The Company faces significant competition from many promotion and
advertising companies as well as on-line publishers which compete, directly or
indirectly, for consumer advertising and promotion business from advertisers
and for consumers' time and attention. Many of these companies have longer
operating histories, greater market presence, and substantially greater
financial and other resources than the Company. Many of these companies,
including Catalina Marketing Corporation, Money Mailer, Val-Pak Direct
Marketing Systems, Interactive Coupon Network, Valassis Communications, Inc.
and News America Holdings Incorporated have initiated or are planning to
initiate programs and services involving the Internet. Additionally, the
Internet is a relatively new format upon which retailers and consumers conduct
business. As the Internet evolves and consumers gain greater confidence in the
Internet and other means of electronic commerce, it is likely that competition
will increase. Accordingly, there can be no assurance that competition will
not increase from existing competitors, that established or new companies will
not enter the market, that competitors will not offer comparable products and
services at lower prices than the Company, or that the Company will be able to
compete successfully with such existing or new competitors. See "Business" --
"General."
Significant Indebtedness To Be Repaid From The Net Proceeds Of This Offering
The Company currently has significant indebtedness in the aggregate
principal amount of approximately $6,118,000, $4,488,000 of which constitutes
short-term notes and accrued interest thereon, and approximately $1,630,000 of
which will consist primarily of past due accounts payable as of April 30,
1998. Thus, the Company is highly leveraged and plans to use approximately
$6,118,000 or 48.0% of the net proceeds from this Offering to repay all such
indebtedness. See "Use of Proceeds."
Pending Legal Proceedings
The Company has been named as a defendant in five contract related
disputes involving amounts payable to trade creditors for products sold or
services rendered to the Company. The aggregate amount of damages claimed in
these disputes is approximately $340,000. The Company is attempting to settle
most of these actions prior to proceeding to a trial on the merits. See
"Business - Legal Proceedings."
As of March 31, 1998, the Company had made accruals for all of the
potential damages it would be required to pay if it is not successful in
either settling these cases or does not prevail in the legal proceedings.
However, the Company has not made accruals for potential attorneys' fees or
court costs which it may be required to pay if it does not prevail in these
legal proceedings. The payment of these amounts could delay the Company's
progress in meeting its business plan.
-9-
<PAGE>
Reliance on Key Personnel
The Company is dependent upon the continuing services of its executive
officers, particularly Michael A. Clark, its President and Chief Executive
Officer and Richard F. Davey, its Vice President and Chief Technology Officer
and certain other key employees. The Company is also dependent upon certain
other officers who possess specialized knowledge and experience relating to
the Company's technology, markets and sales. The Company does not presently
maintain or intend to obtain key-man insurance on any of its executive
officers. Although the Company has entered into employment agreements with Mr.
Clark, Mr. Davey and other of its key employees, there can be no assurance
that such individuals will continue to work for the Company. In the event that
any of these individuals terminate their relationship with the Company or
otherwise cease to be affiliated with the Company and acceptable replacements
are not identified, there could be a material adverse effect on the Company's
business and prospects. See "Business Executive Compensation - Employment
Agreements and Other Matters." Additionally, there can be no assurance that
suitable replacements could be hired without the Company incurring substantial
additional costs, or at all. The success of the Company is also dependent upon
its ability to attract and retain highly qualified technical, managerial and
marketing personnel. The Company faces competition for such personnel from
other entities, many of which have significantly greater resources than the
Company. There can be no assurances that the Company will be able to recruit
and retain such personnel.
Dependence on DMR Consulting Group, Inc. to Provide Essential Services to the
Company
The Company has entered into an agreement with DMR Consulting Group,
Inc. ("DMR") to develop core software for the Company and perform the
Company's initial systems integration. The development and integration of the
Company's core software and operating systems is crucial to the financial
viability of the Company. In June 1997, in response to the Company's failure
to satisfy certain invoices of DMR for services rendered to the Company, DMR
discontinued work on the Company's software. DMR recommenced such work
following execution of an agreement pursuant to which the terms of payment
were restructured. DMR has delivered the operational programs to the Company
and the Company is currently using the programs to develop and operate its
products. However, DMR has not delivered the source code for these programs to
the Company and will not do so until it has received full payment for services
provided under the agreement. With respect to the payments due DMR on account
of such agreement, on March 9, 1998, the parties amended the agreement so that
all amounts owed to DMR are now due on the earlier of two business days
following the closing date of this Offering or payment dates which correspond
to the dates which the Company expects to receive payments from IQ Value,
L.L.C. ("IQ"), a Delaware limited liability company with which the Company has
recently entered into a letter of intent to distribute the Company's Coupons
Online(SM) and I-Value(SM) products. See "Business - Marketing and Sales
Strategy - Letter Agreement with IQ Value, L.L.C." For services provided under
the agreement, DMR has billed the Company approximately $3,100,000 and the
Company has paid DMR approximately $2,500,000. As of April 10, 1998, the
Company owes DMR approximately $600,000 which includes accrued interest of
$36,000. DMR holds title to the software it has developed until such amount is
repaid to DMR. If the Company fails to make these payments and DMR does not
deliver the source code to the Company, it will be very difficult for the
Company to make modifications to its products and the Company may default on
its agreement with IQ. In the future, the Company will continue to be
dependent on DMR and other unaffiliated service providers to carry out its
business plan. A failure by DMR or any other significant third party service
provider to provide required services could have a material adverse effect on
the business and prospects of the Company. See "Financial Statements; Business
- - General."
10
<PAGE>
Rapid Technological Changes
The online services industry is subject to rapid and significant
changes in technology. Such changes could lead to new products and services
that compete with Coupons Online(SM), i-Value(SM) or other products proposed to
be offered by the Company or could lower the cost of current competing
products and services to the point where the Company's products and services
could become non-competitive. In response to these changes, the Company could
be required to reduce the prices of its products or to increase its research
and development expenses in an effort to develop technological advances in its
own products so that they remain competitive in the marketplace. While the
Company is not aware of any technology changes that would materially affect
the attractiveness or effectiveness of its proposed products and services, the
effect of technological changes on the business of the Company cannot be
predicted. In the event that the Company is unable to continue to upgrade its
products and services, it will be unable to provide the types of products and
services demanded by consumers of online services. See "Business -General."
Composition of the Board of Directors
The Company's Board of Directors currently consists of six members. Only
two members of the Company's Board of Directors are independent, nonemployee
directors. These two members joined the Board of Directors in December 1997.
Prior to this date, the Company did not have independent nonemployee
directors. Accordingly, certain transactions which the Company has completed
with related parties were not approved by disinterested independent directors.
See "Certain Transactions."
Limitation on Monetary Liability of Board of Directors to Stockholders of the
Company
The Company's Amended and Restated Certificate of Incorporation
eliminates the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors, other than the liability of a
director (i) for a breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions by the director not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for a willful or negligent declaration of an unlawful dividend, stock purchase
or redemption or (iv) for transactions from which the director derived an
improper personal benefit. These provisions are consistent with applicable
Delaware law. Accordingly, unless the directors commit one of the acts
enumerated above, stockholders will not be able to recover any loss of their
investments from members of the Board of Directors. See "Management Liability
and Indemnification of Officers and Directors."
Government Regulation
The Company's operations are subject to various federal, state and
local laws and the supervision of various regulatory authorities, including
the Federal Trade Commission, with respect to the Company's advertising and
promotion services, and the Federal Communications Commission and individual
state utility commissions, with respect to those elements of the Company's
operations which involve telecommunications. Based on current laws and
regulations, the Company does not believe there are any legal or regulatory
impediments to the Company's operations as presently contemplated. However,
applicable legal and regulatory environments are subject to change and there
can be no assurance that future federal, state and local laws and/or
regulations will not be enacted which would have a material adverse effect on
the Company's business.
RISKS RELATED TO THE OFFERING
Arbitrary Determination of Offering Price
The offering price of the Common Stock has been determined solely by
negotiation between the Company and the Underwriter. In determining the
offering price, the Company and Underwriter considered, among other things,
estimates of the business potential of the Company and the relative
capabilities of the management of the Company. The offering price does not
necessarily bear any relationship to assets, book value, net worth or earnings
history of the Company or other investment criteria. The offering price of the
Common Stock should not necessarily be considered an indication of the actual
value of the Company's securities. See "Underwriting."
11
<PAGE>
Lack of Public Market; Possible Volatility of Stock Price
Prior to this Offering there has been no public market for the Common
Stock of the Company and there can be no assurance that an active trading
market will develop or be sustained after this Offering. See "Underwriting."
The market prices of securities of emerging growth companies have historically
been highly volatile. Factors having a significant effect on the market price
of the Common Stock include fluctuation in the Company's operating results,
announcement of technical innovations or new commercial products by the
Company or its competitors, governmental regulation, developments in patent or
other proprietary rights, developments in the Company's relationships with
current or future collaborative partners and general market conditions. See
"Description of Capital Stock - Listing and Trading of Common Stock."
No Assurance that Listing on NASDAQ SmallCap will be Approved or Maintained
The Company has applied to have the Common Stock approved for
quotation on the SmallCap. NASDAQ has recently increased the requirements for
both initial and continued listing on the SmallCap. Accordingly, there can be
no assurance that NASDAQ will approve the Company's application for initial
listing on the SmallCap or that the Company will meet the requirements to
maintain its listing on the SmallCap. In either of these situations, the
development of a public market for the Company's Common Stock will be greatly
delayed as its only alternatives will be to either complete an application for
listing on another stock exchange or to initiate quotations of the Company's
Common Stock in the OTC Bulletin Board Service, the NQB Pink Sheets, or
another comparable quotation medium. See "Description of Capital Stock Listing
and Trading of Common Stock."
Penny Stock Regulations
The Commission has adopted rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." These regulations 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. These requirements may have the effect of reducing the
level of trading activity in the secondary markets for a stock that becomes
subject to the penny stock rules. If the Company's Common Stock becomes
subject to the penny stock rules, investors may find it more difficult to sell
their Common Stock and such rules may have the effect of reducing the price of
the Company's securities.
Broad Discretion Over Use of Proceeds
Approximately $6,118,000 or 48.0%, of the estimated net proceeds of
this Offering will be used to repay short term promissory notes, including the
interest accrued thereon, and commercial accounts payable. The remaining
$6,632,000 of estimated net proceeds of this Offering will be used for working
capital purposes. The Company has provided an estimate of its expected needs
and anticipated uses of the proceeds based upon its current plans and certain
assumptions. If these plans or assumptions change, the Company may be required
to modify or reallocate its use of these proceeds. Accordingly, the Company
will have broad discretion as to the application of such proceeds. See "Use of
Proceeds."
Dividends
No assurance can be given that the proposed operations of the Company
will be profitable. No dividends have been paid by the Company since inception
and the payment of dividends on the Common Stock is not contemplated in the
foreseeable future. The payment of future dividends will be directly dependent
upon the earnings of the Company, its financial needs and other similarly
unpredictable factors. Earnings, if any, are expected to be retained to
finance and develop the Company's business. See "Market Price and Dividends on
the Common Stock and Related Stockholder Matters."
12
<PAGE>
Immediate Substantial Dilution
Investors who purchase shares of Common Stock in this Offering will
experience an immediate and substantial dilution in the net tangible book
value per share of the Common Stock of $4.52 per share, approximately a 90.4%
decrease from the assumed public offering price of $5.00 per share. See
"Dilution."
Control by Stockholders
As of the date of this Prospectus, executive officers and directors of
the Company and other significant stockholders own approximately 59.8% of the
issued and outstanding shares of Common Stock. Following the consummation of
this Offering, executive officers and directors of the Company and other
significant stockholders will own approximately 46.7% of the issued and
outstanding shares of Common Stock. Accordingly, these persons, if they act
together, will be able to exert significant influence over the Board of
Directors and the direction of the affairs of the Company. See "Security
Ownership of Principal Stockholders and Management."
Anti-Takeover Effect of Bylaws
The Company's Bylaws contain certain provisions which may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which some
stockholders may deem to be in their best interests). These provisions could
delay or frustrate the removal of incumbent directors or the assumption of
control by an acquirer, even if such removal or assumption of control would be
beneficial to stockholders. These provisions also could discourage or make it
more difficult to consummate a merger, tender offer or proxy contest, even if
such events would be beneficial, in the short term, to the interest of
stockholders. These provisions include a classified Board of Directors serving
staggered three-year terms and the ability of the Board of Directors to issue
and determine the terms of preferred stock. See "Management - Board of
Directions."
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market, if
any, or the prospect of such sales, could materially adversely affect the
market price of the Common Stock, depending on the timing of such sales.
Additionally, sales of shares of Common Stock issuable upon conversion or
exercise of securities convertible into or exercisable for Common Stock may
effect a dilution of the book value per share of Common Stock. For a
description of the Company's shares of Common Stock eligible for future sale,
see "Shares Eligible for Future Sale."
Possible Negative Effects of Preferred Stock
The Company's Amended and Restated Certificate of Incorporation
authorizes the issuance of Preferred Stock in one or more series and grants
the Company's Board of Directors broad authority to determine the voting
powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions of
such series to the fullest extent permitted by the laws of the State of
Delaware. Upon the completion of this Offering, 124,500 shares of Series A
Convertible Preferred Stock will be issued and outstanding, 175,500 shares of
Series A Convertible Preferred Stock will be reserved for issuance, and
700,000 shares of Preferred Stock will remain authorized, undesignated and
unissued. The issued and outstanding Series A Convertible Preferred stock is
convertible into 1,556,250 shares of Common Stock at the option of the holder
or the Company. See "Certain Transactions - Rozel Preferred Stock Purchase
Agreement." Accordingly, the Company's Board of Directors is empowered,
without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect
the voting power or other rights of the holders of Common Stock. Although
there is no present intention to issue any additional series of the Company's
Preferred Stock, there can be no assurance that the Company will not do so in
the future. See "Description of Capital Stock - Preferred Stock."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares
of Common Stock offered hereby, at an assumed initial public offering price of
$5.00 per share, and after deducting underwriting discounts, commissions and
expenses of $1,950,000, and other expenses of the Offering in the amount of
$300,000, are estimated to be approximately $12,750,000 ($14,707,500 if the
Underwriter's over-allotment option is exercised in full). At this time, the
Company plans to use the net proceeds of this Offering as follows:
Repayment of Short Term Promissory Notes, including interest..$4,488,000 (35.2%)
Repayment of Commercial Accounts Payable......................$1,630,000 (12.8%)
Working Capital Purposes:
Research and Development $1,611,000 (12.6%)
Sales and Marketing $1,730,000 (13.6%)
Systems and Operation $1,745,000 (13.7%)
General and Administrative $ 951,000 ( 7.5%)
Capital Expenditures $ 595,000 ( 4.6%)
------------------
$6,632,000 (52.0%)
------------------
$12,750,000 (100%)
==================
Pending its use for the foregoing purposes, the Company intends to invest the
net proceeds of the Offering in investment grade short-term, interest-bearing
obligations.
The allocation of net proceeds set forth in the table above represents
the Company's current estimates of its anticipated needs and is based upon its
current plans and certain assumptions. If any of these factors or assumptions
change, the Company reserves the right to reallocate some or all of the
proceeds within the above-listed categories or use all or portions thereof for
other purposes. See "Risk Factors - Broad Discretion in Application of
Proceeds." For example, the Company has assumed that it will receive the
proceeds of this Offering at such time that will allow it to repay the
short-term promissory notes, including interest, and the commercial accounts
payable on or before April 30, 1998. If the Company does not receive the
proceeds of the Offering on or before April 30, 1998, it will be required to
use a larger portion of the proceeds of the Offering for this purpose, thus
reducing the amount of proceeds available to be used for working capital
purposes. The Company has also assumed that it will receive all of its current
funding needs through April 30, 1998 from Rozel International Holdings
Limited. See "Certain Transactions - Rozel Preferred Stock Purchase
Agreement." If Rozel refuses to purchase shares of Preferred Stock upon the
Company's request, the Company will be required to use a larger portion of the
proceeds to repay accounts payable. In addition, due to the fact that the
Company operates in an emerging industry that involves extremely rapid
technological advancement, opportunities may arise that will require the
Company to adjust its business plan and modify its product development. In
such instances, the Company will reallocate the use of the proceeds of this
Offering within the working capital categories to increase, for example, the
amount used for research and development or capital expenditures and to reduce
the amount of proceeds used for sales and marketing activities.
The proposed repayment of short-term promissory notes relates to the
following:
1. Promissory notes (the "Notes") in the aggregate principal amount of
$4,025,000 that were sold in two separate debt/equity financing transactions
which the Company completed in October and early December 1997. The Notes are
unsecured subordinated obligations of the Company which accrue interest at the
rate of 10% per annum (upon the occurrence of an event of default, the
interest rate increases to 15%). All principal and accrued interest due and
payable on the Notes is payable in full on the earlier of (i) the one year
anniversary of their date of issuance and (ii) five days after the
consummation by the Company of any of the following transactions which provide
gross proceeds to the Company of at least $3,000,000: (a) the Offering, (b) an
offering of the Company's capital stock, (c) the sale of all, or a portion, of
the Company's assets or (d) the licensing of all, or a portion, of the
Company's intellectual property rights to a third party. The proceeds of these
financings were used to repay short term notes payable, to pay past due
accounts payable and to satisfy other working capital requirements. None of
the investors in the Notes are officers, directors or affiliated parties of
the Company.
14
<PAGE>
2. A promissory note in the principal amount of $250,000 that relates
to a senior secured loan made by Golden Eagle Partners ("Golden Eagle") to the
Company on June 17, 1997. The promissory note accrues interest at the rate of
10% per annum (upon the occurrence of an event of default, the interest rate
increases to 15%). All principal and accrued interest due and payable on the
promissory note is payable in full within five business days of the Company's
receipt of proceeds from this Offering. In exchange for Golden Eagle's
agreement to release any conversion and registration rights it had under the
loan and security agreement it signed with the Company, the Company has agreed
to issue 10,000 shares of its Common Stock to Golden Eagle at the time it
repays the principal amount and accrued interest due under the promissory
note. Golden Eagle is not an affiliated party of the Company and none of its
partners are officers, directors or affiliated parties of the Company.
MARKET PRICE AND DIVIDENDS ON THE
COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There currently is no trading market for the Common Stock. As of April
14, 1998, there were approximately 250 record holders of the Common Stock.
The Company is not currently a party to any contracts containing
provisions that limit its ability to declare cash dividends on its Common
Stock. However, the Company has never paid any dividends on the Common Stock
and anticipates that, for the foreseeable future, all earnings, if any, will
be retained for the operation and expansion of its business. As of December
31, 1997, the Company had current liabilities of $6,535,649 and had not
generated any revenues. The Company intends to repay these current liabilities
prior to paying any cash dividends on its Common Stock. Accordingly, the
Company does not anticipate paying any cash dividends in the foreseeable
future. See "Risk Factors-Risks Related to the Offering-Dividends."
15
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company
at December 31, 1997 and as adjusted for certain pro-forma transactions and to
give effect to this Offering and the application of the net proceeds as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Actual Pro Forma (1) As Adjusted (2)
------ ------------- ---------------
Notes payable and accrued interest $4,345,681 $142,319 $0
Stockholders' equity (deficit)
Preferred stock 22 102 124
Common Stock 10,686 33 13,719
Additional paid-in capital 8,174,788 1,071,115 21,774,130
Deferred financing fees (277,371) 0
Deficit accumulated during the
development stage (12,395,393) (908,569) (13,949,735)
Total stockholders' equity (deficit) (4,487,268) 162,681 7,838,238
Total capitalization $(141,587) $305,000 $7,838,238
</TABLE>
(1) Includes additional 1998 borrowings, 1998 proceeds from the sale of
preferred stock and the proceeds from the IQ licensing agreement,
collectively used to fund deficits accumulated during the development
stage (a component of stockholders' equity (deficit)) and the payment
of the Company's existing obligations, as reflected in the Pro Forma
Transactions table below.
16
<PAGE>
(2) Adjusted to reflect the repayment of certain notes payable and accrued
interest arising from the sale of shares of Common Stock from this
offering and the application of net proceeds thereof as reflected in
the "As Adjusted" Transactions table below.
Pro Forma Transactions
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) Total
Notes payable
and accrued
interest 750,000 (750,000) 142,319 142,319
Stockholders'
equity
(deficit)
Preferred
Stock 102 102
Common
Stock 3 30 33
Additional
paid-in
capital 1,019,898 13,747 37,470 1,071,115
Deferred
financing
fees 0
Deficit
accumulated
during the
development
stage (50,000) 1,250,000 (13,750) (40,000) (1,912,500) (142,319) (908,569)
Total 0
Stockholders'
equity
(deficit) (50,000) 1,020,000 1,250,000 0 (2,500) (1,912,500) (142,319) 162,681
Total
Capitalization 700,000 1,020,000 1,250,000 (750,000) (2,500) (1,912,500) 0 305,000
</TABLE>
(a) Proceeds of borrowings from independent party and related financing fee of
$50,000.
(b) Proceeds from sale of preferred stock.
(c) Proceeds from IQ licensing agreement.
(d) Loan obligation paid from proceeds of the IQ licensing agreement and
repayment of $13,750 of interest with common stock.
(e) Obligations incurred and paid and common stock issued pursuant to the IQ
licensing agreement.
(f) Remaining proceeds of (a), (b) and (c) utilized to fund deficits
accumulated during the development stage.
(g) Accrued insterest on notes payable incurred on the Company's
obligations prior to the receipt of proceeds from the sale of the
shares of Common Stock offered hereby.
17
<PAGE>
"As Adjusted" Transactions (2)
<TABLE>
<CAPTION>
Total Actual
Plus Pro
Forma
Amounts (a) (b) (c) (d) Total
<S> <C> <C> <C> <C> <C> <C>
Notes payable and
accrued interest 4,488,000 (4,488,000) 0
Stockholders' equity
(deficit)
Preferred Stock 124 124
Common Stock 10,719 3,000 13,719
Additional paid-in
capital 9,245,903 12,747,000 (218,773) 21,774,130
Deferred financing fees (277,371) 277,371 0
Deficit accumulated
during the development
stage (13,303,962) (645,773) (13,949,735)
Total stockholders'
equity (deficit) (4,324,587) 12,750,000 (368,402) (218,773) 7,838,238
Total capitalization 163,413 12,750,000 (4,488,000) (368,402) (218,773) 7,838,238
</TABLE>
(a) Receipt of gross proceeds from the sale of 3,000,000 shares of common
stock offered by the Company at an assumed offering price of $5.00 per
share less of offering costs of $2,250,000.
(b) Repayment of notes payable and accrued interest.
(c) Includes prepaid and deferred financing fees assumed to be expended
upon the repayment of certain notes payable at December 31, 1997 until
the expected date of repayment, which approximates the date of the
consummation of the Offering.
(d) Reclassification of deferred offering costs to equity resulting from the
completion of the public offering.
Does not include 450,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 2,930,500 shares
of Common Stock issuable upon the exercise of outstanding options and
warrants, 1,556,250 shares of Common Stock issuable to Rozel upon the
conversion of 124,500 shares of Series A Preferred Stock, and 10,000
shares of Common Stock issuable to Golden Eagle Partners, a creditor
of the Company.
18
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company at December 31,
1997 was ($5,303,185), or ($.50) per share of Common Stock. Net tangible book
value per share is determined by subtracting total liabilities and the
Preferred Stock liquidation value of $10 per share from total assets less
intangible assets of $3,742, prepaid expenses and registration costs in the
aggregate amount of $587,175, divided by the number of outstanding shares of
Common Stock. Assuming (i) the repayment of an aggregate of $4,488,000 of
notes and loans payable including accrued interest thereon, and (ii) the sale
of 3,000,000 shares of Common Stock offered hereby at the initial public
offering price of $5.00 per share, the net tangible book value of the Company
at that date, as reflected in the following table, (after deducting estimated
underwriter's discounts and commissions and other offering expenses of
$2,250,000) will be $6,589,496 or $.48 per share.
Net Tangible
Net Worth
------------
Balance December 31, 1997 $(5,303,185)
Gross Offering proceeds 15,000,000
Offering costs (2,250,000)
Issuance of Common Stock in 1998,
prior to the Offering 51,250
Deficit accumulated during the
development stage funded by
additional borrowings, the proceeds
from the IQ licensing agreement and
sales of Preferred Stock (766,250)
Interest on notes payable prior to
Offering (142,319)
----------
$6,589,496
==========
This represents an immediate increase in net tangible book value per
share of $.98 or 196% to the existing common stockholders and an immediate
dilution of $4.52 per share or 90.4% to the new investors as illustrated in
the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share $5.00
Net tangible book value (deficit) per share before Offering(1)(2) ($.50)
Increase per share attributable to new investors .98
------
Pro forma net tangible book value per share after Offering .48
-------
Immediate dilution to new investors $4.52
=======
</TABLE>
19
<PAGE>
(1) Does not include 450,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 2,930,500 shares
of Common Stock issuable upon the exercise of outstanding options and
warrants, 1,556,250 shares of Common Stock issuable to Rozel upon the
conversion of 124,500 shares of Series A Preferred Stock, and 10,000
shares of Common Stock issuable to Golden Eagle Partners, a creditor
of the Company.
(2) Also does not include 150,000 shares of Common Stock issuable to Rozel
International Holdings Limited upon the satisfaction of an obligation
to purchase 300,000 shares of Preferred Stock, and 2,193,750 shares of
common stock convertible upon the possible purchase by Rozel, at the
Company's request, of an additional 175,500 shares of Series A
Preferred Stock.
The following table summarizes on a pro forma basis as of December 31,
1997, the number of shares of Common Stock issued by the Company, the total
consideration received by the Company and the average price per share paid by
existing stockholders and to be paid by purchasers of the Common Stock offered
hereby (before deducting offering expenses and underwriting discounts and
commissions) at an assumed offering price of $5.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- ------------------- Average Price
Per Share
---------
<S> <C> <C> <C> <C> <C>
Number Percent Amount Percent
Existing common stockholders 10,718,756 78.1% $8,056,303 34.8% $ .75
New investors 3,000,000 21.9 15,000,000 65.2 $5.00
---------- ----- ---------- ----- -----
Total 13,718,756 100% $23,056,303 100% $1.68
========== ===== =========== ===== =====
</TABLE>
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for each of the periods
ended December 31, 1995, 1996 and 1997 have been derived from the Company's
audited financial statements. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Financial Statements."
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended December 16, 1994
December 31, 1995 December 31, 1996 December 31, 1997 (inception) through
----------------- ----------------- ----------------- December 31, 1997
-------------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Operating Expenses
Compensation and
related expenses $131,174 $742,545 $2,163,716 $3,037,435
Professional fees 38,436 399,356 405,193 842,985
Advertising 236,775 219,760 832,340 1,288,875
Consulting 9,492 869,693 609,591 1,488,776
Research and
development
expenses 142,224 809,491 2,588,748 3,540,463
Depreciation and
amortization 7,570 13,148 179,304 200,022
Other general and
administrative 181,274 262,529 785,107 1,246,052
--------- -------- ------- ---------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Loss from Operations (746,945) (3,316,522) (7,563,999) (11,644,608)
Other Income (Expense)
Interest Income 1,405 4,953 5,627 11,985
Interest Expense (2,020) (2,525) (270,810) (275,355)
Financing Fees --- --- (487,415) (487,415)
---------- ------------ ------------ -------------
Net Loss $(747,560) $(3,314,094) $(8,316,597) $(12,395,393)
========== ============ ============ =============
Net Loss Per Share Data
Net loss per common
shares outstanding $ (1.15)
================
Weighted average
number of common
shares outstanding 7,218,801
================
Pro forma Information
(Unaudited)
Net Loss (747,560) (3,314,094)
Pro forma Tax
Provision --- ---
----------- -----------
Pro forma Net Loss (747,560) (3,314,094)
=========== ===========
Net Loss Per Share
Data
Net loss per common
shares $ (.89)
=================
Weighted average
number of common
shares outstanding 3,739,236
=================
December 31,1996 December 31, 1997
---------------- -----------------
<S> <C> <C>
Balance Sheet Data
Cash and cash equivalents $ 299,351 $ 671,508
Working capital (deficit) (792,841) (5,488,247)
Total assets 794,592 2,048,381
Total liabilities 1,099,684 6,535,649
Notes payable and accrued interest --- 4,345,681
Stockholders' deficit (305,092) (4,487,268)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the financial
statements, including the notes thereto, of the Company contained elsewhere in
this Prospectus.
The Company was formed on July 16, 1996 for the purposes of merging
with COL and developing and marketing online coupons. See "Certain
Transactions - Organization of the Company." The business and assets of COL
were acquired by the Company through merger on September 19, 1996. See
"Certain Transactions - The Merger." The Company is in the development stage.
See "Business." COL was the accounting acquiror in the merger and, as a
result, the information provided in this section through the date of the
merger is for COL.
Twelve Months Ended December 31, 1996 Compared to the Twelve Months
Ended December 31, 1995. The Company did not generate any revenues in 1996 or
1995. The Company was operated as a limited liability company until its
restructuring as a Delaware corporation in September 1996. The Company's
principal focus in 1995 was business concept development and activities
associated with raising capital. The Company continued to focus on these
principal activities in 1996 until the restructuring and infusion of capital
in September 1996. Subsequent to the restructuring, the Company commenced
business planning, market research, product development, sales and marketing,
and operational infrastructure building activities.
The Company incurred a net loss of $3,314,094 in 1996 compared to a
net loss of $747,560 in 1995. This $2,566,534 increase in net loss was
primarily attributable to the costs associated with the restructuring and the
commencement of product and market development activities. Ninety-seven
percent of the total increase in net loss can be accounted for by increases in
four categories of operating expenses, as follows:
Compensation and related expenses increased from $131,174 in 1995 to
$742,545 in 1996, representing additional payroll costs related to the
implementation of a management team and an operational infrastructure.
Professional fees increased from $38,436 in 1995 to $399,356 in 1996,
primarily due to the restructuring and related capital raising activities.
Consulting expenses increased from $9,492 in 1995 to $869,693 in 1996,
primarily reflecting implementation of the Company's strategy of outsourcing
certain marketing functions in order to focus internal efforts on product
development and to reduce initial infrastructure requirements.
Research and development expenses increased from $142,224 in 1995 to
$809,491 in 1996 due to the commencement of product development activities.
Twelve Months Ended December 31, 1997 Compared to the Twelve Months
Ended December 31, 1996. The Company did not generate any revenues in 1997 or
1996. The Company started to build its infrastructure in October 1996 when
operations were established in Connecticut. Comparisons of operating results
for the twelve months ended December 31, 1997 and 1996 can be misleading given
the Company's limited operating activities prior to October 1996.
The Company initiated commercial operation of its first product and
service, Coupons Online SM, in July 1997 and will recognize its first revenues
during the quarter ending March 31, 1998. As the Company is in the early stage
of commercial operations with respect to its first product, management does
not believe it is possible to draw conclusions from these results with respect
to future revenue potential of its products. See "Business." The Company
incurred a net loss of $8,316,597 in 1997, compared to a net loss of
$3,314,094 in 1996. This $5,002,503 increase reflects primarily the change in
focus from concept development to actual product and business development and
interest and financing costs related to debt obligations incurred to finance
these business development activities. See "Business - Program Development."
Compensation and related expenses increased from $742,545 in 1996 to
$2,163,716 in 1997 (an increase of $1,421,171). The Company began hiring
additional full-time employees in October 1996, primarily to commence product
development, as well as marketing and sales activities, and ended 1996 with 17
full-time employees.
23
<PAGE>
Additionally, in 1996 the Company realized additional non-cash compensation of
approximately $172,000 for options issued to a key employee at an exercise
price which was less than the fair market value of the common stock at the
date of the grant. As of December 31, 1997 the Company had 24 full-time
employees, representing 7 new hires during 1997, primarily in the areas of
sales and marketing.
Consulting expenses were $869,693 in 1996 and $609,591 in 1997. The
decrease of $260,102 or 29.9% was primarily attributable to the Company's
converting consultants to full-time employees to manage the day-to-day
operations, sales and marketing activities of the Company.
Advertising expenses increased from $219,760 in 1996 to $832,340 in
1997 (an increase of $612,580). This increase was due to the initiation of
advertising and promotional campaigns to support the introduction of the
Company's products, the first of which, Coupons OnlineSM, commenced commercial
operations in July 1997.
Research and development expenses increased from $809,491 in 1996 to
$2,588,748 in 1997 (an increase of $1,779,257). The Company intends to
continue to devote significant resources to research and development
activities and believes that incurring these expenses will be necessary in
order for the Company's products and services to successfully compete in its
markets, each of which is characterized by rapid technological change.
Depreciation and amortization expenses increased from $13,148 in 1996
to $179,304 in 1997. The increase of $166,156 was attributable to the
increased base of capital equipment, primarily computer equipment.
Other general and administrative expenses increased from $262,529 in
1996 to $785,107 in 1997 (an increase of $522,578). The increase was
attributable to higher operating costs such as travel, rent, telephone and
other costs required to support the Company's growth.
Interest expense was $2,525 in 1996 and $270,810 in 1997. The increase
of $268,285 was attributable to interest related to various debt obligations
incurred by the Company throughout 1997.
Financing fees increased by $487,415 in 1997. This increase was
attributable to various financing agreements, both debt and equity, signed by
the Company during 1997. The fees represent commissions paid to registered
brokers as well as inducements for investors to either enter into or forbear
on the collection of various loans made to the Company.
As of December 31, 1997, the Company had an accumulated deficit of
$12,395,393. The Company believes approximately $9,897,000 of this amount will
be available to offset future taxable income, if any. See Note 5 to the
Company's financial statements included herein. The Company anticipates that
it will continue to incur significant net operating losses through 1998.
24
<PAGE>
Coupons Online L.L.C.
COL was formed on December 16, 1994 and ceased operations on September
19, 1996 upon its merger into the Company. COL's objective was to develop and
commercialize an approach to delivering coupons via various online networks
such as America OnLine, CompuServe and Prodigy.
COL did not generate any revenues during that period and incurred net
losses of $1,749,138, principally from activities associated with testing its
concept, defining its business development requirements and plans and seeking
capital. When it ceased operations on September 19, 1996, COL had an
accumulated deficit of $1,749,138. This accumulated deficit is included in the
financial statements presented in this prospectus. See "Financial Statements."
Changes in Financial Position, Liquidity and Capital Resources
Beginning in late July 1997, the Company was unable to meet its
payroll for a period of approximately six weeks. During this period, the
Company laid off its employees and continued its operations at a minimal level
with a volunteer staff. Subsequently, the Company re-hired its staff but lost
three employees due to the uncertainty regarding the Company's ability to
attract sufficient funding to continue operations. Management of the Company
believes that, although it lost momentum in its marketing efforts as a direct
result of this interruption, there will be no long-term negative impact on the
Company's prospects.
The funds utilized to sustain the Company's developmental activities
and initial commercial operations have been obtained principally through the
sale of the Company's securities, as well as related and third-party debt
transactions. During the period from January 1, 1997 through December 31,
1997, the Company received an aggregate of $590,000 in gross proceeds through
the sale of 295,000 shares of Common Stock in private offerings.
During the period from January 1, 1997 through December 31, 1997, the
Company received $4,051,000 in loans from various related and independent
parties. In November 1997, the Company converted an aggregate of $2,578,301 in
notes payable and accrued interest into an aggregate of 3,222,877 shares of
Common Stock. In October, November and December 1997, the Company received
gross proceeds of $4,025,000 in two separate debt/equity financing
transactions that resulted in the issuance of an aggregate of 402,500 shares
of Common Stock, the issuance of an aggregate of 402,500 Common Stock Purchase
Warrants (See "Description of Capital Stock - Common Stock Purchase Warrants")
and the issuance of promissory notes in the aggregate principal amount of
$4,025,000. The promissory notes are unsecured subordinated obligations of the
25
<PAGE>
Company which accrue interest at the rate of 10% per annum (upon the
occurrence of an event of default, the interest rate increases to 15%). All
principal and accrued interest due and payable on the Notes is payable in full
on the earlier of (i) the one year anniversary of their date of issuance and
(ii) five days after the consummation by the Company of any of the following
transactions which provide gross proceeds to the Company of at least
$3,000,000: (a) the Offering, (b) an offering of the Company's capital stock,
(c) the sale of all, or a portion, of the Company's assets or (d) the
licensing of all, or a portion, of the Company's intellectual property rights
to a third party. The Company used these funds to repay short term notes
payable, pay commercial accounts payable due and to fund continuing
operations. See "Use of Proceeds." As of December 31, 1997, the promissory
notes in the principal amount of $4,025,000, a short-term note in the
principal amount of $250,000 and accrued interest on all of these notes
remained outstanding. The Company intends to use a portion of the net proceeds
of this Offering to repay these notes and to satisfy its commercial accounts
payable.
In February 1998, the Company received a loan in the principal amount
of $750,000 from Lancer Partners, L.P., ("Lancer") an independent party. This
loan accrues interest at the rate of 10% per annum and matures on the earlier
of August 2, 1998 or the date on which IQ Value, L.L.C. provides funds to the
Company totaling $750,000 pursuant to a distribution and license agreement.
See "Business - Marketing and Sales Strategy - Letter Agreement with IQ Value,
L.L.C." SPH Equities, Inc. ("SPH"), an investment banking firm, received a fee
of $50,000 for assisting the Company in obtaining this loan. SPH and a related
entity own approximately 130,000 shares or approximately 1.2% of the current
outstanding shares of the Company's common stock. In April 1998, the Company
repaid the principal balance of this loan and issued 2,750 shares of its
Common Stock to Lancer as payment of accrued interest of $13,750 related to
the loan.
In March 1998, the Company issued an aggregate of 27,000 shares of its
Series A Preferred Stock to Rozel, generating aggregate gross proceeds of
$270,000. In April 1998, the Company issued an aggregate of 75,000 shares of
its Series A Preferred Stock to Rozel, generating gross proceeds of $750,000.
The Company intends to satisfy its short term financing needs through
additional issuances of Series A Preferred Stock to Rozel. See "Certain
Transactions - Rozel Preferred Stock Purchase Agreement."
In March and April 1998, the Company received licensing fees in the
aggregate amount $1,250,000 from IQ Value, LLC. See "Business - Marketing
Strategy - Distribution and License Agreement With IQ Value, L.L.C."
As of December 31, 1997, the Company had cash of $671,508 available
for operating expenses and capital equipment purchases; however, at that date,
the Company had accounts payable of $2,071,948, short-term debt of $4,275,000
and accrued expenses of $188,701. At April 10, 1998, the Company had cash of
approximately $515,000 available for operating expenses and capital equipment
purchases, short term debt of $4,275,000 and accounts payable of approximately
$1,815,000. The Company anticipates that it will spend approximately
$4,800,000 in 1998 in order to complete its systems development, perform its
market research and to launch its products in accordance with its business
plan.
Of the approximately $12,750,000 the Company expects to receive as net
proceeds from this Offering, management expects that approximately $6,118,000
(48.0%) will be used to repay short term notes payable and commercial accounts
payable due. Management intends to use the remaining net proceeds of
approximately $6,632,000 (52.0%) as follows:
$1,611,000 (12.6%) Research and Development
$1,730,000 (13.6%) Sales and Marketing
$1,745,000 (13.7%) Operations
$ 951,000 ( 7.5%) General and Administrative
$ 595,000 ( 4.6%) Capital Expenditures
Management has estimated that the net proceeds of this Offering, when
combined with other financial commitments and projected cash flow from
operations (See "Description of Capital Stock - Preferred Stock"), will be
sufficient to meet the Company's cash requirements through at least June 30,
1999. However, operating revenues may fall short of, and expenses may exceed,
the Company's projections. If the Company's results of operations in 1998 are
less than projected, the Company may be required to seek additional financing
26
<PAGE>
sooner than expected. Because of the lack of a stable operating history on
which to base projections, the unproven demand for the Company's products and
services, and the volatile nature of the markets in which the Company is
operating, the Company's projections are likely to be inaccurate. Moreover,
the viability of the Company depends on the Company's ability to significantly
expand its operations to a profitable basis. Due to the limited operating
history of the Company, it is impossible to predict with any degree of
certainty the extent to which the Company must expand its operations in order
to become profitable. There can be no assurance that the Company will be able
to sustain or expand its operations, that needed financing will be available
on acceptable terms or at all, that the Company will not require further
financing to sustain or expand its operations, or that the Company will become
profitable in the future. See "Risk Factors - Risks Related to the Company -
Development Stage Company; Limited Operating History; Significant Cumulative
Operating Losses; Auditor Report Modification for Going Concern,""Risk Factors
- - Risks Related to the Company - Need for Additional Financing," "Use of
Proceeds" and "Business."
The Company's independent auditors stated in their report that the
Company's net losses and the need for additional financing to implement its
business plan and continue its operations raise substantial doubt about the
Company's ability to continue as a going concern unless additional financing
can be obtained through this Offering or from alternative sources. See
"Financial Statements." If the Company does not generate revenues sufficient
to produce break-even cash flow during the period in which it attempts to
fully implement its business plan, additional financing will be required. See
"Risk Factors - Need For Additional Financing."
Effect of Inflation and Changing Prices
The Company's limited operating history provides no experience
regarding the impact of inflation on the conduct of its business. At present,
the Company does not have long-term commitments for maintenance of its core
software and systems nor does the Company have long-term contracts with
customers for the use of its products and services. Accordingly, the Company's
costs and projected revenues may fluctuate due to general inflation or changes
in the specific competitive environments in which the Company operates.
Additionally, the online services industry is generally characterized by rapid
and significant changes in technology and does not have a long history which
would enable reliable prediction of trends. The Company cannot predict its
ability to pass along future development costs or operating cost increases to
its customers.
27
<PAGE>
BUSINESS
General
The Company is a development stage company which provides electronic
advertising, promotion and transaction processing products and services
("Programs") to Customers.
The Company's first product, Coupons Online SM, enables marketers to
deliver secure, targeted coupons and other promotional incentives to consumers
from the Internet. Consumers register online to install and use the Company's
software to access and print promotional offers from the Web sites of the
Company's Customers. The Company's systems provide online targeting, control,
validation and reporting for each offer delivered. In July 1997, the Company
commenced commercial operations of its Coupons Online SM service.
The Company's second product, i-Value(sm), is a service whereby
consumers install a free software program through which "electronic packages"
of promotional offers are periodically delivered via the Internet. Consumers
can customize the Program to deliver promotional offers only for products and
services in which they are interested, thereby creating a database of
individual preferences which can be used for offer qualification and
targeting. The Company provides its Customers with program management,
targeting, validation and reporting services. The Company plans to
commercially launch its i-Value(sm) program in the third quarter of 1998.
The Company expects its principal customers and sources of revenue to
be national, regional and local retailers, manufacturers of consumer products,
consumer service providers and online publishers. The Company plans to
generate revenues through a combination of software licensing, promotion
set-up and transaction fees charged to its Customers. To date, sales of the
Company's Programs have been accomplished through the Company's direct sales
force; in the future, the Company expects a significant portion of its sales
to be derived from distribution agreements with third parties.
In developing its Programs, the Company has obtained input from major
retailers, product manufacturers, coupon clearing agents and online
publishers. The Company believes that its products and services provide a
faster and easier method than traditional alternatives (such as freestanding
inserts and coupon mailers) for online consumers to receive meaningful values
on the Internet and that its Programs provide a more cost-effective and secure
means for marketers to distribute and track targeted consumer incentives.
However, the Company has a limited operating history and little market
experience and there can be no assurance that the Company's products and
services will be attractive to current or future online consumers, that
consumers will participate in the Programs at sufficient levels so as to be
attractive to the Company's Customers or that the Company will be able to
attract and retain sufficient numbers of Customers on terms favorable to the
Company.
Program Development
Background. The Company was incorporated in Delaware on July 16, 1996
and is the successor by merger to COL. For a more detailed description of the
merger of COL into the Company (the "Merger"), see "Certain Transactions - The
Merger." COL was formed in December 1994 for the purpose of developing and
commercializing an approach to delivering coupons via various online networks
such as CompuServe, America OnLine and Prodigy.
Prior to the Merger, all of COL's resources were principally utilized
for research and development activities including (i) conducting interviews
with retailers, advertisers and coupon clearing companies in order to
understand the market environment and product service attributes which might
be attractive to potential customers, (ii) developing product and service
specifications and initial prototypes, (iii) establishing relationships with
online service providers, (iv) developing its business plans and models and
(v) seeking additional development capital.
28
<PAGE>
Strategy. Effective with the Merger and responding to changes in
technology and the rapid growth of consumer Internet use over the past two
years, the Company has modified the original COL business strategies to focus
on the market for providing Internet advertising, promotion and commerce
solutions for retailers, manufacturers and online publishers.
By the third quarter of 1998, the Company anticipates expanding
commercial operations of its Coupons OnlineSM service and the commercial
launch of its i-Value(sm) product. The Company expects to expend significant
funds during such period in order to complete its initial systems development;
implement its sales and marketing plans; and build an appropriate
infrastructure to support its planned commercial operations. The net proceeds
of this Offering together with existing cash on hand and anticipated working
capital from operations are expected to be sufficient to finance these planned
expenditures. Thereafter, there can be no assurance that the Company's market
activities will generate sufficient revenues and cash flow to fund the
Company's continuing operations. Accordingly, the Company may need to seek
additional financing. In connection with such financing, the Company may issue
additional shares of Common Stock and/or Preferred Stock. Any such issuance
may result in dilution of existing stockholders. Additionally, there can be no
assurance that the Company will be successful in securing the required funding
when needed, or at all, or that such capital investments will be on terms
favorable to the Company or its current investors. In the event the Company
cannot obtain additional funding on a timely basis, the Company may be forced
to reduce or cease operations. See "Risk Factors--Need for Additional
Financing."
The Company currently has 24 employees and expects to hire
approximately 20 additional employees by December 31, 1998 to support its
planned expansion of operations.
Market
According to the most recent information available from industry
sources, in 1995, combined advertising and promotion spending by retailers and
product and service marketers totaled more than $293 billion. Over 291 billion
coupons were delivered to U.S. consumers in 1995 and coupon redemption fell to
2%. Similarly, the Company believes that the relative effectiveness of other
forms of traditional mass media have also declined in recent years as the
growth of new, more targeted media (e.g. cable, in-store) have continued to
fragment consumer audiences into even narrower communities of interest.
One new consumer communications medium which has demonstrated
significant growth over the past several years is the World Wide Web portion
of the Internet, in which consumers use personal computers and, most recently,
television sets to access multimedia information and transact business. Since
1994, the base of consumers reportedly using the Internet has grown from 2
million to approximately 62 million in the fourth quarter of 1997. Given this
potential of the Internet to effect highly targeted, one-on-one communications
with individual consumers, numerous consumer marketers have been testing a
variety of Web-based programs to advertise and promote their products and
services. Internet advertising spending reached $597.1 million in 1997 and is
projected to grow to more than $8 billion annually by the year 2002.
The growth of the Internet as an advertising and promotion medium has
been characterized by innovation, rapid technological change and business
uncertainty. Very few Web-based ventures have achieved profitability and,
since the majority have been in business for less than three years, it is not
possible to draw reliable conclusions concerning such ventures' ability to
sustain growth or their long term business viability.
Products and Services
The Company has developed and is focusing on commercialization of two
Programs in response to what the Company believes are two distinct market
needs relating to online consumer promotion. Although each of the Company's
Programs seeks to address security and targeting issues associated with
electronic delivery of consumer promotions, each Program presents a different
solution: (i) Coupons Online SM provides an online "pull" marketing solution
in which consumers who are browsing the Web can access a promotional offer
they see - i.e. the consumer finds the product and service offer on the Web;
and (ii) i-Value SM provides a "push" marketing solution in which consumers
register their product and service preferences and corresponding promotional
offers are automatically delivered to them via the Internet - i.e. the product
29
<PAGE>
and service offer finds the consumer. Since most consumer marketers often
employ both "push" and "pull" consumer strategies simultaneously in their
non-Internet marketing, the Company believes that its Programs are
complementary and are not mutually-exclusive.
Coupons Online(sm) allows consumer marketers to deliver secure, targeted
promotions to consumers from Internet web sites. To receive promotional offers
from the Company's Customers, consumers first register online, then download
and install the Coupons Online Plug-In. Once the consumer's computer is so
enabled, the role of the plug-in for ongoing offer request and delivery is
relatively transparent to the consumer.
In the registration process, consumers are required to supply their
zip code but no other personal information. Thus, zip code-based targeting is
enabled while preserving the anonymity and privacy of the consumer and
minimizing the time required to complete registration.
The Coupons Online Plug-In is a compact software application which is
designed to work with the consumer's Web browser. Each plug-in is encoded with
a unique serial number which, when interacting with the Company's systems,
provides the security, control, targeting, display, and printing features and
functions. The Program currently supports consumers using Microsoft's Internet
Explorer or Netscape Navigator web browsers (release 3.0 or higher) in a
Windows 95 or Windows NT operating system environment.
Program security is provided on a number of levels including, but not
limited to: (i) the unique serial number associated with each consumer can be
printed on each offer; (ii) the printable offer is assembled by the plug-in
responding to a print command and never appears on the consumer's computer
screen; and (iii) installation checks limit consumers to a single plug-in per
browser.
Customers control offer distribution by setting both individual caps
(e.g. limit one per customer) and promotion caps (e.g. program instruction to
cease issuance after distribution of a preset number of offers).
The Program currently features three primary methods of targeting
offers: (i) zip code-based targeting can be used by Customers to deliver
different offers to consumers based on geographic, demographic, lifestyle and
cultural marketing criteria; (ii) source-based targeting can be used by
Customers to distinguish offers delivered to each consumer based on which Web
site the consumer was visiting when they requested an offer; and (iii)
behavioral targeting can be used by Customers to program a series of different
offers to be delivered to consumers over time or based on the results of prior
interaction.
In addition to consumer marketers who are promoting a narrow set of
products and services to online consumers, the Company believes there is a
significant market opportunity to establish commercial relationships with
online media companies and aggregators (e.g. online newspapers, directories,
search engines, direct marketers, etc.) who could act as resellers in
providing the Company's programs to their customers. To address these
opportunities, the Company has developed: (i) a specialized set of software
tools to facilitate field sales and order entry; and (ii) a methodology known
as containers which allows resellers to deliver multiple targeted offers in
response to a single consumer request.
Customers license the Company's Coupons Online(sm) technology and
systems and contract with the Company to perform the online targeting, control
and delivery functions. Generally, the Company charges a set-up fee for each
offer and a transaction fee for each offer delivered online to a consumer,
which fee varies based on whether the offer is universal or targeted.
The Company commercially launched its Coupons Online(sm) program in
July 1997.
The i-Value(sm) Program provides a service whereby consumers are able
to install a free software program through which "electronic packages" of
promotional offers for a broad array of products and services are periodically
delivered to the consumers via the Internet. A profiling feature enables
consumers to customize the Program so that they only receive offers for
products and services in which they are interested. In addition to allowing
consumers to control the type and numbers of offers they receive, the
profiling process creates a database of individual product and service
30
<PAGE>
preferences which can be used by the Company's Customers to target their
promotional offers more effectively and efficiently.
Similar to the Company's Coupons Online(sm) Program: (i) consumers
need only provide their zip code in order to register to use the i-Value(sm)
Program which protects consumer privacy and confidentiality; (ii) the software
program for each consumer is encoded with a unique serial number to enable
consumer identification and tracking; and (iii) the Company provides consumer
and Customer software, and targeting, control, validation and reporting
services.
Unlike Coupons Online(sm), among other differences, in the i-Value(sm)
Program: (i) a bundle of offers across a broad array of product and service
categories are aggregated by the Company and can be automatically delivered to
the consumer's computer; and (ii) the consumer can store, sort, review and
print offers off-line.
To access i-Value(sm) Program offers, consumers use a graphic
interface based on the familiar physical analog of a daily organizer, complete
with subject "tabs" which separate offers into major categories such as
grocery, mass merchandise, drug, apparel, specialty retail, local merchant,
etc. Within each tab, offers are further broken down into specific product or
service categories similar to the way in which aisle signs in supermarkets
tell the consumer where various types of products are located.
As the Company has designed its i-Value(sm) Program, initially both
Program content (i.e. promotional offers) and consumer enrollment (i.e.
consumer awareness, software distribution and registration) will be the
responsibility of retailers who are the primary target Customer of the
Company's sales efforts. The Company plans to charge Customers offer set-up
and transaction processing fees, which costs the Company believes will be
largely underwritten by the vendors of specific products and services featured
in the Program, similar to current trade practices. To incentivize retailer
participation, the Company is offering Customers, among other things: (i)
co-branding of the Program - each participating retailer can distribute a
customized version of the i-Value(sm) Program to his customers, which
distribution can be accomplished either via download from the Internet or
through the physical distribution of diskettes; (ii) competitive advantage -
although the Company does not anticipate offering retailers Program
exclusivity by either trade class or geography, participating retailers can
have their own unique "tab" in their Program version enabling the retailer
distinction from competitors among his customers; (iii) revenue sharing - each
participating retailer can receive up to 50% of the Company's transaction
revenue, which percentage is indexed to the total number of consumers each
retailer has enrolled in the Program; and (iv) promotional concessions based
on volume and co-op marketing fees based on consumer enrollment.
Beyond delivery of promotional offers, the Company believes that, if
it can establish and maintain a meaningful base of consumers using the
i-Value(sm) Program, there may be significant additional market opportunities
in delivering other secure, targeted communications to consumers and in
facilitating other types of electronic commerce transactions.
The Company expects to commercially launch its i-Value(sm) Program in
the third quarter of 1998 and has recently commenced its sales efforts to
retailers. However, in spite of the Company's development efforts, the Company
has no direct market experience operating the i-Value(sm) Program and there
can be no assurances that: (i) the Company will be successful in attracting
sufficient Customers on the business terms described, other suitable business
terms, or at all; (ii) sufficient numbers of participating retailers' vendors
will sponsor promotional offers; (iii) sufficient numbers of consumers will
enroll and regularly use the Program; or (iv) beyond an initial launch period,
that the Program will be commercially viable or sustainable.
Marketing and Sales Strategy
Product Development and Management. The Company has developed its
initial products and services to reflect both the current state and direction
of Internet advertising, promotion and commerce. Therefore, the Company has
developed Coupons Online SM to reflect the market's need for a "pull"
distribution promotion solution in which the consumer is visiting Web sites,
sees an item of interest from a Client and wishes to receive and print a
promotional offer. The Company has developed i-Value(sm) to address the
current trend of "push" distribution solutions in which the consumer
subscribes to a service which regularly delivers personalized content.
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<PAGE>
The Company believes that its success will be directly related to (i)
consumer willingness to use the Company's Programs to access Customer
promotions; (ii) the Company's ability to attract and maintain Customers in
its Programs; and (iii) the Company's ability to adapt quickly and
appropriately to continuing advancements in Internet technologies and trends.
Therefore, the Company intends to commit a significant portion of its
resources to ongoing product and service development, as well as market
research and product testing.
Consumer Positioning Strategies. Although the Company does not market
directly to consumers, its products and services are used by consumers to
obtain promotional information from, and to transact business with, the
Company's Customers. Therefore, an important part of the service delivered to
the Company's Customers is the Company's knowledge and experience in respect
of consumer promotion strategies, database marketing and computer
interfaces. In designing its Programs, the Company has targeted both current
and future Internet users with an emphasis on less technology-oriented
consumers. By using familiar analogs (such as coupon clipping and
organization), the Company's interfaces are designed to address the needs of
Internet newcomers by being intuitive and easy to use.
Additionally, the Company believes that consumer control over the
privacy of personal information and the security of transactions conducted via
computers and networks is, and will continue to be, an important and highly
visible public issue and area of sensitivity for large numbers of consumers,
particularly in respect of data based products and services. Therefore, the
Company has established a privacy policy that the Company will never give
individual consumer-identified or Customer-identified information to anyone,
for any reason. The Company believes that its privacy policy is an important
point of market differentiation and will likely play a prominent role in the
positioning of the Company's products and services to Customers and consumers.
Customer Positioning and Sales Strategies. The Company has structured
its product development and management efforts to reflect three primary market
segments of potential Customers: (i) retailers - including grocery, drug, mass
merchandise and specialty retailers; (ii) product and service marketers -
including consumer package goods manufacturers, durable goods manufacturers,
entertainment and other service providers; and (iii) local area merchants
independent retail and consumer service providers operating within a limited
trading area. The Company believes that the benefits of its products and
services, while largely applicable to each of these three segments, will
require different positionings, pricing, promotion and sales channels in order
to maximize the Company's sales opportunities.
Based on the Company's belief that its products and services provide
different value sets to each of its three target segments and that each
represents a unique sales environment, the Company has established three
distinct sales channels.
o Product and Service Marketer Sales. The Company believes
that product and service marketers are the most likely
potential Customers to immediately understand and implement
the Company's targeted delivery services. Since promotional
spending is generally divided between direct-to-consumer and
trade promotion, the Company has established dual sales
channels. Direct-to-consumer promotion, which is typically
administered at a headquarters location, is handled by the
Company's direct sales force. Trade promotion is handled
through a revenue-sharing arrangement with retailers who are
well-positioned to take advantage of existing relationships
and trade practices.
o Retailer Sales. The Company believes that this segment
presents an excellent opportunity to immediately build upon
retailers' existing relationships with product manufacturers
and to provide targeted delivery for retailers based on
their own purchase behavior databases arising out of card-
based frequent shopper programs. By co-branding its Programs
and sharing revenues with chain retailers, the Company
believes it can leverage both the retailers' goodwill with
consumers and the retailers' relationships with
manufacturers. The Company has established its own sales
force for this segment.
o Local Area Merchant Sales. The Company believes that this
segment holds significant long-term potential. Given the
size and complexity of the sales and service infrastructure
required to develop this segment, however, the Company has
determined that its best strategy is to partner with
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<PAGE>
organizations which already have established sales and
service infrastructures and for which the incremental cost
of representing the Company's products and services can be
effectively offset by the incremental revenues attributable
to those sales. Potential partners include newspapers,
directories, search engines, direct mailers and content
aggregators.
Distribution and License Agreement with IQ Value, L.L.C.
On April 7, 1998, the Company entered into a Distribution and License
Agreement (the "IQ Agreement") with IQ whereby IQ will receive an exclusive
right to distribute the Company's Coupons OnlineSM product for use in
electronically delivering coupons promoting the products and services of Local
Merchants, and the nonexclusive right to distribute the Company's Coupons
OnlineSM and i-Value(sm) products for use in electronically delivering coupons
promoting the products and services of consumer marketers globally.
In exchange for these rights to distribute the Company's products, IQ
will pay a $3,000,000 fee to the Company over an expected period of
approximately twelve months. The Company has received $1,250,000 of this fee
from IQ and has granted to IQ a security interest in the Company's assets
securing the Company's performance under the IQ Agreement.
In addition to this fee, the Company will receive certain transaction
fees for transactions processed using the Company's products. In order for IQ
to maintain an exclusive right to distribute Coupons OnlineSM with respect to
Local Merchants, IQ must meet annual minimum transaction fees.
American Maple Leaf Financial Corporation ("AML") received an
investment banking fee of $30,000 as compensation for its efforts in
identifying IQ and assisting in the negotiations which resulted in the parties
entering into the Letter of Intent. The Company also entered into an agreement
with Promunicom, Inc., Gary R. Blau, and any other entities with which Mr.
Blau is affiliated. Pursuant to this Agreement, the Company and Mr. Blau
agreed to terminate a consulting agreement between the Company and Promunicom,
Inc. dated May 1, 1997 (the "Consulting Agreement") effective January 15,
1998, the Company agreed to pay Mr. Blau the aggregate amount of $100,000 and
to issue to Mr. Blau 30,000 shares of the Company's Common Stock in connection
with the execution of the IQ Agreement. The Company has paid Mr. Blau $62,500
and has issued 30,000 shares of the Company's Common Stock to Mr. Blau. The
remaining $37,500 payment is due to Mr. Blau upon the earlier of July 6, 1998
or the Company's receipt of the proceeds of this Offering. Mr. Blau is
currently the Manager of IQ and, prior to attaining this status, played an
instrumental role in the negotiations which resulted in the parties entering
into the IQ Agreement.
Systems and Technology
The systems and technology required to deliver the Company's current
products and services consist of three interrelated sub-systems: (i) Consumer
Software; (ii) Internet Communications and Online Database; and (iii)
Targeting. The Consumer Software sub-system is a proprietary application which
resides on each consumer's personal computer and provides connection, viewing,
storage, and printing functions and controls. The Internet Communications and
Online Database sub-system provides the interface between consumers and the
Company's products and services. The Targeting sub-system maintains consumer
profile and usage data and client promotional database and executes packaging
of targeted promotions to individual consumers for distribution through the
Online Database sub-system.
In order to speed the time required to launch its test phase and to
minimize the Company's initial infrastructure requirements, the Company has
decided to hire independent contractors to develop and integrate its
sub-systems as well as to conduct certain operational functions (e.g. DMR
Consulting Group, Inc. See "Risk Factors - Risks Related to the Company -
33
<PAGE>
Dependence on DMR Consulting Group, Inc. to Provide Essential Services to the
Company"). Once its products and services become operational, the Company will
determine which operational and development elements to bring in-house and an
appropriate timetable for bringing such functions in-house. During the initial
development cycle, the Company intends to maintain a modest development and
operations staff to manage its external development resources.
Backlog
Because the Company is in its development stage, it has no backlog
and, given the nature of its primary business as a provider of on-line
services, anticipates that no material backlog of the delivery of its products
and services will develop in the near future.
Competition
The Company faces significant competition from many consumer promotion
and advertising companies which compete, directly or indirectly, for consumer
advertising and promotion business from advertisers and for consumers'
attention acceptance of promotional offers. Many of such advertising and
promotion companies have longer operating histories, greater market presence,
and substantially greater financial and other resources than the Company. Many
of these companies, including Catalina Marketing Corporation, Money Mailer,
Val-Pak Direct Marketing Systems, Interactive Coupon Network, Valassis
Communications, Inc. and News America Holdings Incorporated have initiated or
are planning to initiate programs and services involving the Internet. There
can be no assurance that competition will not increase from existing
competitors, that established or new companies will not enter the market, that
pricing policies will not be undertaken by more established companies so as to
erode the benefits of the Company's products and services, or that the Company
will be able to compete successfully with such existing or new competitors.
Patent and Trademark Protection
The Company has applied for a patent entitled "Method and Distribution
of Product Redemption Coupons," which describes what the Company believes to
be a proprietary process for executing its products and services. The Company
had initially received an indication from the United States Patent and
Trademark Office (USPTO) that certain of the claims of this application were
allowable but in February 1998 received a reversal on this indication in which
the USPTO stated that the Company's application included a form of prior art.
The Company is currently preparing its response to this reversal, which it
plans to file in April 1998. The Company does not believe that this patent
will provide material commercial value to the Company or that its denial will
have a material impact on the achievement of the Company's business plan.
Additionally, the Company has registered COUPONS ONLINE as a
trademark, and has applied for federal registration of its trademarks and/or
service marks I-VALUE, NETVALUE and the NETVALUE logo, and INTERNET MARKETING
AND RESEARCH INSTITUTE.
There can be no assurance that the patent, servicemark or trademark
registrations applied for will be reviewed on a timely basis, that any
patents, service marks, or trademarks will be granted and issued, that any
patents, service marks or trademarks issued will afford meaningful protection
against competitors with similar names, technology or services, or that any
patents, service marks or trademarks issued will not be challenged by third
parties. The Company believes it is the only company currently using its
approach to the secure distribution of targeted, scannable incentives and that
the service marks and trademarks applied for are currently unencumbered and
available to the Company. See "Risk Factors - No Assurance of Protection of
Important Patents and Proprietary Technology."
On April 1, 1998, the Company received a letter from a third party
indicating that the Company's Internet coupon distribution process might be
covered by a patent held by this third party. The Company has referred this
matter to its patent counsel. Based on a preliminary review of this patent,
the Company's patent counsel has concluded that the Company does not
infringe upon this patent and patent counsel has indicated his willingness to
issue an opinion to this effect. See "Risk Factors - No Assurance of
Protection of Important Patents and Proprietary Technology."
Employees
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<PAGE>
As of April 14, 1998, the Company employed 24 full-time employees.
These employees include 12 operations and software development staff, 10
marketing and sales staff and two finance and administration staff. None of
the Company's employees is covered by collective bargaining agreements and the
Company considers its relations with its employees to be satisfactory.
However, in August 1997, as a result of financial uncertainty experienced by
the Company in connection with its development, three employees left the
Company.
Facilities
Until December 1997, the Company's principal facilities consisted of
approximately 9,287 square feet of office space in Stamford, Connecticut. The
Company subleased these facilities under an agreement which expires on January
14, 1998, at a cost of $11,062 per month, including utilities. In October
1997, in final settlement of this lease agreement, the landlord agreed to
apply $35,671 of the Company's security deposit to a rental arrearage and to
accept payment of $30,713 for the remaining term of the lease.
In November 1997, the Company signed a lease for its new executive
offices located at 1960 Bronson Road, Building No. 2, Fairfield, Connecticut.
The new offices consist of approximately 8,800 square feet. Under the lease,
the Company is required to pay a monthly rental of $13,284 per month plus
utilities, general liability insurance premiums for up to $5,000,000 of
coverage, and the amount of any increases in operating expenses and real
estate taxes up to 5% over the amounts paid for these expenses during the year
ended June 30, 1998. The Company has assumed possession of the new office
space and its obligation to pay rent under the lease commenced on January 1,
1998. The lease expires on December 31, 2000.
Legal Proceedings
In November 1997, Guild Concepts, Limited d/b/a The Guild Group
("Guild") filed an action against the Company in the United States District
Court for the Southern District of New York alleging breach of contract and
other claims related to services rendered by Guild to the Company in
connection with the development of the Company's marketing plans and strategy.
Guild seeks damages in the amount of $243,538 from the Company for the
services allegedly provided. The Company has filed an answer and counterclaim
denying liability to Guild and seeking to enforce a prior agreement with Guild
which resolved these claims. The case is currently in the discovery phase. The
Company expects that a trial will commence in August 1998.
The Company, in the normal course of business, is also party to
litigation relating to contract-related disputes. To date, all of these
matters have related to amounts payable to trade creditors for services
rendered. Management of the Company does not believe that any of these
actions, either individually or in the aggregate, will have a material adverse
effect on the Company's results of operations or financial condition. See
"Risk Factors - Risks Related to the Company - Pending Legal Proceedings."
Regulatory Matters
In 1998, the Company discovered that it had not paid use taxes of
approximately $240,000 to the State of Connecticut related to the procurement
of out-of-state consulting services by the Company. Immediately upon making
this discovery, the Company voluntarily notified the appropriate taxing
authorities of the delinquency and is currently attempting to arrange for a
payment program with the State of Connecticut. The Company has included an
accrual for these unpaid use taxes in the December 31, 1997 financial
statements.
Independent Accountants
In August 1996, the Company engaged Ernst & Young LLP ("E&Y") to audit
the Company's financial statements for the year ended December 31, 1995. In
September 1997, E&Y resigned its position as the Company's independent
accounting firm. E&Y has confirmed that, prior to E&Y's resignations there
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<PAGE>
were no disputes or disagreements between the Company and E&Y regarding the
Company's accounting principles or practices, financial statement disclosure
or auditing scope or procedures.
On September 15, 1997, the Company engaged LJ Soldinger Associates
("LJSA") as its independent accountant. LJSA has completed the audit of the
financial statements for the years ended December 31, 1995 and December 31,
1996. In January 1998, the Audit Committee of the Board of Directors
recommended that LJSA be engaged to complete the audit of the financial
statements for the year ended December 31, 1997. The Board of Directors
accepted this recommendation and LJSA has completed the audit of the Company's
financial statements for the year ended December 31, 1997. See "Financial
Statements."
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age and position of each
present executive officer and director of the Company.
Name Age Position
- ---- --- --------
Michael A. Clark 42 President and Chief Executive Officer,
Treasurer and Chairman of the
Board of Directors
David E. Brandkamp 57 Vice President - Retail Sales,
Director
Richard F. Davey 52 Vice President and Chief Technology
Officer, Secretary, Director
Michael Cirillo 49 Director
Steven B. Rosner 47 Director
Andrew P. Panzo 33 Director
Michael A. Clark has served as Chairman of the Board since January
1998 and as President, Chief Executive Officer and a Director of the Company
since September 19, 1996. In addition, Mr. Clark provided consulting services
to the Company consistent with those typically provided by a company's chief
executive officer from June 1996 to September 18, 1996. From September 1994
until joining the Company, Mr. Clark was the principal of mc2, a consulting
firm specializing in the development of strategic planning and marketing for
emerging electronic media ventures. From April 1992 through September 1994,
Mr. Clark served as President and Chief Executive Officer of TSS Ltd. ("TSS"),
a company which owned and operated electronic promotional kiosks in chain
retail stores until it ceased operations in September 1994. From July 1990
until joining TSS, he was Managing Director - Marketing for Citicorp POS
Information Services ("Citicorp POS"), a provider of targeted marketing
programs based on consumer purchase behavior data bases.
David E. Brandkamp has served as the Company's Vice President of
Retail Sales since April 1997, and was elected a Director of the Company in
December 1997. From August 1995 until joining the Company, Mr. Brandkamp was
the Sales Director of Inter*Act, a company that distributed database targeted
coupons through in-store kiosks. From October 1993 through July 1995, Mr.
Brandkamp served as a National Account Executive for Advanced Promotion
Technologies, a company that performed targeted coupon distribution through
printers located in retail store checkout lanes. From April 1991 to July 1993,
Mr. Brandkamp was a Regional Sales Director for VideOcart, a micromarketing
media company.
Richard F. Davey has served as Secretary of the Company since January
1998 and as the Company's Vice President and Chief Technology Officer since
September 1996 and was elected a Director of the Company in December 1997. In
addition, Mr. Davey provided consulting services to the Company consistent
with those provided by a company's chief technology officer from August 1,
1996 to September 18, 1996. From July 1995 until joining the Company, Mr.
Davey served as the Vice President of Technology for Inter*Act, a direct to
consumer target marketing company using in-store kiosk technology. From
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<PAGE>
February 1992 through June 1995, Mr. Davey served as the Director of
Information Services for the law firm of Sullivan & Cromwell where he was
responsible for their worldwide computer, network and voice systems. From
October 1989 through January 1992, Mr. Davey served as a director of Citicorp
POS, a database marketing company to national retailers and package good
manufacturers, where he was responsible for the collection and storage of the
consumer data.
Michael Cirillo was elected a Director of the Company in December 1997.
Mr. Cirillo has been a director of Aviation, Inc. since May 1997, has been the
President of D.A.R. Group, Inc., a New York based investment banking
firm, since 1995, and has been President of CBM Consultants, Inc., a New York
based marketing and consulting firm since 1995. From 1987 to 1995, Mr. Cirillo
was an officer and director of Flex Resources, a temporary and permanent
employment firm based in New Jersey, which was a major contractor of
employment services for the Resolution Trust Corporation and Fidelity National
Bank.
Steven B. Rosner was elected a Director of the Company in December 1997.
Mr. Rosner is the sole shareholder of SLD Capital Corporation, which
specializes in providing consulting and investment banking services.
Previously, Mr. Rosner served as President of Centaur Financial Corporation an
investment banking firm, from 1984 to 1996. He also serves as a director of
several privately held corporations including Tradewinds, Inc. and Informatix,
Inc. Also, Mr. Rosner was President and Director of Pacific Rim Entertainment
from December 1996 to December 1997.
Andrew P. Panzo was elected a Director of the Company in January 1998.
Mr. Panzo is President of American Maple Leaf Financial Corporation ("AML")
which is an investment banking firm in Philadelphia, Pennsylvania specializing
in emerging growth companies. AML is a principal stockholder of the Company.
Mr. Panzo is also a director of The Eastwind Group, and is the President and
sole director of APP Investments, Inc. Prior to his employment with AML, Mr.
Panzo was a student at Temple University School of Business in Philadelphia
where he received a Masters Degree in international business and finance.
During the last five years, except as discussed below with respect to
Mr. Clark, none of the Company's executive officers, directors, promoters or
control persons has: (i) had any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior to that time;
(ii) been convicted in a criminal proceeding or been subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(iii) been subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting his involvement in any type of business, securities, commodities or
banking activities; or (iv) been found by a court of competent jurisdiction
(in a civil action), the Commission, or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities law,
which judgment has not been reversed, suspended, or vacated.
From April 1992 through September 1994, Mr. Clark served as the
President and Chief Executive Officer of TSS which ceased operations in
September 1994 after a general assignment for the benefit of creditors (a
state insolvency proceeding similar to a federal bankruptcy proceeding).
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Executive Compensation
The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the years ended December
31, 1997 and 1996 to the Company's Chief Executive Officer, the Company's
Chief Technology Officer and other highly compensated employees of the Company
(the "Named Executive Officers").
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and
Principal Position Year Salary Bonus Number of Options
------------------ ---- ------ ----- -----------------
Michael A. Clark, 1996 $62,598(1) 0 350,000(2)
President and
Chief Executive 1997 $150,577 0 790,000(2)
Officer
Richard F. Davey, 1996 $52,022(3) 0 60,000(4)
Vice President,
Chief Technology 1997 $134,231 0 137,000(4)
Officer, and
Secretary
Bruce 1996 $175,879(5) 0 0
Malinowski, Vice
President 1997 $115,000 0 48,000
</TABLE>
(1) Includes $6,636 that was paid to Mr. Clark in his capacity as a consultant
to COL prior to September 19, 1996, the date on which his employment agreement
with the Company commenced.
(2) On September 19, 1996, Mr. Clark was granted options to purchase an
aggregate of 350,000 shares of Common Stock. In December 1997, in connection
with the amendment of Mr. Clark's employment agreement, the exercise price of
240,000 of such options was reduced, Mr. Clark was granted options to purchase
an additional 550,000 shares of Common Stock (i.e. Mr. Clark received 790,000
options in 1997), and Mr. Clark's annual salary was increased to $165,000
effective September 19, 1997. See "Employment/Consulting Agreements". All
information contained in this Prospectus relating to Mr. Clark's options
reflects such amendment. Accordingly, Mr. Clark currently owns options to
purchase a total of 900,000 shares of Common Stock. Of such options, (i)
110,000 have vested and are exercisable at a price of $.63 per share, (ii)
158,000 have vested and are exercisable at a price of $.80 per share and (iii)
158,000 will vest and become exercisable on each of September 19, 1998, 1999,
2000 and 2001 at prices of $4.00, $5.00, $6.00 and $7.00 per share,
respectively.
(3) Includes $11,060 that was paid to Mr. Davey in his capacity as a
consultant to COL prior to September 19, 1996, the date on which his
employment agreement with the Company commenced.
(4) On September 19, 1996, Mr. Davey was granted options to purchase an
aggregate of 60,000 shares of Common Stock. In December 1997, in connection
with the amendment of Mr. Davey's employment agreement, the exercise price of
45,000 of such options was reduced, Mr. Davey was granted options to purchase
an additional 92,000 shares of Common Stock (i.e. Mr. Davey received 137,000
options in 1997), and Mr. Davey's annual salary was increased to $140,000
effective September 19, 1997. See "Employment/Consulting Agreements". All
information contained in this Prospectus relating to Mr. Davey's options
reflects such amendment. Also, in January 1998, Mr. Davey was granted options
to purchase an additional 50,000 shares of Common Stock. Accordingly, Mr.
Davey currently owns options to purchase a total of 202,000 shares of Common
Stock. Of such options, 38,000 have vested and are exercisable at a price of
$.80 per share, and 58,000 will vest and become exercisable during each of
1998 and 1999 at prices of $4.00 and $5.00 per share, respectively, and 48,000
will vest and become exercisable during 2000 at a price of $6.00 per share.
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<PAGE>
(5) Includes $144,918 that was earned by Mr. Malinowski prior to the formation
of the Company. Of this amount, $130,788 has been paid to Mr. Malinowski and
$14,130 remains unpaid and is recorded in accounts payable as of the date of
this Offering.
The following table contains information concerning the grant of stock
options during Fiscal 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term (1)
----------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
% of Total
Options
Number of Granted
Options to Exercise
Name Granted Employees or Expiration Date 5% 10%
---- ------- in Fiscal Base Price --------------------
Year
Michael A. Clark 158,000 10.1% $ .80 September 18, 2002 $933,780 $1,275,060
Michael A. Clark 158,000 10.1% $4.00 September 18, 2003 $481,189 $ 909,606
Michael A. Clark 158,000 10.1% $5.00 September 18, 2004 $378,849 $ 906,288
Michael A. Clark 158,000 10.1% $6.00 September 18, 2005 $279,791 $ 918,612
Michael A. Clark 158,000 10.1% $7.00 September 18, 2006 $182,655 $ 946,578
Richard F. Davey 38,000 2.4% $ .80 September 18, 2002 $224,580 $ 306,660
Richard F. Davey 38,000 2.4% $4.00 September 18, 2003 $115,900 $ 218,880
Richard F. Davey 38,000 2.4% $5.00 September 18, 2004 $ 91,200 $ 218,120
Richard F. Davey 23,000 1.5% $6.00 September 18, 2005 $ 40,710 $ 38,000
Bruce Malinowski 12,000 .8% $ .80 September 18, 2002 $ 70,920 $ 96,840
Bruce Malinowski 12,000 .8% $4.00 September 18, 2003 $ 36,600 $ 69,120
Bruce Malinowski 12,000 .8% $5.00 September 18, 2004 $ 28,800 $ 68,880
Bruce Malinowski 12,000 .8% $6.00 September 18, 2005 $ 21,240 $ 69,720
</TABLE>
(1) Based upon the assumed public offering price of $5.00 per share for the
Common Stock.
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<PAGE>
The following table sets forth information regarding the number and
value of options held as of the date hereof by the Named Executive Officers.
The Named Executive Officers did not exercise any options during Fiscal 1997.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End (1)
------------------ ----------------------
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
Michael A. Clark 268,000 632,000 $1,144,300 $158,000
Richard F. Davey 38,000 114,000 $ 159,600 $ 38,000
Bruce Malinowski 12,000 36,000 $ 50,400 $ 12,000
</TABLE>
(1) Based on the assumed public offering price of $5.00 per share
for the Common Stock.
Board of Directors
The Company's Bylaws currently provide that the authorized number of
directors of the Company will be a variable number ranging from one to nine
with the exact number to be fixed by the Board of Directors.
The Board of Directors currently consists of six members. Members of
the Board of Directors hold office for a period of three years. The terms of
the current directors are staggered as follows:
Class of 2000: Michael A. Clark, Richard F. Davey
Class of 1999: David Brandkamp, Michael Cirillo
Class of 1998: Steven B. Rosner, Andrew P. Panzo
Each director holds office until his successor has been elected and
qualified at the Annual Meeting of Stockholders held during the year in which
his term expires. The Audit Committee of the Board of Directors consists of
Andrew P. Panzo, Steven B. Rosner and Michael Cirillo. The Compensation
Committee of the Board of Directors consists of Michael A. Clark, Steven B.
Rosner and Michael Cirillo. The Pricing Committee consists of Michael A.
Clark.
Directors of the Company who are also officers, employees or
principal shareholders of the Company do not currently receive additional
compensation for their services to the Board of Directors. The Company's
independent directors are permitted to participate in the Company's
Non-Qualified Stock Option Plan. In April 1998, the Company granted options to
purchase 30,000 shares of the Company's Common Stock to each of Michael
Cirillo and Steven B. Rosner, the Company's independent directors.
Employment/Consulting Agreements
The Company has entered into the following employment agreements and
consulting arrangements:
Mr. Clark entered into an employment agreement pursuant to which he
agreed to serve as the Company's President and Chief Executive Officer through
September 19, 2002. Under the agreement, Mr. Clark is paid an annual base
41
<PAGE>
salary of $165,000 and is eligible to receive bonuses and increases to
his base salary at the discretion of the Board of Directors. In addition, Mr.
Clark was granted options to purchase an aggregate of 900,000 shares of Common
Stock. Of such options, (i) 110,000 have vested and are exercisable at a price
of $.63 per share, (ii) 158,000 have vested and are exercisable immediately at
a price of $.80 per share and (iii) 158,000 will vest and become exercisable
on each of September 19, 1998, 1999, 2000 and 2001 at prices of $4.00, $5.00,
$6.00 and $7.00 per share, respectively. In the event that Mr. Clark is
terminated upon a Change of Control (as defined below) of the Company, (i) he
shall receive an amount equal to two years of his then current base salary
(provided, however, that this amount shall be increased by two additional
months of base salary on each anniversary of his employment with the Company)
and (ii) any of his 900,000 options which have not vested as of the effective
date of the Change of Control shall immediately vest and become exercisable.
In addition, all severance payments payable to Mr. Clark pursuant to his
employment agreement are secured by a subordinated lien on the Company's
intellectual property rights.
For purposes of Mr. Clark's employment agreement, "Change of Control"
of the Company shall mean the occurrence of an event which would be required
to be reported by the Company in response to Items 1 or 2 of Current Report on
Form 8-K of the Exchange Act.
Mr. Davey entered into an agreement pursuant to which he agreed to
serve as the Company's Vice President and Chief Technology Officer until
September 19, 1998. Under the agreement, Mr. Davey is paid an annual base
salary of $140,000 and is eligible to receive bonuses and increases to his
base salary at the discretion of the Board. In addition, Mr. Davey was granted
options to purchase 152,000 shares of Common Stock. Of such options, (i)
38,000 vested and became exercisable on September 19, 1997 at an exercise
price of $.80 per share and (ii) 38,000 will vest and become exercisable on
each of September 19, 1998, 1999 and 2000 at exercise prices of $4.00, $5.00
and $6.00 per share, respectively. In addition to the terms of this Agreement,
Mr. Davey was subsequently granted options to purchase an additional 50,000
shares of Common Stock at exercise prices ranging from $4.00 to $6.00 per
share. See "Management - Executive Compensation."
Pursuant to their respective employment agreements, each of Messrs.
Clark and Davey is entitled to receive all employee benefits offered to senior
executives and key management employees, including disability insurance,
hospitalization insurance, major medical insurance, medical reimbursement,
survivor income, life insurance and any other benefit plan or arrangement
instituted by the Company. In addition, each of them is entitled to be
reimbursed for all out-of-pocket expenses reasonably and necessarily incurred
in the performance of their duties.
Each of Messrs. Barnett and Mark D. Braunstein, co-founders of COL,
entered into a consulting agreement pursuant to which he agreed to serve as a
consultant to the Company until September 19, 1999. Pursuant to their
consulting agreements, they were each entitled to be paid $84,000 per year as
consideration for their services. In addition, in connection with the Merger,
each of Mr. Barnett and Mr. Braunstein was granted 300,000 shares of Common
Stock (collectively, the "Consulting Shares") which were to vest upon the
earlier of (i) a Change of Control of the Company or (ii) the commencement of
beta testing in a test market for the Company's online targeted incentive
program. In July 1997, the beta testing for the Company's online targeted
incentive program was completed and the consulting shares were issued to
Messrs. Barnett and Braunstein in December 1997.
In December 1997, the consulting agreements with Messrs. Barnett and
Braunstein were canceled and Messrs. Barnett and Braunstein each entered into
employment agreements with the Company. Mr. Barnett entered into an agreement
pursuant to which he agreed to serve as the Company's Vice President of Local
Market Administration. Mr. Braunstein entered into an agreement pursuant to
which he agreed to serve as the Company's Vice President of Local Market
Development. Under the agreements, which were effective October 1, 1997,
Messrs. Barnett and Braunstein are each paid a base salary of $85,000 and a
draw of $15,000 against commissions earned through September 30, 1998.
Thereafter, Messrs. Barnett and Braunstein will each be compensated solely on
a commission basis. They will each receive an annual draw against commissions
of $85,000 and will receive the balance of earned commissions, if any, on a
quarterly basis commencing on June 30, 1998. In addition, Messrs. Barnett and
Braunstein were each granted options to purchase an aggregate of 60,000 shares
of Common Stock. These options will vest and become exercisable on each of
July 1, 1997, 1998, 1999 and 2000 at prices of $.80, $4.00, $5.00 and $6.00
per share, respectively.
On February 11, 1998, the Company, Barnett and Braunstein signed a
mutual release from their respective obligations under the employment
agreements. IQ believes that by hiring Messrs. Barnett and Braunstein, it will
42
<PAGE>
be able to take advantage of their relationships with potential
Customers and thus enhance its performance under the definitive agreement.
Since the Company earns transactions fees based on IQ's performance, the
Company is willing to release Messrs. Barnett and Braunstein from their
employment agreements so that IQ can attempt to hire each of them. See
"Business - Marketing and Sales Strategy - Distribution and License Agreement
With IQ Value, L.L.C." Under the terms of these mutual releases, each of
Barnett and Braunstein will continue to receive their salaries and commission
draws until September 30, 1998, they will each receive cash payments of
$20,000, and they will each receive options to purchase 75,000 shares of the
Company's Common Stock at the per share price of this Offering. The mutual
releases became effective on April 7, 1998, concurrent with the execution of
the Distribution and License Agreement with IQ. The Company has paid each of
Messrs. Barnett and Braunstein $10,000 and has issued options to purchase
75,000 shares of the Company's Common Stock to each of Messrs. Barnett and
Branstein. The remaining $10,000 payable to each of Messrs. Barnett and
Braunstein is due upon the earlier of July 6, 1998 or the Company's receipt of
the proceeds of this Offering.
Each of Messrs. Clark, Davey, Barnett and Braunstein is bound by his
respective agreement, to treat confidentially all proprietary information
learned by him during the course of his employment with the Company or COL for
the term of the agreement and at all times thereafter. They have each also
agreed to refrain from (i) competing with the Company or any of its affiliates
and (ii) soliciting the Corporation's employees or officers, during the term
of such agreement and for a period of one year thereafter.
1996 Non-Qualified Stock Option Plan
General
The netValue, Inc. 1996 Non-Qualified Stock Option Plan (as amended,
the "Plan") authorizes the Board or a committee which the Board may appoint
from among its members (the "Compensation Committee") to grant options
("Options") to purchase up to 2,500,000 shares of Common Stock. None of the
Options will be "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
Option Grants to Date
As of the date hereof, the Company has granted Options to purchase
2,028,000 shares of Common Stock.
Purpose
The general purpose of the Plan is to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to officers, directors, employees, consultants and
independent contractors and to promote the success of the Company's business.
Administration
The Plan may be administered by the Board or the Compensation
Committee. Subject to the other provisions of the Plan, the Board or the
Compensation Committee has the authority to (i) award Options; (ii) determine
the exercise price of any Options to be awarded; (iii) determine the eligible
participants to whom, and the time or times at which, Options shall be
awarded, and the number of shares to be subject to each Option; (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan; (v)
determine the terms and provisions of each Option awarded under the Plan, each
option agreement and, with the consent of the optionee, to modify or amend an
outstanding Option or option agreement; (vi) accelerate the vesting or
exercise date of any Option; (vii) determine whether any Optionee will be
required to execute any agreement as a condition to the exercise of an Option,
and to determine the terms and provisions of any such agreement and, with the
consent of the Optionee, to amend any such agreement; (viii) interpret the
Plan or any agreement entered into with respect to the Award or exercise of
Options; (ix) authorize any person to execute on behalf of the Company any
instrument required to effectuate the Award of an Option previously awarded or
to take such other actions as may be necessary or appropriate with respect to
the Company's rights pursuant to Options or agreements relating to the Award
or exercise thereof; and (x) make such other determinations and establish such
other procedures as it deems necessary or advisable for the administration of
the Plan.
43
<PAGE>
Eligibility
The Plan provides that Options may be granted to the Company's
officers, directors and employees and to any consultants or independent
contractors engaged by the Company.
Terms and Conditions of Options
Each Option to be granted under the Plan will be evidenced by a
written award agreement between the optionee and the Company and is subject to
the following terms and conditions:
(a) Exercise Price. The Board or the Compensation Committee
is responsible for determining the exercise price of Options at the time such
Options are granted.
(b) Form of Consideration. The means of payment for shares
of Common Stock issued upon exercise of an Option is specified in each award
agreement and generally may be made by cash, check, promissory note or shares
of Series A Preferred Stock having a Stated Value on the date of surrender
equal to the aggregate exercise price of the options.
(c) Exercise of the Option. Each Option agreement will
specify the terms of the Option and the date when the Option is to become
exercisable. However, in no event shall an Option granted under the Plan be
exercised more than ten years after the date of grant.
(d) Termination of Employment. If an optionee's employment
terminates for any reason (other than death or permanent disability), then all
Options held by such Optionee under the Plan expire upon the earlier of (i)
one year from the date of such termination and (ii) the expiration date of the
Option, unless otherwise provided for in the Option Agreement related to such
Option.
(e) Permanent Disability, Death. If an Optionee dies while
employed by the Company or is unable to continue employment with the Company
as a result of permanent and total disability (as defined in the Code), his or
her Option shall expire upon the earlier of (i) twelve months after the
Optionee's death or disability or (ii) the expiration date of the Option. The
executor or other legal representative of the Optionee may exercise all or
part of the Option at any time before such expiration to the extent that such
Option was exercisable at the time of death or permanent disability of the
Optionee.
(f) Termination of Options. Each award agreement will
specify the expiration date of the Option. No Option may be exercised by any
person after the expiration of its term.
(g) Nontransferability of Options. During the lifetime of
the Optionee, his or her Option(s) shall be exercisable only by the Optionee
and shall not be transferable other than by will or laws of descent and
distribution.
Adjustment Upon Changes in Capitalization, Corporate Transactions
In the event that the capital stock of the Company is changed by
reason of any stock split, reverse stock split, stock dividend,
recapitalization or other change in the capital structure of the Company,
appropriate proportional adjustments shall be made in the number and class of
shares of Common Stock subject to the Plan, the number and class of shares of
Common Stock subject to any Option outstanding under the Plan, and the
exercise price of any such outstanding Option. Any such adjustment shall be
made upon approval of the Board and, if required, the stockholders of the
Company, whose determination shall be conclusive. In the event of a Change of
Control of the Company, the Board shall have the right to accelerate the
vesting of all unmatured Options. In addition, in the event of a Change of
Control of the Company by reason of a merger, consolidation or tax free
reorganization or sale of all or substantially all of the assets of the
Company (other than in the ordinary course of business), the Board shall have
right to terminate and to (a) exchange all Options for options to purchase
common stock in the successor corporation or (b) distribute to each optionee
cash and/or other property in an amount equal to and in the same form as the
optionee would have received from the successor corporation if the optionee
had owned the shares of Common Stock subject to the Option rather than the
Option at the time of the Change of Control. The form of payment or
distribution to the optionee pursuant to this section shall be determined by
the Board.
Amendment, Suspensions and Termination of the Plan
The Board may amend, suspend or terminate the Plan at any time,
subject to any restrictions imposed by applicable law.
44
<PAGE>
Federal Tax Information
Options granted under the Plan are not "incentive stock options," as
defined in Section 422 of the Code.
The Company will be entitled to a tax deduction in the same amount as
the ordinary income recognized by the optionee with respect to shares of
Common Stock acquired upon exercise of an Option.
Liability and Indemnification of Officers and Directors
The Company's Amended and Restated Certificate of Incorporation
provides that Directors of the Company will not be liable for monetary damages
for breach of their fiduciary duty as directors, other than the liability of a
director (i) for a breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions by the director not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for a willful or negligent declaration of an unlawful dividend, stock purchase
or redemption or (iv) for transactions from which the director derived an
improper personal benefit. These provisions are consistent with applicable
Delaware law.
The Company's Amended and Restated Certificate of Incorporation
provides that the Company shall, to the full extent permitted by Section 145
of the Delaware General Corporation Law, indemnify all persons whom it may
indemnify pursuant thereto.
In addition, the Company's Bylaws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines
and amounts incurred or paid in settlement in connection with civil or
criminal claims, actions, suits or proceedings against such persons by reason
of serving or having served as officers, directors, or in other capacities, if
such person acted in good faith, and in a manner such person reasonably
believed to be in or not opposed to the best interest of the Company and, in a
criminal action or proceeding, if he had no reasonable cause to believe that
his/her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to the best interests of the
Company or that he or she had reasonable cause to believe his or her conduct
was unlawful. Indemnification as provided in the Bylaws shall be made only as
authorized in a specific case and upon a determination that the person met the
applicable standards of conduct. Insofar as the limitation of, or
indemnification for, liabilities arising under the Securities Act may be
permitted to directors, officers, or persons controlling the Company pursuant
to the foregoing, or otherwise, the Company has been advised that, in the
opinion of the Commission, such limitation or indemnification is against
public policy as expressed in the Securities Act, and is therefore,
unenforceable.
45
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership (as calculated pursuant to Rule 13d-3(d)(1) promulgated
under the Exchange Act) of Common Stock owned, as of April 14, 1998, by (i)
the holders of more than 5% of the Common Stock, (ii) each director of the
Company, (iii) the Named Executive Officers and (iv) all directors and
executive officers of the Company as a group. Prior to this Offering, as of
April 14, 1998, an aggregate of 10,718,756 shares of Common Stock were issued
and outstanding. Assuming the consummation of this Offering, as of April 14,
1998, an aggregate of 13,718,756 shares of Common Stock were issued and
outstanding. For purposes of computing the percentages under this table, it is
assumed that all options and warrants to acquire Common Stock which have been
issued to the directors, executive officers and the holders of more than 5% of
the Common Stock and are fully vested or will become fully vested within 60
days of the date of this Prospectus have been exercised by these individuals
and the appropriate number of shares of Common Stock have been issued to these
individuals, and that all shares of Series A Convertible Preferred Stock which
have been issued to the directors, executive officers and the holders of more
than 5% of the Common Stock have been converted into shares of Common Stock
and the appropriate number of shares of Common Stock have been issued to these
individuals.
<TABLE>
<CAPTION>
<S> <C> <C>
Shares of Common Stock Beneficially Owned
Name and Address Number Percent of Class
- ---------------- ------ ----------------
Before Offering After Offering
--------------- --------------
American Maple Leaf 1,291,850 (1) 11.5 9.1
Financial Corporation
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
APP Investments, Inc. 1,291,850 (2) 11.5 9.1
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Craig W. Barnett 827,000 (3) 7.7 6.0
300 E. 71st Street, #3E
New York, NY 10021
David Brandkamp - 0 - * *
40 Oak Grove
East Greenwich, RI 02818
Mark D. Braunstein 732,000 (4) 6.8 5.3
405 E. 54th Street, #11H
New York, NY 10022
Michael Cirillo 30,000 (5) * *
55 Eastwood Blvd.
Manalopan, NJ 07726
Michael A. Clark 268,000 (6) 2.4 1.9
20 Hill Street
Milford, CT 06460
Richard F. Davey 38,000 (7) * *
95 Saddle Hill Road
Stamford, CT 06903
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
Name and Address Number Percent of Class
- ---------------- ------ ----------------
<S> <C> <C>
Before Offering After Offering
--------------- --------------
Andrew P. Panzo 1,291,850 (8) 11.5 9.1
c/o American Maple Leaf Financial
Corporation
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Steven B. Rosner 222,500 (9) 2.1 1.6
1220 Mirabeau Lane
Gladwyne, PA 19035
Rozel International Holdings Limited 5,539,627 (10) 45.1 36.3
c/o Whitehill House
Newby Road-Industrial Estate
Stratford Chesire, United Kingdom
All directors and executive officers 1,850,350 16.1 12.7
as a group (6 people)
</TABLE>
- ------------
* Less than 1%
(1) Consists of 791,850 shares of Common Stock and the 500,000 APP
Warrant Shares (as defined under "Certain Transactions - Organization
of the Company") issuable to APP Investments, Inc. ("APP"). Andrew P.
Panzo is the controlling shareholder, President and a director of
both AML and APP and as a result thereof, the 500,000 APP Warrant
47
<PAGE>
Shares issuable to APP upon the exercise of the APP Warrant (as
defined under "Certain Transactions - Organization of the Company")
may be deemed to be beneficially owned by AML.
(2) Consists of 500,000 APP Warrant Shares and the 791,850 shares of
Common Stock owned by AML. Andrew P. Panzo is the controlling
shareholder, President and a director of both APP and AML and as a
result thereof, the 791,850 Common Shares owned by AML may be deemed
to be beneficially owned by APP.
(3) Includes 15,000 shares of Common Stock issuable upon the exercise of
certain outstanding options held by Mr. Barnett which are currently
exercisable at a price of $.80 per share and 75,000 shares of Common
Stock issuable upon the exercise of certain outstanding options held
by Mr. Barnett which are currently exercisable at $5.00 per share.
Does not include 47,500 shares of Common Stock owned by Mr. Barnett's
brother, Larry Barnett. Mr. Barnett disclaims beneficial ownership of
such shares.
(4) Includes 15,000 shares of Common Stock issuable upon the exercise of
certain outstanding options held by Mr. Braunstein which are
currently exercisable at a price of $.80 per share and 75,000 shares
of Common Stock issuable upon the exercise of certain outstanding
options held by Mr. Braunstein which are currently exercisable at
$5.00 per share.
(5) Consists of 30,000 shares of Common Stock owned by the DAR Group,
Inc. Michael Cirillo is the President of the DAR Group, Inc. ("DAR").
As a result thereof, the 30,000 shares of Common Stock owned by DAR
may be deemed to be owned by Michael Cirillo.
(6) Consists of 110,000 and 158,000 shares of Common Stock issuable upon
the exercise of certain outstanding options held by Mr. Clark which
are currently exercisable at a price of $.63 and $.80 per share,
respectively.
(7) Consists of 38,000 shares of Common Stock issuable upon the exercise
of certain outstanding options held by Mr. Davey which are currently
exercisable at a price of $.80 per share.
(8) Consists of 500,000 APP Warrant Shares and the 791,850 shares of
Common Stock owned by AML. Andrew P. Panzo is the controlling
shareholder, President and a director of both APP and AML and as a
result thereof, the 791,850 Common Shares owned by AML and the
500,000 Warrant Shares issuable to APP may be deemed to be
beneficially owned by Andrew P. Panzo.
(9) Includes 32,500 shares of Common Stock owned by the Steven B. Rosner
Money Purchase Pension Plan of which Mr. Rosner is a trustee.
(10) Includes 1,556,250 shares of Common Stock issuable upon the
conversion of 124,500 shares of Series A Convertible Preferred Stock
currently owned by Rozel International Holdings Limited. Includes
10,500 shares owned by HPC Corp. Services. Harold P. Chaffe, the
President of Rozel, is also the President of HPC Corp.
Services.
CERTAIN TRANSACTIONS
Organization of the Company
On July 16, 1996, the Company was formed solely for the purpose of
merging with COL. In exchange for an aggregate purchase price of $1,090, the
Company's founders, including American Maple Leaf Financial Corporation
("AML"), received an aggregate of 1,090,000 shares of Common Stock. In
addition, in connection with the Company's formation, APP Investments, Inc.
("APP"), an affiliate of AML, was issued a warrant to acquire 500,000 shares
of Common Stock (the "APP Warrant Shares") at an exercise price of $6.00 per
share (the "APP Warrant"). None of the APP Warrant Shares issuable upon the
exercise of the APP Warrant may be sold, transferred or otherwise disposed of
prior to September 19, 1998 without the prior written approval of AML.
48
<PAGE>
The Merger
On September 18, 1996, the Merger was consummated and COL was merged
with and into the Company. In connection with the Merger, the Company issued
an aggregate of 3,074,000 shares of Common Stock to the members of COL (the
"COL Shares") in exchange for (i) all of the issued and outstanding membership
interests of COL, (ii) the termination of all agreements among COL and certain
of its members and other affiliated parties (collectively, the "COL Holders")
and (iii) the waiver of all pre-existing rights, claims, causes of action and
suits which COL Holders have or may have against COL, except for the Surviving
Claims (as defined below).
In connection with the Merger, the Company agreed to pay an aggregate
of $292,966 to certain of the COL Holders in satisfaction of certain (i) loans
advanced to COL by the officers of COL and (ii) compensation owed by COL to
such COL Holders (the "Surviving Claims"). In satisfaction of certain of the
Surviving Claims, Mr. Barnett was paid an aggregate of $88,669. Also in
connection with the Merger, the Company (i) reserved an aggregate of 600,000
shares of Common Stock for issuance to Messrs. Barnett and Braunstein (which
were subsequently issued in December 1997), (ii) entered into an agreement
with Muzak Limited Partnership ("Muzak"), whereby Muzak was appointed the
Company's exclusive sales agent for a three-year period (which agreement was
mutually terminated on April 3, 1997, and the termination of this relationship
has not had a material adverse effect on the Company), and (iii) adopted the
Plan. Except for an aggregate of 866,000 of COL Shares, none of the COL shares
may be sold or transferred prior to September 19, 1998 without the prior
written consent of AML.
Transactions with AML
On September 18, 1996, the Company entered into a six-month
consulting agreement with AML pursuant to which AML agreed to provide
investment banking services to the Company in exchange for 350,000 shares of
Common Stock. As AML has satisfied all of its obligations under such
agreement, all of such shares have been issued to AML.
During 1997, AML advanced $1,001,000 in short-term bridge financing
to the Company. As of October 31, 1997, the Company had repaid $976,000 of
this amount. In December 1997, the Company issued 190,200 shares of
Common Stock to AML as consideration for the advance of the financings and the
consensual forbearance by AML from collecting the amounts due during the term
of the financings. In December 1997 the Company repaid the remaining $25,000
due under the short-term bridge financing.
In March 1998, the Company paid AML an investment banking fee of
$30,000 as compensation for its efforts in locating IQ and assisting in the
negotiations which resulted in the Company entering into a letter of intent
with IQ. See "Business - Marketing and Sales Strategy - Letter Agreement with
IQ Value, L.L.C."
Employment/Consulting Agreements
On September 18, 1996, the Company entered into Employment Agreements
with each of Messrs. Clark and Davey and Consulting Agreements with each of
Messrs. Barnett and Braunstein. The Employment Agreements with Messrs. Clark
and Davey were amended in December 1997 effective retroactive to September 19,
1997. In December 1997, the consulting agreements with each of Messrs. Barnett
and Braunstein were canceled and the Company entered into employment
agreements with each of them. Also in December 1997, the Company issued
300,000 shares of Common Stock to each of Messrs. Barnett and Braunstein in
accordance with the terms of each of their respective consulting agreements.
In February 1998, the Company and each of Messrs. Barnett and Braunstein
signed a mutual release from their respective obligations under the employment
agreements. These mutual releases became effective on April 7, 1998 concurrent
with the execution of the Distribution and License Agreement between the
Company and IQ Value, L.L.C. See "Management - Employment/Consulting
Agreements" for a complete description of such agreements and releases.
Transactions With VDC Corporation Ltd.
49
<PAGE>
On September 6, 1996, the Company issued and sold 650,000 shares of
Common Stock to VDC Corporation Ltd. ("VDC") for an aggregate purchase price
of $650,000.
On April 22, 1997, the Company entered into an agreement with VDC
pursuant to which VDC proposed to acquire the Company through a statutory
merger or similar business combination (the "VDC Agreement"). On August 26,
1997, the Company and VDC mutually agreed to terminate the VDC Agreement in
order to allow the Company to proceed with other financing alternatives.
In connection with the VDC Agreement, VDC provided the Company with
bridge financing in the principal amount of $2,500,000 (the "Bridge
Financing") and a senior secured loan in the principal amount of $100,000 (the
"Loan"). The Bridge Financing and the Loan were secured by a lien on all of
the Company's tangible and intangible assets (the "VDC Lien"). In
consideration for the receipt of the Bridge Financing and the Loan, the
Company issued 100,000 shares of Common Stock to VDC. In December 1997,
$2,400,000 principal amount of the Bridge Financing and interest accrued on
the Bridge Financing and the Loan through November 14, 1997 was canceled and
converted into 3,222,877 shares of Common Stock. In December 1997, the Company
repaid the remaining $200,000 principal amount outstanding on the Bridge
Financing and the Loan. On December 18, 1997, VDC sold all of its shares of
the Company's Common Stock to Rozel International Holdings Limited ("Rozel").
Accordingly, VDC is no longer a principal shareholder of the Company.
Rozel Preferred Stock Purchase Agreement
In connection with a Preferred Stock Purchase Agreement (the
"Agreement") that the Company entered into with Rozel, the Board of Directors
designated a Series A Convertible Preferred Stock consisting of 300,000 shares
("Series A Shares"). The Agreement provides that the Company may request that
Rozel purchase up to an aggregate of 300,000 shares at an aggregate purchase
price of $3,000,000. As of the date of this Prospectus, Rozel has purchased
124,500 shares for $1,245,000. The Company can request that Rozel purchase an
additional 88,000 Series A Shares at any time, an additional 50,000 Series A
Shares at any time subsequent to May 1, 1998 and an additional 37,500 Series A
Shares at any time subsequent to June 1, 1998. As of March 31, 1998, the
Company has not made any such written requests. In the event that Rozel does
not purchase the Series A Shares in accordance with the written requests, the
Company does not have any remedy or recourse against Rozel. Each Series A
Share is convertible at any time at the option of either Rozel or the Company
into 12.5 shares of the Company's Common Stock. The Series A Shares will be
canceled and will no longer be issued and outstanding. See "Description of
Capital Stock - Preferred Stock."
On December 18, 1997, Rozel purchased 3,972,877 shares of the
Company's Common Stock from VDC.
Approval of Transactions By Independent Directors
Each of the Company's two independent, nonemployee directors joined
the Board of Directors in December 1997. Prior to this date, the Company did
not have any independent, nonemployee directors. Accordingly, none of the
closed or ongoing transactions described above was approved by independent,
nonemployee directors who did not have an interest in the transactions. All
future material transactions and loans completed by the Company will be made
or entered into on terms that are no less favorable to the Company than those
that can be obtained from unaffiliated third parties. Any future forgiveness
of loans by the Company must be approved by a majority of the Company's
independent directors who do not have an interest in the transactions and who
have access at the Company's expense to the Company's legal counsel.
DESCRIPTION OF CAPITAL STOCK
Authorized Shares
Under the Company's Amended and Restated Certificate of
Incorporation, the authorized capital stock of the Company consists of
24,000,000 shares of Common Stock, par value $.001 per share, and 1,000,000
shares of preferred stock, $.001 par value per share ("Preferred Stock"). As
of the date of this Prospectus, (i) 10,718,756 shares of Common Stock were
issued and outstanding, (ii) 2,500,000 shares of Common Stock were reserved
for issuance pursuant to Plan, (iii) 902,500 shares of Common Stock were
reserved for issuance upon the exercise of outstanding warrants (including the
50
<PAGE>
APP warrant) and (iv) 1,556,250 shares of Common Stock were reserved for
issuance upon the conversion of the Series A Preferred Stock. As of the date
of this Prospectus, 124,500 shares of Preferred Stock are issued and
outstanding.
Common Stock
Holders of Common Stock are entitled to one vote for each share on
all matters voted on by stockholders and are not entitled to cumulative
voting. The first annual meeting of stockholders is expected to be held during
1998.
All shares of Common Stock to be distributed will be fully paid and
nonassessable. Holders of Common Stock do not have any subscription,
redemption or conversion privileges. Holders of Common Stock are entitled to
participate ratably in dividends on the Common Stock as declared by the Board
of Directors. Holders of Common Stock are entitled to share ratably in all
assets available for distribution to stockholders in the event of liquidation
or dissolution of the Company.
Preferred Stock
The shares of Preferred Stock may be issued in one or more classes
and in one or more series within a class with such designations, powers,
preferences, rights, qualifications, limitations and restrictions as may be
established from time to time by resolution of the Board of Directors at or
prior to the time of issuance of shares of such class or series.
In connection with a Preferred Stock Purchase Agreement that the
Company entered into with Rozel, the Board of Directors designated a Series A
Convertible Preferred Stock consisting of 300,000 shares ("Series A Shares").
See "Certain Transactions - Rozel Preferred Stock Purchase Agreement." In the
event that Rozel does not purchase the Series A Shares in accordance with the
written request of the Company, the Company does not have any remedy or
recourse against Rozel. Each Series A Share is convertible at any time at the
option of either Rozel or the Company into 12.5 shares of the Company's Common
Stock. Upon any conversion of Series A Shares by either Rozel or the Company,
Rozel shall turn over its certificates representing the Series A Shares and
the Company shall issue a certificate for that number of shares of Common
Stock into which the Series A Shares are convertible. The Series A Shares will
be canceled and will no longer be issued and outstanding.
The Series A Shares do not have any voting rights or any registration
rights. Upon any liquidation or dissolution of the Company, the Series A
Shares shall have a preference over any subsequent series of Preferred Stock
issues by the Company.
All remaining authorized shares of Preferred Stock currently are
undesignated. Although it has no current intention to do so, the Board of
Directors may authorize and issue series of Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Common Stock. In addition, the issuance of Preferred Stock
may have the effect of deterring or preventing a change in control of the
Company. See "Risk Factors - Risks Related to the Offering - Possible Negative
Effects of Preferred Stock."
Common Stock Purchase Warrants
As of the date of this Prospectus, the Company has issued 902,500
Common Stock Purchase Warrants.
In connection with the formation of the Company, the Company issued
to APP or its registered assigns 500,000 Common Stock Purchase Warrants (the
"APP Warrants"). The APP Warrants have an exercise price of $6.00 per share
and are exercisable at any time prior to August 2, 2001. During the period
commencing on the date on which the Company's Common Stock has been traded for
five consecutive days on a public exchange, over-the-counter market or other
public trading system or market, and ending 10 days thereafter, the Company
may, in its sole discretion, require the exercise of all of the APP Warrants
(the "Mandatory Exercise"). If APP fails to exercise any of the APP Warrants
within 30 days after receiving notice of the Company's election of the
Mandatory Exercise, then all rights granted to APP related to the unexercised
APP Warrants shall be terminated.
51
<PAGE>
In connection with private offerings of its securities which the
Company completed in October and December 1997, the Company issued an
aggregate of 402,500 Common Stock Purchase Warrants (the "1997 Warrants"). The
1997 Warrants have an exercise price equal to the lower of (i) $4.00 and (ii)
the price per share at which the Common Stock is offered to the public in the
initial public offering of the Company's Common Stock. The 1997 Warrants are
exercisable for a period of five years commencing on the date the Common Stock
is first registered with the Securities and Exchange Commission pursuant to
Section 12(g) of the Securities Exchange Act of 1934.
Preemptive Rights
No holder of any capital stock of the Company has any preemptive
right to subscribe for or purchase any securities of any class or kind of the
Company.
Listing and Trading of Common Stock
The Company has made an application to have the Common Stock approved
for listing on the Nasdaq SmallCap Market. There can be no assurance that
NASDAQ will approve the Company's application for initial listing on the
SmallCap or that, if the Company's initial listing is approved by NASDAQ, that
the Company will be able to maintain its listing. See "Risk Factors - Risks
Related to the Offering - Lack of Public Market; Possible Volatility of Stock
Price; No Assurance that Listing on NASDAQ SmallCap will be Approved or
Maintained." There is currently no public market for the Common Stock. Until
the Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which the Common Stock trades will be determined by the marketplace
and may be influenced by many factors, including, among others, the depth and
liquidity of the market for the Common Stock, investor perception of the
Company and its industry and general economic and market conditions.
Registration Rights
The Company has granted certain demand and incidental registration
rights under the Securities Act to stockholders an aggregate of 3,510,929
shares of the Company's Common Stock. The Company has agreed to pay certain of
the expenses of certain of such registrations, other than brokers' commissions
and fees. See "Shares Eligible for Future Sale" and "Underwriting."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is StockTrans,
Inc. located in Ardmore, Pennsylvania.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 13,718,756
shares of Common Stock outstanding (14,168,756 shares if the over-allotment
option is exercised in full).
Pursuant to the terms of the Underwriting Agreement, none of the
issued and outstanding shares of the Company's Common Stock may be sold or
otherwise transferred, except for certain familial transfers, for a period of
12 months from the date of this Prospectus. The Company is in the process of
requiring its shareholders to sign agreements to abide by these transfer
restrictions (the "Lock-ups"). See "Underwriting." In addition, under the
terms of the subscription agreements of previous private placements of the
52
<PAGE>
Company's Common Stock, 4,826,929 outstanding shares of Common Stock may not
be sold or otherwise transferred, without the prior written consent of the
Company or AML, except for certain familial transfers, until the date set
forth below:
Number of Shares Restrictions in
Subject to Restriction Effect Through
---------------------- -------------------
4,129,429 September 19, 1998
155,000 February 19, 1999
37,500 March 24, 1999
102,500 May 31, 1999
20,000 October 7, 1998
97,500 October 17, 1998
182,500 October 31, 1998
102,500 December 11, 1998
Holders of an aggregate of 3,510,929 shares of Common Stock (the
"Registrable Shares") have certain registration rights with respect to the
registration of the resale of such shares under the Securities Act and will,
upon the effectiveness of a registration statement filed by the Company on
behalf of such holders, be freely tradeable under the Securities Act, subject
to the transfer restrictions described above. The Company intends to file a
registration statement with the Commission covering the resale of such shares
of Common Stock following the expiration of the Lock-ups.
All of the 3,000,000 shares (3,450,000 shares if the over-allotment
option is exercised in full) sold in this Offering will be freely transferable
by persons other than "affiliates" of the Company (as that term is defined
under the Securities Act), without restriction or further registration under
the Securities Act.
Following this Offering, approximately 78.1% of the Company's
outstanding shares of Common Stock (including the 3,510,929 Registrable Shares
until the resale of such shares is registered as described above) will be
"restricted securities" and may, subject to the transfer restrictions
described above, in the future be sold in compliance with Rule 144 adopted
under the Securities Act ("Rule 144"). Rule 144 generally provides that
beneficial owners of Common Stock who have held such Common Stock for one year
may sell within a three-month period a number of shares not exceeding the
greater of (i) 1% of the total outstanding shares or (ii) the average weekly
trading volume of the shares during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. Rule 144(k) provides that a person who is not
deemed an "affiliate" and who has beneficially owned shares for at least two
years is entitled to sell such shares at any time under Rule 144 without
regard to the limitations described above. Prior to this Offering, 6,137,929
shares of the Company's Common Stock have been issued and outstanding for over
1 year and may be sold in compliance with Rule 144.
Future sales of restricted Common Stock under Rule 144 or otherwise
or of the Registrable Shares pursuant to a registration statement could
negatively impact the market price of the Common Stock.
In addition to the outstanding shares of Common Stock described
above, as of the date of this Prospectus, the Company has 2,500,000 shares of
Common Stock reserved for issuance upon the exercise of outstanding options
under the Plan, 1,556,250 shares of Common Stock reserved for issuance upon
the conversion of the 124,500 shares of Series A Preferred Stock issued and
outstanding, and 902,500 shares of Common Stock are reserved for issuance upon
the exercise of outstanding warrants. All of these securities and the shares
of Common Stock underlying each of these securities are restricted securities.
The transfer of these restricted securities is subject to both the
Underwriter's lock-up and the requirements of Rule 144, as discussed above.
The Company is unable to estimate the number of shares that may be
sold in the future by its existing stockholders or the effect, if any, that
53
<PAGE>
sales of shares by such stockholders will have on the market price of Common
Stock prevailing from time to time. Sales of substantial amounts of Common
Stock by existing stockholders could adversely affect prevailing market
prices.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the
3,000,000 shares of Common Stock offered hereby at the initial offering price
less the underwriting discount set fourth on the cover page of the Prospectus.
The Underwriter is committed to purchase all of such shares, if any are
purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the shares to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain securities dealers
at such price less a concession of not more than $_____ per share, and that
the Underwriter and such dealers may reallot to other dealers, including the
Underwriter, a discount not in excess of $______ per share. After this
Offering, the public offering price and concessions and discounts may be
changed by the Underwriter. No reduction in such terms will change the amount
of proceeds to be received by the Company as set forth on the cover page of
this Prospectus.
The Company has granted an option to the Underwriter, exercisable for
a period of 30 days after the date of this Prospectus, to purchase up to an
additional 450,000 shares of Common Stock from the Company at the public
offering price set forth on the cover page of this Prospectus less the
underwriting discounts and commissions. The Underwriter may exercise this
option only for the purpose of covering over-allotments, if any.
In addition to receiving its commission equal to 10% of the gross
proceeds of this Offering, the Underwriter is entitled to receive a
non-accountable expense allowance equal to 3% of the gross proceeds of this
Offering.
The Company has granted to the Underwriter a right of first refusal
to underwrite or place any public or private sale of debt or equity securities
of the Company during the 18-month period following the date of this
Prospectus and on the same terms as offered to the Company by a third party.
In addition, the Underwriter has the right to conduct any transactions for the
account of any of the Company's officers, directors or beneficial shareholders
of 5% or more of the Company's Common Stock regarding any of the Company's
securities sold pursuant to Rule 144.
The Company has granted the Underwriter an option to purchase up to
10% of the number of shares sold to the public in this offering for a period
of 18 months following the date of this Prospectus at an exercise price equal
to 120% of the public offering price set forth on the cover page of this
Prospectus.
The Company has agreed to retain the Underwriter as a financial
consultant to the Company for a period of 18 months commencing on the date of
this Prospectus at a fee equal to $10,000 per month. The Company has also
granted the Underwriter the right to appoint a financial advisor to the
Company's Board of Directors for a term of 18 months commencing upon the
completion of this Offering.
The Underwriting Agreement provides that the Company will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act, or will contribute to payments the Underwriter may be required
to make in respect thereof.
Pursuant to the terms of the Underwriting Agreement, the Underwriter
has required that all shares of the Common Stock owned by all shareholders may
not be sold or otherwise transferred, except for certain transfers to family
members, family trusts or other family entities, for a period of 12 months
from the date of this Prospectus. In order to enforce this provision, the
Underwriter has required that the Company obtain Lock-ups from every
shareholder of the Company. All of the 3,000,000 shares (3,450,000 shares if
the over-allotment option is exercised in full) sold in this Offering will be
freely transferrable by persons other than "affiliates" of the Company,
without restriction or further registration under the Securities Act. The term
"affiliate" means any person or entity that controls, is controlled by, or is
under common control with the Company.
54
<PAGE>
The offering price of the Common Stock has been determined solely by
negotiation between the Company and the Underwriter. In determining the
offering price, the Company and Underwriter considered, among other things,
estimates of the business potential of the Company and the relative
capabilities of management of the Company. The offering price does not
necessarily bear any relationship to assets, book value, net worth or earnings
history of the Company or other investment criteria. The offering price of the
Common Stock should not necessarily be considered an indication of the actual
value of the Company's securities.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon
for the Company by Klehr, Harrison, Harvey, Branzburg & Ellers LLP,
Philadelphia, Pennsylvania.
EXPERTS
The financial statements of the Company as of December 31, 1997 and
1996 and for each of the years in the three year period ended December 31,
1997, 1996, 1995 and for the period from December 1994 (inception) through
December 31, 1997 included herein and elsewhere in the Registration Statement
have been included herein and in the Registration Statement in reliance upon
the report (which includes a modification that indicates that the Company's
existence may be dependent on its ability to continue to raise capital and
generate sufficient working capital from operations) of LJ Soldinger
Associates, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. L.J. Soldinger Associates has consented to the use of its report
herein and in the Registration Statement.
55
<PAGE>
netValue, Inc.
(A Development Stage Entity)
INDEX TO THE FINANCIAL STATEMENTS
---------------------------------
Page
----
Independent Auditors' Report F2
Balance Sheets F3
Statements of Operations F4
Statements of Stockholders' Deficit F5
Statements of Cash Flows F7
Notes to Financial Statements F8
- F1 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of netValue, Inc.
We have audited the accompanying balance sheets of netValue, Inc. (a
development stage entity) (the "Company") as of December 31, 1996 and 1997,
and the related statements of operations, stockholders' deficit and cash flows
for each of the years in the three-year period ended December 31, 1997, and
for the period from December 16, 1994 (date of inception) through December 31,
1997. 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 audits 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 netValue, Inc. as of December
31, 1996 and 1997, and the results of its operations, stockholders' deficit
and cash flows for each of the years in the three-year period ended December
31, 1997, and for the period from December 16, 1994 (date of inception)
through December 31, 1997, 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 more fully discussed in Note 3 to
the financial statements, the Company's negative working capital position,
substantial losses incurred since inception and dependence on outside
financing, raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. Management's plans concerning
these matters are also described in Note 3.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
March 30, 1998
(except for Note 11, as to
which the date is April 14, 1998)
- F2 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
------
December 31,
------------
1996 1997
------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents .................................................. $ 299,351 $ 671,508
Prepaid financing fees ..................................................... -- 368,402
Other ...................................................................... 7,492 7,492
------------ ------------
Total Current Assets .......................................... 306,843 1,047,402
Property and Equipment, Net ..................................................... 432,049 684,174
Intangibles (Net of accumulated amortization of $3,508
in 1996 and $5,320 in 1997) .................................................. 5,555 3,742
Registration Costs .............................................................. -- 218,773
Deposits ........................................................................ 50,145 94,290
------------ ------------
$ 794,592 $ 2,048,381
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities
Notes payable .............................................................. $ -- $ 4,275,000
Accounts payable ........................................................... 885,052 2,071,948
Accrued salaries and other expenses ........................................ 156,299 188,701
Accrued expenses-related parties ........................................... 58,333 --
------------ ------------
Total Current Liabilities ..................................... 1,099,684 6,535,649
------------ ------------
Commitments and Contingencies ................................................... -- --
Stockholders' Deficit
Preferred stock, $.001 par value per share. At December 31, 1996,
1,000,000 shares authorized; none outstanding. At December 31, 1997,
1,000,000 shares authorized; 22,500 shares issued and outstanding ........ -- 22
Common stock, $.001 par value per share. At December 31, 1996,
24,000,000 shares authorized; 6,270,430 shares issued and outstanding.
At December 31, 1997, 24,000,000 shares authorized; 10,686,006
shares issued and outstanding ............................................ 6,270 10,686
Additional paid-in capital ................................................. 3,767,434 8,174,788
Deferred financing fees .................................................... -- (277,371)
Deficit accumulated during the development stage ........................... (4,078,796) (12,395,393)
------------ ------------
Total Stockholders' Deficit ................................... (305,092) (4,487,268)
------------ ------------
$ 794,592 $ 2,048,381
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F3 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31, December 16, 1994
------------------------------------------- (Inception) through
1995 1996 1997 December 31, 1997
------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
Operating Expenses
Compensation and related expenses $ 131,174 $ 742,545 $ 2,163,716 $ 3,037,435
Professional fees 38,436 399,356 405,193 842,985
Advertising 236,775 219,760 832,340 1,288,875
Consulting 9,492 869,693 609,591 1,488,776
Research and development expenses 142,224 809,491 2,588,748 3,540,463
Depreciation and amortization 7,570 13,148 179,304 200,022
Other general and administrative 181,274 262,529 785,107 1,246,052
------------- ------------- ------------- -------------
Loss From Operations (746,945) (3,316,522) (7,563,999) (11,644,608)
Other Income (Expense)
Interest income 1,405 4,953 5,627 11,985
Interest expense (2,020) (2,525) (270,810) (275,355)
Financing fees - - (487,415) (487,415)
------------- ------------- ------------- -------------
Net Loss $ (747,560) $ (3,314,094) $ (8,316,597) $ (12,395,393)
============= ============= ============= =============
Net Loss Per Share Data:
Net loss per common shares outstanding $ (1.15)
=============
Weighted average number of common
shares outstanding 7,218,801
=============
Pro Forma Information (Unaudited):
Net loss (747,560) (3,314,094)
Pro forma tax provision - -
------------- -------------
Pro forma net loss (747,560) (3,314,094)
============= =============
Net Loss Per Share Data:
Net loss per common shares outstanding $ (.89)
=============
Weighted average number of common
shares outstanding $ 3,739,236
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F4 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Par Value $0.001 Additional Deferred During the
Preferred ------------------------ Paid-In Members' Financing Development
Stock Shares Amount Capital Capital Fees Stage
----------- ----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 16, 1994
(Date of Inception) ... $ -- -- $ -- $ -- $ -- $ -- $ --
Net loss ................. -- -- -- -- -- -- (17,142)
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance at December 31,
1994................... -- -- -- -- -- -- (17,142)
Capital contribution ..... -- -- -- -- 485,000 -- --
Net loss ................. -- -- -- -- -- -- (747,560)
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance at December 31,
1995................... -- -- -- -- 485,000 -- (764,702)
Capital contribution ..... -- -- -- -- 15,000 -- --
Founders' stock; issued .. -- 1,090,000 1,090 -- -- -- --
Founders' common
stock warrants issued . -- -- -- 2,000 -- -- --
Common stock; issued in
private placements
(net of offering costs
of $189,090).......... -- 1,931,429 1,931 2,483,979 -- -- --
Common stock; issued and
issuable to former
members ............... -- 3,074,000 3,074 496,926 (500,000) -- --
Compensatory common
stock options issued .. -- -- -- 172,200 -- -- --
Common stock granted for
consulting services ... -- 350,000 350 962,152 -- -- --
Unearned consulting
services .............. -- (174,999) (175) (349,823) -- -- --
Net loss ................. -- -- -- -- -- -- (3,314,094)
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balances at December 31,
1996, carry forward ... $ -- 6,270,430 $ 6,270 $ 3,767,434 $ -- $ -- $(4,078,796)
=========== =========== =========== =========== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F5 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Par Value $0.001 Additional Deferred During the
Preferred ------------------------ Paid-In Members' Financing Development
Stock Shares Amount Capital Capital Fees Stage
----------- ----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996, brought forward... $ -- 6,270,430 $ 6,270 $ 3,767,434 $ -- $ -- $(4,078,796)
Common stock granted for
consulting services .... -- 174,999 175 349,823 -- -- --
Compensatory common
stock options issued ... -- -- -- 8,500 -- -- --
Common stock; issued in
private placements (net
of offering costs of
$38,167)................ -- 295,000 295 551,538 -- -- --
Common stock; issued as
consideration for notes
and loans payable ...... -- 320,200 320 375,840 -- (224,000) --
Common stock; issued in
connection with short-
term bridge financing .. -- 402,500 403 321,597 -- (322,000) --
Common stock; issued in
connection with conver-
sion of note and accrued
interest ............... -- 3,222,877 3,223 2,575,078 -- -- --
Issuance of preferred stock 22 -- -- 224,978 -- -- --
Financing fee ............. -- -- -- -- -- 268,629 --
Net loss for period ....... -- -- -- -- -- -- (8,316,597)
----------- ----------- ----------- ----------- -------------- ----------- ------------
Balances at December 31,
1997 .................... $ 22 10,686,006 $ 10,686 $ 8,174,788 $ -- $ (277,371) $(12,395,393)
=========== =========== =========== =========== ============== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F6 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, December 16, 1994
-------------------------------------------- (Inception) through
1995 1996 1997 December 31, 1997
------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Operating Activities
Net loss ........................................ $ (747,560) $ (3,314,094) $ (8,316,597) $(12,395,393)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ............... 7,570 13,148 179,304 200,022
Financing fees .............................. -- -- 487,415 487,415
Conversion of accrued interest
to common stock ........................... -- -- 178,301 178,301
Compensatory common stock, options
and warrants issued and issuable .......... -- 786,704 358,498 1,145,202
Increase in assets and liabilities
Increase in other current assets
and deposits ......................... (358) (57,279) (44,145) (101,782)
Increase in accounts payable
and accrued expenses ................. 248,691 671,806 1,232,448 2,152,945
Increase (decrease) in accrued expenses -
related parties ...................... -- 58,333 (58,333) --
------------ ------------ ------------ ------------
Net Cash Used in
Operating Activities ............. (491,657) (1,841,382) (5,983,109) (8,333,290)
------------ ------------ ------------ ------------
Investing Activities
Payments for organization costs ................. (9,063) -- -- (9,063)
Purchases of furniture and equipment ............ (19,509) (308,896) (544,618) (873,023)
------------ ------------ ------------ ------------
Net Cash Used in
Investing Activities ............. (28,572) (308,896) (544,618) (882,086)
------------ ------------ ------------ ------------
Financing Activities
Proceeds from member loans ...................... 37,636 26,045 -- 80,823
Repayment of member loans ....................... -- (80,823) -- (80,823)
Proceeds from bridge loan ....................... -- 245,000 -- 245,000
Repayment of bridge loan ........................ -- (245,000) -- (245,000)
Proceeds from notes and loans payable -
related parties ............................... -- -- 3,601,000 3,601,000
Proceeds from notes payable ..................... -- -- 4,575,000 4,575,000
Repayments of notes and loans
payable - related parties ..................... -- -- (1,501,000) (1,501,000)
Proceeds from member capital
contributions ................................. 485,000 15,000 -- 500,000
Proceeds from private placements and
Founders' Stock, net of offering costs ........ -- 2,487,000 551,833 3,038,833
Proceeds from purchase of preferred stock ....... -- -- 225,000 225,000
Payment of financing fees ....................... -- -- (427,028) (427,028)
Registration costs .............................. -- -- (124,921) (124,921)
------------ ------------ ------------ ------------
Net Cash Provided by
Financing Activities ............. 522,636 2,447,222 6,899,884 9,886,884
------------ ------------ ------------ ------------
Net Increase in Cash ................................. $ 2,407 $ 296,944 $ 372,157 $ 671,508
Cash at Beginning of Period .......................... -- 2,407 299,351 --
------------ ------------ ------------ ------------
Cash at End of Period ................................ $ 2,407 $ 299,351 $ 671,508 $ 671,508
============ ============ ============ ============
Cash Paid for Interest and Taxes ..................... $ -- $ -- $ 3,200 $ 3,200
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F7 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 1 - DESCRIPTION OF THE BUSINESS
netValue, Inc. (formerly named Vsquared, Inc. which was formerly named COL
Acquisition Corp.) ("netValue") was formed on July 16, 1996 and subsequently
merged on September 18, 1996 with Coupons Online, LLC (the "LLC"), a limited
liability company formed on December 16, 1994 (collectively, the "Company").
The business combination (the "Merger") was treated as a purchase in
accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations" ("APB 16"), whereby the members of the LLC exchanged their
membership interests in the LLC for common stock in netValue, the surviving
entity, in proportion to their former interests in the LLC. Additional parties
also received shares of common stock in netValue in exchange for their
cancellation of certain agreements and pre-existing rights and the waiver of
certain obligations of the LLC. The Merger resulted in the LLC being the
accounting acquiror in accordance with APB 16, since the former members of the
combining company retained the larger portion of the voting rights pursuant to
the terms of the Merger agreement. The Merger has therefore been treated as a
reverse acquisition since netValue, as the surviving entity, was both the
legal acquiror and the accounting acquiree pursuant to the requirements of APB
16 [see Note 9(g) for additional discussions regarding the Merger].
The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards No. 7 "Accounting and Reporting for Development
Stage Enterprises," which is developing Internet software products intended to
provide fee based targeted marketing services to both retailers and
advertisers of consumer products and services through the electronic
transmission of coupon incentives to be delivered to specific consumer
segments. Since inception, the Company has been in the process of developing
two products. Product testing was successfully completed on its initial
product, Coupons Online ("COL"), in 1997. The Company has since contracted to
provide services to at least five clients. An updated version of COL has
successfully completed product testing and was made available for sale
commercially in March 1998. The second product, i-Value, which management
anticipates will be the Company's principal revenue producing product, has
incurred the majority of the Company's software development costs to date.
i-Value is in the process of product testing and is expected to begin
commercial operations in the third quarter of 1998. The Company has obtained a
trademark for COL and has applied for, but not yet obtained, a trademark for
i-Value. The Company has also applied for, but not yet obtained, patents
relating to the Company's products.
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles, and
have been presented on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business (see Note 3). In order to commence operations for i-Value,
additional capital investments will be required to complete the development
and marketing of the product. No assurance can be given that the Company will
be able to complete the product testing of i-Value or achieve market
acceptance of its products.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid instruments purchased with a maturity of three months or less to be
cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
- F8 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
Through December 31, 1997, the Company has expensed its research and
development costs in accordance with Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("SFAS 86"). The Company intends to continue
expensing such costs until software feasibility is established which is
expected to take place in 1998. Thereafter, the Company will capitalize the
direct costs and allocated overhead associated with the development of
software products. Under SFAS 86, maintenance costs incurred subsequent to the
product feasibility are to be charged to operations.
Intangibles
Intangibles consist of costs incurred in connection with the organization of
netValue, and are being amortized ratably over five years. Amortization
expense for 1995, 1996 and 1997 was $1,812, $1,696 and $1,811, respectively.
Property and Equipment
Property and equipment are stated at cost. The Company's policy is to
depreciate these assets over their estimated useful lives, as indicated in the
following table, using straight-line methods. The Company's policy is to
amortize leasehold improvements over the shorter of their useful lives or the
remaining periods of the related leases.
Years
Leasehold Improvements 3
Computer Hardware 5
Office Furniture and Equipment 7
Advertising Expenses
The Company expenses advertising costs as incurred. During 1995, 1996 and
1997, the Company incurred advertising expenses of $236,775, $219,760 and
$832,340, respectively.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"),
which requires companies to present basic earnings per share and diluted
earnings per share (as defined in SFAS 128), instead of primary earnings per
share and fully diluted earnings per share as formerly required under
Accounting Principles Board No. 15 "Earnings Per Share" ("APB 15"). Both
presentations under SFAS 128 require the use of the weighted average number of
shares outstanding for each period presented in the computation of earnings
per share, however the computation of diluted earnings per share under SFAS
128 increases the weighted average number of shares, giving rise to the
dilutive effects of options and warrants issued.
SFAS 128 is required to be adopted by all public companies for reporting
periods ending after December 15, 1997 and requires restatement of earnings
per share for all prior periods being presented. Accordingly, in 1997 the
Company adopted SFAS 128 for all applicable periods presented in the
accompanying financial statements. Net loss per share under SFAS 128 does not
differ from prior period presentations under APB 15. Under SFAS 128, diluted
net loss per share does not differ from basic net loss per share, since
options and warrants increase the weighted average number of shares under the
diluted net loss per share presentation and are therefore anti-dilutive.
Accordingly, diluted net loss per share is not in accordance with SFAS 128 as
it relates to the Company and is therefore not presented in these financial
statements.
- F9 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss Per Share (Continued)
The Company formerly presented net loss per share in accordance with Staff
Accounting Bulletin No. 83 "Earnings Per Share Computations in an Initial
Public Offering" ("SAB 83"). SAB 83 requires that the presentation of common
stock and common stock subject to options and warrants that, during the twelve
months preceding the initial filing of the registration statement, are issued
at prices less than the contemplated initial public offering price, be
presented as outstanding for all periods presented. Staff Accounting Bulletin
No. 98D "Earnings Per Share Computations in an Initial Public Offering" ("SAB
98"), issued in February 1998, requires that historical earnings per share be
presented in accordance with SFAS 128. The Company has therefore followed the
requirements of SAB 98 for all applicable periods presented in these financial
statements.
Prepaid Expenses
Prepaid expenses consist of prepaid financing fees, which include commissions
and professional fees incurred by the Company on borrowings received during
1997. These prepaid expenses are being charged to expense over the remaining
term of the outstanding borrowings [see Note 8(b)].
Registration Costs
Registration costs consist of professional fees, commissions, filing fees and
other costs incurred by the Company in connection with the filing of its
registration statement with the Securities and Exchange Commission ("SEC") for
an initial public offering ("IPO") and are reflected on the balance sheet as
non-current assets.
Deferred Financing Fees
Deferred financing fees represent costs associated with common stock issued to
certain lenders in connection with loans made to the Company in 1997. These
deferred financing fees are being charged to expense over the remaining term
of the outstanding borrowings [see Note 8(b)].
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, notes payable,
accounts payable and accrued expenses approximate fair value.
Segment Information
The Company conducts its business within one industry segment.
Income Taxes
Income taxes are recorded in the period in which the related transactions are
recognized in the financial statements, net of the valuation allowances which
have been recorded against deferred tax assets. Deferred tax assets and
liabilities are recorded for the expected future tax consequences of temporary
differences between the tax basis and financial reporting basis of assets and
liabilities. At December 31, 1996 and 1997, net deferred tax assets and
liabilities, relating primarily to stock-based compensation, financing costs
associated with the stock issuances and depreciation differences that have
been deferred for tax purposes, have been offset by a valuation reserve
because the future utilization of these assets and liabilities cannot be
determined.
Pursuant to the terms of the Internal Revenue Code, no provision or benefit
for federal income taxes has been reflected in the accompanying financial
statements for the LLC, since all tax losses flowed directly to the members.
See proforma financial information below.
- F10 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Compensatory Stock-Based Arrangements
Management has utilized the guidelines of Accounting Principles Board Opinion
No. 25 to account for the value of stock-based compensation arrangements that
the Company entered into in exchange for services performed by employees and
independent contractors (see Notes 7 and 9).
Concentrations
Concentrations not disclosed elsewhere in the financial statements are as
follows:
As discussed in Note 1, the Company has only one product which was offered to
the public commercially in 1997, and only one other product which is expected
to be initially offered to the public in the third quarter of 1998. Both
products are to be offered through the same medium. Lack of product
development or customer interest could have a material adverse effect on the
Company. Further, significant changes in technology could lead to new products
or services that compete with the products to be offered by the Company. These
changes could materially affect the price of the Company's products and
services or render them obsolete.
Credit Risk
The Company has maintained cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to a maximum of $100,000. At December 31, 1996 and 1997, the
Company's uninsured cash balances totaled $229,975 and $571,508, respectively.
Pro Forma Financial Information
As discussed in Note 1, netValue, which consisted primarily of cash at the
date of the Merger, is a successor to the LLC whose former members, subsequent
to the reverse acquisition, retained the larger portion of the voting rights
pursuant to the terms of the Merger agreement. Since netValue was deemed a
predecessor business, no pro forma information has been included in the
financial statements relating to netValue prior to its being acquired by the
LLC through the reverse acquisition (see Note 1).
As further discussed in Note 1, the LLC was originally organized in the form
of a limited liability company. Upon the Merger, its capital structure changed
to that of a corporation. The change resulted in the Company retaining the tax
benefit for subsequent net operating losses whereas the previous losses were
passed through to the LLC members. Pursuant to Staff Accounting Bulletin
Number 1B.2 "Pro Forma Financial Statements and Earnings per Share" ("SAB
1B.2"), a pro forma income statement has been presented which reflects the
impact of the Company's change in capital structure as if it had occurred
December 16, 1994 (the Company's inception). This presentation reflects the
Company generating a tax benefit for the net operating losses which were
incurred by the LLC during 1995 and in 1996 prior to the LLC's termination
(see Note 5). Pursuant to SAB 1B.2, pro forma earnings per share have only
been presented for 1996, since 1997 is unaffected by any pro forma
requirements.
NOTE 3 - CONTINGENCY - GOING CONCERN
At December 31, 1996 and 1997 and as of the date of this report, the Company
is in arrears with a significant number of its key vendors. Further,
management anticipates the Company will need to expend an aggregate of
approximately $4.8 million in 1998 in order to complete its systems
development, perform its market research and tests and build an appropriate
infrastructure to support its planned commercial venture.
- F11 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 3 - CONTINGENCY - GOING CONCERN (Continued)
The Company does not expect that existing stockholders will provide the
Company with adequate future financing to meet its requirements and therefore
intends to obtain additional financing from an IPO. The Company filed its
registration statement for an IPO with the SEC on December 30, 1997 and
intends to refile an amended registration statement concurrent with the date
of this report. There can be no assurance that the SEC will approve the
Company's registration statement, such that an IPO may occur, or that the
Company will successfully raise the required financing on terms desirable to
the Company. Management expects to utilize the proceeds from (i) its
distribution and licensing agreement with IQ Value, LLC (see Note 11), (ii) a
preferred stock purchase agreement (see Note 9), and (iii) a loan, which was
received in February 1998 (see Note 11), to continue the implementation of its
business plan, repay certain vendor obligations and fund development stage
cash requirements until obtaining the necessary funding for the Company from
the expected proceeds of the contemplated IPO. The failure of the Company to
obtain such additional financing or successfully complete an IPO would require
the Company to adjust its business plan, or may require the Company to cease
operations and liquidate. Further, no assurance can be given that the Company
will be able to complete the product testing of i-Value or achieve market
acceptance of its products. As a result of the foregoing, there is substantial
doubt about the Company's ability to continue as a going concern. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
-------------------------
1996 1997
--------- ---------
Leasehold Improvements $ - $ 6,066
Computer Equipment 327,878 748,723
Office Equipment 46,087 48,792
Office Furniture 75,294 75,294
--------- ---------
449,259 878,875
Less Accumulated Depreciation (17,210) (194,701)
--------- ---------
$ 432,049 $ 684,174
========= =========
Depreciation expense for 1995, 1996 and 1997 was $5,758, $11,452 and $177,491,
respectively.
NOTE 5 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement carrying amounts of assets and liabilities and
the amounts used for income tax purposes. The tax effects of temporary
differences and carryforwards that give rise to significant portions of the
deferred tax assets and liabilities recognized at December 31, 1996 and 1997
are presented below:
- F12 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 5 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets (liabilities):
Temporary differences:
Vesting of non-qualified stock options $ 69,000 $ 72,000
Accrued salaries and compensation
to related parties 30,000 -
Common stock issued as debt consideration - 21,000
Common stock warrants issued 1,000 1,000
Depreciation - (27,000)
----------- -----------
Total temporary differences 100,000 67,000
Federal and state deferred tax benefits arising
from net operating loss carryforwards 667,000 3,959,000
Research and development credit - 168,000
----------- -----------
$ 767,000 $ 4,194,000
Less valuation allowance (767,000) (4,194,000)
----------- ----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
In accordance with federal income tax regulations, the net loss incurred by
the LLC from inception to the date of the Merger has been excluded from the
benefits of the net operating loss carryforwards reflected above.
The following table presents the principal reasons for the difference between
the effective tax rates and the United States federal statutory income tax
rate of 35%:
<TABLE>
<CAPTION>
Pro Forma
Years Ended ----------------------
December 31, December 31,
-------------------------- ----------------------
1996 1997 1995 1996
---------- ----------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Federal income tax benefit at statutory rate $ 1,160,000 $ 2,911,000 $ 262,000 $ 1,160,000
State and local income tax benefits, net of
effect of federal income tax benefit 166,000 415,000 37,000 166,000
Research and development credit,
net of effect of asset basis reduction - 101,000 - -
Nondeductible research and development costs (342,000) - (57,000) (354,000)
Net loss for LLC in 1996 prior to
date of Merger (see below) (217,000) - - -
---------- ----------- --------- ---------
767,000 3,427,000 242,000 972,000
Valuation allowance for deferred
income tax benefit (767,000) (3,427,000) (242,000) (972,000)
Income tax benefit $ 0 $ 0 $ 0 $ 0
========== =========== =========== ===========
Effective income tax rate 0% 0% 0% 0%
========== =========== =========== ==========
</TABLE>
Prior to September 18, 1996, the Company was a limited liability company and,
accordingly, losses were passed through to its members. For the period from
September 18, 1996 through December 31, 1997, the Company had losses which
resulted in net operating loss carryforwards for income tax purposes amounting
to approximately $9,897,000, which expire in 2011 and 2012. However, this
carryforward may be significantly limited due to changes in the ownership of
the Company as a result of future equity offerings. The Company has also
generated research and development credits approximating $168,000 that expire
in 2012.
- F13 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 5 - INCOME TAXES (Continued)
The pro forma presentation reflects the effect on the Company had the change
in capital structure to a corporation been effective as of December 16, 1994
(the Company's inception) (see Note 2).
Recognition of the benefits of the deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company has established valuation
allowances for deferred tax assets (net of liabilities) of approximately
$767,000 and $4,194,000 as of December 31, 1996 and 1997, respectively.
NOTE 6 - OPERATING LEASES
The Company conducted its primary operations from a facility located in
Stamford, Connecticut until December 1997. The facility was subleased under a
sixteen-month lease agreement that commenced October 1996 and was scheduled to
expire January 1998. Monthly rent under the lease agreement amounted to
$11,062. In July 1997 the Company became delinquent on its monthly rental
obligations. In October 1997, in complete settlement of the existing lease
agreement, the landlord agreed to apply $35,671 of the Company's security
deposit to the rental arrearage and accept payment of $30,713 for the
remaining term of the lease.
In November 1997, the Company executed an operating lease agreement for a
facility located in Fairfield, Connecticut where it currently conducts its
primary operations. The agreement commenced December 1997 and expires December
2000. Monthly rent under this lease agreement amounts to $13,284 plus
additional rent for the Company's pro rata portion of certain property
expenses. A security deposit of $79,704 was paid pursuant to the terms of the
lease agreement.
The Company previously conducted its operations in a facility located in New
York City under a lease agreement with monthly lease payments of $1,512 which
commenced June 1995 and expired June 1997.
Total rental expense amounted to $10,584, $29,300 and $145,682 in 1995, 1996
and 1997, respectively. Future minimum payments required under the terms of
the Company's lease agreements at December 31, 1997 are as follows:
1998 $159,408
1999 159,408
2000 159,408
--------
$478,224
========
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Commitments and contingencies not disclosed elsewhere in the financial
statements are as follows:
The Company entered into a five-year employment agreement with its Chief
Executive Officer ("CEO") and a one-year employment agreement with its Chief
Technology Officer ("CTO") on September 19, 1996. These agreements were
subsequently amended and restated on December 19, 1997 to be effective as of
September 19, 1997 (collectively the "Compensation Agreements"). The
Compensation Agreements call for the issuance of stock options [see Note
9(i)], annual salaries at specified amounts, and bonuses and salary increases
to be given at the discretion of the Company's board of directors. The
Compensation Agreements also require the deferral of specified salary amounts
which approximated $17,700 at December 31, 1996. No deferred salary existed at
December 31, 1997. In addition, the CEO's employment agreement provides that
in the event severance payments become due, such payments are to be secured by
a lien and security interest in certain of the Company's intangible assets. In
March 1998, the CEO entered into an intercreditor agreement subordinating this
lien and security interest to IQ Value, LLC (see Note 11).
- F14 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
During 1996, the Company entered into an agreement with DMR Consulting Group,
Inc. ("DMR") ("the DMR Agreement") pursuant to which DMR agreed to develop the
material portion of the core software for the Company (the "Software") and
perform the Company's initial systems integration for its two products. As
described in Note 1, Management has completed development of its initial
product, COL, and is currently undergoing product testing of an updated
version. Management is also in the process of product testing i-Value, which
is anticipated to be the Company's principal product. Pursuant to the DMR
Agreement, DMR was granted title to the portion of the Software that it was
retained to develop, and such title is being maintained by DMR until such time
that all amounts due pursuant to the DMR Agreement are paid in full. DMR's
title to the Software will revert to the Company upon the Company satisfying
all of its obligations to DMR under the DMR Agreement. The Company is required
to obtain a license from DMR for all intended usage of the Software for
commercial purposes until such time that all of the Company's obligations
under the DMR Agreement are satisfied. At December 31, 1996 and 1997, the
Company owed DMR $300,000 and $818,368, respectively, net of agreed upon
prepayments and accrued interest. As of the date of this report, the Company
has paid DMR approximately $2,350,000 of the $3,100,000 incurred on the
project under the DMR Agreement. Failure by DMR to complete the Software,
release the Software, or complete the Company's initial systems integration of
the products on a timely basis could have a material adverse effect on the
Company.
In June 1997, the Company owed DMR approximately $1.2 million in delinquent
obligations, which resulted in DMR discontinuing providing its services to the
Company. On September 26, 1997, the Company and DMR entered into a letter
agreement ("Letter Agreement") pursuant to which the Company paid $600,000 to
DMR in October 1997, of which $300,000 represented payment for future services
and the remaining $300,000 was applied to the delinquent obligations. The
remaining $900,000 of delinquent obligations was to be paid to DMR in the form
of $500,000 of common stock at a mutually agreed-upon price per share, plus
$400,000 in cash which was to be paid by February 1, 1998. In accordance with
the Letter Agreement, DMR resumed its services upon receipt of the $600,000
October 1997 payment. On March 9, 1998, the Company and DMR amended the Letter
Agreement ("Amendment"), renegotiating the payment terms of the remaining
$900,000 obligation. Under the terms of the Amendment, DMR agreed to grant a
license to the Company in order to allow the Company to grant a sublicense for
the Company's software to IQ Value, LLC (formerly I.Q. Card, Inc.) ("IQ") (see
Note 11). In return for granting the license to the Company, DMR received a
security interest in the Company's future proceeds to be derived under the
sublicense agreement granted to IQ (see Note 11). The Amendment provides for a
disbursing arrangement pursuant to which the funds due to DMR are paid on the
earlier of two days subsequent to the closing of the Company's contemplated
IPO or out of the proceeds to be generated as a result of the sublicense
agreement.
The Amendment requires that all other terms of the DMR Agreement remain in
full force and effect. Simple interest on the unpaid balance at the prime rate
accrues from October 1, 1997 until the obligation is paid. Interest expense
for 1997 on the DMR obligation amounted to $18,503 and has been included in
the accompanying Statement of Operations.
In October 1997, the Company began contracting with Task Management, Inc.
("Task") to provide consultants to perform programming services for the
development the Company's products. The Company incurred $262,782 of software
development expenses with Task in 1997 of which $66,108 has been included in
accounts payable at December 31, 1997.
Subsequent to December 31, 1997 the Company discovered that it owed
approximately $240,000 to the State of Connecticut for past due use taxes and
interest thereon related to out of state consulting services which had been
previously incurred by the Company. The Company has voluntarily notified the
appropriate taxing authorities of the delinquency and is currently attempting
to arrange for a payment program with the State of Connecticut.
During 1996, the Company entered into a series of agreements with Media Circus
to develop consumer interface software and other products for the Company. As
of December 31, 1996, $97,250 of expense had been incurred and paid in
connection with these agreements. The Company has since discontinued its
relationship with Media Circus and is currently disputing outstanding invoices
totaling $32,250 which has been included in accrued salaries and other
expenses at December 31, 1997.
- F15 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
During 1996, the Company reached an agreement with Guild Concepts, Ltd.
("Guild") pursuant to which Guild agreed to provide the Company with certain
marketing and creative services in connection with the promotion of the
Company's products. As of December 31, 1996 and 1997, approximately $60,000
and $527,000, respectively, had been incurred in connection with this
agreement. In November 1997, Guild filed a lawsuit against the Company
alleging nonpayment of $243,538. Management is currently working to resolve
this lawsuit in a manner favorable to the Company. As of December 31, 1997,
the balance due Guild has been included in accounts payable.
During 1997, the Company became a defendant in three lawsuits with claims
aggregating approximately $95,000. The plaintiffs are vendors that allege
nonpayment of obligations which were incurred in 1997. Management is currently
working to resolve these lawsuits in a manner favorable to the Company. These
obligations are included in accounts payable at December 31, 1997.
On May 1, 1997, the Company entered into a professional services agreement
with Promunicom, Inc. ("PI") ("PI Agreement"). Pursuant to the PI Agreement,
PI was to perform marketing services for the Company in exchange for a monthly
fee of $10,000 and an unspecified equity interest in the Company. The initial
term of the agreement was six months with automatic six-month renewal periods
unless terminated thirty days prior to the completion of the initial term and
ninety days prior to the completion of each six-month renewal period. In March
1998, the Company and PI agreed to terminate the PI Agreement effective
January 15, 1998 (the "Termination Agreement"). Under the terms of the
Termination Agreement, the Company is required to pay $152,500 to PI for 1997
consulting services. $15,000 of this expense was paid in 1997, $100,000 is to
be paid by July 1998 and 30,000 shares of common stock are to be issued by
July 1998 in complete payment of the $37,500 balance due. At December 31,
1997, $137,500 has been included in accounts payable relating to the PI
Agreement.
In December 1997, the Company signed a letter of intent with J.B. Sutton
Group, LLC ("Underwriter") to underwrite the Company's initial public offering
of 2,400,000 shares at an offering price of $5.00 per share, with aggregate
offering proceeds totaling $12,000,000 less related offering costs ("Letter of
Intent"). The Letter of Intent calls for the Underwriter to receive a
commission of 10% and an expense allowance of 3% of the IPO's gross proceeds.
The Letter of Intent also requires all of the Company's shareholders of record
prior to the IPO to agree not to transfer, sell or dispose of their shares
("Underwriter's Lockup Agreement") for an eighteen-month period. Under the
Letter of Intent, the Company agreed at or prior to the closing of the IPO to
enter into a consulting agreement with the Underwriter for an eighteen-month
period at a fee of $10,000 per month.
In March 1998, the Letter of Intent was amended ("Amended Letter of Intent")
and the number of shares being offered in the IPO was increased from 2,400,000
to 3,000,000 with aggregate offering proceeds increasing from $12,000,000 to
$15,000,000. The term of the Underwriter's Lockup Agreement was reduced from
eighteen months to twelve months under the Amended Letter of Intent (see Note
11).
NOTE 8 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of the following:
Golden Eagle Partners (a) $ 250,000
Bridge Offerings (b) 4,025,000
-----------
$ 4,275,000
===========
There were no outstanding notes or loans payable at December 31, 1996.
- F16 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 8 - NOTES PAYABLE (Continued)
(a) On June 17, 1997, the Company obtained $250,000 in financing from Golden
Eagle Partners ("Golden Eagle") and executed a Loan and Security
Agreement ("Golden Eagle Agreement"). Under the Golden Eagle Agreement,
Golden Eagle was granted certain conversion and registration rights. In
consideration for the financing, the Company issued a convertible
promissory note which accrued interest at the rate of 10% per annum with
all principal and accrued interest becoming due September 15, 1997. The
maturity date for the note was subsequently extended until June 17, 1998
providing that the Company continued to proceed towards the consummation
of an IPO. Pursuant to the terms of the Golden Eagle Agreement, the
Company executed an assignment of patents and trademarks for the benefit
of Golden Eagle (the "Golden Eagle Lien"). Further, VDC Corporation, Ltd.
("VDC") and Golden Eagle entered into an intercreditor agreement, which
provided Golden Eagle a priority lien over VDC and all subsequent lenders
on all of the Company's tangible and intangible assets. The intercreditor
agreement required VDC's approval for all subsequent financings
transacted by the Company.
On December 1, 1997 the Company and Golden Eagle agreed to modify the
Golden Eagle Agreement. The modification requires the Company to pay the
outstanding balance of the loan plus the balance of accrued interest to
Golden Eagle within five days of the Company's receipt of proceeds from
an IPO and to issue 10,000 shares of common stock as additional
consideration at the time of the repayment. In return, Golden Eagle
agreed to the cancellation of its registration and conversion rights
under the Golden Eagle Agreement and the cancellation of its
intercreditor agreement with VDC, thereby allowing the Company to repay
its obligations to VDC prior to the repayment of Golden Eagle's
obligation. $8,000 of expense related to the Company's future stock
issuance under this modification was incurred in 1997, is a noncash
transaction, and is reflected in accrued expenses at December 31, 1997.
In March 1998, Golden Eagle entered into an intercreditor agreement
subordinating the Golden Eagle Lien to IQ (see Note 11).
(b) In October 1997, the Company completed a $3,000,000 private placement
offering aggregating 120 units ("Units") at $25,000 per Unit. In December
1997, the Company completed a $1,025,000 private placement offering
aggregating 41 Units at $25,000 per Unit (collectively the "Bridge
Offerings"). Each Unit in the Bridge Offerings consisted of a promissory
note in the principal amount of $25,000 ("Note"), 2,500 shares of common
stock, and a warrant to purchase 2,500 shares of common stock [see Note
9(m)]. The Notes are unsecured subordinated obligations of the Company
which accrue interest at the rate of 10% per annum. All principal and
accrued interest due and payable on the Notes is payable in full on the
earlier of the one year anniversary of their date of issuance or that
date which is five days after the consummation by the Company of certain
equity or licensing transactions which provide gross proceeds to the
Company of at least $3,000,000. All of the Units and the Notes, warrants
and shares of common stock issuable as part of the Units or upon exercise
of the warrants, are restricted from sale, transfer and disposal until
the one-year anniversary of the date of the issuance of the Units, unless
the prior written consent of American Maple Leaf Financial Corporation
("AML"), a related party, is obtained [see Note 9 (f)]. Financing fees
consisting of commissions and legal fees, amounting to $427,028 were
incurred in connection with the Bridge Offerings. Expense relating to the
financing fees is being recognized over the term of the Notes. Financing
fee expense in 1997 amounted to $58,626, and the remaining $368,402,
which is included in prepaid financing fees at December 31, 1997, will be
recognized as expense in 1998 over the unexpired term of the Notes.
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 8 - NOTES PAYABLE (Continued)
Additional financing fees, a noncash transaction resulting from the
issuance of the Company's common stock as part of the Bridge Offerings,
were $322,000, which represented the fair market value of the stock at
the date of issuance, as determined by an independent valuation company.
The cost of the common stock issuance is being recognized as expense over
the term of the Notes. The expired portion of the stock-based financing
fee at December 31, 1997 amounted to $44,629 and was recorded as
financing fee expense in 1997. The unexpired portion at December 31, 1997
is included in stockholders' deficit, amounts to $277,371, and will be
recognized as expense in 1998 over the remaining term of the Notes.
In addition to the above, the following transactions occurred in 1997:
In January 1997 and August 1997, VDC provided the Company with bridge
financing in the principal amount of $2,500,000 (the "Bridge Financing")
and a senior secured convertible loan in the amount of $100,000 (the
"VDC Loan"), respectively. The financing was made in anticipation of a
statutory merger between the Company and VDC. The Bridge Financing and
the VDC Loan were secured by a lien on all of the Company's tangible and
intangible assets. In consideration for the receipt of the Bridge
- F17 -
<PAGE>
Financing, the Company issued 100,000 shares of common stock to VDC, a
non-cash transaction, which was recorded as a financing fee expense of
$200,000 in 1997. Both the Bridge Financing and the VDC Loan accrued
interest at 10% per annum and were subordinate to the Golden Eagle note
prior to the modification of the Golden Eagle Agreement discussed above.
On April 22, 1997, the Company entered into an agreement with VDC
pursuant to which VDC proposed to acquire the Company through a statutory
merger or similar business combination (the "VDC Agreement"). On August
26, 1997, the Company and VDC mutually agreed to terminate the VDC
Agreement in order to allow the Company to proceed with other financing
alternatives.
In December 1997, $2,400,000 of Bridge Financing principal and accrued
interest of $178,301 due to VDC was canceled and converted into 3,222,877
shares of common stock. On December 18, 1997, all of the Company's common
stock and debt obligations owned by VDC were acquired by Rozel
International Holdings Limited ("Rozel") [see Note 9(p)]. Subsequently in
December 1997, the Company repaid the remaining $200,000 of principal
outstanding on Bridge Financing and the VDC Loan which had been acquired
by Rozel, a related party. As a result, the intercreditor agreement
between VDC and Golden Eagle was canceled.
In 1997, the Company received and repaid $1,001,000 in unsecured advances
from AML, a related party. The Company also issued 190,200 shares of
common stock to AML in a noncash transaction as consideration to AML for
the issuance of the unsecured advances. The consideration amounted to
$152,160, based on a valuation of $0.80 per share as determined by an
independent valuation company, all of which was recorded as financing fee
expense in 1997.
On September 5, 1997, the Company obtained $300,000 in an unsecured
30-day loan at an interest rate of 10% from a private investor. As
additional consideration for such financings in 1997, the Company issued
30,000 shares of common stock to the investor in a noncash transaction
which has been recorded as a financing fee amounting to $24,000, based on
a valuation of $0.80 per share as determined by an independent valuation
company. On October 5, 1997, the note was acquired by another private
investor, who extended its maturity date to November 5, 1997. The Company
retired the note in October 1997 with the proceeds received from the
Bridge Offerings.
NOTE 9 - CAPITAL STOCK ACTIVITY
Common stock activity for the years ended December 31, 1996 and 1997 was as
follows:
Common Stock Issued and Issuable
- --------------------------------
<TABLE>
<CAPTION>
Purchase Price Consulting Cost
-------------- ---------------
Shares Date Per Share Total Per Share Total
------------ ---- --------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
1,090,000(a) 8/96 $ .001 $ 1,090 $ - $ -
581,429(b) 9/96 $ .17 100,000 - -
250,000(c) 9/96 $ 1.40 350,000 - -
650,000(d) 9/96 $ 1.00 650,000 - -
3,074,000(g) 9/96 $ - - - -
450,000(h) 9/96 $ 3.50 1,575,000 - -
175,001(f) various 3.50 612,504
Costs of issuance (189,090)
----------- -----------
1996 Net Proceeds $ 2,487,000
===========
Balance December 31, 1996 6,270,430
---------
</TABLE>
- F18 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
<TABLE>
<CAPTION>
Purchase Price Consulting Cost
-------------- ---------------
Shares Date Per Share Total Per Share Total
------------- ---- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
174,999 (f) various $ - $ - $ 2.00 $ 349,998
192,500 (j) 3/97 $ 2.00 385,000 - -
102,500 (k) 5/97 $ 2.00 205,000 - -
130,000 (l) various $ - - - -
402,500 (m) various $ - - - -
3,222,877 (n) 11/97 $ - - - -
190,200 (o) 12/97 $ - - - -
- Costs of issuance (38,167)
--------- -----------
1997 Net Proceeds $ 551,833
===========
Balance December 31, 1997 10,686,006
==========
</TABLE>
<TABLE>
<CAPTION>
Exercise
Grant Date Price Per Expiration
Warrants Granted and Outstanding Shares Date Exercisable Share Date
- -------------------------------- ----------- ---- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Granted (a) 500,000 8/96 8/98 $ 6.00 8/01
-----------
Balance at December 31, 1996 500,000
Granted (m) 402,500 10/97-12/97 IPO Date $ 4.00 Five Years from IPO
------------
Balance at December 31, 1997 902,500
============
</TABLE>
<TABLE>
<CAPTION>
Grant/ Exercise
Cancellation Vesting Price Per Expiration
Options Granted and Outstanding Shares Date Date Share Date
- ------------------------------- --------- ------------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Granted (e) 439,634 9/96 1/98 $ 3.50 12/99
Granted (e) 16,334 9/96 1/98 $ 6.00 12/99
Granted (i) 60,000 9/96 9/96 $ .63 9/01
--------
Balance at December 31, 1996 515,968
Canceled (e) (439,634) 4/97
Canceled (e) (16,334) 4/97
Granted (i) 50,000 9/97 9/97 $ .63 9/02
Granted (i) 351,500 9/97-12/97 7/97-11/98 $ .80 7/02-11/03
Granted (i) 351,500 9/97-12/97 7/98-11/99 $ 4.00 7/03-11/04
Granted (i) 351,500 9/97-12/97 7/99-11/00 $ 5.00 7/04-11/05
Granted (i) 351,500 9/97-12/97 7/00-11/01 $ 6.00 7/05-11/06
Granted (i) 158,000 9/97 9/01 $ 7.00 9/06
---------
Balance at December 31, 1997 1,674,000
=========
</TABLE>
- F19 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Board No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants
and common stock issuances as of the grant date. APB 25 recognizes the
intrinsic value of the instruments issued by the Company as of the measurement
date, which is generally the date at which both the number of shares that an
individual is entitled to receive and the purchase price are known. Had
compensation expense for 1996 and 1997 been determined under the fair value
provisions of SFAS 123, the Company's net loss and net loss per share would
have differed as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
----------------------------- -----------------------------
Pro Forma
Per Share
Net Loss (Unaudited) Net Loss Per Share
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
As Reported Under APB 25 $ (3,314,094) $ (.89) $ (8,316,597) $ (1.15)
========== =========== ============= ===========
Pro Forma Under SFAS 123 $ (3,149,487) $ (.84) $ (8,552,742) $ (1.18)
========== =========== ============= ===========
</TABLE>
No such differences between the application of APB 25 and SFAS 123 existed for
1995.
(a) On July 16, 1996, netValue was formed solely for the purpose of merging
with the LLC. On August 2, 1996, in exchange for $1,090, the initial
stockholders ("the Founders") received an aggregate of 1,090,000 shares
of common stock (the "Founders' Shares"). In connection with the
Company's formation, APP Investments, Inc., an affiliate of AML, a
related party and one of the Founders, was issued warrants to acquire
500,000 shares of common stock at an exercise price of $6.00 per share.
The warrants (and the underlying shares) and the Founders' Shares, except
for 450,000 shares issued to AML, are restricted from sale, transfer or
disposal ("Lockup Agreement") until September 1998 without the prior
written consent of AML. The warrants are currently exercisable and expire
in August 2001.
(b) On September 6, 1996 the Company sold an aggregate of 581,429 shares of
common stock to a group of Accredited Investors [as defined under
Regulation D of the Securities Act of 1933, as amended ("Accredited
Investors")] for an aggregate price of $100,000 ($.17 per share). This
accredited investor group consisted of certain Founders and a group of
other initial investors. These funds were utilized to fund operating and
formation costs. These shares are subject to a Lockup Agreement until
September 18, 1998 without the prior written consent of the Company.
(c) On September 6, 1996 the Company sold an aggregate of 250,000 shares of
common stock to a group of Accredited Investors for an aggregate price of
$350,000 ($1.40 per share). The share price was negotiated between the
Company and a group of investors. These shares are subject to a Lockup
Agreement until September 18, 1998 without the prior written consent of
the Company.
(d) On September 6, 1996 the Company sold 650,000 shares of common stock to
VDC for an aggregate purchase price of $650,000 ($1.00 per share) (see
Notes 8 and 10). At the time of the sale, VDC was a strategic investor
that the Company was considering for a business combination. All shares
held by VDC were sold to Rozel, a related party, on December 18, 1997
(see Note 8).
- F20 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
(e) On September 12, 1996, the LLC entered into an agreement with Muzak
Limited Partnership ("Muzak") (the "Muzak Agreement") whereby Muzak was
appointed as the exclusive sales agent for a three-year period to sell
and solicit orders for various targeted coupons, rebates, special offers
and incentives offered by the Company via the Internet. In connection
with the Muzak Agreement and the Merger [see Notes 1 and 9(g)], Muzak, in
its capacity as a member of the LLC, received 474,000 shares of common
stock in the Merger, an option to purchase 439,634 shares of common stock
at an exercise price of $3.50 per share pursuant to certain anti-dilutive
protections (the "Muzak Option"), and an option to purchase 16,334 shares
of common stock at $6.00 per share pursuant to such anti-dilutive
protections. On April 3, 1997, the Company and Muzak mutually agreed to
terminate the Muzak Agreement. Upon the termination of the Muzak
Agreement, Muzak retained the 474,000 shares of common stock, however all
options granted to Muzak automatically expired and were canceled.
(f) On September 18, 1996, the Company entered into an agreement with AML, a
related party, pursuant to which AML agreed to provide investment banking
services to the Company for the six-month period commencing September 18,
1996 in exchange for 350,000 shares of common stock valued at $962,502.
Such shares were issuable to AML in six equal installments over the term
of the agreement which commenced on October 17, 1996 and ended on March
17, 1997. During 1996, in accordance with APB 25, the Company recorded
consulting expense of approximately $671,000, in a noncash transaction
representing the cost of 175,001 shares issued to AML as of December 31,
1996, and by accruing approximately $58,000 of additional expense.
Unearned shares not yet issued at December 31, 1996 were deducted from
equity on the balance sheet. During 1997, the remaining 174,999 shares of
common stock were issued, resulting in consulting expense of
approximately $292,000 in 1997.
(g) In connection with the Merger, the members of the LLC exchanged all of
their issued and outstanding membership interests, representing
cumulative capital contributions of $500,000, plus the termination and
waiver of all related party agreements, pre-existing rights, claims and
causes of action (except for some predetermined surviving claims) for
3,074,000 shares of common stock of netValue. The Merger was a reverse
acquisition, whereby the legal acquiree, the LLC, was the accounting
acquiror in the transaction (see Note 1). 600,000 of these shares (the
"Holdback Shares") were issuable pending verification of certain
representations and warranties made by two former executives of the LLC,
who are also significant shareholders of the Company ("Co-Founders"),
which was accomplished in July 1997. Holders of 532,000 shares of common
stock entered into Lockup Agreements subject to the prior written consent
of AML, until September 18, 1997 with respect to 25% of such shares,
March 18, 1998 with respect to 25% of such shares and September 18, 1998
with respect to the balance of such shares. The Holdback Shares were not
subject to a Lockup Agreement, and the remaining 1,942,000 shares are
subject to a Lockup Agreement until September 18, 1998 unless prior
written consent of AML is obtained.
(h) On September 19, 1996, after the Merger and subsequent to the first three
private offerings, the Company sold an aggregate of 450,000 shares of
common stock to a group of unrelated Accredited Investors for an
aggregate amount of $1,575,000 ($3.50 per share). These shares are
subject to a Lockup Agreement until September 19, 1998 unless the prior
written consent of AML is obtained.
(i) During 1996, a stock option plan (the "Plan") was adopted pursuant to
which the Company may grant nonqualified stock options to employees,
directors and qualified consultants. Pursuant to the Plan, as
subsequently amended, 2,500,000 shares of common stock were reserved for
issuance. On September 19, 1996, options to acquire 350,000 shares of
common stock were granted to the CEO in connection with his employment
agreement in effect at that time. In December 1997, 290,000 of these
options were canceled and reissued with new exercise prices. On September
19, 1997, options to acquire an additional 550,000 shares of common stock
were granted to the CEO and 152,000 options were granted to the CTO in
connection with their amended and restated employment agreements. Certain
of these options carry exercise prices which were less than the fair
value of the common stock at the date of grant, which resulted in
compensation expense of $172,200 in 1996 and $8,500 in 1997 (see Note 7).
Such shares are subject to a Lockup Agreement until September 19, 1998
unless the prior written consent of the Company is obtained.
In addition to the options granted to the CEO and CTO, the Company
granted compensatory options to acquire 622,000 shares of common stock to
employees and other directors of the Company, including the Co-Founders,
in 1997 (see Note 10).
- F21 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
Of the options granted by the Company to acquire 1,674,000 shares of
common stock that were outstanding as of December 31, 1997, options to
acquire 407,500 shares of common stock were exercisable.
In January 1998, the Company granted additional options to acquire
294,000 shares of common stock to certain directors, officers, employees
and consultants (see Note 11). In February 1998, the Company entered into
an agreement to cancel options to acquire 90,000 shares of common stock
originally granted to the Co-Founders and grant additional options to
acquire 150,000 shares of common stock with an exercise price equivalent
to the price per share ultimately realized in the Company's contemplated
IPO (see Notes 10 and 11).
(j) During the first quarter of 1997, the Company sold an aggregate of
192,500 shares of common stock to a group of Accredited Investors for an
aggregate purchase price of $385,000 ($2.00 per share) less approximately
$18,852 in commissions paid. Such shares are subject to a Lockup
Agreement for two years from the date of issuance unless prior written
consent of AML is obtained.
(k) On May 31, 1997, the Company sold an aggregate of 102,500 shares of
common stock to a group of Accredited Investors for an aggregate purchase
price of $205,000 ($2.00 per share). Such shares are subject to a Lockup
Agreement for two years from the date of issuance unless prior written
consent of AML is obtained. Commissions of $4,500 were paid on this
offering.
(l) During 1997, the Company issued 100,000 shares of common stock to VDC and
30,000 shares to a private investor in connection with the requirements
of each of their respective loan agreements (see Note 8).
(m) In accordance with the terms of the Bridge Offerings, the Company issued
402,500 shares of common stock and 402,500 warrants to a group of
Accredited Investors [see Note 8(b)]. The warrants have an exercise price
equal to the lower of $4.00 per share or the IPO price per share. The
warrants are exercisable for a period of five years commencing on the
date the common stock issued in connection with the Bridge Offerings is
first registered with the SEC.
(n) On November 14, 1997, in a noncash transaction, the Company and VDC
agreed to convert the outstanding Bridge Financing principal and accrued
interest due VDC amounting to $2,578,301 into 3,222,877 shares of the
Company's common stock (see Note 8).
(o) On December 15, 1997 in a noncash transaction, the Company issued 190,200
shares of common stock to AML as consideration to AML for the issuance of
unsecured advances to the Company (see Note 8).
(p) On December 18, 1997, Rozel acquired all 3,972,877 shares of the
Company's common stock which had been owned by VDC (see Note 8).
Costs of issuance relating to the above transactions amounted to $189,090 in
1996 and $38,167 in 1997 of which AML, a related party, received $31,150 and
$23,352, respectively.
On October 16, 1996, the Company authorized 1,000,000 shares of preferred
stock having a par value of $.001 per share. Dividends, voting rights and
other terms, rights and preferences of the preferred stock may be so
designated by the Company's Board of Directors from time to time.
On December 15, 1997, the Company entered into a preferred stock purchase
agreement with Rozel (the "Preferred Stock Agreement"). Pursuant to the terms
of the Preferred Stock Agreement, the Company's Board of Directors designated
a Series A Convertible Preferred Stock consisting of 300,000 shares at a
$10.00 stated value with no voting or registration rights ("Series A Shares").
Each Series A Share may be converted into 12.5 shares of common stock at the
option of the Company or Rozel. The shares bear no dividends, and the
preferred shareholders would receive the stated value of their shares as a
priority over common stock shareholders in the event of a liquidation of the
Company.
- F22 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
The Preferred Stock Agreement permits the Company to request that Rozel
periodically purchase up to an aggregate of 300,000 shares at an aggregate
purchase price of $3,000,000. The terms of the Preferred Stock Agreement
provide that the Company may require Rozel to purchase the Series A Shares as
follows:
Purchase
Date Shares Price
---- ------ -----
12/15/97 22,500 $ 225,000
Subsequent to 2/1/98 70,000 $ 700,000
Subsequent to 3/1/98 70,000 $ 700,000
Subsequent to 4/1/98 50,000 $ 500,000
Subsequent to 5/1/98 50,000 $ 500,000
Subsequent to 6/1/98 37,500 $ 375,000
In exchange for the satisfaction of Rozel's funding obligations under the
terms of the Preferred Stock Agreement, the Company has agreed to issue
150,000 shares of common stock to Rozel. These shares of common stock will
have registration rights for the purpose of public resale and will be subject
to a Lockup Agreement solely as required by the Underwriter and commencing on
the effective date of the Company's contemplated IPO. In accordance with the
Preferred Stock Agreement, Rozel purchased 22,500 shares of Series A Shares
for $225,000 in December 1997. The remaining 277,500 shares of Series A Shares
were reserved for issuance at December 31, 1997 (see Note 11). 700,000 shares
of authorized and unissued Preferred Stock remained undesignated at December
31, 1997.
As discussed in Note 3, the Company filed a registration statement for its
contemplated IPO, incurring related professional and filing fees during 1997
amounting to $218,773, of which approximately $94,000 has been included in
accounts payable at December 31, 1997.
NOTE 10 - RELATED PARTIES
Related party transactions not disclosed elsewhere in the financial statements
are as follows:
In 1994, the former president of the LLC, who is one of the Co-Founders,
loaned the Company $17,142 to fund operations. During 1995, certain members of
the LLC advanced funds to the Company amounting to $37,636. Such amounts were
non-interest bearing and were payable when funds became available. These
advances from the members were repaid in full during 1996.
In 1996, an additional $26,045 was advanced to the Company by certain
shareholders. The advance was repaid in full during 1996.
AML is a significant shareholder of the Company and was also an employer of a
former director of the Company until September 1997. In January 1998, the
president of AML and APP Investments, Inc. became a director of the Company.
On June 14, 1996, the Company entered into a $245,000 bridge loan agreement
with VDC, a former significant shareholder. The loan was paid in full in
September 1996 in conjunction with a stock purchase by VDC [see Note 9(d)].
On September 18, 1996, the Company entered into three-year consulting
agreements with the Co-Founders providing for compensation in the aggregate of
$168,000 annually. The aggregate amount paid on these agreements was $46,480
and $183,225 in 1996 and 1997, respectively. In December 1997, the consulting
agreements were canceled and replaced with employment agreements providing
each of the Co-Founders with an annual salary of $85,000 plus commissions for
the first year of the contract, and with compensation, solely on a commission
basis, thereafter. The employment agreements also granted the Co-Founders
options to acquire 120,000 shares of common stock (see Notes 9 and 11).
- F23 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 11 - SUBSEQUENT EVENTS
On April 7, 1998, the Company entered into a distribution and license
agreement with IQ to use the Company's products and services to provide
fee-based marketing services to its customers (the " IQ Agreement"), whereby
IQ was granted the exclusive right to the use of COL in providing services to
local merchants, as defined in the IQ Agreement, and the nonexclusive right to
use COL and i-Value elsewhere. The Company also agreed to provide IQ with one
seat on its Board of Directors during the term of the IQ Agreement or until
such time that IQ no longer retains any exclusivity under the IQ Agreement.
The Company is to receive a minimum licensing fee in the amount of $3,000,000,
of which $1,250,000 had been received as of the date of this report. The
balance is due in three quarterly installments of $500,000 each, commencing in
July 1998 with a final payment of $250,000 due in April 1999. In addition to
the minimum licensing fee, the Company is to receive a fee for each
transaction processed under the IQ Agreement. In order to maintain the
exclusivity of the license for COL, IQ will be required to meet minimum annual
levels of transaction fees. Proceeds received from IQ under the IQ Agreement
are subject to a disbursing arrangement with DMR. The Company has agreed to
grant DMR a first priority security interest in all of the Company's right,
title and interest in the IQ Agreement and the Company's right to receive the
proceeds thereon ("DMR Lien"). Such security interest is to remain in force
until such time that DMR is paid in full on all contractual obligations under
the DMR Agreement (see Note 7).
On March 11, 1998, the Company, IQ, Golden Eagle and the CEO entered into an
intercreditor agreement (the "Intercreditor Agreement"). The Intercreditor
Agreement provides IQ with a priority interest over the Golden Eagle Lien [see
Note 8(a)], and the CEO's liens pursuant to the terms of the Compensation
Agreements (see Note 7). As a result of the Intercreditor Agreement, IQ was
granted a priority security interest in all of the Company's assets,
subordinate only to the DMR Lien. Subsequent to the execution of the
Intercreditor Agreement, AML transferred 15,000 shares of its common stock to
Golden Eagle in consideration for Golden Eagle's participation in the
Intercreditor Agreement.
In February 1998, the Company and the Co-Founders agreed to terminate the
Co-Founders' employment agreements (see Notes 9 and 10). These terminations,
which became effective upon the execution of the IQ Agreement, provide that
the Co-Founders receive compensation of $40,000 of which $20,000 was paid upon
the execution of the IQ Agreement and $20,000 is required to be paid within
the earlier of the receipt of the contemplated IPO proceeds or in July 1998.
The Co-Founders are continuing to receive their annual salaries through
September 30, 1998 and their options to acquire shares of common stock have
been renegotiated (see Notes 9 and 10).
In February 1998, the Company obtained $750,000 in financing from an
independent party and correspondingly issued a promissory note with an
interest rate of 10% per annum. The Company paid $50,000 of investment banking
fees, relating to this financing, to a shareholder owning approximately 1% of
the Company's outstanding common stock at December 31, 1997. The note was
repaid on April 9, 1998 and the lender agreed to accept 2,750 shares of common
stock as payment in full for $13,750 of accrued interest, thereon.
In March 1998, the Company and PI executed an agreement to terminate the PI
Agreement effective January 15, 1998 (see Note 7). In accordance with the
requirements of the termination agreement, in April 1998 the Company paid PI
$37,500 and issued 30,000 shares of common stock to PI.
In February 1998, the Company executed an operating lease agreement for
computer equipment. The lease agreement calls for 36 monthly payments of
$4,285. At the end of the lease term, the Company has the option to purchase
the equipment at an amount approximating $35,000.
- F24 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 11 - SUBSEQUENT EVENTS (Continued)
On January 21, 1998, the Company granted options to acquire an aggregate of
294,000 shares of common stock to various directors, officers, employees and
consultants. A description of the options are listed below:
Exercise
Options Vesting Price Per Expiration
Granted Date Share Date
------- ------- --------- ----------
88,250 12/31/98 $ 4.00 12/31/03
85,250 12/31/99 $ 5.00 12/31/04
75,250 12/31/00 $ 6.00 12/31/05
45,250 12/31/01 $ 7.00 12/31/06
-------
294,000
=======
In March and April 1998 in accordance with the Preferred Stock Agreement,
Rozel purchased an additional 102,000 shares of Series A Shares, which
resulted in the Company receiving $1,020,000 of aggregate proceeds (see Note
9).
In March 1998, the Company amended its Letter of Intent with the Underwriter
(see Note 7).
In March 1998, the Company amended the terms of its Letter Agreement with DMR
(see Note 7).
On April 1, 1998, the Company received written notice from an unnamed party
that the process used by the Company's products to distribute coupons may
infringe upon the unnamed party's existing patent. Management, along with the
Company's patent attorneys, believes that the Company does not infringe on the
unnamed party's patent, and that the claim is without merit.
- F25 -
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer
to sell or solicitation of an offer to buy any securities in any jurisdiction
in which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person
to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or that information contained herein is correct as of
any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
Page
Available Information..............................................2
Prospectus Summary.................................................3
Forward-Looking Statements.........................................7
Risk Factors ......................................................7
Use of Proceeds...................................................14
Market Price of and Dividends on Common
Stock and Related Shareholder Matters...........................15
Capitalization....................................................16
Dilution..........................................................19
Selected Financial Data...........................................21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................23
Business..........................................................27
Management .......................................................35
Security Ownership of Principal Stockholders
and Management..................................................44
Certain Transactions .............................................46
Description of Capital Stock......................................48
Shares Eligible for Future Sale...................................50
Underwriting......................................................51
Legal Matters.....................................................52
Experts...........................................................52
Index to Financial Statements.....................................F1
-------------------------------
NETVALUE, INC.
3,000,000 SHARES OF COMMON STOCK
-------------
PROSPECTUS
--------------
April 15, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred
in connection with the Offering. All amounts are estimates except the
Commission Registration Fee.
Commission Registration Fee........... $5,089.00
NASD Filing Fee....................... 1,880.00
NASDAQ SmallCap Fee................... 11,760.00
EDGAR and Printing Expenses........... 25,000.00
Legal Fees and Expenses............... 95,000.00
Accounting Fees and Expenses.......... 75,000.00
Blue Sky Fees and Expenses............ 40,000.00
Transfer Agent's Fees and Expenses.... 15,000.00
Miscellaneous Expenses................ 31,271.00
---------
Total*....................... $300,000.00
===========
* All expenses other than the Commission Registration Fee, NASD
Filing Fee, NASDAQ SmallCap Fee and the Blue Sky Fees and Expenses are
estimated.
Item 14. Indemnification of Directors and Officers.
The Company's Amended and Restated Certificate of Incorporation
eliminates the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors, other than the liability of a
director (i) for a breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions by the director not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for a willful or negligent declaration of an unlawful dividend, stock purchase
or redemption or (iv) for transactions from which the director derived an
improper personal benefit. These provisions are consistent with applicable
Delaware law.
In addition, the Company's Bylaws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines
and amounts incurred or paid in settlement in connection with civil or
criminal claims, actions, suits or proceedings against such persons by reason
of serving or having served as officers, directors, or in other capacities, if
such person acted in good faith, and in a manner such person reasonably
believed to be in or not opposed to the best interest of the Company and, in a
criminal action or proceeding, if he had no reasonable cause to believe that
his or her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, or conviction or upon a plea of
nolo contendere or its equivalent shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to the best interests of the
Company or that he or she had reasonable cause to believe his or her conduct
was unlawful. Indemnification as provided in the Bylaws shall be made only as
authorized in a specific case and upon a determination that the person met the
applicable standards of conduct.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the issuer pursuant to the foregoing provisions, or otherwise, the issuer
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the issuer
of expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
The following sets forth all sales of the Company's securities during
the past three years. None of such securities were registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on
exemptions from registration under Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering. The purchasers in
these transactions acquired the securities for investment purposes only and
the stock certificates representing the shares issued in connection with such
exemptions bear restrictive legends indicating that the shares may not be
freely transferred.
On July 16, 1996, the Company was formed solely for the purpose of
merging with Coupons Online, L.L.C. ("COL") through a merger or similar
transaction. In exchange for an aggregate purchase price of $1,090, the
founders, including American Maple Leaf Financial Corporation ("AML"),
received an aggregate of 1,090,000 shares of the Company's common stock, $.001
par value per share (the "Common Stock"). In addition, in connection with the
Company's formation, APP Investments, Inc., an affiliate of AML, was issued a
five-year warrant to acquire 500,000 shares of Common Stock at an exercise
price of $6.00 per share.
On September 6, 1996, the Company issued and sold an aggregate of
581,429 shares of Common Stock pursuant to Section 4(2) of the Securities Act
to a group of "accredited investors" (as defined in Rule 501(a) of Regulation
D promulgated under the Securities Act) for an aggregate purchase price of
$100,000 ($.17 per share of Common Stock).
On September 6, 1996, the Company issued and sold an aggregate of
250,000 shares of Common Stock pursuant to Section 4(2) of the Securities Act
to a group of accredited investors for an aggregate purchase price of $350,000
($1.40 per share of Common Stock).
On September 6, 1996, the Company issued and sold 650,000 shares of
Common Stock pursuant to Section 4(2) of the Securities Act to VDC for an
aggregate purchase price of $650,000 ($1.00 per share of Common Stock).
On September 18, 1996, the Company entered into a Consulting
Agreement with AML (the "AML Consulting Agreement") pursuant to which AML
agreed to provide investment banking services to the Company in exchange for
350,000 shares of Common Stock, all of which shares have been issued pursuant
to Section 4(2) of the Securities Act.
On September 18, 1996, Coupons Online, L.L.C., New Jersey Limited
Liability Company (the "COL"), was merged (the "Merger") with and into the
Company. In connection with the Merger, the Company issued an aggregate of
3,074,000 shares of Common Stock to the members of COL (the "COL Shares") in
exchange for (i) all of the issued and outstanding membership interests of
COL, (ii) the termination of any and all agreements among COL and certain of
its members and other affiliated parties (collectively, the "COL Holders") and
(iii) the waiver of any and all pre-existing rights, claims, causes of action
and suits which COL Holders have or may have against COL, except for certain
surviving claims. Included in such shares were 600,000 shares which were
issuable to the two co-founders of the COL pending verification of their
certain representations and warranties. This was accomplished in July 1997 and
the 600,000 shares were issued on December 15, 1997.
On September 19, 1996, the Company issued and sold an aggregate of
450,000 shares of Common Stock to a group of accredited investors pursuant to
Section 4(2) of the Securities Act for an aggregate purchase price of
approximately $1,575,000 ($3.50 per share of Common Stock). The Company paid
an aggregate of $75,000 from the proceeds of such transaction as commissions
to registered broker-dealers.
On February 19, 1997 and March 24, 1997, the Company issued and sold
an aggregate of 192,500 shares of Common Stock to accredited investors
pursuant to Rule 506 for an aggregate purchase price of $385,000 ($2.00 per
share of Common Stock). The Company paid an aggregate of $15,000 from the
proceeds of such transaction as commissions to registered broker-dealers.
On March 25, 1997, pursuant to Section 4(2) of the Securities Act,
the Company issued 100,000 shares of Common Stock to an investor in connection
with the provision of $2,500,000 in bridge financing (the "VDC Financing") by
such investor to the Company. In November 1997, the VDC Financing and accrued
interest thereon was canceled and converted into 3,222,877 shares of Common
Stock.
<PAGE>
On May 31, 1997, the Company issued and sold an aggregate of 102,500
shares of Common Stock to a group of accredited investors pursuant to Rule 506
for an aggregate purchase price of $205,000 ($2.00 per share of Common Stock).
The Company paid an aggregate of $4,500 from the proceeds of such transaction
as commissions to registered broker-dealers.
On September 5, 1997, pursuant to Section 4(2) of the Securities Act,
the Company issued 30,000 shares of Common Stock to an accredited investor in
connection with the provision of $300,000 in bridge financing by such investor
to the Company.
On October 7, October 17, 1997 and October 31, 1997, the Company
issued and sold an aggregate of 120 Units, pursuant to Rule 506 of Regulation
D promulgated under the Securities Act, to a group of accredited investors for
an aggregate purchase price of $3,000,000. Each Unit consisted of a promissory
note in the principal amount of $25,000, 2,500 shares of Common Stock, and a
warrant to purchase 2,500 shares of Common Stock at an exercise price of the
lower of (i) $4.00 and (ii) the price per share at which the Common Stock is
offered in an initial public offering. The Company paid an aggregate of
$300,000 from the proceeds of such transaction as commissions to registered
broker-dealers, including $287,500 to First United Equities Corporation and
$12,500 to J.P. Turner & Company, the Underwriters for this Offering.
On December 11, 1997, the Company issued and sold an aggregate of 41
Units, pursuant to Rule 506 of Regulation D promulgated under the Securities
Act, to a group of accredited investors for an aggregate purchase price of
$1,025,000. Each Unit consisted of a promissory note in the principal amount
of $25,000, 2,500 shares of Common Stock, and a warrant to purchase 2,500
shares of Common Stock at an exercise price of the lower of (i) $4.00 and (ii)
the price per share at which the Common Stock is offered in an initial public
offering. The Company paid $100,000 from the proceeds of this transaction as
commissions to J.P. Turner & Company.
In December 1997, pursuant to Section 4(2) of the Securities Act, the
Company issued 190,200 shares of Common Stock to American Maple Leaf Financial
Corporation ("AML") as consideration for the advance of short-term bridge
financing and the consensual forbearance by AML relating thereto.
In December 1997, pursuant to Section 4(2) of the Securities Act, the
Company issued 300,000 shares of Common Stock to each of Messrs. Barnett and
Braunstein in satisfaction of the terms of their respective consulting
agreements with the Company.
In December 1997, pursuant to Section 4(2) of the Securities Act, the
Company issued and sold 22,500 shares of Preferred Stock to an accredited
investor for a purchase price of $225,000.
In March 1998, pursuant to Section 4(2) of the Securities Act, the
Company issued and sold 27,000 shares of Preferred Stock to an accredited
investor for a purchase price of $270,000.
In April 1998, pursuant to Section 4(2) of the Securities Act, the
Company issued and sold 75,000 shares of Preferred Stock to an accredited
investor for an aggregate purchase price of $750,000.
On April 8, 1998, pursuant to Section 4(2) of the Securities Act, the
Company issued 30,000 shares of Common Stock to an accredited investor in
satisfaction of the terms of his consulting agreement with the Company.
Item 16. Financial Statements and Exhibits.
(a) Financial Statements:
(b) Exhibits:
* 3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws of the Company as amended to date
* 4.1 Certificate of Designation of Series A Convertible Preferred
Stock
<PAGE>
10.1 Registrant's Amended and Restated 1996 Non-Qualified Stock
Option Plan
<TABLE>
<CAPTION>
<S> <C> <C>
10.2 Agreement and Plan of Merger and Reorganization between the Registrant and Coupons
Online, L.L.C. dated as of September 12, 1996
* 10.3 Amended and Restated Employment Agreement between Michael A. Clark and the
Registrant dated December 19, 1997
* 10.4 Amended Employment Agreement between Richard F. Davey and the Registrant dated
December 19, 1997
* 10.5 Employment Agreement between Craig W. Barnett and the Registrant dated December 19,
1997
* 10.6 Employment Agreement between Mark D. Braunstein and the Registrant dated December
19, 1997
* 10.7 Conversion Agreement, dated as of November 14, 1997 between the Registrant and VDC
Corporation Ltd.
* 10.8 Letter Agreement, dated December 1, 1997, between the Registrant and American Maple
Leaf Financial Corporation
* 10.9 Letter Agreement dated December 1, 1997 between the Registrant and Golden Eagle
Partners
10.10 Letter Agreement between the Registrant, Mark D.
Braunstein and Craig W. Barnett dated February 10,
1998
10.11 Systems Integration and Development Master Services
Agreement, dated as of November 11, 1996, between
the Registrant and DMR Trecom, Inc. (currently
d/b/a DMR Consulting Group, Inc.)
10.12 Letter Agreement dated June 19, 1997 between the
Registrant and DMR Trecom (currently d/b/a DMR
Consulting Group, Inc.)
10.13 Letter Agreement dated March 9, 1998 between the Registrant and DMR Consulting Group,
Inc.
11 Computation of Net Income (Net Loss) Per Share
16 Letter from Ernst & Young, LLP dated April 2, 1998
23.1 Consent of LJ Soldinger Associates, independent auditors to the Company
</TABLE>
- ------------------------------------
* Incorporated by reference to the Company's registration statement filed on
Form S-1.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
<PAGE>
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such designations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fairfield,
Connecticut, on April 14, 1998.
NETVALUE, INC.
By: /s/ Michael A. Clark
---------------------------
Michael A. Clark, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael A. Clark his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on April 14, 1998.
Signature Title
- --------- -----
/s/ Michael A. Clark President and Director
- --------------------- (Principal Executive, Financial and Accounting
Michael A. Clark Officer)
/s/ David E. Brandkamp Director
- -----------------------
David E. Brandkamp
/s/ Michael Cirillo Director
- --------------------
Michael Cirillo
/s/ Richard F. Davey Director
- ---------------------
Richard F. Davey
/s/ Steven B. Rosner Director
- ---------------------
Steven B. Rosner
/s/ Andrew P. Panzo Director
- --------------------
Andrew P. Panzo
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
* 3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws of the Company as amended to date
* 4.1 Certificate of Designation of Series A Convertible Preferred
Stock
10.1 Registrant's Amended and Restated 1996 Non-Qualified Stock
Option Plan
10.2 Agreement and Plan of Merger and Reorganization between the Registrant and Coupons
Online, L.L.C. dated as of September 12, 1996
* 10.3 Amended and Restated Employment Agreement between Michael A. Clark and the
Registrant dated December 19, 1997
* 10.4 Amended Employment Agreement between Richard F. Davey and the Registrant dated
December 19, 1997
* 10.5 Employment Agreement between Craig W. Barnett and the Registrant dated December 19,
1997
* 10.6 Employment Agreement between Mark D. Braunstein and the Registrant dated December
19, 1997
* 10.7 Conversion Agreement, dated as of November 14, 1997 between the Registrant and VDC
Corporation Ltd.
* 10.8 Letter Agreement, dated December 1, 1997, between the Registrant and American Maple
Leaf Financial Corporation
* 10.9 Letter Agreement dated December 1, 1997 between the Registrant and Golden Eagle
Partners
10.10 Letter Agreement between the Registrant, Mark D.
Braunstein and Craig W. Barnett dated February 10,
1998
10.11 Systems Integration and Development Master Services
Agreement, dated as of November 11, 1996, between
the Registrant and DMR Trecom, Inc. (currently
d/b/a DMR Consulting Group, Inc.)
10.12 Letter Agreement dated June 19, 1997 between the
Registrant and DMR Trecom (currently d/b/a DMR
Consulting Group, Inc.)
10.13 Letter Agreement dated March 9, 1998 between the Registrant and DMR Consulting Group,
Inc.
11 Computation of Net Income (Net Loss) Per Share
16 Letter from Ernst & Young, LLP dated April 2, 1998
23.1 Consent of LJ Soldinger Associates, independent auditors to the Company
</TABLE>
- ------------------------------------
* Incorporated by reference to the Company's registration statement filed on
Form S-1.
<PAGE>
Exhibit 3.2
BY-LAWS OF
NETVALUE, INC.
ARTICLE I - OFFICES
-------------------
Section 1-1. Registered Office and Registered Agent. The Corporation
shall maintain a registered office and registered agent within the State of
Delaware, which may be changed by the Board of Directors from time to time.
Section 1-2. Other Offices. The Corporation may also have offices at
such other places, within or without the State of Delaware, as the Board of
Directors may from time to time determine.
ARTICLE II - STOCKHOLDERS' MEETINGS
-----------------------------------
Section 2-1. Place of Stockholders' Meetings. Meetings of stockholders
may be held at such place, either within or without the State of Delaware, as
may be designated by the Board of Directors from time to time. If no such
place is designated by the Board of directors, meetings of the stockholders
shall be held at the registered office of the corporation in the State of
Delaware.
Section 2-2. Annual Meeting. A Meeting of the stockholders of the
Corporation shall be held in each calendar year, on such date and time as is
designated by the Board of Directors.
Section 2-3. Special Meetings. Except as otherwise specifically
provided by law, special meetings of the stockholders, for any purpose or
purposes prescribed in the notice of the meeting, may be called at any time by
the Board of Directors or the President of the Corporation, and shall be held
at such place, on such date and at such time as the Board of Directors, the
President or the stockholders shall fix pursuant to the notice.
Section 2-4. Notice of Meetings and Adjourned Meetings. Written notice
stating the place, date and hour of any meeting shall be given not less than
ten (10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting. If mailed, notice is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation.
Such notice may be given by or at the direction of the person or persons
authorized to call the meeting.
When a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting if the time and place thereof are announced
at the meeting at which the
<PAGE>
adjournment is taken. If the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be give to each stockholder of record
entitled to vote at the meeting.
Section 2-5. Quorum. At all meetings of stockholders, the presence in
person or by proxy, of the holders of a majority of the outstanding shares
entitled to vote shall constitute a quorum. The stockholders present at a duly
organized meeting can continue to do business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. If a meeting cannot be organized because of the absence of a quorum,
those present may, except as otherwise provided by law, adjourn the meeting to
such time and place as they may determine. At any adjourned meeting at which a
quorum is present any action may be taken which might have been taken at the
meeting as originally called.
Section 2-6. Voting List; Proxies. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the
name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy. All proxies
shall be executed in writing and shall be filed with the Secretary of the
Corporation not later than the day on which exercised. No proxy shall be voted
or acted upon after three (3) years from its date, unless the proxy provides
for a longer period.
Except as otherwise specifically provided by law, all matters coming
before the meeting shall be determined by a vote by shares. Except as
otherwise specifically provided by law, all other votes may be taken by voice
unless a stockholder demands that it be taken by ballot, in which latter event
the vote shall be taken by written ballot.
Section 2-7. Informal Action by Stockholders. Unless otherwise
provided by the Certificate of Incorporation, any action required to be taken
at any annual or special meeting of stockholders, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
Corporation by delivery to its registered office in the State of Delaware, its
principal
<PAGE>
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or be
certified or registered mail, return receipt requested.
Prompt notice of the taking of corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III - BOARD OF DIRECTORS
--------------------------------
Section 3-1. Number. The business and affairs of the Corporation shall
be managed by a Board of Directors that shall consist of a minimum of 1 member
and a maximum of 9 members, as may be fixed from time to time by the vote of a
majority of the Board of Directors. In the event that there shall be more than
three (3) directors, the directors shall be divided into three classes as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the first annual meeting of stockholders, the term of
office of the second class to expire at the second annual meeting of the
stockholders, and the term of office of the third class to expire at the third
annual meeting of the stockholders. At each annual meeting of stockholders
following such initial election, directors elected to succeed those directors
whose terms expire shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their election.
Whenever the authorized number of directors is increased
between the annual meetings of the stockholders, a majority of the directors
then in office shall have the power to elect such new directors for the
balance of the term and until their successors are elected. Any decrease in
the authorized number of directors shall not become effective until the
expiration of the term of the directors then in office unless, at the time of
such decrease, there shall be vacancies on the Board of Directors which are
being eliminated by the decrease.
Section 3-2. Place of Meeting. Meetings of the Board of Directors may
be held at such place either within or without the State of Delaware, as a
majority of the Directors may from time to time designate or as may be
designated in the notice calling the meeting.
Section 3-3. Regular Meetings. A regular meeting of the Board of
Directors shall be held annually, immediately following the annual meeting of
stockholders, at the place where such meeting of the stockholders is held or
at such other place, date and hour as a majority of the Directors may from
time to time designate or as may be designated in the notice calling the
meeting.
Section 3-4. Special Meetings. Special meetings of the Board of
Directors shall be held whenever ordered by the President or by a majority of
the Directors in office.
Section 3-5. Notices of Meetings of Board of Directors.
(a) Regular Meetings. No notice shall be
required to be given of any
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regular meeting, unless the same be held at other than the time or place for
holding such meetings as fixed in accordance with Section 3-3 of these
by-laws, in which event two (2) days notice shall be given of the time and
place of such meeting.
(b) Special Meetings. At least two (2) day's
notice shall be given of the time, place and purpose for which any special
meeting of the Board of Directors is to be held.
Section 3-6. Quorum. A majority of the total number of Directors shall
constitute a quorum for the transaction of business, and the vote of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors. If there be less than a quorum
present, a majority of those present may adjourn the meeting from time to time
and place to place and shall cause notice of each such adjourned meeting to be
given to all absent Directors.
Section 3-7. Informal Action by the Board of Directors. Any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board or
committee.
Section 3-8. Powers.
(a) General Powers. The Board of Directors
shall have all powers necessary or appropriate to the management of the business
and affairs of the Corporation, and, in addition to the power and authority
conferred by these by-laws, may exercise all powers of the Corporation and do
all such lawful acts and things as are not by statute, these by-laws or the
Certificate of Incorporation directed or required to be exercised or done by the
stockholders.
(b) Specific Powers. Without limiting the
general powers conferred by the last preceding clause and the powers conferred
by the Certificate of Incorporation and by-laws of the Corporation, it is hereby
expressly declared that the Board of Directors shall have the following powers:
(i) To declare dividends from time to time
in accordance with law.
(ii) To confer upon any officer or
officers of the Corporation the power to choose, remove or suspend assistant
officers, agents or servants.
(iii) To appoint any person, firm or
corporation to accept and hold in trust for the Corporation any property
belonging to the Corporation or in which it is interested, and to authorize any
such person, firm or corporation to execute any documents and perform any dutie
that may be requisite in relation to any such trust.
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(iv) To appoint a person or persons to
vote shares of another corporation held and owned by the Corporation.
(v) To adopt, from time to time, such
stock option, stock purchase, bonus or other compensation plans for Directors,
officers, employees and agents of the Corporation and its subsidiaries as it
may determine.
(vi) To adopt, from time to time, such
insurance, retirement, and other benefit plans for Directors, officers,
employees and agents of the Corporation and its subsidiaries as it may
determine.
(vii) By resolution passed by a majority
of the whole Board of Directors, to designate one (1) or more additional
committees, each to consist of one (1) or more Directors, to have such duties,
owners and authority as the Board of Directors shall determine. All committees
of the Board of Directors shall have the authority to adopt their own rules of
procedure. Absent the adoption of specific procedures, the procedures
applicable to the Board of Directors shall also apply to committees thereof.
(viii) To fix the place, time and purpose
of meetings of stockholders.
(ix) To purchase or otherwise acquire for
the Corporation any property, rights or privileges which the Corporation is
authorized to acquire, at such prices, on such terms and conditions and for
such consideration as it shall from time to time see fit, and, at its
discretion, to pay any property or rights acquired by the Corporation, either
wholly or partly in money or in stocks, bonds, debentures or other securities
of the Corporation.
(x) To create, make and issue mortgages,
bonds, deeds of trust, trust agreements and negotiable or transferable
instruments and securities, secured by mortgage or otherwise, and to do every
other act and thing necessary to effectuate the same.
(xi) To appoint and remove or suspend such
subordinate officers, agents or servants, permanently or temporarily, as it
may from time to time think fit, and to determine their duties, and fix, and
from time to time change, their salaries or emoluments, and to require
security in such instances and in such amounts as it think fit.
(xii) To determine who shall be authorized
on the Corporation's behalf to sign bills, notes, receipts, acceptances,
endorsements, checks, releases, contracts and documents.
Section 3-9. Compensation of Directors. Compensation of Directors and
reimbursement of their expenses incurred in connection with the business of
the Corporation, if any, shall be as determined from time to time by
resolution of the Board of Directors.
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Section 3-10. Removal of Directors by Stockholders. The entire Board
of Directors or any individual Director may be removed from office with or
without cause by a majority vote of the holders of the outstanding shares then
entitled to vote at an election of directors. In case the Board of Directors
or any one (1) or more Directors be so removed, new Directors may be elected
at the same time for the unexpired portion of the full term of the Director or
Directors so removed.
Section 3-11. Resignations. Any Director may resign at any time by
submitting his written resignation to the Corporation. Such resignation shall
take effect at the time of its receipt by the Corporation unless another time
be fixed in the resignation, in which case it shall become effective at the
time so fixed. The acceptance of a resignation shall not be required to make
it effective.
Section 3-12. Vacancies. Vacancies and new created directorships
resulting from any increase in the authorized number of Directors elected by
all of the stockholders having the right to vote as a single class may be
filled by a majority of the Directors then in office, although less than a
quorum, or by a sole remaining Director, and each person so elected shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of the class to which he or she has been elected expires, and until such
directors successor shall have been duly elected and qualified.
Section 3-13. Participation by Conference Telephone. Directors may
participate in regular or special meetings of the Board by telephone or
similar communications equipment by means of which all other persons
participating in the meeting can hear each other, and such participation shall
constitute presence at the meeting.
ARTICLE IV - OFFICERS
---------------------
Section 4-1. Election and Office. The Corporation shall have a
President, Secretary and a Treasurer, all of whom shall be elected by the
Board of Directors. The Board of Directors may elect such additional officers
as it may deem proper, including a Chairman and a Vice Chairman of the Board
of Directors, one (1) or more Vice Presidents, and one (1) or more assistant
or honorary officers. Any number of offices may be held by the same person.
Section 4-2. Term. The term of office of any officer shall be as
specified by the Board oDirectors.
Section 4-3. Powers and Duties of the Chairman of the Board of
Directors. Unless otherwise determined by the Board of Directors, the Chairman
of the Board of Directors, if any, shall preside at all meetings of Directors.
He shall have such other powers and perform such further duties as may be
assigned to him by the Board of Directors.
Section 4-4. Powers and Duties of the President. Unless otherwise
determined by the Board of Directors, the President shall have the usual
duties of an executive officer with general supervision over and direction of
the affairs of the Corporation. In the exercise of these duties and
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subject to the limitations of the laws of the State of Delaware, these
by-laws, and the actions of the Board of Directors, he may appoint, suspend
and discharge employees and agents, shall preside at all meetings of the
stockholders at which he shall be present, and, unless there is a Chairman of
the Board of Directors and, unless otherwise specified by the Board of
Directors, shall be a member of all committees. He shall also do and perform
such other duties as from time to time may be assigned to him by the Board of
Directors.
Unless otherwise determined by the Board of Directors, the President
shall have full power and authority on behalf of the Corporation to attend and
to act and to vote at any meeting of the stockholders of any corporation in
which the Corporation may hold stock and, at any such meeting, shall possess
and may exercise any and all of the rights and powers incident to the
ownership of such stock and which, as the owner thereof, the Corporation might
have possessed and exercised.
Section 4-5. Powers and Duties of the Secretary. Unless otherwise
determined by the Board of Directors, the Secretary shall record all
proceedings of the meetings of the Corporation, the Board of Directors and all
committees, in books to be kept for that purpose, and shall attend to the
giving and serving of all notices for the Corporation. He shall have charge of
the corporate seal, the certificate books, transfer books and stock ledgers,
and such other books and papers as the Board of Directors may direct. He shall
perform all other duties ordinarily incident to the office of Secretary and
shall have such other powers and perform such other duties as may be assigned
to him by the Board of Directors.
Section 4-6. Powers and Duties of the Treasurer. Unless otherwise
determined by the Board of Directors, the Treasurer shall have charge of all
the funds and securities or the Corporation which may come into his hands.
When necessary or proper, unless otherwise ordered by the Board of Directors,
he shall endorse for collection on behalf of the Corporation checks, notes and
other obligations, and shall deposit the same to the credit of the Corporation
In such banks or depositories as the Board of Directors may designate and
shall sign all receipts and vouchers for payments made to the Corporation. He
shall sign all checks made by the Corporation, except when the Board of
Directors shall otherwise direct. He shall enter regularly, in books of the
Corporation to be kept by him for that purpose, a full and accurate account of
all moneys received and paid by him on account of the Corporation. Whenever
required by the Board of Directors, he shall render a statement of the
financial condition of the Corporation. He shall at all reasonable times
exhibit his books and accounts to any Director of the Corporation, upon
application at the office of the Corporation during business hours. He shall
have such other powers and shall perform such other duties as may be assigned
to him from time to time by the Board of Directors. He shall give such bond,
if any, for the faithful performance of his duties as shall be required by the
Board of Directors and any such bond shall remain in the custody of the
President.
Section 4-7. Powers and Duties of Vice Presidents and Assistant
Officers. Unless otherwise determined by the Board of Directors, each Vice
President and each assistant officer shall have the powers and perform the
duties of his respective superior officer. Vice Presidents and
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assistant officers shall have such rank as shall be designated by the Board of
Directors and each, in the order of rank, shall act for such superior officer
in his absence, or upon his disability or when so directed by such superior
officer or by the Board of Directors. Vice Presidents may be designated as
having responsibility for a specific aspect of the Corporation's affairs, in
which event each such Vice President shall be superior to the other Vice
Presidents in relation to matters within his aspect. Except as otherwise set
forth herein, the President shall be the superior officer of the Vice
Presidents. The Treasurer and the Secretary shall be the superior officers of
the Assistant Treasurers and Assistant Secretaries, respectively.
Section 4-8. Delegation of Office. The Board of Directors may delegate
the powers or duties of any officer of the Corporation to any other officer or
to any Director from time to time.
Section 4-9. Vacancies. The Board of Directors shall have the power to
fill any vacancies in any office occurring from whatever reason.
Section 4-10. Resignations. Any officer may resign at any time by
submitting his written resignation to the Corporation. Such resignation shall
take effect at the time of its receipt by the Corporation, unless another time
be fixed in the resignation, in which case it shall become effective at the
time so fixed. The acceptance of a resignation shall lot be required to make
it effective.
Section 4-11. Removal. Subject to the provisions of any employment
agreement approved by the Board of Directors, any officer of the Corporation
may be removed at any time, with or without cause, by the Board of Directors.
ARTICLE V - CAPITAL STOCK
-------------------------
Section 5-1. Stock Certificates. Shares of the Corporation shall be
represented by certificates signed by or in the name of the Corporation by (a)
the Chairman or Vice Chairman of the Board of Directors, or the President or a
Vice President, and (b) the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary, representing the number of shares
registered in certificate form. If such certificate is countersigned (i) by a
transfer agent other than the Corporation or its employee, or (ii) by a
registrar other than the Corporation or its employee, the signatures of the
officers of the Corporation may be facsimiles. In case any officer who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the Corporation with the same effect as if he were such officer at
the date of issue.
Section 5-2. Determination of Stockholders of Record.
(a) The Board of Directors may fix a record date
to determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, which record date shall not precede the
date upon which the resolution fixing the record date
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is adopted by the Board of Directors, and which record date shall not be more
than sixty (60) nor less than ten (10) days before the date of such meeting.
If no record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) The Board of Directors may fix a record date
to determine the stockholders entitled to consent to corporate action in
writing without a meeting, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten (10) days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken s delivered to
the Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders
are recorded. Delivery made to the Corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
(c) The Board of Directors may fix a record date
to determine the stockholders entitled to receive payment of any dividend or
other dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights with respect of any exchange,
conversion or exchange of stock, or for the purpose of any other lawful
action, which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date shall be not more
than sixty (60) days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
Section 5-3. Transfer of Shares. Transfer of shares shall be made only
upon the transfer books of the Corporation kept at an office of the
Corporation, or by transfer agents designated to transfer shares of stock of
the Corporation. Except where a certificate is issued in accordance with
Section 5-4 of these by-laws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation duly endorsed and
otherwise in proper form for transfer before a new certificate is issued
therefor. No transfer of shares shall be made on the books of this Corporation
if such transfer is in violation of a lawful restriction noted conspicuously
on the certificate.
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Section 5-4. Lost, Stolen or Destroyed Share Certificates. The
Corporation may issue a new certificate of stock or uncertified shares in
place of any certificate therefor issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen, or destroyed certificate, or his legal representative to give the
Corporation a bond sufficient to indemnify it against claims that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
ARTICLE VI - NOTICES
--------------------
Section 6-1. Contents of Notice. Whenever any notice of a meeting is
required to be given pursuant to these by-laws or the Certificate of
Incorporation or otherwise, the notice shall specify the place, day and hour
of the meeting and, in the case of a special meeting or where otherwise
required by law, the general nature of the business to be transacted at such
meeting.
Section 6-2. Method of Notice. All notices shall be given to each
person entitled thereto, either personally or by sending a copy thereof
through the mail or by telegraph, charges prepaid, to his address as it
appears on the records of the Corporation, or supplied by him to the
Corporation for the purpose of notice. Notices of special meetings of
stockholders shall conform to Section 2-4 and notices of special meetings or
the Board of Directors shall conform to Section 3-5. If notice is sent by mail
or telegraph, it shall be deemed to have been given to the person entitled
thereto when deposited in the United States mail or with the telegraph office
for transmission. If no address for a stockholder appears on the books of the
Corporation and such stockholder has not supplied the Corporation with an
address for the purpose of notice, notice deposited in the United States mail
addressed to such stockholder care of General Delivery in the city in which
the principal office of the Corporation is located shall be sufficient.
Section 6-3. Waiver of Notice. Whenever notice is required to be
given under any provision of law or of the Certificate of Incorporation or
by-laws of the Corporation, written waiver, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, Directors, or members of a
committee of Directors need be specified in any written waiver of notice
unless so required by the Certificate of Incorporation.
ARTICLE VII - INDEMNIFICATION OF DIRECTORS AND OFFICERS
AND OTHER PERSONS
-----------------
Section 7-1. The corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding,
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whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 7-2. The corporation shall indemnify any person who was or is
a party, or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 7-3. To the extent that a director, officer, employee or
agent of the corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in sections 7.1 or 7.2
of this Article, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 7-4. Any indemnification under sections 7.1 or 7.2 of this
Article (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in such
section. Such determination shall be made:
(a) By the board of directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or
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(b) If such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or
(c) By the stockholders.
Section 7-5. Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this Section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of directors deems
appropriate.
Section 7-6. The indemnification and advancement of expenses provided
by, or granted pursuant to the other sections of this Article shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
Section 7-7. The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article.
Section 7-8. For purposes of this Article, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this Article with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation of its separate existence had continued.
Section 7-9. For purposes of this Article, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in
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a manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this Article.
Section 7-10. The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 7-11. No director or officer of the corporation shall be
personally liable to the corporation or to any stockholder of the corporation
for monetary damages for breach of fiduciary duty as a director or officer,
provided that this provision shall not limit the liability of a director or
officer (i) for any breach of the director's or the officer's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of Delaware, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.
ARTICLE VIII - RELIANCE UPON BOOKS, REPORTS AND RECORDS
-------------------------------------------------------
Each Director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation, shall, in the performance of
his duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation, including reports made to the
Corporation by any of its officers, by an independent certified public
accountant, or by an appraiser selected with reasonable care.
ARTICLE IX - SEAL
-----------------
The form of the seal of the Corporation, called the corporate seal
[Form of Seal] of the Corporation, shall be as impressed adjacent hereto.
ARTICLE X - FISCAL YEAR
-----------------------
The Board of Directors shall have the power by resolution to
fix the fiscal year of the Corporation. If the Board of Directors shall fail
to do so, the President shall fix the fiscal year.
ARTICLE XI - AMENDMENTS
-----------------------
The original or other by-laws may be adopted, amended or
repealed by the stockholders entitled to vote thereon at any regular or
special meeting or, if the Certificate of
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Incorporation so provides, by the Board of Directors. The fact that such power
has been so conferred upon the Board of Directors shall not divest the
stockholders of the power nor limit their power to adopt, amend or repeal
by-laws.
ARTICLE XII - INTERPRETATION OF BY-LAWS
---------------------------------------
All words, terms and provisions of these by-laws shall be interpreted
and defined by and in accordance with the General Corporation Law of the State
of Delaware, as amended, and as amended from time to time hereafter.
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Exhibit 10.2
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
BY AND AMONG
COL ACQUISITION CORP., COUPONS ONLINE, L.L.C.,
CRAIG W. BARNETT, MARK D. BRAUNSTEIN, KAREN REISNER,
RAM REDDY, JODI JAMIESON, JAMES HORGAN, LARRY BARNETT,
BARRY BRAVERMAN, DIVERSIFIED EQUITIES AND MANAGEMENT II
t/a DEM II, GEORGE GORDON, MANUEL GORDON,
LORRAINE MARTIN, JEFFREY SILVERSTEIN, DR. ROBERT C. GORDON,
RENEE GORDON, NORMAN BATANSKY, TOBY BATANSKY,
ALAN KLEBAN FAMILY TRUST, BRUCE MALINOWSKI
AND MUZAK LIMITED PARTNERSHIP
DATED AS OF SEPTEMBER 12, 1996
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ARTICLE 1.............................................................................-2-
<S> <C> <C>
The Merger............................................................................-2-
1.1 The Merger..........................................................-2-
1.2 Effective Time......................................................-2-
1.3 Effect of the Merger................................................-2-
1.4 Certificate of Incorporation; By-Laws; Operating Agreement..........-2-
1.5 Directors and Officers..............................................-3-
1.6 Effect on Securities................................................-3-
1.7 Taking of Necessary Action; Further Action..........................-6-
1.8 Material Adverse Effect; Ordinary Course of Business................-6-
1.9 Tax Consequences....................................................-7-
ARTICLE 2.............................................................................-7-
Representations and Warranties of COL and the Active Holders..........................-7-
ARTICLE 3.............................................................................-7-
Representations and Warranties of the Holders.........................................-7-
ARTICLE 4.............................................................................-7-
Representations and Warranties of Company.............................................-7-
ARTICLE 5.............................................................................-8-
Conduct of Business Pending the Merger................................................-8-
5.1 Conduct of Business by COL Pending the Merger.......................-8-
5.2 No Solicitation or Transfer of Interests...........................-10-
5.3 No Transfer of Holder Rights.......................................-10-
5.4 Conduct of Business by the Company Pending the Merger..............-10-
ARTICLE 6............................................................................-11-
Additional Covenants.................................................................-11-
6.1 Registration Under the Securities Act..............................-11-
6.2 Access to Information..............................................-14-
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
6.3 Consents; Approvals................................................-15-
6.4 Notification of Certain Matters....................................-15-
6.5 Further Action.....................................................-15-
6.6 Public Announcements...............................................-15-
6.7 Conveyance Taxes...................................................-15-
ARTICLE 7............................................................................-16-
Conditions to the Merger.............................................................-16-
7.1 Conditions to Obligation of Each Party to Effect the Merger........-16-
7.2 Additional Conditions to Obligations of the Company................-16-
7.3 Additional Conditions to Obligation of COL and the Holders.........-18-
ARTICLE 8............................................................................-19-
Termination..........................................................................-19-
8.1 Termination........................................................-19-
8.2 Effect of Termination..............................................-20-
8.3 Fees and Expenses..................................................-20-
ARTICLE 9............................................................................-21-
Survival of Representations and Warranties; Indemnification..........................-21-
9.1 Survival...........................................................-21-
9.2 Indemnification....................................................-21-
9.3 Conditions of Indemnification for Third Party Claims...............-22-
9.4 Payment of Claims..................................................-23-
9.5 Set-Off............................................................-23-
9.6 Loan and Security Agreement........................................-24-
ARTICLE 10...........................................................................-24-
General Provisions...................................................................-24-
10.1 Disclosure Schedules...............................................-24-
10.2 Notices............................................................-24-
10.3 Certain Definitions................................................-25-
10.4 Amendment..........................................................-25-
10.5 Waiver.............................................................-26-
10.6 Headings...........................................................-26-
10.7 Severability.......................................................-26-
10.8 Entire Agreement...................................................-26-
10.9 No Assignment......................................................-26-
10.10 Parties In Interest................................................-26-
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.11 Failure or Indulgence Not Waiver; Remedies Cumulative..............-27-
10.12 GOVERNING LAW......................................................-27-
10.13 Counterparts.......................................................-27-
10.14 Joint Participation................................................-27-
10.15 No Tax Advice......................................................-27-
10.16 Exhibits and Schedules.............................................-27-
10.17 WAIVER OF JURY TRIAL...............................................-28-
</TABLE>
(iii)
<PAGE>
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
Agreement and Plan of Merger and Reorganization, dated as of
September 12, 1996 (this "Agreement"), by and among COL Acquisition Corp., a
Delaware corporation (the "Company"), Coupons Online, L.L.C., a New Jersey
limited liability company ("COL"), Craig W. Barnett ("C. Barnett"), Mark D.
Braunstein ("Braunstein"), Karen Reisner ("Reisner"), Ram Reddy ("Reddy"),
Jodi Jamieson ("Jamieson"), James Horgan ("Horgan"), Larry Barnett ("L.
Barnett"), Barry Braverman ("Braverman"), Diversified Equities and Management
II t/a DEM II ("DEM"), George Gordon ("G. Gordon"), Manuel Gordon ("M.
Gordon"), Lorraine Martin ("Martin"), Jeffrey Silverstein ("Silverstein"), Dr.
Robert C. Gordon ("Dr. Gordon"), Renee Gordon ("R. Gordon"), Norman Batansky
("N. Batansky"), Toby Batansky ("T. Batansky"), Alan Kleban Family Trust
("Trust"), Bruce Malinowski ("Malinowski") and Muzak Limited Partnership
("Muzak") (collectively, the "Holders").
C. Barnett and Braunstein are sometimes collectively referred to as
the "Active Holders". Reisner, Reddy, Jamieson, Horgan, L. Barnett, Braverman,
DEM, G. Gordon, M. Gordon, Martin, Silverstein, Dr. Gordon, R. Gordon, N.
Batansky, T. Batansky, Trust, Malinowski and Muzak are sometimes collectively
referred to as the "Passive Holders". DEM, G. Gordon, M. Gordon, Martin,
Silverstein, Dr. Gordon, R. Gordon, N. Batansky, T. Batansky and Trust are
sometimes collectively referred to as the "Gordon Group". The Active Holders,
the Gordon Group, Reisner, Reddy, Jamieson, Horgan, L. Barnett and Braverman
are sometimes collectively referred to as the "Interest Holders".
WITNESSETH:
WHEREAS, the Board of Directors of the Company and the Board of
Managers of COL have each determined that it is advisable and in the best
interests of their respective stockholders and members for COL to be acquired
by the Company pursuant to the merger (the "Merger") of COL with and into the
Company upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance thereof, the Board of Directors of the
Company and the Board of Managers and members of COL have each approved the
Merger in accordance with the applicable provisions of the Delaware General
Corporation Law ("Delaware Law") and the New Jersey Limited Liability Company
Act ("New Jersey Law") and upon the terms and subject to the conditions set
forth herein; and
WHEREAS, pursuant to the Merger, the Holders will receive the Merger
Consideration (as defined in Section 1.6(d) hereof), in exchange for (i) all
of the issued and outstanding membership interests of COL, (ii) the
termination of any and all agreements among COL and the Holders and (iii) the
release of any and all pre-existing rights, claims, causes of actions and
suits which the Holders have or may have against COL, upon the terms and
subject to the conditions set forth herein.
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<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements herein contained, and intending to be legally
bound hereby, the Company, COL and each of the Holders hereby agree as
follows:
ARTICLE 1.
The Merger
Section 1.1 The Merger.
-----------
(a) Effective Time. At the Effective Time (as defined in
Section 1.2), and subject to and upon the terms and conditions of this
Agreement, New Jersey Law and Delaware Law, respectively, COL shall be merged
with and into the Company, the separate existence of COL shall cease, and the
Company shall continue as the surviving corporation. The Company, as the
surviving corporation after the Merger, is hereinafter sometimes referred to
as the "Surviving Corporation."
(b) Closing. Subject to the satisfaction or waiver of the
conditions set forth in Article 7 hereof, the closing of the transactions
contemplated hereby will take place upon the earlier of (i) the satisfaction
or waiver of the conditions set forth in Article 7 hereof and (ii) September
18, 1996, at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers LLP,
1401 Walnut Street, Philadelphia, Pennsylvania 19102, or such other date, time
or place as is agreed to in writing by the Company and COL (the date of the
closing of the transactions contemplated hereby is hereinafter referred to as
the "Closing Time").
Section 1.2 Effective Time. As promptly as practicable after the
Closing Time, the parties hereto shall cause the Merger to be consummated by
filing articles of merger (the "Articles of Merger"), together with any
required certificates, with the Secretary of State of the State of New Jersey
and the Secretary of State of the State of Delaware, in such form as is
required by, and executed in accordance with, the relevant provisions of New
Jersey Law and Delaware Law, respectively (the time of such filing being the
"Effective Time").
Section 1.3 Effect of the Merger. At the Effective Time, the effect
of the Merger shall be as provided in this Agreement, the Articles of Merger
and the applicable provisions of New Jersey Law and Delaware Law,
respectively. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers
and franchises of each of COL and the Company shall vest in the Surviving
Corporation, and all debts, liabilities and duties of each of COL and the
Company shall become the debts, liabilities and duties of the Surviving
Corporation.
Section 1.4 Certificate of Incorporation; By-Laws; Operating
Agreement.
------------------------------------------------
(a) Certificate of Incorporation. At the Effective Time,
the Certificate of Incorporation of the Company, as in effect immediately prior
to the Closing Time, shall be the
-2-
<PAGE>
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended as of the Effective Time to read as
follows: "FIRST" The name of the corporation is "Coupons Online, Inc." (or
such other name as is selected by the Surviving Corporation).
(b) By-Laws. At the Effective Time, the By-Laws of the
Company, as in effect immediately prior to the Closing Time, shall be the
By-Laws of the Surviving Corporation until thereafter amended as provided by
Delaware Law, the Certificate of Incorporation of the Surviving Corporation
and such By-Laws.
(c) Operating Agreement. At the Effective Time, the Operating
Agreement (as defined in Section 1.6(a) hereof) and all obligations and rights
thereunder shall be terminated and shall no longer be of any force or effect.
(d) Investors Agreement. At the Effective Time, that certain
Investors Agreement by and among COL and the Gordon Group and all obligations
and rights thereunder shall be terminated and shall no longer be of any force
or effect.
Section 1.5 Directors and Officers. As soon as reasonably
practicable following the Effective Time, the sole director of the Company
shall cause (i) the three (3) individuals to be identified by American Maple
Leaf Financial Corporation, Michael A. Clark and C. Barnett (with Braunstein
having the right to attend all meetings of the Board of Directors so long as
C. Barnett shall be a director of the Surviving Corporation) to be elected to
and constitute the entire Board of Directors of the Surviving Corporation and
(ii) Michael A. Clark and such other executive officers of the Surviving
Corporation as are identified by Mr. Clark to be appointed to their respective
positions, in each case until their respective successors are duly elected or
appointed and qualified. Mr. Clark and C. Barnett shall be elected to serve as
Class B Directors of the Surviving Corporation in accordance with the
Surviving Corporation's Bylaws.
Section 1.6 Effect on Securities. Subject to the terms and
conditions contained herein, at the Effective Time, by virtue of the Merger
and without any action on the part of the Company, COL or any of the Holders:
(a) Conversion of Securities. All of the Interests (as
defined in the Operating Agreement for COL dated December 1994 by and among
COL and the Interest Holders (the "Operating Agreement")) of COL shall be
canceled.
(b) Termination of Agreements. Any and all agreements among
COL and any of the Holders (the "Holder Agreements") shall be terminated.
(c) Release of Claims. Except for the obligations of COL set
forth on Schedule 1.6(c) attached hereto, which claims shall survive the
consummation of the Merger (collectively, the
-3-
<PAGE>
"Surviving Claims"), any and all pre-existing rights, claims, causes of
actions and suits which any of the Holders then have or may have against COL
(the "Holder Claims" (which term specifically excludes the Surviving Claims)
and together with the Holder Agreements, the "Holder Rights") shall be
released.
(d) Merger Consideration. In exchange for the consideration
set forth in clauses (a), (b) and (c) of this Section 1.6, the Holders shall
receive, in the aggregate, 2,474,000 shares of validly issued, fully paid and
nonassessable shares of common stock of the Company, $.01 par value per share
(the "Common Stock"). No fraction of a share of Common Stock shall be issued
hereunder and no cash shall be issued in lieu of any such fractional shares
which would otherwise be issuable thereof. The Common Stock issuable under
this Section 1.6(d) is referred to herein as the "Merger Consideration".
The shares of Common Stock issued as Merger
Consideration, except (i) for all the shares of Common Stock issued to the
Gordon Group (the "Gordon Shares") and (ii) 57,000 of the shares of Common
Stock issued to Braverman (the "Unrestricted Braverman Shares"), may not be
sold, transferred or otherwise disposed of by any or all of the Holders until
the Second Anniversary of the Effective Time (the "Transfer Restriction").
Notwithstanding the foregoing, the restrictions contained herein shall in no
way restrict or limit such Holder's ability to (a) transfer shares of Common
Stock to (1) another Holder, (2) his immediate family members or (3) a trust
or trusts for the benefit of his immediate family members for estate planning
purposes or (b) pledge shares of Common Stock to a bona fide reputable
financial institution as security for debt incurred by such Holder (all
transferees permitted by clause (a) and (b) are referred to herein as
"Permitted Transferees"); provided, however, that such Holder and such
Permitted Transferees shall (i) be bound by the Transfer Restriction and (ii)
execute, prior to any such transfer to such Permitted Transferee, such
documents as may be reasonably requested by the Company to evidence and affirm
its obligations hereunder (each of such permitted transfers shall hereinafter
be referred to as a "Permissible Transfer").
The Gordon Shares may not be sold, transferred or
otherwise disposed of by any or all of the Holders constituting the Gordon
Group except (i) in connection with a Permissible Transfer or (ii) in
accordance with the following provisions: (x) 25% of such Shares on the first
anniversary of the Effective Date; (y) 25% of such Shares on the eighteenth
month anniversary of the Effective Date; and (z) the balance of such Shares on
the second anniversary of the Effective Date.
The Unrestricted Braverman Shares may not be sold,
transferred or otherwise disposed of by Braverman except (i) in connection
with a Permissible Transfer or (ii) in accordance with the following
provisions: (x) 25% of such Shares on the first anniversary of the Effective
Date; (y) 25% of such Shares on the eighteenth month anniversary of the
Effective Date; and (z) the balance of such Shares on the second anniversary
of the Effective Date.
(e) The certificates for all shares of Common Stock
issued as Merger
-4-
<PAGE>
Consideration will be issued with a restrictive legend setting forth or
otherwise indicating the restrictions on transfer set forth in clause (d) of
this Section 1.6. Immediately upon the Effective Time, (i) all Interests of
COL shall automatically be canceled and all rights of holders of such
Interests with respect thereto shall cease and be extinguished, (ii) all
Holder Agreements shall be terminated and (iii) all Holder Claims shall be
waived. The Merger Consideration shall be allocated among the Holders as set
forth in Exhibit A attached hereto. By accepting a certificate for shares of
Common Stock representing such Merger Consideration, a Holder shall knowingly
and willingly remise, waive, release and forever discharge COL and its
successors, including the Company, and their respective members, managers,
shareholders, directors, officers, employees, agents, affiliates, and assigns
(collectively, the "Releasees") of and from any and all manner of actions and
causes of action, debts, agreements, claims and demands whatsoever
(collectively, "Claims") which such Holder, his heirs, executors,
administrators or assigns has, had or may hereafter have against the Releasees
or any of them from or by reason of any cause, matter or thing whatsoever from
the beginning of time to the Effective Time, including, without in any way
limiting the generality of the foregoing (but specifically excluding the
Surviving Claims), (i) any and all matters relating to his status as a member
of COL; (ii) any and all matters relating to his employment, if any, by COL
and the termination thereof; (iii) any and all claims under any federal, state
or local law; (iv) any common law claims now or hereafter recognized and (v)
all claims for counsel fees and costs. By accepting such Merger Consideration,
except in connection with the Surviving Claims, Holder shall also be deemed to
agree that neither he nor any person, organization, or other entity acting on
his behalf, will file, charge, claim, sue or cause or permit to be filed,
charged, or claimed any action, suit or proceeding against any of the
Releasees involving any matter occurring at any time in the past up to the
Effective Time or involving any continuing effects of any acts or practices
which may have arisen or occurred prior to the Effective Time.
(f) Capital Stock of the Company. Each share of Common Stock,
and all rights, options and warrants to purchase Common Stock ("Stock Purchase
Rights") of the Company issued and outstanding immediately prior to the
Effective Time shall become shares and Stock Purchase Rights of the Surviving
Corporation after the Merger and together with all the shares of Common Stock
issuable as Merger Consideration hereunder shall at the Effective Time
constitute all of the issued and outstanding shares and Stock Purchase Rights
of the Surviving Corporation. Each stock certificate or agreement of the
Company evidencing ownership of any such shares and Stock Purchase Rights
shall continue to evidence ownership of such shares and Stock Purchase Rights
of the Surviving Corporation.
(g) Adjustments to Merger Consideration. In the event the
Company shall effect any stock split, reverse split, stock dividend (including
any dividend or other similar distribution of securities convertible into
Common Stock), reorganization, recapitalization or other like change with
respect to Common Stock after the date hereof and prior to the Effective Time,
the number of shares of Common Stock issuable as Merger Consideration
hereunder shall be adjusted to reflect fully such split, dividend,
reorganization, recapitalization or change.
(h) Delivery of Certificates. At the Effective Time, the
Company will cause to
-5-
<PAGE>
be delivered to each Holder (in accordance with clauses (a) through (e) of
this Section 1.6 and Exhibit A attached hereto) certificate or certificates,
appropriately registered in the name of the holder, representing the shares of
Common Stock issuable as Merger Consideration hereunder.
(i) Withholding Rights. The Company shall be entitled to
receive from each Holder, prior to the payment of the Merger Consideration, an
amount in cash equal to the amount which the Company is required to deduct and
withhold with respect to the making of such payment under the Internal Revenue
Code of 1986, as amended (the "Code") or any provision of state, local,
provincial or foreign tax law.
(j) The Merger Consideration delivered upon the surrender for
exchange of Interests and termination and/or waiver of Holder Rights in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Interests and/or Holder Rights,
as the case may be.
Section 1.7 Taking of Necessary Action; Further Action. Each of the
Company, COL and each of the Holders in good faith will take, and will cause
any other persons who are or become holders of Interests or other rights
against the Company at or prior to the Effective Time to take, all such
commercially reasonable and lawful actions as may be necessary or appropriate
in order to effectuate the Merger in accordance with this Agreement as
promptly as possible. If, at any time after the Effective Time, any such
further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises
of COL and the Company, the officers, managers and directors of COL and the
Company, respectively, are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and
necessary actions.
Section 1.8 Material Adverse Effect; Ordinary Course of Business.
When used herein or in any Exhibit, Annex or Schedule hereto in connection
with COL or the Company, as the case may be, the term "Material Adverse
Effect", or any derivation thereof, means any change or effect that,
individually or when taken together with all other such changes or effects
that have occurred prior to the date of determination of the occurrence of the
Material Adverse Effect, is or is reasonably likely to be materially adverse
to the business, assets (including intangible assets), financial condition,
prospects or results of operations of COL or the Company, as the case may be,
in each case taken as a whole.
When used in connection with either COL or the Company, as the case
may be, the term "ordinary course of business", or derivations thereof, means
the normal conduct of business consistent with past practice except that no
action which is contrary to law, order, rule or regulation or otherwise
contrary to commercial reasonableness shall be considered to be in the
ordinary course of business.
-6-
<PAGE>
Section 1.9 Tax Consequences. It is intended by the parties hereto
that the Merger be part of a series of transactions which, together, will be
treated as a transaction in which no gain or loss is recognized pursuant to
Section 351 of the Code. The parties hereto agree to report the Merger
consistent with such treatment for income tax purposes.
ARTICLE 2.
Representations and Warranties of COL and the Active Holders
COL and each Active Holder hereby, jointly and severally, represents
and warrants to the Company (which representations and warranties shall be
true and correct on the date hereof and at the Effective Time) as to each of
the matters set forth in Annex I hereto.
In addition, COL hereby represents and warrants to Muzak (which
representation and warranty shall be true and correct on the date hereof and
at the Effective Time) that, to the best of COL's knowledge, there are no
claims, actions, suits, proceedings or investigations pending or threatened
against COL or any properties or rights of COL, before any court, arbitrator
or administrative, governmental or regulatory authority or body, domestic or
foreign, which claims, actions, suits, proceedings or investigations are
reasonably likely to be asserted or commenced against Muzak or any of its
assets or properties. Notwithstanding anything to the contrary contained
herein, in the event that the representation and warranty set forth in the
preceding sentence is determined (by a court of competent jurisdiction) to
have been untrue as of the date hereof or at the Effective Time, then Muzak's
remission, waiver, release and discharge of the Claims set forth in Section
1.6(e) hereof shall be of no force and effect.
ARTICLE 3.
Representations and Warranties of the Holders
Each Holder, with respect to such Holder only, hereby represents and
warrants to the Company (which representations and warranties shall be true
and correct as of the date hereof and at the Effective Time) as to each of the
matters set forth in Annex II hereto.
ARTICLE 4.
Representations and Warranties of Company
The Company represents and warrants to COL and to each Holder (which
representations and warranties shall be true and correct on the date hereof
and at the Effective Time) as to each of the matters set forth in Annex III
hereto.
-7-
<PAGE>
ARTICLE 5.
Conduct of Business Pending the Merger
Section 5.1 Conduct of Business by COL Pending the Merger. During
the period from the date of this Agreement and continuing until the earlier of
the termination of this Agreement or the Effective Time, COL covenants and
agrees that, unless the Company shall otherwise agree in writing, COL shall
conduct its business only in, and COL shall not take any action except in, the
ordinary course of business; and COL shall use reasonable commercial efforts
to (i) preserve substantially intact its business organization, (ii) pay its
trade payables and other liabilities in accordance with their terms as they
became due, (iii) collect its receivables and other claims in full in
accordance with their terms, as they become due, (iv) keep available the
services of each of its present officers, employees and consultants, (v) take
all reasonable actions in the ordinary course of business necessary to prevent
the loss, cancellation, abandonment forfeiture or expiration of any COL
Intellectual Property, and (vi) preserve each of its present relationships
with customers, suppliers and other persons with which COL has significant
business relations. By way of amplification and not limitation, except as
contemplated by this Agreement, COL shall not, during the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, directly or indirectly do, or propose to do,
any of the following without the prior written consent of the Company:
(a) amend or otherwise change its Articles of Formation or the
Operating Agreement;
(b) issue, transfer, pledge, dispose of or encumber, or
authorize the transfer, pledge, disposition or encumbrance of, any Interests;
(c) sell, lease, assign, transfer, pledge, dispose of or
encumber any of its assets (whether real, personal or intellectual property)
(except for (i) sales of assets in the ordinary course of business; and (ii)
dispositions of obsolete or worthless assets).
(d) [Intentionally Omitted];
(e) sell, transfer, license, sublicense or otherwise dispose
of any COL Intellectual Property Rights, or amend or modify any existing
agreements with respect to COL Intellectual Property Rights or Third Party
Intellectual Property Rights, other than nonexclusive licenses in the ordinary
course of business;
(f) (i) acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business organization
or division thereof; (ii) incur any indebtedness for borrowed money or
representing the deferred purchase price of any property or assets or issue
debt securities or assume, guarantee or endorse or otherwise as an
accommodation become responsible for, the obligations of any person (except
for the endorsement of commercial
-8-
<PAGE>
paper for deposit or collection in the ordinary course of business) or make
any loans or advances to or investments in any person; (iii) create, incur,
assume or suffer to exist, any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind or nature upon its property or assets,
income or profits, whether now owned or hereafter acquired, other than
"Permitted Liens" (as defined in that certain Loan and Security Agreement
dated as of June 14, 1996 by and between VDC Corporation and COL (the "VDC
Loan Agreement")); (iv) assume, guarantee, endorse or otherwise in anyway be
or become responsible or liable for, directly or indirectly, any contingent
obligation; (v) enter into or amend any contract or agreement other than in
the ordinary course of business; (vi) authorize any capital expenditures or
purchase of fixed assets which are, in the aggregate, in excess of $10,000 for
COL, taken as a whole; (vii) enter into any agreement or become liable under
any agreement for the lease, hire or use of any real or personal property; or
(viii) enter into or amend any contract, agreement, commitment or arrangement
to effect any of the matters prohibited by this Section 4.1(f);
(g) increase the compensation payable or to become payable to
any of their officers or employees (except for such increases as may be set
forth in the employment agreements and/or consulting agreements to be entered
into upon consummation of the Merger) or grant any severance or termination
pay to, or enter into any employment or severance agreement with, any
director, officer or other employee of COL, or establish, adopt or enter into
any Employee Plan;
(h) take any action, other than as required by GAAP, to
change accounting policies or procedures (including, without limitation,
procedures with respect to revenue recognition, payments of accounts payable
and collection of accounts receivable);
(i) make any material Tax election inconsistent with past
practices or settle or compromise any material, federal, state, local or
foreign tax liability or agree to an extension of a statute of limitations for
any assessment of any Tax, except to the extent the amount of any such
settlement has been reserved for on the Balance Sheet of COL;
(j) pay, discharge or satisfy any principal of any debt prior
to its scheduled maturity for borrowed money or for the deferred purchase
price of property or services, except at the stated maturity of such debt or
as required by mandatory prepayment provisions relating thereto; or amend any
provision pertaining to the subordination or the terms of payment of any debt;
(k) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) except for (i) the payment, discharge or satisfaction in the
ordinary course of business of liabilities reflected or reserved against on
the Balance Sheet of COL or incurred in the ordinary course of business, (ii)
the Loan (as such term is defined in the VDC Loan Agreement), (iii) reasonable
attorneys' fees and expenses incurred in the ordinary course of business, and
(iv) Indebtedness secured by Permitted Liens (as each such term is defined in
the VDC Loan Agreement);
(l) liquidate or dissolve itself (or suffer any liquidation or
dissolution); or
-9-
<PAGE>
(m) take, or agree in writing or otherwise to take, any of
the actions described in Sections 5.1(a) through (l) above, or any action
which would make any of the representations or warranties contained in Article
2 or Article 3 of this Agreement untrue or incorrect or prevent COL from
performing or cause COL not to perform its covenants hereunder or result in
any of the conditions to the Merger set forth herein not being satisfied.
Section 5.2 No Solicitation or Transfer of Interests.
-----------------------------------------
(a) COL and each Holder agrees that neither it nor any of
their respective officers, managers, or directors shall, and COL and each
Interest Holder shall direct and use their best efforts to cause the
employees, agents, directors and representatives of COL and of each Interest
Holder (including, without limitation, any attorney or accountant retained by
any of them) not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making of any proposals or offers (including, without
limitation, any proposals or offers to members of COL) with respect to a
merger, consolidation or similar transaction involving, or any purchase of all
or any significant portion of the assets or any equity securities of, COL or a
change of the managers of COL (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
(b) COL and each Holder (to the extent such Holder is aware
of such Acquisition Proposal) shall immediately notify the Company after
receipt of any Acquisition Proposal or any request for information relating to
COL in connection with an Acquisition Proposal or for access to the
properties, books or records of COL by any person or entity that informs COL
or such Holder that it is considering making, or has made, an Acquisition
Proposal. Such notice to the Company shall be made orally and in writing and
shall indicate in reasonable detail the identity of the offeror and the terms
and conditions of such proposal, inquiry or contact.
(c) COL shall ensure that its officers, managers and
employees, and COL and each Interest Holder shall ensure that its or his
advisors and representatives are aware of the restrictions described in this
Section, and shall be responsible for any breach of this Section 5.2 by such
officers, managers, employees, advisors or representatives.
(d) No Interest Holder shall transfer, pledge or otherwise
dispose of any or all of his Interests or any rights therein prior to the
Effective Time or earlier termination of this Agreement.
Section 5.3 No Transfer of Holder Rights. No Holder shall transfer,
pledge or otherwise dispose of any or all of his Holder Rights prior to the
Effective Time or earlier termination of this Agreement.
Section 5.4 Conduct of Business by the Company Pending the Merger.
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement
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or the Effective Time, the Company covenants and agrees that, unless COL shall
otherwise agree in writing, other than actions taken by the Company in
contemplation of the Merger, the Company shall not directly or indirectly do,
or propose to take or agree in writing or otherwise to take any action which
would prevent the Company from performing or cause the Company not to perform
its obligations hereunder.
ARTICLE 6.
Additional Covenants
Section 6.1 Registration Under the Securities Act.
--------------------------------------
(a) The Company shall use its best efforts to file, as
promptly as practicable after the Effective Time, and to cause to become
effective as soon thereafter as is reasonably practicable, a registration
statement on Form SB-2 (together with all supplements and amendments thereto,
the "Registration Statement") with the SEC covering the public resale of the
Gordon Shares and Unrestricted Braverman Shares.
(b) The Company shall pay all Registration Expenses (as
defined below) in connection with the registration contemplated by this
Section 6.1. Each selling shareholder shall pay all underwriting and selling
discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of such shareholder's shares of Common Stock pursuant to the
Registration Statement. For purposes of this Agreement, "Registration
Expenses" shall mean any and all expenses incurred by the Company incident to
the performance of or compliance by the Company with this Section 6.1,
including all SEC, stock exchange or NASD registration and filing fees, all
fees and expenses incurred in connection with compliance with state securities
or "blue sky" laws (including reasonable fees and disbursements of the
Company's counsel), all fees and expenses incurred in connection with the
preparation and printing of the Registration Statement and the related
prospectus and the fees and disbursements of the Company's counsel and
independent public accountants, but excluding fees of counsel to the selling
shareholders and underwriting and selling discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of such selling
shareholders' shares of Common Stock pursuant to the Registration Statement.
(c) In connection with the obligations of the Company under
this Section 6.1, the Company shall:
(i) prepare and file with the SEC such
amendments and post-effective amendments to the Registration Statement as may be
necessary to (x) keep such Registration Statement effective for the applicable
period under this Agreement and (y) cause each prospectus included as part of
such Registration Statement (a "Prospectus") to be supplemented by any required
prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424
under the Securities Act and (z) keep each Prospectus current during the period
described under Section 4(3) and Rule 174 under the Securities Act that is
applicable to transactions by brokers or dealers with respect to
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the securities covered by such Prospectus;
(ii) furnish to each selling shareholder, without
charge, as many copies of each Prospectus, including each preliminary
Prospectus, and any amendment or supplement thereto and such other documents
as such selling shareholder may reasonably request, in order to facilitate the
public sale or other disposition of the Common Stock covered by the
Registration Statement;
(iii) use its reasonable best efforts to register or
qualify the Common Stock covered by the Registration Statement under all
applicable Blue Sky Laws of such jurisdictions as any selling shareholder with
Common Stock covered by the Registration Statement shall reasonably request in
writing by the time the Registration Statement is declared effective by the
SEC; provided, however, that the Company shall not be required to (x) qualify
as a foreign entity or as a dealer in securities in any jurisdiction where it
would not otherwise be required to qualify but for this Section 6.1(c)(iii),
(y) file any general consent to service of process or (z) subject itself to
taxation in any such jurisdiction if it is not so subject.
(iv) notify each selling shareholder (v) when the
Registration Statement has become effective and when any post-effective
amendments and supplements thereto have been filed and become effective, (w)
of any request by the SEC or any state securities authority for amendments and
supplements to the Registration Statement and related Prospectus or for
additional information after the Registration Statement has become effective,
(x) of the issuance by the SEC or any state securities authority of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (y) of the happening of any
event which makes any statement made in the Registration Statement or the
related Prospectus untrue in any material respect or which requires the making
of any changes in the Registration statement or Prospectus in order to make
the statements therein not misleading and (z) of any determination by the
Company that a post-effective amendment to the Registration Statement would be
appropriate;
(v) make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible moment and provide prompt notice to each
selling shareholder of the withdrawal of any such order;
(d) The Company may require each selling shareholder to
furnish to the Company such information regarding the selling shareholder and
the proposed distribution by such selling shareholder of Common Stock covered
by the Registration Statement as the Company may from time to time reasonably
request in writing. Each such selling shareholder shall provide the Company
with any such information within five business days after such information is
requested and shall provide to the Company, within five business days after
such selling shareholder receives a draft of the Registration Statement or
amendment thereto in which such information is included, comments on such
Registration Statement or amendment thereto. The Company agrees to supplement
or amend the Registration statement, if required by the rules, regulations or
instructions applicable to the Registration Statement or by the Securities Act
or by any other rules and regulations thereunder
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for shelf registration or if reasonably requested by a selling shareholder
with respect to information relating to such selling shareholder in order to
accurately reflect information regarding such selling shareholder or such
selling shareholder's plan of distribution as required by the Registration
Statement, and to use its best efforts to cause any such amendment to become
effective and such Registration Statement to become usable as soon as
thereafter practicable. The Company agrees to furnish to the selling
shareholders copies of any such supplement or amendment promptly after its
being made available for use or filed with the SEC.
(e) Each selling shareholder agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 6.1(c)(iv)(x)(y) or (z) hereof, such selling shareholder will
forthwith discontinue disposition of Common Stock pursuant to the Registration
Statement until such selling shareholder's receipt of the copies of the
supplemented or amended Prospectus and, if so directed by the Company, such
selling shareholder will deliver to the Company (at its expense) all copies in
its possession, other than permanent file copies then in such selling
shareholder's possession, of the Prospectus current at the time of receipt of
such notice.
(f) (i) The Company agrees to indemnify and hold harmless,
each selling shareholder from and against any and all losses, claims, damages,
liabilities and expenses (including, without limitation, any legal or other
expenses reasonably incurred by such selling shareholder in connection with
defending or investigating any such action or claim) arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prospectus, or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein in light of the circumstances under which they were made
not misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with information relating to any
selling shareholder furnished to the Company by a selling shareholder for use
therein; provided, however, that the indemnification provided for in this
paragraph shall not inure to the benefit of any selling shareholder with
respect to any sale or disposition of Common Stock by such selling shareholder
in violation of Section 1.6.
(ii) Each Holder comprising the Gordon Group and
Braverman (collectively, the "Indemnifying Holders") agrees, severally and not
jointly, to indemnify and hold harmless the Company, each other selling
shareholder, each director and officer of the Company and each person, if any,
who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act or is under common control with
or is controlled by the Company to the same extent as the foregoing indemnity
from the Company to the selling shareholders with respect to any and all
information provided by such Indemnifying Holder to the Company for use or
inclusion in the Registration Statement.
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(iii) If any action, suit or proceeding shall be
instituted involving any person in respect of which such person is entitled to
indemnity pursuant to either paragraph (i) or (ii) above, such person (the
"indemnified party") shall promptly notify the parties against whom
indemnification is being sought (each an "indemnifying party") and such
indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such indemnified
party shall have the right to select its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (x) the indemnifying parties have agreed in writing to pay such fees
and expenses, (y) the indemnifying parties shall have failed to assume the
defense and employ counsel on a timely basis or (z) the named parties to any
such action, suit, or proceeding (including any impleaded parties) include
both such indemnifying parties and such indemnified party and such indemnified
party shall have been reasonably advised by its counsel that representation of
such indemnified party and any indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed due to actual or
potential differing interests between them (in which case the indemnifying
parties shall not have the right to assume the defense of such action, suit or
proceeding on behalf of the indemnified party)). It is understood, however,
that the indemnifying parties shall, in connection with any one such action,
suit or proceeding, or substantially similar action, suit or proceeding or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable
fees and expenses of only one separate firm of attorneys (in addition to any
local counsel) at any time for all of the indemnified parties. The
indemnifying parties shall not be liable for any settlement of any action,
suit or proceeding effected without their written consent, but if settled with
such written consent or if there be a final judgment for the plaintiff, the
indemnifying parties agree to indemnify and hold harmless the indemnified
party from and against any loss, action, damage, liability or expense by
reason of such settlement or judgment.
(iv) No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened action, suit or proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
(g) The Holders acknowledge that the Company has granted
certain of its security holders the right to include additional shares of
Common Stock in the Registration Statement.
Section 6.2 Access to Information. COL shall afford to the officers,
employees, accountants, counsel and other representatives of the Company,
reasonable access, during the period prior to the Effective Time, to all its
properties, books, contracts, commitments and records and, during such period,
COL shall furnish promptly to the Company all information concerning its
business, properties and personnel as the Company may reasonably request, and
COL shall make available to the Company the appropriate individuals (including
attorneys, accountants and other
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professionals) for discussion of its business, properties and personnel as the
Company may reasonably request. The Company acknowledges and agrees that all
such information shall be maintained in strict confidence and may not be used
for any purpose other than to facilitate the Merger.
Section 6.3 Consents; Approvals. COL, each Holder and the Company
shall each use their best efforts to obtain all consents, waivers, approvals,
authorizations or orders (including, without limitation, all United States and
foreign governmental and regulatory rulings and approvals), and COL, each
Holder and the Company shall make all filings (including, without limitation,
all filings with United States and foreign governmental or regulatory
agencies) required in connection with the authorization, execution and
delivery of this Agreement by COL, the Holders and the Company, respectively,
and the consummation by them of the transactions contemplated hereby.
Section 6.4 Notification of Certain Matters. COL and each Holder
shall give prompt notice to the Company and the Company shall give prompt
notice to COL and to each Holder of (i) the occurrence, or non-occurrence, of
any event the occurrence, or non-occurrence, of which would be likely to cause
any representation or warranty contained in this Agreement to be untrue or
inaccurate, and (ii) any failure of COL, each Holder and the Company, as the
case may be, materially to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it or him hereunder; provided,
however, that the delivery of any notice pursuant to this Section shall not
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
Section 6.5 Further Action. Upon the terms and subject to the
conditions hereof, each of the parties hereto in good faith shall use all
commercially reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, to obtain in a timely manner all necessary
filings, and to otherwise satisfy or cause to be satisfied all conditions
precedent to its obligations under this Agreement.
Section 6.6 Public Announcements. The Company shall be responsible
for, and have exclusive control over, any and all press releases and public
statements with respect to the Merger or this Agreement.
Section 6.7 Conveyance Taxes. The Company, COL and the Holders shall
cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any real property
transfer or gains, sales, use, transfer, value added, stock transfer and stamp
taxes, any transfer, recording, registration and other fees, and any similar
taxes which become payable in connection with the transactions contemplated
hereby that are required or permitted to be filed on or before the Effective
Time.
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ARTICLE 7.
Conditions to the Merger
Section 7.1 Conditions to Obligation of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal restraint or prohibition
(an "Injunction") preventing the consummation of the Merger shall be in
effect, nor shall any proceeding brought by any administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; and there shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger, which makes the consummation of
the Merger illegal.
(b) (i) The Company shall have raised an aggregate
of at least $2,000,000 in one or more private placements of the Company's
securities.
(ii) Without in any way limiting the foregoing
condition, COL and each of the Holders hereby acknowledges that the Company
expects to raise an aggregate of $2,600,000 in exchange for 1,910,000 shares
of Common Stock (the "Private Placement Shares") in four separate private
placements. In the first private placement, the Company expects to issue an
aggregate of 581,429 shares of Common Stock to a group of accredited investors
in exchange for $100,000. In the second private placement, the Company expects
to issue an aggregate of 250,000 shares of Common Stock to a group of
accredited investors in exchange for $350,000. In the third private placement,
the Company expects to issue 650,000 shares of Common Stock to VDC Corporation
Ltd. ("VDC") in exchange for $650,000. It is then contemplated that VDC will
spin off all of such shares to its existing stockholders. In the fourth
private placement, the Company expects to issue an aggregate of 428,571 shares
of Common Stock to a group of accredited investors in exchange for $1,500,000.
There can be no assurance that the transactions contemplated by this Section
7.1(b)(ii) will be consummated by the Company on the terms set forth above, or
at all. As further clarification, it is acknowledged by the parties that the
consummation of any or all of transactions contemplated by this Section
7.1(b)(ii) is not a condition to the Merger.
Section 7.2 Additional Conditions to Obligations of the Company.
The obligations of the Company to effect the Merger are also subject to the
following conditions:
(a) The satisfactory completion of the Company's due
diligence investigation of COL;
(b) Representations and Warranties. The representations
and warranties of COL
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and each of the Holders contained in this Agreement (together with the COL
Disclosure Schedule) shall be true and correct in all respects as of the date
hereof and on and as of the Effective Time, except for (i) changes
contemplated by this Agreement and (ii) those representations and warranties
which address matters only as of a particular date (which shall remain true
and correct as of such date), with the same force and effect as if made on and
as of the Effective Time, and the Company shall have received a certificate to
such effect signed by the President of COL and each Holder;
(c) Agreements and Covenants. COL and each Holder shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it on
or prior to the Effective Time, and the Company shall have received a
certificate to such effect signed by the President of COL and each Holder;
(d) Consents Obtained. All material consents, waivers,
approvals, authorizations or orders required or advisable (in the Company's
discretion) to be obtained, and all filings required to be made, by COL for
the authorization, execution and delivery of this Agreement and the
consummation by them of the transactions contemplated hereby shall have been
obtained or made by COL. At the Effective Time, COL shall deliver to the
Company copies of the resolutions adopted by the members and Board of Managers
of COL approving the Merger and the other transactions contemplated hereby,
certified by the Secretary of COL as being in full force and effect and not
modified in any manner whatsoever;
(e) Governmental Actions. There shall not have been
instituted, pending or threatened any action or proceeding (or any
investigation or other inquiry that might result in such an action or
proceeding) by any governmental authority or administrative agency before any
governmental authority, administrative agency or court of competent
jurisdiction, in either case, seeking to prohibit or limit the Merger or the
transactions contemplated by this Agreement;
(f) Material Adverse Change. Since the date of this
Agreement, there shall have been no change, occurrence or circumstance
affecting the business, results of operations or financial condition of COL
having or which may have a Material Adverse Effect;
(g) Legal Opinion. The Company shall have received an
opinion, dated the Effective Date, from Greenberg, Traurig, counsel to COL,
substantially in the form of, and covering such matters as are set forth in,
Exhibit B hereto;
(h) Private Placement Representations. The Company shall have
received a certificate dated as of the Effective Time from each Holder,
substantially in the form of Exhibit C hereto, to ensure that the issuance of
Common Stock as Merger Consideration hereunder will be a valid private
placement under Section 4(2) of the Securities Act and will not require any
filings to be made with any state securities regulatory authority under any
Blue Sky Laws;
(i) Other Certificates. COL and the Holders shall have
furnished to the Company such other certificates and documents as the Company
shall have reasonably requested;
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(j) Contractual Matters. All unliquidated claims which may
arise under, and/or all material ambiguities contained in, any agreement to
which COL may be a party (the determination of whether any such unliquidated
claim or ambiguity exists is to be made by the Company in its reasonable
discretion) shall be clarified and satisfied to the reasonable satisfaction of
the Company, and no such clarification shall result in any additional material
obligation on the part of the Surviving Corporation or the Company;
(k) [Intentionally Omitted.]
(l) Muzak Agreement. COL shall have entered into a new
agreement with Muzak on terms satisfactory to the Company. Such agreement
shall supersede any and all previous agreements or arrangements between Muzak
and COL and shall inure to the benefit of the Surviving Corporation upon
consummation of the Merger;
(m) Employment/Consulting Agreements. Each of Barnett,
Braunstein, Malinowski, Michael Clark and Richard Davey shall terminate their
existing employment/consulting agreements with COL and shall have entered into
an employment/consulting agreement with the Surviving Corporation; and
(n) Consulting Agreement. The Company shall have entered into
a Consulting Agreement with American Maple Leaf Corporation ("AML") pursuant
to which AML will provide the Company with future investment banking services
in exchange for an aggregate of 350,000 shares of Common Stock.
Section 7.3 Additional Conditions to Obligation of COL and the
Holders. The obligation of each of COL and each Holder to effect the Merger is
also subject to the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and
correct in all respects as of the date hereof and on and as of the Effective
Time, except for (i) changes contemplated by this Agreement and (ii) those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), with the same
force and effect as if made on and as of the Effective Time, and COL shall
have received a certificate to such effect signed by the President and Chief
Financial Officer of the Company;
(b) Agreements and Covenants. The Company shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by them
on or prior to the Effective Time, and COL and such Holder shall have received
a certificate to such effect signed by the President and Chief Financial
Officer of the Company;
(c) Consents Obtained. All material consents, waivers,
approvals, authorizations or orders required to be obtained, and all filings
required to be made, by the Company for the
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authorization, execution and delivery of this Agreement and the consummation
by them of the transactions contemplated hereby shall have been obtained or
made by the Company. At the Effective Time, the Company shall deliver to COL
and to the Holders copies of the resolutions adopted by the Company approving
the Merger and the other transactions contemplated hereby certified by the
Secretary of the Company, as the case may be, as being in full force and
effect and not modified in any manner whatsoever;
(d) Material Adverse Change. Since the date of this
Agreement, there shall have been no change, occurrence or circumstance in the
business, results of operations or financial condition of the Company having
or reasonably likely to have a Material Adverse Effect; and
(e) The Company Common Stock Certificates. The Company shall
have tendered for delivery to each Holder certificates representing the number
of shares of Common Stock set forth next to such Holder's name on Exhibit A.
(f) Stock Option Plan. The Company shall have effectuated an
employee stock option plan.
(g) Management Shares. The Company shall have reserved for
issuance an additional 600,000 shares of Common Stock (the "Management
Shares"); provided, however, that in the event COL's negative net worth as of
August 31, 1996 (as determined by Ernst & Young, LLP or such other accounting
firm engaged by the Surviving Corporation and then acting as its outside
auditors) is greater than $470,000 (assuming the capitalization of those
certain amounts previously indicated by Ernst & Young, LLP as appropriate to
be capitalized in the aggregate amount of $229,388) (the "Permissible Negative
Net Worth"), as is determined in accordance with generally accepted accounting
principles to the extent applicable, such number of Management Shares shall be
reduced by 1 1/2 shares for each dollar by which COL's negative net worth
exceeds the Permissible Negative Net Worth. Such Shares to be granted to the
management of the Surviving Corporation shall vest according to a schedule
established by the Company.
ARTICLE 8.
Termination
Section 8.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time, notwithstanding approval thereof by the
Holders:
(a) by mutual written consent of the Company and COL;
(b) by the Company if the Merger shall not have been
consummated by September 18, 1996, provided that the Company's right to
terminate this Agreement pursuant to this Section 8.1(b) shall not be
available in the event the Company's failure to fulfill any obligation under
this Agreement or any action or inaction on the part of the Company has been,
in full or in part, the cause
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of or resulted in, in full or in part, the failure of the conditions to COL's
and each Holder's obligation to consummate the Merger to be satisfied or the
failure of the Merger to occur on or before such date;
(c) by COL or any Holder if the Merger shall not have been
consummated by September 18, 1996, provided that the right of COL or any
Holder, as the case may be, to terminate this Agreement pursuant to this
Section 8.1(c) shall not be available in the event COL's or such Holder's, as
the case may be, failure to fulfill any obligation under this Agreement or any
action or inaction on the part of COL or any Holder, as the case may be, has
been, in full or in part, the cause of or resulted in, in full or in part, the
failure of the conditions to the Company's obligation to consummate the Merger
to be satisfied or the failure of the Merger to occur on or before such date;
(d) by the Company or COL if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued a non-appealable final order, decree or ruling or
taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger; or
(e) by the Company if prior to the Effective Time, (i)
trading in securities generally on the New York Stock Exchange, American Stock
Exchange or The Nasdaq National Market shall have been suspended or materially
limited, (ii) a general moratorium on commercial banking activities in New
York shall have been declared by either Federal or state authorities or (iii)
there shall have occurred any outbreak or escalation of hostilities or other
international or domestic calamity, crisis or change in political, financial
or economic conditions, the effect of which on the financial markets of the
United States is such as to make it, in the judgment of the Company,
impracticable or inadvisable to consummate the transactions contemplated
hereby.
Section 8.2 Effect of Termination. In the event of the termination
of this Agreement pursuant to Section 8.1, this Agreement shall forthwith
become null and void and there shall be no liability on the part of any party
hereto or any of its affiliates, directors, officers, managers, members or
stockholders except (i) as set forth in Section 8.3, Article 9 and Section
10.8 hereof, and (ii) nothing herein shall relieve any party from liability
for any willful breach hereof.
Section 8.3 Fees and Expenses.
------------------
In the event the Merger is consummated, the Surviving Corporation
will pay all reasonable legal and accounting fees and costs incurred by the
parties in connection with this Agreement and the transactions contemplated
hereby; provided, however, that with respect to any such legal fees and costs
incurred by COL or any of the Holders, the Surviving Corporation shall only be
obligated to pay those reasonable amounts attributable to the engagement of
Greenberg, Traurig in connection with the transactions contemplated hereby and
shall have no obligation to pay any legal fees and costs incurred by any
Holder in connection with their engagement of independent counsel.
In the event the Merger is not consummated as a result of COL's or any
Holder's (i) breach
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of their respective representations, warranties, agreements or covenants
contained herein or (ii) failure to fulfill their respective obligations
hereunder, COL shall be obligated to pay all reasonable out-of-pocket expenses
and legal and accounting fees and costs incurred by the Company in connection
with this Agreement and the transactions contemplated hereby. In the event the
Merger is not consummated for any reason other than as set forth in the
preceding sentence, the parties' obligations with respect to the payment of
fees and expenses shall be as set forth in the Letter Agreement dated June 7,
1996 by and among COL and American Maple Leaf Financial Corporation (the
"Letter Agreement").
ARTICLE 9.
Survival of Representations and Warranties; Indemnification
Section 9.1 Survival. All statements contained in any certificate or
other instrument delivered by or on behalf of COL, any of the Holders or the
Company pursuant to this Agreement or in connection with the transactions
contemplated by this Agreement shall be considered representations and
warranties by COL, such Holder or Holders or the Company with the same force
and effect as if contained in this Agreement. All representations, warranties,
covenants and agreements by COL, any Holder or the Company shall survive the
Effective Time for a period of two years after the Effective Time (provided
that the representations, warranties, covenants and agreements contained in
Annex I hereto and this Article 8 in so far as they relate to any Tax shall
survive until the expiration of the applicable statute of limitation for a
claim by the applicable taxing authority for such Tax) notwithstanding any
investigation at any time by or on behalf of any party to which such
representation or warranty was given, and shall not be considered waived by
the consummation of the Merger contemplated by this Agreement with knowledge
of any breach or misrepresentation by any of the parties hereto.
Section 9.2 Indemnification.
----------------
(a) Each of COL and each Active Holder shall jointly and
severally indemnify and hold harmless the Surviving Corporation against all
loss, liability, damage or expense (including reasonable fees and expenses of
counsel in any matter, whether involving a third party or between the
indemnifying or indemnified parties) Surviving Corporation may suffer, sustain
or become subject to as a result of (i) any breach by such Holder or COL of
any of its or his representations, warranties, covenants or other agreements
contained in this Agreement, (whether or not the Surviving Corporation had
knowledge, at or prior to the Effective Time, of the breach), (ii) the failure
by COL to pay, perform or discharge prior to the Effective Time any COL
Liabilities (other than the Assumed Liabilities), (iii) any liability or
obligation (other than the Assumed Liabilities) arising prior to the Effective
Time, or after the Effective Time as a result of events occurring prior to the
Effective Time, from or in connection with the violation of any federal, state
or local statute, rule or regulation, decree or ordinance applicable to COL,
(iv) any other claim (other than the Assumed Liabilities), whether made before
or after the date of this Agreement, or any litigation, proceeding or
governmental investigation, whether commenced before or after the date of this
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Agreement (collectively, the "Litigation")), arising out of the operations of
COL prior to the Effective Time (regardless of whether or not referred to on a
schedule to this Agreement or otherwise disclosed or known to the Company as
of the date of this Agreement), or (v) any claim by any person that the Merger
Consideration payable hereunder should have been paid in a manner inconsistent
with the manner set forth in Exhibit A. Notwithstanding the foregoing, (i) no
Holder shall have any indemnification obligation for any claim or liability to
the extent covered by insurance maintained by the Surviving Corporation and
(ii) COL shall not have any liability to the Surviving Corporation or any
Holder (by contribution or otherwise) hereunder at any time after the
Effective Time. Notwithstanding the foregoing, the liability of each of the
Active Holders pursuant to this Section 9.2 shall be limited to (i) the amount
of any and all Merger Consideration to be issued to such Active Holder upon
the consummation of the Merger and (ii) the right of set-off set forth in
Section 9.5 hereof; provided, however, that there shall be no such limitation
of liability in the event the Company seeks indemnification from an Active
Holder for any knowing breach of the provisions of this Agreement or any
fraudulent or criminal action or inaction.
(b) Each Holder shall indemnify and hold harmless the
Surviving Corporation against all loss, liability, damage or expense
(including reasonable fees and expenses of counsel in any matter, whether
involving a third party or between the indemnifying and indemnified parties)
Surviving Corporation may suffer, sustain or become subject to as a result of
any breach of any warranties, covenants or other agreements made by such
Holder in this Agreement or any misrepresentation by such Holder, or as a
result of any of such Holder's representations or warranties not being true
and correct as of the Effective Time (whether or not the Company had
knowledge, prior to the Effective Time, of the misrepresentation or breach of
warranty). Notwithstanding the foregoing, the liability of each Holder
pursuant to this Section 9.2 shall be limited to (i) the amount of any and all
Merger Consideration to be issued to such Holder upon the consummation of the
Merger and (ii) the right of set-off set forth in Section 9.5 hereof;
provided, however, that there shall be no such limitation of liability in the
event the Surviving Corporation seeks indemnification from such Holder for any
fraudulent or criminal action or inaction.
(c) The Surviving Corporation shall indemnify and hold
harmless each Holder against all loss, liability, damage or expense (including
reasonable fees and expenses of counsel in any matter, whether involving a
third party or between the indemnifying and indemnified parties) such Holder
may suffer, sustain or become subject to as a result of any breach of any
warranties, covenants or other agreements contained in this Agreement or any
misrepresentation by the Company, or as a result of any of the Company's
representations or warranties not being true and correct as of the Effective
Time (whether or not such Holder had knowledge, prior to the Effective Time,
of the misrepresentation or breach of warranty).
(d) Each party acknowledges that reliance shall not be an
element of any claim by the other for breach of warranty or misrepresentation
under this Agreement.
Section 9.3 Conditions of Indemnification for Third Party Claims.
The obligations and liabilities of the parties under this Agreement with respect
to, relating to, caused (in whole or in part)
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by or arising out of claims of third parties (individually, a "Third Party
Claim" and collectively "Third Party Claims") including, without limitation,
any Federal, state or local taxing authorities, shall be subject to the
following terms and conditions:
(a) The party entitled to be indemnified hereunder (the
"Indemnified Party") shall give the party obligated to provide the indemnity
(the "Indemnifying Party") prompt notice of any Third Party Claim, and,
provided that the Indemnifying Party acknowledges in writing its obligation to
indemnify in accordance with the terms and subject to the limitations on such
party's obligation to indemnify contained in this Agreement with respect to
that claim (or part of that claim), the Indemnifying Party shall have the
right to approve (such approval not to be unreasonably withheld) the
representatives to undertake the defense of that claim. Any such notice of a
Third Party Claim shall identify with reasonable specificity the basis for the
Third Party Claim, the facts giving rise to the Third Party Claim, and the
amount of the Third Party Claim (or, if such amount is not yet known, a
reasonable estimate of the amount of the Third Party Claim (if determinable)).
The Indemnified Party shall make available to the Indemnifying Party copies of
all relevant documents and records in its possession. In addition, no
settlement or compromise of such Third Party Claim shall be made with the
prior written consent of the Indemnifying Party.
(b) If the Indemnifying Party, within ten (10) business days
after receiving notice of any such Third Party Claim, fails to acknowledge in
writing its obligation to indemnify in accordance with Section 9.3(a) hereof,
the Indemnified Party shall (upon further notice to the Indemnifying Party and
subject to Section 9.3(c) hereof) have the right to defend, compromise or
settle the Third Party Claim without obtaining any consents from the
Indemnifying Party.
(c) Anything in this Section 9.3 to the contrary
notwithstanding, (i) the Indemnifying Party shall not, without the written
consent of the Indemnified Party (which consent shall not be unreasonably
withheld), settle or compromise any Third Party Claim or consent to the entry
of judgment which does not include as an unconditional term thereof the giving
by the claimant or the plaintiff to the Indemnified Party an unconditional
release from all liability in respect of the Third Party Claim; and (ii) if
there is a reasonable probability that a claim may materially and adversely
affect the Indemnified Party other than as a result of money damages or other
money payments, the Indemnified Party shall have the right, at its own cost
and expense, to participate in the defense of the Third Party Claim.
Section 9.4 Payment of Claims. Any party obligated to indemnify
another party hereunder shall advance any amounts so payable to the
Indemnified Party as such amounts are incurred by such Indemnified Party upon
written demand therefor containing reasonable supporting documentation of the
amounts so payable.
Section 9.5 Set-Off. Any party (the "Entitled Party") entitled to
indemnification from another party hereunder (the "Obligated Party") pursuant
to the terms of this Agreement shall have the right to set-off against any
amounts payable (in cash, Common Stock or otherwise) by such Entitled Party to
the Obligated Party under this Agreement or any other agreement(s) such
Obligated
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<PAGE>
Party may have with the Entitled Party (including, without limitation, any
consulting agreement) all amounts payable to the Entitled Party by the
Obligated Party under this Section 9.
Section 9.6 Loan and Security Agreement. Notwithstanding anything to
the contrary contained herein, each of the parties hereby acknowledges that
neither the execution of this Agreement, nor the consummation (or failure to
consummate) the transactions contemplated hereby, shall release COL or the
Surviving Corporation, as the case may be, from COL's obligations under the
VDC Loan Agreement.
ARTICLE 10.
General Provisions
Section 10.1 Disclosure Schedules. Any disclosure made with
reference to one or more sections of the COL Disclosure Schedule shall be
deemed disclosed with respect to each other section therein as to which such
disclosure is relevant provided such relevance is reasonably apparent.
Section 10.2 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered if delivered personally, three days
after being sent by registered or certified U.S. mail (postage prepaid, return
receipt requested), one day after dispatch by recognized overnight courier
(provided delivery is confirmed by the carrier), to the parties at the
following addresses (or at such other address for a party as shall be
specified by like changes of address):
(a) If to COL Acquisition Corp.:
COL Acquisition Corp.
401 City Line Avenue
Suite 725
Bala Cynwyd, PA 19004
Attention: Edward S. Zobian, President
With a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102
Telecopier No. (215) 568-6603
Attention: Michael C. Forman, Esq.
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(b) If to COL:
Coupons Online, L.L.C.
271 Madison Avenue
Suite 1005
New York, NY 10016
Attention: Craig W. Barnett, President
With a copy to:
Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel
153 East 53rd Street, 35th Floor
New York, NY 10022
Attention: Andrew Cosentino, Esq.
(c) If to Muzak:
Muzak Limited Partnership
2901 3rd Avenue
Seattle, WA 98121
Attention: President
(d) If to any Holder (other than Muzak), to the
Holder's address reflected in the Operating
Agreement.
Section 10.3 Certain Definitions. For purposes of this Agreement,
the term:
(a) "affiliates" means a person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned person, including, without
limitation, any partnership or joint venture in which either of COL (either
alone, or through or together with any other subsidiary) has, directly or
indirectly, an interest of 10 percent or more;
(b) "business day" means any day other than a day on which
banks in New York are required or authorized to be closed; and
(c) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d)(3)) of the Exchange Act).
Section 10.4 Amendment. This Agreement may be amended by COL and
the Company (without the consent of any Holder) by action taken by or on behalf
of the Board of Directors of the
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<PAGE>
Company and the Board of Managers of COL at any time prior to the Effective
Time; provided, however, that no amendment may be made which by law requires
further approval by the members of COL without such further approval;
provided, further, that no amendment that materially and adversely affects a
Holder shall be binding on or effective as to such Holder without such
Holder's written consent. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto entitled to effectuate such
amendment.
Section 10.5 Waiver. At any time prior to the Effective Time, any
party hereto may with respect to any other party hereto (a) extend the time
for the performance of any of the obligations or other acts, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver shall
be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby.
Section 10.6 Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 10.7 Severability. If any term or other provision of this
Agreement is held to be invalid, illegal or incapable of being enforced under
any rule of law or public policy by a court of competent jurisdiction, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner so that the
transactions contemplated hereby are fulfilled to the extent possible.
Section 10.8 Entire Agreement. This Agreement constitutes the entire
agreement between the parties and supersedes all prior agreements and
undertakings both written and oral, among the parties, or any of them, with
respect to the subject matter hereof and, except as otherwise expressly
provided herein, is not intended to confer upon any other person any rights or
remedies hereunder. Notwithstanding the foregoing, the parties hereto
acknowledge that the terms and provisions of (i) the Letter Agreement
regarding confidentiality and the payment of fees and expenses (as qualified
by Section 8.3 hereof) and (ii) the VDC Loan Agreement shall survive the
execution of this Agreement, the termination or breach of this Agreement by
any party hereto for any reason whatsoever and the consummation of the Merger,
and shall thereafter continue in full force and effect. Each Holder hereto
agrees to comply with all such terms of the Letter Agreement as if he were
named a party therein.
Section 10.9 No Assignment. This Agreement shall not be assigned by
operation of law or otherwise.
Section 10.10 Parties In Interest. This Agreement shall be binding
upon and inure solely to
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<PAGE>
the benefit of each party hereto, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
Section 10.11 Failure or Indulgence Not Waiver; Remedies Cumulative.
No failure or delay on the part of any party hereto in the exercise of any
right hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right preclude
other or further exercise thereof or of any other right. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
Section 10.12 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND FULLY PERFORMED WITHIN THE STATE
OF DELAWARE (WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES). EACH OF THE
PARTIES HERETO, BY EXECUTION OF THIS AGREEMENT, SUBMITS TO THE JURISDICTION OF
THE COURTS OF THE STATE OF DELAWARE AND THE UNITED STATES DISTRICT COURT FOR
THE DISTRICT OF DELAWARE, IN EACH CASE, LOCATED IN NEW CASTLE COUNTY, AND
WAIVES ANY OBJECTION TO SUCH JURISDICTION ON THE GROUNDS OF VENUE OR FORUM
NON-CONVENIENCE, THE ABSENCE OF IN PERSONAM OR SUBJECT MATTER JURISDICTION OR
ANY SIMILAR GROUNDS AND CONSENTS TO THE SERVICE OF PROCESS BY MAIL OR BY ANY
OTHER MANNER PERMITTED BY LAW.
Section 10.13 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original
but all of which taken together shall constitute one and the same Agreement.
Section 10.14 Joint Participation. The Company, COL and each of the
Holders has participated in the drafting of this Agreement and expressly
acknowledges such joint participation, to avoid application of any rule
construing contractual language against the party which drafted the language.
Section 10.15 No Tax Advice. COL and each of the Holders hereby
acknowledges that it has not received any tax advice, guidance or information
with respect to the Tax consequences, effects or impact of transactions
contemplated hereby by the Company or any representative or agent thereof.
Each of the Holders should consult such Holder's individual counsel with
regard to such matters.
Section 10.16 Exhibits and Schedules. All Exhibits and Disclosure
Schedules attached hereto are delivered pursuant to this Agreement are
incorporated by reference into, and made a part of, this Agreement.
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<PAGE>
Section 10.17 WAIVER OF JURY TRIAL. EACH OF COL, THE COMPANY AND THE
HOLDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER
BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.
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<PAGE>
IN WITNESS WHEREOF, the Company, COL and each Holder have caused
this Agreement to be executed as of the date first written above.
COL ACQUISITION CORP.
By:________________________
Name:_____________
Title:____________
COUPONS ONLINE, L.L.C.
By:________________________
Name:_____________
Title:____________
[SIGNATURES CONTINUED]
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<PAGE>
HOLDERS:
___________________________
CRAIG W. BARNETT
___________________________
MARK D. BRAUNSTEIN
___________________________
KAREN REISNER
___________________________
RAM REDDY
___________________________
JODI JAMIESON
___________________________
JAMES HORGAN
___________________________
LARRY BARNETT
[SIGNATURES CONTINUED]
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<PAGE>
___________________________
BARRY BRAVERMAN
DIVERSIFIED EQUITIES AND
MANAGEMENT II t/a DEM II
By:________________________
Name:_____________
Title:____________
____________________________
GEORGE GORDON
____________________________
MANUEL GORDON
____________________________
LORRAINE MARTIN
____________________________
JEFFREY SILVERSTEIN
[SIGNATURES CONTINUED]
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___________________________
DR. ROBERT C. GORDON
___________________________
RENEE GORDON
___________________________
NORMAN BATANSKY
___________________________
TOBY BATANSKY
___________________________
ALAN KLEBAN FAMILY TRUST
By:________________________
Name:
Title:
___________________________
BRUCE MALINOWSKI
___________________________
MUZAK LIMITED PARTNERSHIP
By:________________________
Name:
Title:
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<PAGE>
EXHIBIT A
Holder Shares of Common Stock
------ ----------------------
Muzak Limited Partnership 474,000
Craig W. Barnett 437,000
Mark D. Braunstein 342,000
Bruce Malinowski 100,000
Gordon Group 475,000
Barry Braverman 380,000
Ram Reddy 114,000
Jodi Jamieson 57,000
Jim Horgan 47,500
Larry Barnett 47,500
<PAGE>
EXHIBIT B
Form of Legal Opinion
For the purposes of these opinions we shall assume, with the
permission of the Company, that the procedural and substantive laws of the
State of New Jersey are the same as those in the State of Delaware.
(a) COL is a limited liability company duly organized, validly
existing and in good standing under the laws of New Jersey. With respect to
COL's good standing we have relied solely upon a certificate of the Secretary
of State of the State of New Jersey.
(b) COL has the power and authority under its Articles of Formation,
the Operating Agreement and New Jersey Law to own, lease and operate its
current properties and to transact the business in which it is currently
engaged.
(c) COL has all necessary power and authority under its Articles of
Formation and the New Jersey Law to execute and deliver the Merger Agreement
and to perform its obligations thereunder. The execution, delivery and
performance by COL of the Merger Agreement have been duly authorized by all
necessary action of COL.
(d) The Merger Agreement has been duly executed and delivered on
behalf of COL and constitutes a valid and binding obligation of COL,
enforceable against COL in accordance with its terms, subject to customary
enforceability qualifications.
(e) The execution, delivery and performance by COL of the Merger
Agreement do not (i) require any approval of its members which has not been
obtained or (ii) violate the New Jersey Law or COL's Articles of Formation or
the Operating Agreement.
(f) Upon the filing of the Articles of Merger in accordance with the
Delaware Law, the merger of COL into the Company will be legally effective in
accordance with the New Jersey Law.
Provided, that further assumptions and qualifications to these legal
opinions are to be contained in Counsel's final form of legal opinion.
In addition to the opinions contained above, the opinion letter shall
contain a factual statement to the effect that to the best of our knowledge
and without the benefit of conducing a lien search or any independent
investigation, all of the outstanding Interests are held by the Holders free
and clear of all security interests, liens, claims, pledges, agreements,
limitations or other encumbrances of any nature whatsoever.
<PAGE>
EXHIBIT C
CERTIFICATE
The undersigned has executed and delivered this Certificate to COL
Acquisition Corp. (the "Company") this ____ day of September, 1996 pursuant to
Section 7.2(h) of that certain Agreement and Plan of Merger and Reorganization
dated September __, 1996, by and among the Company, Coupons Online, L.L.C.,
and the Holders named therein (the "Merger Agreement"). The undersigned
acknowledges that the Company is relying upon the representations and
warranties contained herein in issuing its Common Stock to the undersigned as
Merger Consideration pursuant to the Merger Agreement.
NOW THEREFORE, the undersigned hereby certifies as follows:
1. [He/She] has received a copy of the Merger Agreement. The
undersigned acknowledges that [he/she] has had sufficient time to review the
Merger Agreement and has had the opportunity to ask questions and receive
answers concerning the terms and conditions of the merger contemplated by the
Merger Agreement and to obtain any additional information which Acquisition
Corp. possesses or can acquire without unreasonable effort or expense to
verify the information contained in the foregoing documents.
2. The undersigned has such knowledge and experience in financial and
business matters that [he/she] is capable of evaluating the merits and risks
of an investment in the Company's Common Stock.
3. The undersigned acknowledges that the shares of the Company's
Common Stock delivered to the undersigned as Merger Consideration pursuant to
the Merger Agreement have not been registered under the Securities Act of
1933, as amended, or any state securities laws and, unless so registered, may
not be offered or sold in the United States except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws.
4. The undersigned is acquiring the shares of the Company's Common
Stock issuable to [him/her] pursuant to the Merger Agreement for [his/her] own
account.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
this _____ day of September, 1996.
<PAGE>
ANNEX I
COL and Active Holders' Representations and Warranties
11. Organization and Qualification; Subsidiaries. COL is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of New Jersey and has the requisite power and authority
and is in possession of all franchises, grants, authorizations, licenses,
permits, easements, consents, certificates, approvals and orders (collectively
"Approvals") necessary to own, lease and operate the properties it purports to
own, operate or lease and to carry on its business as it is now being
conducted. COL does not directly or indirectly own any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any equity or similar interest in any corporation, partnership, joint
venture or other business association, entity or person.
12. Articles of Formation and Operating Agreement. COL has heretofore
delivered to the Company complete and correct copies of its Articles of
Formation and the Operating Agreement as amended to date, certified as such by
its Secretary. Each of the Articles of Formation and the Operating Agreement
are in full force and effect. COL is not in violation of any of the provisions
of its Articles of Formation or the Operating Agreement.
13. Capitalization. COL's current outstanding Interests are as set
forth on Schedule 3 of that certain written disclosure schedule, dated of even
date herewith, delivered by COL to the Company (the "COL Disclosure Schedule")
and are free and clear of all security interests, liens, claims, pledges,
agreements, limitations, charges or other encumbrances of any nature
whatsoever. Except for those certain oral arrangements with Malinowski which
shall be terminated at the Effective Time pursuant to Sections 1.6(b) and (c)
of the Agreement (the "Malinowski Arrangement"), there are no rights,
agreements, arrangements or outstanding commitments of any character relating
to any equity interests in COL or obligating COL to transfer any such equity
interests and, COL has not adopted or made any commitment to adopt any plan
for the issuance of any of its equity interests. There are no obligations,
contingent or otherwise, of COL to repurchase, redeem or otherwise acquire any
of its Interests or any interests therein or to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
person.
14. Authority Relative to this Agreement. COL has all necessary power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by COL and the consummation by
COL of the transactions contemplated hereby have been duly and validly
authorized by all necessary action and no other proceedings on the part of COL
are necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly and validly executed and delivered
by COL and, assuming the due authorization, execution and delivery by the
Company constitutes the legal, valid and binding obligation of COL,
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<PAGE>
enforceable against COL in accordance with its terms.
15. No Conflict; Required Filings and Consents.
15.1. Section 5(a) of the COL Disclosure Schedule includes a
list of (i) all contracts to which COL is a party and which provides for
aggregate payments, either to or from COL, of $10,000 or more and (ii) all
other agreements which are material to the business, assets (including
intangible assets), financial condition, prospects or results of operations of
COL ((i) and (ii) being, collectively, the "Material Contracts"). COL has
delivered to the Company true and correct copies of all Material Contracts, as
amended to date, certified as such by its Secretary, except for the Letter
Agreement and the VDC Loan Agreement (and all documents executed in connection
therewith) which have previously been delivered to the Company.
15.2. The execution and delivery of this Agreement by COL
does not, and the performance of this Agreement by COL will not, (i) conflict
with or violate the Articles of Formation or the Operating Agreement or
equivalent organizational documents of COL, (ii) conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to COL or by which
COL or any of its respective properties is bound or affected, or (iii) result
in any breach of or constitute a default (or an event that, with notice or
lapse of time or both, would become a default), or impair COL's rights or
alter the rights or obligations of any third party under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
Material Contract or any agreement to which COL is a party, or result in the
creation of a lien or encumbrance on any of the properties or assets of COL
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which COL is a
party or by which COL or any of its properties is bound or affected, except in
the event that any such breach, default or other occurrence would not and is
not reasonably likely to have a Material Adverse Effect.
15.3. The execution and delivery of this Agreement by COL
does not, and the performance of this Agreement by COL will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
for the filing and recordation of appropriate merger or other documents as
required by New Jersey Law and Delaware Law and (ii) where the failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent or delay consummation of the
Merger, or otherwise prevent or delay COL from performing its obligations
under this Agreement, or would not and is not reasonable likely to otherwise
have a Material Adverse Effect.
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<PAGE>
16. Compliance; Permits.
16.1 Except as set forth in Section 6 of the Disclosure
Schedule, COL is not in conflict with, or in default or violation of, (i) any
law, rule, regulation, order, writ, judgment or decree applicable to it or by
which it or any of its properties is bound or affected, except in the event
that such conflict, default or violation would not and is not reasonably
likely to have a Material Adverse Effect or (ii) any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which it is a party or by which it or any of its
properties is bound or affected, except in connection with the Surviving
Claims.
16.2 COL holds all permits, licenses, easements, variances,
exemptions, consents, certificates, orders and approvals from governmental
authorities which are material to the operation of its business (collectively,
the " COL Permits"). COL is in compliance with the material terms of each of
the COL Permits.
17. Financial Statements. COL has furnished to the Company its
balance sheet as of December 31, 1995 and its balance sheet (the "Balance
Sheet") as of June 30, 1996, certified by its President. All such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied ("GAAP") and fairly present the position of
COL as of December 31, 1995 and June 30, 1996, respectively. There has not
been any change in the assets, liabilities or financial condition of COL from
that reflected in the Balance Sheet except for changes in the ordinary course
of business which in the aggregate have not had and are not reasonably likely
to have a Material Adverse Effect, it being understood that COL currently
suffers from insufficient capital and cash flow.
18. Absence of Certain Changes or Events. Since the date of the
Balance Sheet, COL has conducted its business in the ordinary course (except
for activities in connection with the transactions contemplated by the Letter
Agreement) and there has not occurred: (i) any amendments or changes in the
Articles of Formation or Operating Agreement of COL, except for the amendment
to the Operating Agreement recommended by Ernst & Young, LLP to clarify COL's
accounting treatment which shall be executed by all the Holders prior to the
Closing Time; (ii) any damage to, or destruction or loss of, any assets of COL
(whether or not covered by insurance) that had or is reasonably likely to have
a Material Adverse Effect; (iii) any material depletion of any assets of COL;
(iv) any change by COL in its accounting methods, principles or practices; (v)
any revaluation by COL of any of its assets, including, without limitation,
writing down the value of capitalized inventory, or writing off notes or
accounts receivable; (vi) any transfer of, or rights granted under, any
material leases, licenses, agreements, patents, trademarks, trade names or
copyrights other than those transferred or granted in the ordinary course of
business or pursuant to the VDC Loan Agreement; (vii) any mortgage, pledge,
security interest or imposition of lien or other encumbrance on any asset of
COL except for Permitted Liens and liens incurred pursuant to the VDC Loan
Agreement; (viii) any early collection, at a discount of par, of any
receivable of COL; or (ix) any event that had or is reasonably likely to have
a Material Adverse Effect.
-3-
<PAGE>
19. No Undisclosed Liabilities and Commitments. COL has no
liabilities, obligations or commitments (absolute, accrued, contingent or
otherwise) (collectively, the "COL Liabilities"), including, without
limitation, any outstanding loans, notes, or indebtedness payable to the
Holders, except for such COL Liabilities (i) set forth on the Balance Sheet;
(ii) arising in the ordinary course of business with respect to periods after
the date of the Balance Sheet under any contracts or agreements set forth in
Section 5(a) of the COL Disclosure Schedule; (iii) trade accounts payable
(i.e., accounts payable, accrued expenses and fees and expenses of counsel and
accountants incurred in connection with the preparation of and transactions
contemplated by the Letter Agreement, VDC Loan Agreement and this Agreement)
and Taxes (as defined in item 16 hereof) incurred by COL after the date of the
Balance Sheet in the ordinary course of business and (iv) the Surviving
Claims. Those COL Liabilities which (A) relate to occurrences after the
Closing Time or (B) are described in clauses (i), (ii), (iii) and (iv) of the
preceding sentence are referred to herein as the "Assumed Liabilities".
20. Absence of Litigation. There are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of either of COL or
either of the Active Holders, threatened against COL or any properties or
rights of COL, before any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign.
21. Employee Benefit Plans; Employment Agreements.
21.1 COL's medical plans for the benefit of its employees
and COL's deferred compensation arrangements regarding the Surviving Claims
(collectively, the "Employee Plans") are the only employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")), regardless of whether ERISA is applicable
thereto, bonus, incentive, deferred compensation, supplemental retirement,
severance or termination pay, medical or life insurance, supplemental
unemployment benefits, profit-sharing, pension or retirement plan, agreement
or arrangement or other similar fringe or employee benefit plan, program or
arrangement, or current or former employment or executive compensation or
severance agreement, written or otherwise, for the benefit of, or relating to,
any current or former employee of COL or any trade or business (whether or not
incorporated) which is a member of a controlled group which includes COL or
which is under common control by COL (an "ERISA Affiliate") within the meaning
of Section 414 of the Code, to which COL or an ERISA Affiliate is a party,
with respect to which COL or an ERISA Affiliate has or could have any
obligation or incur liability if such plan or arrangement had been or was
terminated.
21.2 (i) No Employee Plan promises or provides retiree
medical or other retiree welfare benefits to any person and none is a
"multiemployer plan" as such term is defined in Section 3(37) of ERISA; (ii)
except in connection with the Surviving Claims, there has been no transaction
or failure to act with respect to any Employee Plan, which could result in any
material liability of COL; (iii) except in connection with the Surviving
Claims, each Employee Plan is in compliance in all material respects with the
requirements prescribed by any and all statutes, orders, or governmental rules
and regulations currently in effect with respect thereto, and COL has
performed
-4-
<PAGE>
all material obligations required to be performed by it under, is not in
default under or violation of, and has no knowledge of any default or
violation by any other party to, any Employee Plan; (iv) all contributions
required to be made to any Employee Plan, pursuant to the terms of such
Employee Plan or any collective bargaining agreement, have been made on or
before their due dates and a reasonable amount has been accrued for any
required contributions to any Employee Plan for the current plan years; (vi)
with respect to any Employee Plan, no "reportable event" within the meaning of
Section 4043 of ERISA (excluding any such event for which the thirty (30) day
notice requirement has been waived under the regulations to Section 4043 of
ERISA) nor any event described in Sections 4062, 4063 and 4041 of ERISA has
occurred; and (vii) neither COL nor any ERISA Affiliate has incurred, nor
reasonably expects to incur, any liability under Title IV of ERISA.
21.3 Each Employee Plan has been qualified, registered or
approved, as required, by the appropriate governmental agency or authority,
and nothing has occurred since the date of the last qualification,
registration or approval to adversely affect, or cause the appropriate
governmental agency or authority to revoke, such qualification, registration
or approval.
21.4 All contributions (including premiums) required by law
or contract (except with respect to the Surviving Claims) to have been made or
approved by COL under or with respect to any Employee Plan have been paid or
accrued by COL. Except in connection with the Surviving Claims, there are no
unfunded liabilities under any Employee Plan.
21.5 There are no pending or threatened (except with respect
to the Surviving Claims) investigations, litigation or other enforcement
actions against COL with respect to any Employee Plan.
21.6 There are no actions, suits or claims pending or
threatened (except with respect to the Surviving Claims) by former or present
employees of COL (or their beneficiaries) with respect to any Employee Plan or
the assets or fiduciaries thereof (other than routine claims for benefits).
21.7 Except in connection with the Surviving Claims, no
condition or event has occurred with respect to any Employee Plan which has or
could reasonably be expected to result in a material liability to COL.
21.8 COL has delivered to the Company (i) true and correct
copies of all agreements which it has with any of its employees, except for
the oral Malinowski Arrangement which has been previously disclosed to the
Company; (ii) true and correct copies of all agreements with consultants
obligating it to make annual cash payments in an amount exceeding $10,000;
(iii) a schedule listing all of its employees (if any) who have executed a
non-competition agreement with it, and (iv) true and correct copies of all
plans, programs, agreements and other arrangements of COL (if any) with or
relating to its employees which contain change in control provisions or
prohibit assignment thereof by COL without consent.
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<PAGE>
22. Labor Matters. There are no controversies pending or, to the
knowledge of COL or either of Active Holders, threatened, between COL and any
of its employees, which controversies have or are reasonably likely to have a
Material Adverse Effect, except for (i) the Surviving Claims and (ii) any
disputes which will be terminated at the Effective Time pursuant to Sections
1.6(b) and (c) of the Agreement; COL is not a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by it, nor does COL or either of the Active Holders know of any
activities or proceedings of any labor union to organize any such employees;
and neither COL nor either of the Active Holders has any knowledge of any
strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with
respect to any employees of COL.
23. Restrictions on Business Activities. Except for this Agreement
and the Muzak Agreement, there is no material agreement, judgment, injunction,
order or decree binding upon COL which has or could reasonably be expected to
have the effect of prohibiting or impairing any material business practice of
COL, the acquisition of property by COL or the conduct of business by COL as
currently conducted or as proposed to be conducted by COL.
24. Title to Property. COL does not own any real property. Section 14
of the COL Disclosure Statement sets forth a true and complete list of all
real property leased by COL, and the aggregate monthly rental or other fee
payable under such lease. Except for any and all Permitted Liens (as defined
in that certain Loan and Security Agreement, dated as of June 14, 1996, by and
between VDC Corporation and COL) and as set forth in Section 14 of the COL
Disclosure Schedule, COL has good, marketable and defensible title to all of
its properties and assets, free and clear of all liens, charges and
encumbrances, except liens for taxes not yet due and payable and such liens or
other imperfections of title, if any, as do not materially detract from the
value of or interfere with the present use of the property affected thereby or
which would not and are not reasonably likely to have a Material Adverse
Effect; and all leases pursuant to which COL leases from others real or
personal property are in good standing, valid and effective in accordance with
their respective terms, and there is not under any of such leases, any
existing default or event of default (or event which with notice or lapse of
time, or both, would constitute a default and in respect of which COL has not
taken adequate steps to prevent such a default from occurring).
25. Taxes.
25.1 For purposes of this Agreement, "Tax" or "Taxes" shall
mean taxes, fees, levies, duties, tariffs, imposts and governmental
impositions or charges of any kind in the nature of (or similar to) taxes,
payable to any federal, state, provincial, local or foreign taxing authority,
including (without limitation) (i) income, franchise, profits, gross receipts,
ad valorem, net worth, value added, sales, use, service, real or personal
property, special assessments, capital stock, license, payroll, withholding,
employment, social security, workers' compensation, unemployment compensation,
utility, severance, production, excise, stamp, occupation, premiums, windfall
profits, transfer and gains taxes and (ii) interest, penalties, additional
taxes and additions to taxes imposed with respect thereto; and "Tax Returns"
shall mean returns, reports and information statements with respect to Taxes
required to be filed with the United States Internal Revenue Service (the
"IRS") or
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<PAGE>
any other taxing authority, domestic or foreign, including, without
limitation, consolidated, combined and unitary tax returns.
25.2 COL, and any consolidated, combined, unitary or
aggregate group for Tax purposes of which COL is or has been a member, has
filed all United States federal income Tax Returns and all other material Tax
Returns required to be filed by them or any of them on or prior to the date
hereof and will file on or prior to the Effective Time all such Tax Returns
required to be filed on or prior to the Effective Time, and have paid and
discharged (or will pay and discharge prior to the Effective Time) all Taxes
shown therein to be due or are otherwise due to have been paid on an estimated
basis and there are no other Taxes that would be due if asserted by a taxing
authority, except such as are being contested in good faith by appropriate
proceedings (to the extent that any such proceedings are required) or with
respect to which COL is maintaining on its Balance Sheet, in accordance with
generally accepted accounting principles ("GAAP"), reserves which are adequate
for their payment. Neither the IRS nor any other taxing authority or agency is
now asserting or, to the best of COL's and each Active Holder's knowledge,
threatening to assert against COL any deficiency or claim for additional Taxes
other than additional Taxes with respect to which COL is maintaining on its
Balance Sheet, in accordance with GAAP, reserves which are adequate for their
payment. No Tax Return of COL is currently being audited by any taxing
authority. No material tax claim has become a lien on any asset of COL and COL
has not granted any waiver of any statute of limitations with respect to, or
any extension of a period for the assessment of, any Tax. COL is not required
to include in income (i) any material items in respect of any change in
accounting principles or any deferred intercompany transactions, or (ii) any
installment sale gain where, in each case, the inclusion in income would
result in a tax liability materially in excess of the reserves therefor.
25.3 COL is not a party to any agreement, contract or
arrangement that may result, separately or in the aggregate, in the payment of
any "excess parachute payment" within the meaning of Section 280G of the Code.
25.4 No power of attorney has been granted by COL with
respect to any matter relating to Taxes which is currently in force.
25.5 COL is not a party to any agreement or arrangement
(written or oral) providing for the allocation or sharing of Taxes.
25.6 COL has withheld from each payment made to any of its
respective past or present employees, officers or directors the amount of all
Taxes and other deductions required to be withheld therefrom and paid the same
to the proper tax or other governmental authorities within the time required
by law.
25.7 COL has remitted to the appropriate Tax authority when
required by law to do so all amounts collected by it on account of all retail
sales Tax.
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<PAGE>
25.8 Since its inception, COL has been classified as a
partnership for federal and state income tax purposes and has filed its Tax
Returns consistent with such classification.
26. Environmental Matters.
26.1 Except in all cases, in the aggregate, as have not had
and could not reasonably be expected to have a Material Adverse Effect, COL
(and with respect to clause (iii) below, each Active Holder) (i) has obtained
all applicable permits, licenses and other authorizations which are required
under federal, state, provincial or local laws relating to pollution or
protection of the environment, including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants or
hazardous or toxic materials or wastes into ambient air, surface water, ground
water or land or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or hazardous or toxic materials or wastes by COL (or
any of its agents); (ii) is in compliance with all terms and conditions of
such required permits, licenses and authorization, and also is in compliance
with all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in such laws or
contained in any regulation, code, plan, order, decree, judgment, notice or
demand letter issued, entered, promulgated or approved thereunder; (iii) as of
the date hereof, is not aware of nor have received notice of any event,
condition, circumstance, activity, practice, incident, action or plan which is
reasonably likely to interfere with or prevent continued compliance with or
which would give rise to any common law or statutory liability, or otherwise
form the basis of any claim, action, suit or proceeding, based on or resulting
from the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling, or the emission, discharge or release into
the environment, of any pollutant, contaminant or hazardous or toxic material
or waste by COL (or any of its agents); (iv) have taken all actions necessary
under applicable requirements of federal, state or local laws, rules or
regulations to register any products or materials required to be registered by
COL (or any of its agents) thereunder; and (v) has complied with all
applicable occupational safety and health requirements of federal, state or
local laws, rules or regulations relating to the use of storage of any
hazardous, toxic or carcinogenic substances.
26.2 There are no known environmental conditions or problems
at any site of operation of COL, including but not limited to the presence of
asbestos (friable or encapsulated), transformers containing PCBs, radon and
any aboveground or underground storage tanks.
26.3 None of the sites of operation of COL is a Superfund
site under the Comprehensive Environmental Response, Cleanup and Liability
Act, 42 U.S.C. ss. 9601 et seq. or has been proposed for listing on the
National Priorities List under that Act. Any deed restriction or public notice
required by any federal, state or local law, rule or regulation because any
site of operation of COL is contaminated has been complied with, and each such
deed restriction or public notice has been disclosed on Schedule 16 of the COL
Disclosure Schedule.
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<PAGE>
27. Intellectual Property.
27.1 Except for any liens in favor of Greenberg, Traurig,
Hoffman, Lipoff, Rosen & Quentel and the collateral assignment to VDC
Corporation pursuant to the VDC Loan Agreement, COL owns, or is licensed or
otherwise possesses legally sufficient rights to use, all patents, trademarks,
trade names, service marks, copyrights and any applications therefor,
technology, know-how, computer software programs or applications and tangible
or intangible proprietary information or material that are used or proposed to
be used in the business of COL as currently conducted in any material respect.
Section 17(a) of the COL Disclosure Schedule lists all current and past
(lapsed, expired, abandoned or canceled) patents, registered and material
unregistered trademarks and service marks, registered and material
unregistered copyrights, trade names and any applications therefor owned by
COL (the "COL Intellectual Property Rights"), and specifies the jurisdictions
in which each such COL Intellectual Property Right has been issued or
registered or in which an application for such issuance and registration has
been filed, including the respective registration or application numbers and
the names of all registered owners. Section 17(a) of the COL Disclosure
Schedule lists (i) any requests COL has received to make any registration of
the type referred to in the immediately preceding sentence, including the
identity of the requestor and the item requested to be so registered, and the
jurisdiction for which such request has been made; (ii) all material licenses,
sublicenses and other agreements as to which COL is a party and pursuant to
which any person is authorized to use any COL Intellectual Property Right, or
any trade secret material to COL, and includes the identity of all parties
thereto, a description of the nature and subject matter thereof, the
applicable royalty and the term thereof; and (iii) all material licenses,
sublicenses and other agreements as to which COL is a party and pursuant to
which COL is authorized to use any intellectual property rights ("Third Party
Intellectual Property Rights"), or other trade secret of a third party in or
as any product, and includes the identity of all parties thereto, a
description of the nature and subject matter thereof, the applicable royalty
and the term thereof.
27.2 COL is not, nor will it be, as a result of the
execution and delivery of this Agreement or the performance of its obligations
hereunder, in violation of any license, sublicense or agreement described in
Section 17(a) of the COL Disclosure Schedule. No claims with respect to the
Company Intellectual Property Rights, any trade secret material to COL, or
Third Party Intellectual Property Rights to the extent arising out of any use,
reproduction or distribution of such Third Party Intellectual Property Rights
by or through COL, are currently pending or, to the knowledge of COL or either
of the Active Holders are threatened by any person, nor does COL or either of
the Active Holders know of any valid grounds for any bona fide claims (i) to
the effect that the manufacture, sale, licensing or use of any product as now
used, sold or licensed or proposed for use, sale or license by COL infringes
on any copyright, patent, trademark, service mark or trade secret; (ii)
against the use by COL of any trademarks, trade names, trade secrets,
copyrights, patents, technology, know-how or computer software programs and
applications used in the business of COL as currently conducted or as proposed
to be conducted by COL; (iii) challenging the ownership, validity or
effectiveness of any of the COL Intellectual Property Rights or other trade
secret material to COL; or (iv) challenging the license or legally enforceable
right to use of the Third Party Intellectual Property Rights. To the knowledge
of COL and each Active Holder, all patents,
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<PAGE>
registered trademarks, trade names and copyrights held by COL are valid and
subsisting. To the knowledge of COL and each Active Holder, there is no
material unauthorized use, infringement or misappropriation of any of the COL
Intellectual Property Rights by any third party, including any employee or
former employee of COL.
27.3 COL (nor does either of the Active Holders in the case
of clause (ii) below) (i) has not been sued or charged in writing as a
defendant in any claim, suit, action or proceeding which involves a claim or
infringement of trade secrets, any patents, trademarks, service marks, trade
names or copyrights and which has not been finally terminated prior to the
date hereof or been informed or notified by any third party that COL may be
engaged in such infringement or (ii) has no knowledge of any infringement
liability with respect to, or infringement by, COL of any trade secret,
patent, trademark, service mark, trade names or copyright of another.
27.4 COL is not aware that any of its employees is obligated
under any contract or contracts (including licenses, agreements, covenants and
other commitments of any nature), or is subject to any order, writ, judgment,
injunction, decree, determination or award of any court, administrative agency
or other tribunal, that restricts the employee's activities on behalf of COL
as presently conducted or interfere with the use of such employee's best
efforts to promote the interests of COL.
28. Interested Party Transactions. No manager or employee of COL and
no Holder nor any relative or any affiliate of any of the foregoing (i) has
any pecuniary interest in, or receives any compensation for services, from,
any supplier, customer, licensor or licensee of COL or in any other business
enterprise with which COL conducts business or with which COL is in
competition or (ii) is indebted to COL; provided, however, that the foregoing
representation does not apply to the ownership by Holders of up to two percent
(2%) of the outstanding equity securities of any company whose stock is traded
on a national securities exchange or quoted on a national interdealer
quotation system. Except as set forth on Section 18 of the COL Disclosure
Schedule, no compensation has been paid during the last twelve months by COL
to either Active Holder or to any relatives or affiliates of any Holder.
29. Insurance. Section 19 of the COL Disclosure Schedule lists all
insurance policies, including, but not limited to fidelity bonds, covering the
assets, business, equipment, properties, operations, employees, officers and
directors of COL. There is no claim by COL pending under any of such policies
or bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums payable under all such
policies and bonds have been paid and COL is otherwise in full compliance with
the terms of such policies and bonds. COL does not know of any threatened
termination of, or any threatened material premium increase with respect to,
any such policies.
30. Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of COL or either of the Active Holders.
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<PAGE>
31. Full Disclosure. No statement contained herein or in any
certificate or schedule furnished or to be furnished by COL to the Company in,
or pursuant to the provisions of, this Agreement contains or shall contain any
untrue statement of a material act or omits or will omit to state any material
fact necessary, in the light of the circumstances under which it was made, to
make the statements herein or therein not misleading.
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<PAGE>
COL Disclosure Schedule Under Annex I
Schedule 1.6(c) - Surviving Claims
<TABLE>
<CAPTION>
<S> <C> <C>
o Credit Cards (in Craig Barnett's Name) 37,186.75 (as of 8/30/96)
o Craig & Larry Barnett (loan) 41,066.19 (as of 8/30/96)
o Mark Braunstein (loan) 2,000.00 (as of 8/30/96)
o Bruce Malinowski 161,458.33 (as of 8/31/96)
o Bruce Malinowski (Back Salary) 29,838.90 (as of 9/6/96)
o Craig Barnett (Back Salary) 10,416.02 (as of 9/6/96)
o Mark Braunstein (Back Salary) 11,000.00 (as of 9/6/96)
Total Significant Debt at Closing: 255,779.44
---------------------------------- ----------
</TABLE>
Schedule 3
Current outstanding interest in Coupons Online LLC
Gordon Group 25%
Craig Barnett 23%
Barry Braverman 20%
Mark Braunstein 18%
Ram Reddy 6.0%
Jodi Jamieson 3.0%
James Horgan 2.5%
Larry Barnett 2.5%
TOTAL INTEREST 100%
Schedule 5(a) - Contracts/Agreements
Greenberg Traurig - Retainer Letter Attached
The following documents have already been provided:
Patent Assignment
Letter Agreement with American Maple Leaf, and all
associated documents Bridge Loan Agreement with VDC, and all
associated documents Office Lease in NYC Muzak Letter of
Intent and all associated documents
Page 1
<PAGE>
Schedule 6:
Monies owed to the following companies/individuals against invoices
or contracts is overdue. The amounts shown below are amounts invoiced/accrued
through the dates indicated, and as such, totals will be amended by additional
amounts invoiced/accrued through the Effective Date for legal fees (to be
invoiced by Greenberg Traurig), credit cards and the amounts under the heading
"Back Salary Since June 15, 1996.":
<TABLE>
<CAPTION>
<S> <C> <C>
Outstanding/Overdue Accounts:
o Lee Laino Associates 15,670.29 (as of 8/30/96)
o Greenberg Traurig 45,118.38 (as of 8/30/96)
o NPM Advertising 10,000.00 (as of 8/30/96)
o Credit Cards 37,186.75 (as of 8/30/96)
Subtotal 107,975.42
Loans to the Company:
o Craig & Larry Barnett 41,066.19 (as of 8/30/96)
o Mark Braunstein 2,000.00 (as of 8/30/96)
Subtotal 43,066.19
Back Salary/Consulting Fees Pre-June 15, 1996:
o Bruce Malinowski 161,458.33 (as of 8/31/96)
o Ralph McCarthy 52,000.00 (as of 8/30/96)
o Madhukar Sannikommu 20,000.00 (as of 8/30/96)
Subtotal 233,458.33
Back Salary Since June 15, 1996
o Bruce Malinowski 29,838.90 (as of 9/6/96)
o Craig Barnett 10,416.02 (as of 9/6/96)
o Mark Braunstein 11,000.00 (as of 9/6/96)
Subtotal 51,254.92
Total Significant Debt at Closing: 435,754.86
---------------------------------- ----------
</TABLE>
Schedule 11(h):
The only written agreement between Coupons Online and any consultant
relates to Michael Clark. This was prepared by Klehr Harrison, and as such
they have the current document.
Schedule 14:
Coupons Online is party to two leases. The office lease for its
Madison Avenue office has been previously provided. Attached is a lease with
AT&T Capital Corporation for one Toshiba notebook computer.
Page 2
<PAGE>
There are no liens on the real property lease or on the other
property of COL other than liens per the bridge loan agreement and liens in
favor of Greenburg Traurig regarding the intellectual property.
Schedule 16:
As of the time of this merger agreement, there are no known or
suspected environmental conditions or problems at any site of operation of
Coupons Online, LLC.
Schedule 17(a):
I. Patent filed in April 1995 for the Coupons Online technology
and methodology, which has been provided previously.
II. Coupons Online is in the process of filing for registration
of its Coupons Online trademark, using Greenberg Traurig as
council.
Schedule 18:
Between September 1, 1995 and August 30, 1996, the following
compensation was paid to the active holders and to all relatives and
affiliates of any Holder:
Craig Barnett $8,584.58 + Health Insurance amounting to less than
$2,200
Mark Braunstein $8,000.00 + Health Insurance benefits (premiums
amounting to less than $800)
Karen Reisner Health Insurance amounting to less than
$2,200 (Wife of Craig Barnett and Secretary
of COL)
Madhukar Sannikommu (Brother-in-law of Holder Ram Reddy)
performed consulting services in the form of computer
programming and system development for COL
$6,000 Paid
$20,000 Accrued
Schedule 19:
Employee health insurance policy which has been previously provided.
Page 3
<PAGE>
ANNEX II
--------
Holders' Representations and Warranties
1. Authority Relative to this Agreement. This Agreement has been duly
and validly executed and delivered by Holder and, assuming the due
authorization, execution and delivery by COL, the Company and each other
Holder, constitutes the legal, valid and binding obligation of Holder,
enforceable against Holder in accordance with its terms.
2. No Conflict; Required Filings and Consents.
2.1 The execution and delivery of this Agreement by Holder
does not, and the performance of this Agreement by Holder will not, (i)
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Holder or by which Holder or any of his respective properties is
bound or affected, or (ii) result in any breach of or constitute a default (or
an event that, with notice or lapse of time or both, would become a default),
or impair Holder's rights or alter the rights or obligations of any third
party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement to which Holder is a party.
2.2 The execution and delivery of this Agreement by Holder
does not, and the performance of this Agreement by Holder will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic or
foreign, except (i) for the filing and recordation of appropriate merger or
other documents as required by New Jersey Law and Delaware Law and (ii) where
the failure to obtain such consents, approvals, authorizations or permits, or
to make such filings or notifications, would not prevent or delay consummation
of the Merger, or otherwise prevent or delay Holder from performing his
obligations under this Agreement, or would not and is not reasonable likely to
otherwise have a Material Adverse Effect.
3. Interested Party Transactions. Neither Holder nor any relative or
any affiliate of Holder, (i) has any pecuniary interest in, or receives any
compensation for services from, any supplier, customer, licensor or licensee
of COL or in any other business enterprise with which COL conducts business or
with which COL is in competition or (ii) is indebted to COL; provided,
however, that the foregoing representation does not apply to the ownership by
Holder of up to two percent (2%) of the outstanding equity securities of any
company whose stock is traded on a national securities exchange or quoted on a
national interdealer quotation system. During the last twelve months, neither
Holder nor any relative or any affiliate of Holder has received any
compensation paid by COL, except for compensation paid to C. Barnett,
Braunstein, Reisner and Jamieson.
4. Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement
<PAGE>
based upon arrangements made by or on behalf of any of the Passive Holders.
5. Full Disclosure. No statement contained herein or in any
certificate or schedule furnished or to be furnished by Holder to the Company
in, or pursuant to the provisions of, this Agreement contains or shall contain
any untrue statement of a material act or omits or will omit to state any
material fact necessary, in the light of the circumstances under which it was
made, to make the statements herein or therein not misleading.
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<PAGE>
ANNEX III
---------
Company's Representations and Warranties
1. Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the requisite corporate power and authority and is in
possession of all Approvals necessary to own, lease and operate the properties
it purports to own, operate or lease and to carry on its business as it is now
being conducted. The Company is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction
where the character of its properties owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary,
except for such failures to be so duly qualified or licensed and in good
standing that would not and are not reasonably likely to have a Material
Adverse Effect.
2. Authority Relative to this Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby (subject to the satisfaction of the conditions to consummation set
forth herein) have been duly and validly authorized by all necessary corporate
action on the part of the Company, and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement or to consummate
the transactions so contemplated. The Board of Directors of the Company has
determined that it is advisable and in the best interest of the Company's
stockholders for the Company to enter into and perform this Agreement. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by COL and each of the
Holders, constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
3. No Conflict; Required Filings and Consents.
3.1 The execution and delivery of this Agreement by the
Company does not, and the performance of this Agreement by the Company shall
not, (i) conflict with or violate the Certificate of Incorporation or By-Laws
of the Company, (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to the Company or any of its subsidiaries
or by which its or their respective properties are bound or affected, or (iii)
result in any breach of or constitute a default (or an event which with notice
or lapse of time or both would become a default) under, or impair the
Company's rights or alter the rights or obligations of any third party under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any Material Contract or any material agreement to which the
Company is a party or result in the creation of a lien or encumbrance on any
of the properties or assets of the Company or any of its subsidiaries pursuant
to, any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit,
<PAGE>
franchise or other instrument or obligation to which the Company is a party or
by which properties are bound or affected, except in any such case for any
such breaches, defaults or other occurrences that would not and is not
reasonably likely to have a Material Adverse Effect.
3.2 The execution and delivery of this Agreement by the
Company will not require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority,
domestic or foreign, except (i) for the filing and recordation of appropriate
merger or other documents as required by New Jersey Law and Delaware Law; (ii)
for applicable requirements, if any, of the Securities Act and applicable
state securities laws ("Blue Sky Laws") and (iii) where the failure to obtain
such consents, approvals, authorizations or permits, or to make such filings
or notifications, would not prevent or delay consummation of the Merger, or
otherwise prevent the Company from performing their respective obligations
under this Agreement, and would not and is not reasonably likely to have a
Material Adverse Effect.
4. Certificate of Incorporation and By-Laws. The Company has
heretofore furnished to COL complete and correct copies of its Certificate of
Incorporation and By-Laws, certified as such by the Company's Secretary. Such
Certificates of Incorporation and By-Laws are in full force and effect. The
Company is not in violation of any of the provisions of its Certificate of
Incorporation or By-Laws.
5. Capitalization. As of the date hereof, the authorized capital
stock of the Company consisted of 20,000,000 shares of Common Stock of which:
1,090,000 shares are issued and outstanding, 500,000 shares are reserved for
future issuance pursuant to the exercise of certain outstanding warrants of
the Company to acquire Common Stock and an aggregate of 7,088,000 shares are
reserved for issuance in connection with the transactions contemplated by the
Agreement, including, without limitation, those transactions described in
Section 7.1(b) of the Agreement. All of such shares have been duly authorized
and are, or upon issuance will be, validly issued, fully paid and
nonassessable.
6. Compliance; Permits.
6.1 The Company is not in conflict with, in default with
respect to or in violation of (i) any law, rule, regulation, order, judgment
or decree applicable to the Company or by which its properties is bound or
affected or (ii) any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
the Company is a party or by which the Company is or any of its properties is
bound or affected.
6.2 The Company holds all material permits, licenses,
easements, variances, exemptions, consents, certificates, orders and approvals
from governmental authorities which are material to the operation of the
business of the Company as it is now being conducted (collectively, the
"Company Permits").
2
<PAGE>
7. Restrictions on Business Activities. Except for this Agreement,
there is no existing material agreement, judgment, injunction, order or decree
binding upon the Company which has or could reasonably be expected to have the
effect of prohibiting or materially impairing any business practice of the
Company or any of its subsidiaries, any acquisition of property by the Company
or any of its subsidiaries or the conduct of business by the Company as
currently conducted or as proposed to be conducted by the Company.
8. Title to Property. The Company has good, marketable and defensible
title to all of its properties and assets, free and clear of all liens,
charges and encumbrances except liens for taxes not yet due and payable and
such liens or other imperfections of title, if any, as do not materially
detract from the value of or interfere with the present use of the property
affected thereby or which would not and are not reasonably likely to have a
Material Adverse Effect; and, to the Company's knowledge, all leases pursuant
to which the Company leases from others material amounts of real or personal
property are in good standing, are valid and effective in accordance with
their respective terms, and there is not, to the knowledge of the Company,
under any of such leases, any existing material default or event of default
(or event which, with notice or lapse of time, or both would constitute a
material default and in respect of which the Company has not taken adequate
steps to prevent such a default from occurring) except where the lack of such
good standing, validity and effectiveness, or the existence of such default or
event of default would not and is not reasonably likely to a Material Adverse
Effect.
9. Full Disclosure. No statement contained herein or in any
certificate or schedule furnished or to be furnished by the Company to either
COL or to any Holder in, or pursuant to the provisions of, this Agreement
contains or will contain any untrue statement of a material fact or omits or
shall omit to state any material fact necessary, in the light of the
circumstances under which it was made, to make the statements herein or
therein not misleading.
10. No Undisclosed Liabilities. As of the date hereof and the
Effective Time, except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions contemplated by
this Agreement and except for this Agreement and any other agreements or
arrangements contemplated by this Agreement, including, without limitation,
any and all agreements contemplated by Section 7.1(b), the Company has not and
will not have incurred, directly or indirectly, through any subsidiary or
affiliate, any obligations or liabilities or engaged in any business
activities of any type or kind whatsoever or entered into any agreements or
arrangements with any person.
11. Absence of Litigation. There are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of the Company,
threatened against it, or any properties or rights of the Company or any of
its subsidiaries, before any court, arbitrator or administrative, governmental
or regulatory authority or body, domestic or foreign.
12. Taxes. The Company and any consolidated, combined, unitary or
aggregate group for Tax purposes of which the Company is or has been a member,
have filed all United States federal
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<PAGE>
income Tax Returns and all other material Tax Returns required to be filed by
them or any of them, and have paid and discharged all Taxes shown therein to
be due and there are not other Taxes that would be due if asserted by a taxing
authority, except such as are being contested in good faith by appropriate
proceedings (to the extent that any such proceedings are required) or with
respect to which the Company is maintaining reserves in accordance with GAAP
in its financial statements to the extent currently required which are in all
material respects adequate for their payment, except, in each instance, to the
extent the failure to do so would not and is not reasonably likely to have a
Material Adverse Effect. Neither the IRS nor any other taxing authority or
agency is now asserting or, to the best of the Company's knowledge,
threatening to assert against the Company or any of its subsidiaries any
deficiency or claim for additional Taxes other than additional Taxes with
respect to which the Company is maintaining reserves in accordance with GAAP
in its financial statements which are in all material respects adequate for
their payment, except, in each instance, to the extent that the failure to do
so would not and is not reasonably likely to have a Material Adverse Effect.
No Tax Return of the Company is currently being audited by any taxing
authority except as would not and is not reasonably likely to have a Material
Adverse Effect. No material tax claim has become a lien on any assets of the
Company or any subsidiary thereof and has not, except as would not and is not
reasonably likely to have a Material Adverse Effect, granted any waiver of any
statute of limitations with respect to, or any extension of a period for the
assessment of, any Tax.
13. Registration Statement. At the time the Registration Statement
(including any amendments or supplements thereto) is declared effective by the
SEC, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements included therein, in
light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information suppled by COL or any Holder which is
contained in, or furnished in connection with the preparation of the
Registration Statement.
4
<PAGE>
Exhibit 10.10
netValue, inc.
1960 Bronson Road
Building Two
Fairfield, Connecticut 06430
Mr. Craig W. Barnett
Mr. Mark Braunstein
Dear Mark and Craig:
This letter will serve to evidence the agreements between each of
Craig W. Barnett ("Barnett") and Mark Braunstein ("Braunstein") and netValue,
inc. (the "Company") regarding the mutual release from performance under your
respective employment agreements with the Company (the "Employment
Agreements").
Upon the execution of a definitive agreement between the Company and
IQ, Inc. regarding the licensing of the Company's systems and software (the
"IQ Agreement"), the Employment Agreements shall automatically be terminated.
Upon such event, Barnett and Braunstein and the Company shall each waive all
rights, privileges, claims and obligations that such parties have under the
Employment Agreements. Upon the execution of the IQ Agreement and in exchange
for the termination of the Employment Agreements, the Company agrees as
follows:
1. Each of Barnett and Braunstein shall be entitled to receive their current
salaries, consisting of an $85,000 base payment (defined in the Employment
Agreements as "The Starting Salary") and a $15,000 Draw against the current
year's earned commissions, until September 30, 1998. To the extent that the
Draw exceeds the commissions earned by each of Barnett and Braunstein in
accordance with the terms of the Employment Agreements (and exclusive of any
payments received by the Company from IQ, Inc.) through September 30, 1998,
such excess, if any (the "Excess Draws"), shall be repaid by either of them in
accordance with paragraph 5 hereof. As stated in the Employment Agreements,
the salaries shall continue to be paid in accordance with the Company's normal
payment practices (but not less frequently than bi-weekly).
2. Each of Barnett and Braunstein shall receive a cash payment of $20,000,
$10,000 of which shall be payable upon the execution of the IQ Agreement and
$10,000 of which shall be payable upon the earlier of (i) 90 days after the
execution of the IQ Agreement, or (ii) the Company's receipt of the proceeds
of the initial public offering of its Common Stock (the "IPO").
<PAGE>
3. The Company shall issue to each of Barnett and Braunstein options to
purchase 75,000 shares of the Company's Common Stock at the per share price of
the Company's IPO. These options shall vest immediately upon issuance and
shall be exercisable for a period of two years from the date of issuance.
These options will be subject to any restrictions on sale or transfer (the
"Lock-up Agreement") required by the underwriter of such IPO (the
"Underwriter"). These options are in addition to the options to purchase
15,000 shares of the Company's Common Stock which have previously been granted
to each of Barnett and Braunstein and have vested under the Company's
Non-Qualified Stock Option Plan.
4. Within 5 business days of executing this letter agreement, the Company
agrees to deliver (i) certificates representing 737,000 shares of the
Company's Common Stock to Barnett; and (ii) certificates representing 642,000
shares of the Company's Common Stock to Braunstein. The parties hereto
acknowledge and agree that except with respect to the shares which may be
issued in accordance with the terms of this letter agreement, these
certificates represent all of the shares of the Company's Common Stock owned
by Barnett and Braunstein. In consideration of the terms hereof, the Company
will permit each of Barnett and Braunstein to sell 20,000 shares of Common
Stock in the IPO.
5. The amount of any advances made or to be made to Braunstein and Barnett
shall be considered loans from the Company to each of Barnett and Braunstein.
The principal amounts of these loans shall be due upon the earlier of 18
months from the execution of this letter agreement or the expiration of the
Lock-up Agreement. These principal amounts shall accrue interest at the rate
of interest at the rate of 8.5%, until the entire principal balance has been
repaid. These principal amounts are as follows:
a. Braunstein. (i) the amount of $8,344.66 representing general
advances; and (ii) the Excess Draw, if any.
b. Barnett. The Excess Draw, if any.
6. The Company will take all actions necessary to transfer ownership to
Barnett and Braunstein of the personal computers that each of Barnett and
Braunstein is presently using to perform work on behalf of the Company. This
obligation shall be limited to one personal computer for each of Barnett and
Braunstein. Barnett and Braunstein each represent and warrant that they are
not in possession of any other equipment or property of the Company, except
for such property and equipment used by them at the Company's executive
offices located at 1960 Bronson Road, Building Two, Fairfield, Connecticut
06430, which property or equipment shall be retained by the Company. The
Company agrees to timely make all payments under the computer lease with
Toshiba which is guaranteed by Craig Barnett and agrees to indemnify him from
any damages or claims resulting from its failure to do so.
7. The Company agrees to continue to pay all health insurance premiums for
the coverage
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<PAGE>
presently provided to each of Barnett and Braunstein until the date on which
IQ, Inc. begins to provide them with health insurance coverage, provided that
in no event shall this obligation of the Company extend beyond September 30,
1998.
8. The Company agrees to continue to reimburse the out-of-pocket expenses
incurred by each of Barnett and Braunstein in accordance with the terms of the
Employment Agreements until the date on which Barnett and/or Braunstein are
engaged by IQ, Inc. as employees or consultants, provided that in no event
shall this obligation of the Company extend beyond that date which is 60 days
subsequent to the execution of the IQ Agreement.
9. The parties acknowledge and agree that Sections 6, 7, 8b., 9, 20 and 22 of
the Employment Agreements shall survive the termination, if any, of the
Employment Agreements, provided that so long as Barnett and Braunstein are
employed by IQ, Inc. and are soliciting the Company's customers in furtherance
of the IQ Agreement, Section 8b. of the Employment Agreements shall not
survive with respect to customers of the Company.
10. The breach by any party of any terms or conditions of this letter
agreement shall be deemed to be a breach of the letter agreement by such
party.
Very truly yours,
NET VALUE, INC.
/ s / Michael A. Clark
---------------------------
Michael A. Clark, President
Agreed to and accepted:
/ s / Craig W. Barnett
- ------------------------------
Craig W. Barnett
/ s / Mark Braunstein
- ------------------------------
Mark Braunstein
3
<PAGE>
Exhibit 10.11
SYSTEM INTEGRATION AND DEVELOPMENT
MASTER SERVICES AGREEMENT
This SYSTEM INTEGRATION AND DEVELOPMENT MASTER SERVICES
AGREEMENT (this "Master Agreement") is effective as of November 11, 1996, is
made by and between NETVALUE, INC., a Delaware corporation (hereafter
"Customer"), with its principal office located at One Stamford Landing,
Stamford, Connecticut 06902, and DMR TRECOM, INC., a Delaware corporation
(hereafter "TRECOM"), with its principal office located at 333 Thornall
Street, Edison, New Jersey 08837-2246.
WITNESSETH:
WHEREAS, Customer and TRECOM have entered into a System Integration
and Development Agreement dated November 22, 1996 (the "SIDA"); and a first
amendment dated February 14, 1997 (the "First Amendment") to the SIDA
(collectively, the "Existing Agreement"); and
WHEREAS, TRECOM has provided the services called for under the Existing
Agreement; and
WHEREAS, Customer and TRECOM wish to prolong their relationship; and
WHEREAS, capitalized terms used in this Master Agreement are used as
defined in ss. 14 of this Master Agreement.
NOW, THEREFORE, TRECOM and Customer, intending to be legally bound,
hereby agree as follows:
Section 1.
GENERAL
a. Mutual Commitment and Cooperation. Subject to the terms and
conditions of this Master Agreement, TRECOM shall provide services (the
"Development Services") to develop consulting, computer programming, and other
services as necessary to implement the Work. Customer shall cooperate with
TRECOM in every reasonable way and in keeping with the Work Documents and the
Project Schedule to enable TRECOM to provide the Development Services.
1
<PAGE>
Customer shall also cooperate to accept the System based on the Acceptance
Criteria.
1.1.1 The parties anticipate that the Development
Services will include incidental deliverables or
goods, to be provided to Customer from time to
time, as authorized and specified in one or more
Statements of Work.
1.1.2 Customer and TRECOM will enter into a written
Statement of Work for each Project, and a copy of
each Statement of Work will be attached to this
Master Agreement as an exhibit, but failure to
attach any Statement of Work will not vitiate,
affect, diminish or impair any obligation of
Customer or TRECOM under any such Statement of
Work.
1.1.3 This Master Agreement does not authorize or commit
either Customer or TRECOM to any quantity or dollar
amount of Development Services. TRECOM may not
perform any Development Services without a
Statement of Work authorizing the Development
Services, signed by both Customer and TRECOM.
1.1.4 Customer shall be deemed to have received and
accepted Work Result provided under a Statement of
Work fifteen (15) days after delivery in the case
of Work Result other than a System unless
explicitly rejected by Customer as not
substantially conforming to a Statement of Work; in
cases where Work Result involves delivery of a
System, acceptance will be governed by the terms
and conditions of Section 3 of this Master
Agreement.
1.1.5 From time to time or from one Project to the next,
Customer and TRECOM may vary the terms of this
Master Agreement by means of any Statement of Work,
and in the event of any contradiction between the
terms and conditions of any Statement of Work and
this Master Agreement, the terms and conditions of
such Statement of Work shall prevail.
b. Project Directors. Each of TRECOM and Customer shall name a
project director for each Project. All responsibilities of the parties under
this Master Agreement shall be supervised and coordinated by TRECOM's project
director and by Customer's project director, or by such other person or
persons as the foregoing representatives may designate from time to time. No
change contemplated by ss. 7 hereof with respect to any Project shall be
effective unless evidenced by a writing signed by project directors of both
parties. Customer's project director shall not exercise direct control or
supervision over TRECOM's personnel but shall be available for consultation;
each party hereto shall be responsible for selection, supervision, direction
and control of its own personnel, including selection of such party's project
director.
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Section 2.
THE SYSTEM
a. Operational Environment. Any Statement of Work will provide that
one of the parties will provide the computing environment for the Development
Services for phases of any Project. TRECOM is not responsible for production
or support of any Work Result after acceptance, other than pursuant to ss. 11
of this Master Agreement.
b. System Implementation. Development Services in respect of any
Project will be carried out substantially according to the applicable
Statement of Work and Project Schedule, subject to any Excusable Delay.
Customer shall be responsible for installation of software on Customer's
computer environment, from time to time. TRECOM shall make training and
technical assistance available to Customer in connection with such
installation, at Customer's expense at TRECOM's regular rates. Customer and
TRECOM acknowledge and agree that any change may affect the Project Schedule
and may increase or decrease the price of the Development Services and agree
that an evaluation and revision of the Project Schedule and the Project Fee
will be made and approved each time a change request is made.
Section 3.
SOFTWARE DEVELOPMENT
a. Development Undertaking. TRECOM shall
3.1.1 commit and utilize sufficient resources to complete
any Project in a skilled, workmanlike manner and in
accordance with the Statement of Work therefor;
3.1.2 employ competent and skilled personnel having a
level of skill and experience in the area
commensurate with the requirements of the Work to
be performed;
3.1.3 use commercially reasonable, diligent efforts to
start, perform and complete all Development
Services in a timely manner and substantially in
accordance with each aspect of the Work Documents
and the Project Schedule;
3.1.4 notify Customer of any circumstances, when and as
they arise, that may reasonably be anticipated to
lead to a material deviation from the Project
Schedule for any Project; and
3.1.5 incorporate into the final version of any System
such modifications as normal and customary software
tests indicate are necessary.
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b. Customer Access. Customer may inspect TRECOM's performance, and
TRECOM will facilitate inspection, upon reasonable notice and at reasonable
times. TRECOM's inspection (or lack of inspection) will not be an acceptance
of any Work Result or a waiver of any right or warranty or preclude Customer
from rejecting defective Work Result. Without limiting the generality of the
foregoing, Customer shall, upon reasonable advance notice to TRECOM, have
access during normal business hours to the premises where Development Services
are performed for the purposes of design review, "Walk Throughs," and
discussions between Customer's and TRECOM's management and personnel
concerning the status and conduct of the Work being performed and to monitor
the progress of Work.
c. Subcontractors. TRECOM may retain third parties to furnish
services in connection with any Project, provided that such third parties have
executed appropriate Confidentiality and/or Non-Disclosure Agreements with
Customer and with TRECOM. No such retention shall relieve TRECOM from any of
its obligations under this Master Agreement, including its obligation to
perform Development Services substantially in accordance with the Project
Schedule. Nothing in this Master Agreement shall be deemed to prevent or limit
TRECOM's use of commercially available software tools. TRECOM's use, if any,
of any subcontractor for any programming services shall not be the reason of
any Excusable Delay, but an Excusable Delay that affects such subcontractor
shall be deemed an Excusable Delay of TRECOM.
d. Delivery/Acceptance. Immediately upon the completion of the
Development Services to be performed at TRECOM's facilities in respect of any
Project, TRECOM shall deliver to Customer and Customer shall install any
System or software, and TRECOM shall simultaneously deliver therewith all
documentation and other materials required to be provided at such time. TRECOM
shall notify Customer in writing of the availability of the software or System
for testing by Customer. The date of such notice referred to in this Master
Agreement as the "Acceptance Test Date" for any Project. On or before the
second business day after any Acceptance Test Date for any Project, Customer
shall begin a ten (10) business day (unless the parties mutually agree in
writing upon a length of days that is different) Customer Acceptance Test
phase during which time Customer will have the opportunity to exercise the
software or System to determine whether the software or System meets the
functional requirements and satisfies the Acceptance Criteria.
e. Certain Conditions. On or prior to the Start Date,
3.5.1 Each of TRECOM and Customer shall have executed and
delivered a Statement of Work with respect to the
Project in question; and
3.5.2 Customer shall have delivered to TRECOM the initial
payment of the Project Fee for such Project, in
accordance with the terms and conditions of the
applicable Statement of Work, which shall be in
full force and effect on the Start Date; and
3.5.3 Customer shall have satisfied any other conditions
that may be required in
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<PAGE>
advance of the Start Date in respect of any Project.
Section 4.
SYSTEM COMPLETION AND ACCEPTANCE
a. Acceptance Criteria. Customer is responsible for the development
of the Acceptance Criteria Project by Project. TRECOM will consult with,
support and review Customer's Acceptance Criteria to ensure Customer's ability
to adequately assess and accept Work Result. The Acceptance Criteria must be
submitted to TRECOM's project director for review at least thirty (30) days
(unless the parties mutually agree in writing otherwise) prior to the
anticipated delivery date of any software or System. The test or tests for
such assessment and acceptance in respect of any Project are referred to in
this Master Agreement as the "Acceptance Test."
In the event that Customer shall have developed Acceptance
Criteria or any Acceptance Test in respect of any Project that does not
conform to that Project's Work Documents, Customer's project director and
TRECOM's project director shall negotiate in good faith to complete the
Acceptance Criteria or the Acceptance Test to so conform. If they shall prove
unable to agree, then they shall select a mediator familiar with the industry
to assist them in preparing Acceptance Criteria and Acceptance Tests that
conform to the Work Documents for such Project. Customer and TRECOM shall bear
the costs of such mediation equally.
During any Acceptance Test period, Customer shall notify
TRECOM in writing, or by other mutually agreeable means, of items not
conforming to the Acceptance Test plan. Upon completion of the 10-day period,
testing shall cease and TRECOM will make outstanding corrections to such Work
Result such that it conforms with the Acceptance Criteria for the Project.
Once the corrections are complete and the software or System passes the
Acceptance Test, the creation, installation and implementation of the Work
Result shall be considered complete and accepted by Customer.
The following describes the period, process and procedures
of the quality assurance testing phase of the Development Services for any
Project:
4.1.1 Acceptance Testing - During the Acceptance Testing,
Customer will test the application and submit items
for corrections to TRECOM as they are discovered.
TRECOM will periodically produce updated releases
of the application that address such identified
items. This process shall iterate for a period of
ten (10) business days.
4.1.2 Final Corrections - After the Acceptance Testing
period has been completed, Customer shall compile a
final list of outstanding items. At that time,
TRECOM will estimate the time required to implement
a final testing release,
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<PAGE>
which will be the date this release will be
available for final testing. For scheduling
purposes, the date of availability of the final
testing release will be no less than two (2)
business days from the time TRECOM provides
Customer with such date.
4.1.3 Final Testing Release - TRECOM will then use all
commercially reasonable efforts to make the
necessary corrections to produce the Final Testing
release as soon as reasonably practicable. Unless
agreed by TRECOM project management, no additional
Acceptance Testing may be conducted by Customer
during TRECOM's development of the Final Testing
release.
4.1.4 Final Testing - Having received two (2) business
days advanced notice of availability of the final
testing release, Customer will immediately begin
testing the final testing release to ensure all
items from the final corrections list were properly
addressed. If final corrections are still
outstanding, steps 2 through 4 will be repeated
except for the two (2) business day notice.
b. Completion and Acceptance. At such time as the Acceptance Test
demonstrates that the software or System functions substantially in accordance
with each aspect of the Project's Work Documents, Customer shall be considered
to have accepted the fully implemented and complete Work Result. Customer
shall promptly sign and deliver to TRECOM an Acceptance Certificate evidencing
acceptance. If after repeated attempts, TRECOM is unable to remedy each item
on the final corrections list, then Customer's exclusive remedy and TRECOM's
entire liability in contract, tort, or otherwise shall be as set out in ss.ss.
11 and 12 of this Master Agreement.
Section 5.
WORK DOCUMENTS AND PROJECT SCHEDULE
a. Work Documents and Project Schedule. The Work Documents and
Project Schedule for a particular Project will set forth the projected work
effort and schedule for creation, installation, and implementation of the Work
Results. All statements and warranties concerning time are merely good faith
estimates based upon factors existing at the time they were made, and are
subject to equitable adjustment, such as, by way of example only, if Customer
or others fail adequately to perform the tasks required of them to be
performed or if Customer changes the scope, timing or level of work to be
performed by TRECOM. Customer agrees to provide working space and facilities,
and any other services, materials and tools that TRECOM or its personnel may
reasonably request in order to perform the work assigned to them.
b. Excusable Delays. Either party shall be excused from delays in
performing, or from its failure to perform, hereunder to the extent that such
delays or failures result from causes beyond the reasonable control of such
party, including delays in the Project Schedule caused by
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<PAGE>
unavailability, or delays in preparation or shipment, of third-party hardware
or software; provided that, in order to be excused from delay or failure to
perform, the party responsible for the matter causing the delay shall act
diligently to remedy the cause of such delay or failure and shall promptly
notify the other party of such delay, the causes thereof and the anticipated
length of any such delay. Customer acknowledges that delays by Customer in
completing tasks required of Customer or performing Customer's obligations
under this Master Agreement may impede or delay completion of the Development
Services.
c. Adjustments. TRECOM and Customer shall meet at periodic intervals
to adjust the Work Documents and Project Schedule in respect of any Project to
take account of permitted or Excusable Delays in the Work Documents and
Project Schedule that relate to such Project.
Section 6.
PAYMENT
a. Prices, Charges, and Reimbursable Items. Subject to compliance by
TRECOM with the terms and conditions of this Master Agreement and the Work
Documents in respect of any Project, Customer shall pay to TRECOM the Project
Fee in accordance with the Payment Schedule. Customer acknowledges that each
portion of the Project Fee is due on the due date set forth in the Work
Documents in respect of any particular Project.
Customer and TRECOM have agreed that Customer may pay any
amount due to TRECOM by delivery to TRECOM of a Letter of Credit at least 10
days prior to the date on which a payment is due.
Any Letter of Credit shall name TRECOM as beneficiary and
shall be a form reasonably satisfactory to TRECOM and shall be issued by a
bank reasonably satisfactory to TRECOM. Any Letter of Credit shall be an
absolute and unconditional obligation for an amount not less than the amount
due and payable. Any Letter of Credit shall permit TRECOM to draw such amount
immediately by presentation of a certificate of a responsible officer of
TRECOM to the effect that the amount drawn is then due and payable. TRECOM
shall deliver to Customer notice of any draw under any Letter of Credit, but
failure to deliver any such notice shall not limit or diminish in any way
TRECOM's right to any such draw.
TRECOM shall have no obligation to perform or continue any
Development Services when any amount required to be paid on the Payment
Schedule remains due and unpaid; Customer acknowledges that TRECOM has advised
Customer that TRECOM intends to accomplish none of the Development Services
that would otherwise be accomplished in any month if Customer has not paid all
amounts then due on the first day of such month or if Customer has failed to
deliver a Letter of Credit in a manner that permits a draw by TRECOM, as
beneficiary, of such amounts on or prior to the first day of any month. Any
such discontinuity in the delivery services shall extend the due
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dates of deliverables, as shown on the Project Schedule, by the period during
which work was stopped due to lack of payment.
Reimbursable items are stated in the Payment Schedule;
Customer shall be responsible for out-of-pocket travel and entertainment
expense incurred in connection with travel in connection with the Development
Services previously approved by Customer.
b. Invoices; Payments. TRECOM shall have no obligation to invoice
Customer for any regularly scheduled Project Fee payment. Customer shall pay
each regularly scheduled Project Fee payment promptly when due. TRECOM shall
invoice Customer for other prices, charges and reimbursable items payable to
TRECOM as they come due upon satisfaction of the conditions to payment.
Customer shall pay the invoiced amount in full within thirty (30) days of
receipt of invoice. Customer shall pay interest at the rate of 1.5% per month
on the amount shown on any invoice that is paid later than 30 days after such
date of receipt and on any regularly scheduled Project Fee payment that is
paid later than 30 days after the due date thereof.
c. Taxes. Unless tax exempt, Customer agrees to pay amounts equal to
any taxes resulting from this Master Agreement or any Work Documents, or any
components or services provided by TRECOM to Customer pursuant to this Master
Agreement or any Work Documents, exclusive of taxes based on TRECOM's net
income.
d. No Other Payment. Except as expressly provided in this Master
Agreement or any Appendix or attachment to this Master Agreement, TRECOM and
Customer shall each bear all of its own expenses arising from the performance
of its obligations under this Master Agreement or any Work Documents,
including personnel, facilities, utilities, equipment, supplies, clerical, and
the like. Customer shall be responsible for all charges and expenses incurred
in connection with any Letter of Credit.
Section 7.
CHANGES
a. Review of Proposed Changes. It is mutually acknowledged that
changes in the functional scope of any software deliverable, Work Documents,
Project Schedule or Acceptance Criteria may affect the Project Fee, pricing
and payment structure or schedule for the Development Services. Such changes
may be deemed desirable in light of actual experience gained in the course of
creation, installation and integration of any System, or as Customer redefines
its needs. Accordingly, either party shall be entitled to propose changes to
such terms by written notice at any time delivered to the other party. The
parties agree to consider such a proposed change in good faith and to make a
good faith effort to accept equitable adjustments where appropriate to
accomplish the mutual objectives of the parties. All response to proposed
changes shall be made promptly but not later than five (5) business days of
receipt of such proposed change. If such a proposed change is
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accepted, it shall be reduced to a written amendment to Work Documents signed
by both parties. Any such amendment shall be deemed "Work Documents" and shall
be attached to this Master Agreement in the same manner as any other Work
Documents. Customer acknowledges that changes may delay completion of the
Development Services and the amount payable therefor. Any such amendment may
change the Development Services by additional or revised drawings,
specifications, exhibits or written change of the Work Documents. TRECOM and
Customer shall continue performance under the original Work Documents pending
mutual agreement regarding any requested change.
b. Termination by Customer if Necessary Change Declined. If Customer
proposes a change upon which the parties cannot reach agreement, and Customer
in good faith believes its change is feasible and necessary for the System to
meet its operational objectives, Customer may (in its discretion) terminate
any particular Project, provided that it compensates TRECOM in an equitable
manner for all services rendered and items ordered, procured or delivered,
through the date of such termination. In no event, however, shall Customer be
required to pay TRECOM more than the amounts that have become due and payable
through the date of termination pursuant to ss. 6 hereof plus the amounts that
would otherwise have become due and payable through the first day of the next
month, as well as any third-party termination, cancellation and pass-through
charges incurred by TRECOM in connection with such Project. TRECOM shall
deliver to Customer any third-party contract that provides for any such
third-party termination, cancellation and pass-through charges at such time as
TRECOM shall have determined that the Development Services involve such
third-party contract. In the event of any such termination of a Project,
TRECOM shall cooperate with Customer and shall deliver or assign to Customer
the results of the Development Services for such Project, including all paper
and electronic documentation for both the source code and the design elements
of the Development Services, through the date of such termination. Customer
shall compensate TRECOM on a time-and-materials basis, at TRECOM's regular
rates, in respect of such cooperation and delivery. Except to the extent of
any assignment to Customer of any third-party product, at the time of any such
termination, TRECOM shall terminate any third-party agreement that may then be
in effect with respect to the Development Services for such Project.
c. No Termination if TRECOM's Change Declined. If TRECOM proposes a
change in respect of any Project upon which the parties cannot reach
agreement, TRECOM shall nonetheless continue to render performance under this
Master Agreement in accordance with its (unchanged) terms and conditions
unless such continuation is not practicable due to reasons beyond the control
of TRECOM, such as the failure of a third-party software or hardware component
to operate as specified by written specifications of the third-party. In such
an event, Customer and TRECOM shall work together in good faith to agree on
changes as defined in ss. 7.1 that will lead to a successful conclusion of the
Project.
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Section 8.
CERTAIN OBLIGATIONS OF CUSTOMER
a. System Environment. Unless the Work Documents in respect of a
Project otherwise require, Customer will provide space for installation and
will provide designated equipment, utilities (including heat, light, power,
telecommunications, air conditioning and the like) for operation of the Work
Results of any Project.
b. Operational Environment. Unless the Work Documents in respect of a
Project otherwise require, Customer shall
8.2.1 provide the software listed in the Work Documents;
8.2.2 install and maintain the software on PC
workstations available to TRECOM staff during
quality assurance testing phases of the Development
Services; and
8.2.3 during quality assurance testing phases of the
Development Services, assist TRECOM in a timely
manner to fix any hardware or software problems
that would affect the performance of Development
Services related to such Project by TRECOM staff.
c. Access and Facilities. In addition, unless the Work Documents in
respect of a Project otherwise require, during quality assurance testing
phases of the Development Services, Customer shall provide, without charge,
reasonable office space and equipment, telecommunications service, utilities
and programming facilities for use by TRECOM's personnel in rendering the
Development Services, as needed.
d. Customer Staff Commitment. Customer shall ensure that all internal
staff members who may be necessary or appropriate for the successful
development, testing and implementation of any Project will, on reasonable
notice,
8.4.1 be available to assist TRECOM staff for answering
operational questions, providing written documents
and existing guidelines and procedures;
8.4.2 participate in progress and development meetings;
8.4.3 contribute to template, software and system testing;
and
8.4.4 be available to help with any other tasks required
to complete the Development Services relating to
any Project according to the Work Documents and
Project Schedule.
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e. Certain Customer Warranties and Representations. To induce TRECOM
to enter into this Master Agreement and perform the Development Services
provided for in this Master Agreement, Customer warrants and represents to
TRECOM, as of the date hereof and as of each Start Date, as follows:
8.5.1 Customer is a corporation organized, validly
existing and in good standing under the laws of the
State of Delaware, has the power and authority to
own, operate and lease its properties and to carry
on its business as now conducted and is qualified
to do business in each Jurisdiction in which the
nature of its business requires qualification.
8.5.2 Customer has the right, power and authority to
enter into and perform its obligations under this
Master Agreement and all Work Documents. Customer's
execution, delivery and performance of this Master
Agreement has been, and of all Work Documents will
be, duly and validly authorized by all necessary
action on Customer's part.
8.5.3 Rick Davey is Customer's project sponsor and
project director initially and is duly authorized,
acting singly, to execute and deliver this Master
Agreement and the initial Work Documents on behalf
of Customer.
8.5.4 This Master Agreement and all Work Documents, as
executed and delivered from time to time, have been
duly executed and delivered by Customer, and each
is a valid and binding obligation of Customer,
enforceable against Customer in accordance with its
terms.
8.5.5 On each delivery date of any Letter of Credit, the
Letter of Credit then delivered will have been duly
executed and delivered by the issuing bank and will
be a valid and binding obligation of the issuing
bank enforceable by TRECOM in accordance with its
terms without any further action by Customer.
8.5.6 This Agreement is made subject to any laws,
regulations, orders or other restrictions on the
export from the United States and re-export from
foreign countries of software or technical data as
may be imposed from time to time by the United
States government, including the Export
Administration Act and regulations (collectively,
the "Export Laws") and Customer will comply with
all Export Laws in the distribution of the
Custom-Developed Software. Nothing in this Master
Agreement shall be deemed to permit Customer to
export any property from the United States of
America in violation of the Export Laws. Customer
has consulted with its own counsel and has not
relied on any representation or warranty of TRECOM
in connection with export control laws or any
other matter, except as set forth in this Master
Agreement.
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Compliance with Export Laws in connection with
Custom-Developed Software will not diminish its
usefulness to Customer. Customer shall indemnify,
defend and hold harmless the other from and against
any claim, loss, liability, expense or damage
(including fines and legal fees) incurred as a
result of Customer's breach of its obligations to
comply with Export Laws.
f. Certain TRECOM Warranties and Representations. To induce Customer
to enter into this Master Agreement, TRECOM warrants and represents to
Customer as of the date hereof, as follows:
8.6.1 TRECOM is a corporation organized, validly existing
and in good standing under the laws of the State of
Delaware, has the power and authority to own,
operate and lease its properties and to carry on
its business as now conducted and is qualified to
do business in each jurisdiction in which the
nature of its business requires qualification.
8.6.2 TRECOM has the right, power and authority to enter
into and perform its obligations under this Master
Agreement. TRECOM's execution, delivery and
performance of this Master Agreement has been duly
and validly authorized by all necessary action on
TRECOM's part.
8.6.3 Peter Strauss is TRECOM's initial project director
and is duly authorized, acting singly, to execute
and deliver this Master Agreement on behalf of
TRECOM.
8.6.4 This Master Agreement has been duly executed and
delivered by TRECOM and is the valid and binding
obligation of TRECOM, enforceable against TRECOM in
accordance with its terms.
8.6.5 As of the date hereof, TRECOM believes it has the
ability to perform the Development Services in
accordance with the Work Documents.
8.6.6 TRECOM has put into escrow with a third-party
software escrow service a copy of TRECOMware, as it
existed prior to commencement of the initial
Development Services.
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Section 9.
OWNERSHIP AND RIGHTS
a. Customer's Ownership of Work. Upon payment in full of all of
Customer's obligations to TRECOM in respect of any Project, TRECOM will be
deemed to have conveyed to Customer all of TRECOM's right, title and interest
in and to the Custom-Developed Software for such Project, in whole and in
part, and all copies thereof, and all of TRECOM's worldwide proprietary rights
in the Custom-Developed Software, including all patents, copyrights, trade
secrets and other intellectual property rights therein, if any.
Custom-Developed Software shall be deemed "work for hire." Custom-Developed
Software may be transferred or licensed by TRECOM to a third party only with
Customer's prior written consent and upon payment by TRECOM to Customer of an
amount, and upon such other terms and conditions, as TRECOM and Customer may
mutually agree. Nothing shall prohibit TRECOM from utilizing any of the TRECOM
Proprietary Information embodied in such original works of authorship or from
developing new computer software code having similar features and/or
functionality to such original works of authorship. At TRECOM's request,
Customer shall negotiate in good faith to agree upon mutually agreed terms and
conditions for any such transfer or license of Custom-Developed Software,
provided, however, that the parties are not obligated to reach any agreement
with respect thereto.
From time to time, TRECOM shall
9.1.1 execute assignments or other documents necessary to
vest in Customer TRECOM's entire right, title and
interest in and to any Custom-Developed Software;
9.1.2 execute any and all applications for patents and
registrations for copyright as Customer may request
with respect to any Custom-Developed Software; and
9.1.3 assist Customer, at Customer's expense, in
obtaining full patent and copyright protection for
such Custom-Developed Software in those countries
designated by Customer.
TRECOM's obligations under this paragraph shall survive termination of this
Master Agreement.
b. Licenses to Use. Subject to the terms, conditions and limitations
contained in this Master Agreement, TRECOM hereby grants to Customer a
nonexclusive, paid-up and perpetual license to use, modify (including to
prepare derivative works) and copy (collectively, "Use") for its own internal
Use so much of the TRECOM Proprietary Information as may be comprised within
any Work Result. Customer hereby disclaims any ownership interest in or to the
TRECOM Proprietary Information or any portion thereof. Customer acknowledges
that the Custom-Developed Software does not include any ownership interest in
any third-party software; Customer acknowledges that Work Result is expected
to comprise licensed rights for Customer's use of certain third-party
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software.
Except as permitted in the next sentence, Customer shall not
transfer or sublicense any copy of any of the TRECOM Proprietary Information.
Without any further action by TRECOM, at any time after Customer shall have
paid to TRECOM the entire amount of the Project Fee, Customer, its successors
and assigns shall be permitted to transfer the License hereby granted with
respect to any of the TRECOM Proprietary Information or a portion thereof as
part of a transaction in which Customer or any such successor or assign
transfers all of its right, title and interest in and to the Custom-Developed
Software and the Work Result that comprises any TRECOM Proprietary
Information.
Nothing in this ss. 9.2 shall be deemed or construed to
permit TRECOM to Use or license the Custom-Developed Software, except in
accordance with the terms and provisions of this ss. 9: Customer acknowledges
that, in the course of developing the Custom-Developed Software, TRECOM may
have utilized ideas, concepts, models, know-how, methodologies and techniques
previously used for other software development projects, and nothing in this
Master Agreement shall be deemed to limit TRECOM's Use of such ideas,
concepts, models, know-how, methodologies and techniques of TRECOM generally
contained in or otherwise related to the Custom-Developed Software for any
purpose without restriction or obligation.
Customer shall not grant to any other person any sublicense
to Use any element of the TRECOM Proprietary Information for any purpose.
Customer acknowledges that the System may include elements
of software provided by a third party, and Customer shall be responsible for
any licensing fees payable in respect of such third-party software; TRECOM
will cooperate with Customer to cause any such third party to license Customer
to Use such third-party software upon Customer's payment therefor.
c. TRECOM's Ownership of TRECOM Proprietary Information. To the full
extent of TRECOM's ownership thereof immediately prior to the date of the
SIDA, TRECOM has and will at all times retain sole and exclusive title to and
ownership of the TRECOM Proprietary Information, in whole and in part, and all
copies thereof, and all worldwide proprietary rights therein, including all
patents, copyrights, trade secrets and other intellectual property rights
therein. Nothing in this Master Agreement or otherwise shall be construed as
granting or shall grant to Customer any right, title or interest in the TRECOM
Proprietary Information or any of such proprietary rights, other than the
license granted pursuant to this Master Agreement. No license, right or in any
trademark of TRECOM, trade name or service mark of TRECOM is granted
hereunder.
d. Certain Confidentiality Obligations. Customer acknowledges that the
TRECOM Proprietary Information constitutes valuable confidential and proprietary
information of TRECOM. Customer and its affiliates shall
9.4.1 hold all TRECOM Proprietary Information in confidence
and neither disclose
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nor release TRECOM's Proprietary Information to any
other person or entity;
9.4.2 not use TRECOM Proprietary Information for any
purpose whatsoever, except as expressly permitted
under this Master Agreement;
9.4.3 disclose TRECOM's Proprietary Information to only
those of its employees having a need to know such
information; and
9.4.4 take all reasonable precautions to ensure that its
employees comply with the provisions of this ss.
9.4.
The period of nondisclosure shall be 10 years and shall
commence upon the date of disclosure of TRECOM Proprietary Information to
Customer. Nothing contained in this ss. 9.4 shall prohibit either party from
assigning any of their respective personnel utilized for any Project to
similar projects, subject, however, to the other provisions of this ss. 9.4.
The standard of care required to be observed under this ss. 9.4 shall be not
less than tile degree of care that each party uses to protect its own
information of a confidential nature. The provisions of this ss. 9.4 shall
survive the termination of this Statement of Work.
e. Indemnity for Infringement by TRECOM. Subject to the limitations
set forth in ss. 11 and ss. 12, TRECOM shall, at Its expense, defend,
indemnify, and hold harmless Customer from and against any claim, liability or
damage based on the alleged or actual infringement of any U.S. patent or
copyright or violation of trade secrets related to all Custom-Developed
Software. Nothing in this ss. 9.5 shall be deemed to require TRECOM to pay any
royalty or license fee to any third-party software developer whose software
TRECOM has included in the software delivered to Customer under a license from
such third-party software developer. This obligation shall be contingent on:
9.5.1 Prompt notice by Customer to TRECOM in writing of
such claim when it becomes evident to Customer; any
delay in delivery of any such notice shall not
diminish TRECOM's obligations under this ss. 9.5
unless such delay shall have materially impaired
TRECOM's ability to defend any such claim;
9.5.2 Cooperation by Customer with TRECOM in the defense
thereof, at Customer's expense; and
9.5.3 Customer's obtaining TRECOM's prior written
approval of any settlement by Customer of such
matters (which approval shall not be unreasonably
withheld).
TRECOM shall have no indemnity obligation for claims or infringement or
violation resulting or alleged to result from (a) any combination, operation,
or use of any of such items with any other components or any other equipment
or programming, insofar as the manufacturer's specifications do not directly
provide for such combination, operation, or use; or if same has been modified
or
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altered without TRECOM's approval; or (b) the preparation, operation, or use
of any other components or any other equipment or programming-, or (c) use of
an allegedly infringing or violative version thereof, if such alleged
infringement or violation could be avoided by use of a different version and
if TRECOM incorporates such non-infringing version into any Work Result
promptly after notice of such alleged infringement.
f. Custom Computer Code. In addition, as to the items classified as
Custom-Developed Software, TRECOM shall have no indemnity obligation for
claims of infringement or violation resulting or alleged to result from
compliance with the Work Documents where TRECOM's method of compliance has
been compelled by the terms of such Work Documents, but only to the extent
there was no alternative method of compliance available to TRECOM that would
avoid the basis for such claims and TRECOM has notified Customer in writing of
such lack of alternatives within a reasonable time after TRECOM shall have
become aware of such lack of alternatives. In the event of an infringement or
misappropriation claim under ss. 9.5 of the Agreement, or threat thereof,
TRECOM may, at its sole cost and expense:
9.6.1 modify, at no additional charge, the work or
services so that they become non-infringing and
non-violative, without diminishing the usefulness
of the Work Result to Customer;
9.6.2 replace the Work Result with material that is
non-infringing and non-violative, and that does not
contain any misappropriated ideas or rights and is
at least as useful to Customer;
9.6.3 obtain for Customer the right to use such Work
Result upon commercially reasonable terms; or
9.6.4 if none of tile foregoing alternatives is possible,
despite TRECOM's reasonable commercial efforts:
remove the infringing or violative Work Result and
grant to Customer credit for them, as depreciated
on a five (5) year straight-line basis.
This ss. 9 sets out TRECOM's entire liability and obligation with respect to
patent or copyright infringement claims or trade secret misappropriation.
g. Project Materials. TRECOM's project director shall collect and
keep the original versions of the Project Materials in respect of each
Project. Except as otherwise provided in this Master Agreement or in Work
Documents from time to time, the Project Materials shall become the property
of Customer upon completion and acceptance of the Work Result for such
Project, provided that TRECOM may keep and, to the extent otherwise not
prohibited by this Master Agreement, Use a copy of the Project Materials.
h. Limits on Confidentiality. No restriction in this ss. 9 against
Customer's disclosure
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of TRECOM Proprietary Information shall apply to information that
9.8.1 Customer acquired before receiving such information
from TRECOM and without restriction as to
confidentiality;
9.8.2 is in or has entered the public domain through no
breach of any agreement by Customer or other
wrongful act by Customer;
9.8.3 has been received by Customer from a third party
without restriction on disclosure and without
breach of the this Master Agreement or any other
agreement between Customer and TRECOM or other
wrongful act by Customer, or
9.8.4 consists of information jointly developed between
Customer and TRECOM, and as may be implemented, but
only to the extent jointly developed.
Section 10.
FREEDOM OF ACTION; CONFIDENTIALITY
a. Dealing With Others. TRECOM is engaged in the business of
providing systems analysis, integration services, contract programming and
other computer-related services to a variety of clients, and nothing in this
Master Agreement shall prevent TRECOM from using its and its personnel's
general skills in pursuing such business with any other client on any other
terms, whether or not similar or identical to those provided under this Master
Agreement or any Work Documents. TRECOM shall be free to use and disclose in
such business pursuits any data-processing or information-processing
techniques, concepts, or ideas embodied in any Work Result or otherwise
developed or learned by TRECOM in the course of rendering Development
Services.
b. Confidentiality of Customer's Business Information. TRECOM and
Customer have executed a separate bilateral Non-Disclosure Agreement before
the signing of this Master Agreement.
c. Segregation and Return of Customer Materials. TRECOM shall
segregate all materials furnished to it from time to time by Customer that
contain any confidential or proprietary information or data of Customer which
is so marked with an appropriate legend. All such materials shall be returned
to Customer upon completion and acceptance of the Project to which such
materials relate, or, if earlier, upon termination of this Master Agreement.
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Section 11.
LIMITED WARRANTY
a. Development Services. TRECOM warrants that it will render the
Development Services as set forth in ss. 3.1 of this Master Agreement. TRECOM
does not warrant or represent that the Work Result, or any part thereof, will
operate uninterrupted or error free.
b. COMPLETION OF IMPLEMENTATION. TRECOM FURTHER WARRANTS THAT ANY
SYSTEM, WHEN COMPLETED FOLLOWING THE PROCUREMENT AND INSTALLATION OF ALL
COMPONENTS, WILL SATISFY THE ACCEPTANCE CRITERIA IN ALL MATERIAL RESPECTS.
TRECOM DOES NOT WARRANT THAT ANY WORK RESULT WILL OPERATE UNINTERRUPTED OR
ERROR-FREE. AS CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR ANY MATERIAL FAILURE
OF ANY WORK RESULT TO SATISFY THE ACCEPTANCE CRITERIA, TRECOM, ITS SOLE COST
AND EXPENSE, SHALL USE ALL ITS REASONABLE EFFORTS TO CURE OR CORRECT SUCH
FAILURE THROUGH FURTHER PROGRAMMING SERVICES AS SOON AS REASONABLY
PRACTICABLE. IF, AFTER A REASONABLE PERIOD OF TIME, TRECOM DETERMINES THAT ANY
WORK RESULT CANNOT SATISFY THE ACCEPTANCE CRITERIA IN ALL MATERIAL RESPECTS,
TRECOM SHALL OFFER CUSTOMER SUCH WORK RESULT AS IT EXISTS, AND THE PARTIES
SHALL NEGOTIATE TO ADJUST THE CHARGES FOR ITS DEVELOPMENT SERVICES TO REFLECT
ANY REDUCTION IN FUNCTION. IF SUCH OFFER IS UNACCEPTABLE, TRECOM AND CUSTOMER
SHALL NEGOTIATE IN GOOD FAITH WITH RESPECT TO POSSIBLE CHANGES TO SUCH WORK
RESULT. IF AGREEMENT CANNOT BE REACHED ON ANY SUCH CHANGE, TRECOM SHALL REFUND
ANY AMOUNTS PAID FOR THE DEVELOPMENT SERVICES, AND CUSTOMER SHALL
SIMULTANEOUSLY RETURN OR DESTROY ALL PROJECT MATERIALS AND THEREAFTER CEASE
ALL FURTHER USE THEREOF. THIS WARRANTY SHALL REMAIN IN EFFECT ONLY THROUGH THE
SYSTEM WARRANTY PERIOD, AFTER WHICH THIS WARRANTY WILL TERMINATE AND BE OF NO
FURTHER FORCE OR EFFECT. THIS WARRANTY IS EXPRESSLY CONDITIONED UPON (1)
HARDWARE AND PROGRAMMING SUPPLIED BY THIRD PARTIES INCLUDING CUSTOMER)
CONFORMING TO THEIR TECHNICAL, FUNCTIONAL, AND PERFORMANCE SPECIFICATIONS AND
CRITERIA, (2) THE ABSENCE OF ANY ALTERATION OR ABUSE OF ANY WORK RESULT BY
CUSTOMER, ITS PERSONNEL OR OTHER AUTHORIZED USER AND (3) ACCIDENTS, DISASTER,
NEGLECT OR MISUSE, WHICH DIRECTLY OR INDIRECTLY CAUSE SUCH WORK RESULT'S
FAILURE TO SATISFY THE ACCEPTANCE CRITERIA.
c. DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED FOR IN THIS SECTION
OR ss. 8 OR ss. 9 ABOVE, TRECOM DOES NOT, AFTER THE SYSTEM WARRANTY PERIOD,
MAKE ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT
TO ANY WORK RESULT, ITS COMPONENTS, THE PROJECT SCHEDULE, THE SERVICES
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TO BE RENDERED BY TRECOM'S PERSONNEL, OR THE RESULTS TO BE OBTAINED FROM THEIR
SERVICES, SOFTWARE, ANY SERVICES, OR ANY COMPONENTS INCLUDING ANY IMPLIED OR
EXPRESSED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF
ANY WORK RESULT, THE SOFTWARE, ANY SERVICES, OR ANY COMPONENTS. IN NO EVENT
SHALL TRECOM BE LIABLE FOR LOST PROFITS, LOST SAVINGS, LOSS OF DATA, LOSS OF
RECORDS, OR OTHER CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES, OR
FOR ACTS OF NEGLIGENCE THAT ARE NOT INTENTIONAL, OR RECKLESS IN NATURE
REGARDLESS OF WHETHER IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
d. No Effect on Other Agreements. Nothing in this Master Agreement
shall abridge or negate any other third-party warranties contained in any
other agreement concerning the procurement of components or services by
Customer in connection with the creation, installation or implementation of
any Work Result. TRECOM shall provide its reasonable cooperation to enable
Customer to realize the benefits of any such other warranties.
Section 12.
LIMITATION OF LIABILITY AND REMEDIES
a. Maximum Liability. TRECOM's entire liability and Customer's
exclusive remedy, regardless of the form of action as it relates to the
warranty under the Agreement, is as set forth in ss. 11. TRECOM's entire
liability and Customer's exclusive remedy, regardless of the form of action,
for other claims concerning its performance or nonperformance in connection
with any Work Documents, including any negligence, shall be limited to the
total amount paid to TRECOM under such Work Documents for the Work Result or
Development Services actually found or claimed to be defective, or incomplete,
under the estimate or in the authorization for the particular Work Result or
Development Services if no estimate is provided. This limitation does not
apply to TRECOM's obligations under ss. 9.5 of this Master Agreement or for
claims for bodily injury or damage to real property or tangible personal
property for which TRECOM is legally liable provided, however, that all claims
relating to any Work Result and Development Services to be preformed by TRECOM
under this Master Agreement, or failure thereof shall be considered warranty
claims under Section 11 of this Master Agreement. IN NO EVENT WILL TRECOM BE
LIABLE FOR ANY LOST PROFITS, LOST SAVINGS, LOST DATA, LOST RECORDS, OR
INCIDENTAL DAMAGES, OR OTHER ECONOMIC OR CONSEQUENTIAL DAMAGES, EVEN IF TRECOM
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ADDITION, TRECOM WILL
NOT BE LIABLE FOR ANY DAMAGES CLAIMED BY CUSTOMER BASED ON ANY THIRD-PARTY
CLAIM, EXCEPT FOR CLAIMS BY TRECOM'S SUBCONTRACTORS AGAINST CUSTOMER RELATING
TO WORK PERFORMED AT TRECOM'S REQUEST UNDER THIS MASTER AGREEMENT.
19
<PAGE>
Section 13.
TERM AND TERMINATION
a. Term. The term of this Master Agreement shall commence on the
Effective Date and, unless sooner terminated hereunder, shall continue in
effect for a period of 10 years from the date hereof.
b. Termination on Default. Any Project may be terminated by either
party in the event of a default by the other party on its obligations
thereunder, including (in the case of a default by Customer) any failure of
Customer to assume and perform its responsibilities, to obtain and supply the
components, the items specified in such Work Documents, other materials and
facilities for which it is responsible, or to make payment at such time as the
conditions thereto have been satisfied in accordance with such Work Documents,
and (in the case of a default by TRECOM) any impermissible or unexcused
failure to complete a milestone within forty-five (45) days of the date
established for such milestone in the Project Schedule for such Project,
unless such milestone date has been extended by mutual agreement between the
parties.
13.2.1 Remedies; Grace Period. In the event either party
commits such a default, the other party shall so
notify the defaulting party in writing (and, in
such notice, indicate the nature of the default
and the assertion of the aggrieved party's right
to terminate). The aggrieved party may (at its
discretion) suspend further performance in whole
or In part following the issuance of such notice,
except insofar as the failure to continue
performance would cause irreparable injury to the
defaulting party's existing business. The
defaulting party shall have forty-five (45) days
(except ten (10) days in the case of payment of
monies due) following receipt of such notice to
cure such default. If such default remains uncured
after such grace-cure period, the aggrieved party
may terminate Work Documents relating to any
Project by sending further notice of such effect,
effective immediately.
13.2.2 Customer's Default. In the event of termination
upon default of Customer, TRECOM shall recover
payment for all work or services rendered through
the date of termination, as well as equipment or
components ordered on behalf of, delivered to, or
for the account of, Customer, including items
delivered through the date of termination, whether
or not such payments are otherwise then due and
payable. Upon such termination, TRECOM shall
return to Customer or destroy all Project
Materials.
13.2.3 TRECOM's Default. In the event of termination upon
default of TRECOM, Customer may retain all items
and materials delivered through the date of
termination, including a complete copy of all
Project Materials that TRECOM's project director
has on hand as of such date (whether in
20
<PAGE>
electronic or paper form), upon payment by Customer
for all accepted work or services rendered through
the date of termination. In addition, Customer may
recover its actual damages to the limits set forth
in this ss. 13.2.3 and ss. 12 of this Master
Agreement. TRECOM's liability to Customer for
actual damages from any cause whatsoever will be an
amount equal to the charges of the portion of the
Work Documents for such Project that is the subject
of the claim. This limitation does not apply to
patent or copyright infringement claims, or bodily
injury or damage to real property on tangible
personal property for which either party is legally
liable.
c. Survival. In the event of termination or expiration of this Master
Agreement, ss.ss. 6.2, 9.1 through 9.7, 10.1 through 10.3, 12.1 and 15.1
through 15.1 1, shall survive and continue in effect.
Section 14.
DEFINITIONS
For purposes of this Master Agreement,
"Acceptance Certificate" means a certificate, in a form satisfactory
to TRECOM, executed and delivered by Customer evidencing Customer's acceptance
of any completed System.
"Acceptance Criteria" means the acceptance criteria to be developed
by Customer and TRECOM for the Acceptance Test.
"Acceptance Test" has the meaning ascribed to it in ss. 3.4 of this
Master Agreement.
"Acceptance Test Date" has the meaning ascribed to it in ss. 3.4 of
this Master Agreement.
"Coupons On-Line" means the Targeted Marketing System described in
Appendix A and Appendix B to the Existing Agreement.
"Custom-Developed Software" means, collectively, Work Results that
comprise the computer instructions, documentation and programming code that
TRECOM shall develop pursuant to Work Documents following the date of this
Master Agreement specifically for use by Customer. Without limiting the
generality of the foregoing, Custom-Developed Software includes any original
work of authorship constituting new computer software code or a modified part
of a programming statement that, in either case, is developed pursuant to the
Work Documents after the date of this Master Agreement.
"Customer" means NETVALUE, INC., a Delaware corporation with its
principal office located at One Stamford Landing, Stamford, Connecticut 06902.
21
<PAGE>
"Development Services" has the meaning ascribed to it in ss. 1.1 of
this Master Agreement.
"Documentation" means user manuals and other technical documentation,
in any form or media, that relate to the Software and are made available by
TRECOM for Customer's use with the Software.
"Effective Date" means the date on which Customer and TRECOM shall
have executed and delivered this Agreement.
"Excusable Delay" means any delay described as excusable in ss. 5.2
of this Master Agreement.
"Existing Agreement" has the meaning ascribed to it in the Recitals to
this Master
Agreement.
"First Amendment" has the meaning ascribed to it in the Recitals to
this Master Agreement.
"In-Home" means the In-Home Initiative.
"Letter of Credit" means an irrevocable letter of credit in favor of
TRECOM delivered to TRECOM by Customer at any time or from time to time.
"Payment Schedule" means the schedule of payment terms attached to
the Work Documents from time to time, with respect to any Project.
"Project" means any specific project that Customer shall engage
TRECOM to perform or deliver, as described in the Work Documents from time to
time.
"Project Fee" means the sum payable to TRECOM by Customer in respect
of any Project, as such sum is described in Work Documents, from time to time.
"Project Materials" means, collectively, Work Documents, Project
Schedule, Acceptance Criteria and such other materials concerning the design,
installation, testing, and performance of the System as become available
during the course of the creation, installation and implementation of the
System.
"Project Schedule" means the project schedule comprised within the
Work Documents for any Project.
"SIDA" has the meaning ascribed to it in the Recitals to this Master
Agreement.
"Software" means all or any part of TRECOMware, including both the
object code and source code, as such software program products may be modified
pursuant to the Work Documents,
22
<PAGE>
other than any Custom-Developed Software.
"Start Date" means the date of commencement of Work in respect of any
Project.
"Statement of Work" means the statement of work, as in effect from
time to time, to be attached to this Master Agreement to describe any
particular Project to be effected by TRECOM on behalf of Customer.
"System" means, with respect to any Project, the system more
particularly described in the Statement of Work and other Work Documents for
such Project.
"System Warranty Period" means the period of 30 days following the
date of the Acceptance Certificate for such System.
"TRECOM" means DMR TRECOM, INC., a Delaware corporation with its
principal office located at 333 Thornall Street, Edison, New Jersey
08837-2246.
"TRECOM Proprietary Information" means, collectively, any and all
ideas, inventions, concepts, models, know-how, methodologies, techniques and
trade secrets contained therein or otherwise related thereto, and all other
data, information or intelligence, all of which is the property of and is
confidential to TRECOM. "TRECOM Proprietary Information" includes any Software
or Documentation or any portion of the Software or the Documentation, whether
or not expressly stated.
"TRECOMware" means the Visual Basic Class Library, owned or possessed
by TRECOM immediately prior to commencement of the Development Services and
all software and programming developed by TRECOM from and after commencement
of the Development Services but not created as part of the Development
Services.
"Use" has the meaning ascribed to it in ss. 9.2.
"Work" means the Development Services to be provided from time to
time under specific Projects.
"Work Documents" means, collectively, the Statement of Work and
related documents attached to this Master Agreement from time to time with
respect to particular Projects. By way of example, under the SIDA, the work
documents were: the Functional Scope - nETVALUE Project dated November 22,
1996, attached hereto as Appendix A, and the Statement of Work dated November
22, 1996, attached hereto as Appendix B, and the Value Valet Business
Requirements dated November 22, 1996, attached hereto as Appendix C, each as
further elaborated and developed by TRECOM and Customer from time to time.
"Work Result" means, collectively, the deliverables, software, any
System or other end
23
<PAGE>
product of Work.
"Value Valet" means the Value Valet Initiative described in Appendix C
to the Existing Agreement.
Section 15.
MISCELLANEOUS
a. No Agency. TRECOM, in rendering the Development Services, from
time to time, is acting solely as an independent contractor. Customer does not
undertake by this Master Agreement or otherwise to perform any obligation of
TRECOM. TRECOM and Customer expressly do not intend hereby to form a
partnership.
b. Multiple Counterparts. This Master Agreement and any Work
Documents may be executed in several counterparts, all of which taken together
shall constitute one single Agreement between the parties.
c. Section Headings; Exhibits. The section and subsection headings
used herein or in any Work Documents are for reference and convenience only
and shall not enter into the interpretation hereof. The appendices and
attachments referred to herein and attached hereto are incorporated herein to
the same extent as if set forth in full herein.
d. Required Approvals. Where agreement, approval, acceptance, or
consent by either party is required by any provision of this Master Agreement,
such action shall not be unreasonably conditioned, delayed or withheld.
e. No Waiver. No delay or omission by either party hereto to exercise
any right or power occurring upon any noncompliance or default by the other
party with respect to any of the terms of this Master Agreement or any Work
Documents shall impair any such right or power or be construed to be a waiver
thereof. A waiver by either of the parties hereto of any of the covenants,
conditions, or agreements to be performed by the other shall not be construed
to be a waiver of any succeeding breach thereof or of any covenant, condition,
or agreement herein or therein contained.
f. Governing Law. This Master Agreement and all Work Documents shall
be governed by and construed in accordance with the laws of the State of New
Jersey, excluding such State's Uniform Commercial Code, except for the
provisions of Article 9 thereof. The Development Services shall not be deemed
a sale of goods for purposes of the Uniform Commercial Code.
g. Entire Agreement. This Master Agreement and the appendices and
attachments hereto constitute the entire agreement between the parties. No
change, waiver, or discharge hereof shall be valid unless it is in writing and
is executed by the party against whom such change, waiver,
24
<PAGE>
or discharge is sought to be enforced. In the event of any conflict among the
Work Documents and this Master Agreement, the Work Documents's terms and
provisions shall control, and in the event of any conflict among the Work
Documents shall control. Nothing in this Agreement shall be deemed to amend
the Existing Agreement, which remains in full force and effect.
h. Notices. Under this Master Agreement if one party is required to
give notice to the other, such notice shall be deemed given if mailed by U.S.
mail, first class, postage prepaid, and addressed as follows (or as
subsequently noticed to the other party):
DMR TRECOM, Inc.
333 Thornall Street
Edison, New Jersey 08837-2246
Attention: Chief Operating Officer
nETVALUE, Inc.
One Stamford Landing
Stamford, Connecticut 06902
Attention: Rick Davey, Project Director
Copies of all notices shall be sent to TRECOM's General Counsel at TRECOM's
above address.
i. Personnel; Subcontracting. TRECOM shall have sole responsibility
for the assignment of personnel to the Development Services. Such personnel
shall not be restricted or prevented from performing services for others that
are similar the Development Services. Neither TRECOM nor its employees or
others whose services TRECOM may require in performance of Work are entitled
to Customer employee status and benefits provided by Customer to its
employees, including pension benefits, health benefits, group insurance
coverage, separation pay and sick leave benefits.
j. No Assignment. Except as permitted by ss. 3.3 or ss. 15.9 hereof,
neither party may, without the prior written consent of the other party,
assign or transfer this Master Agreement or any obligation incurred hereunder,
except by merger, reorganization, consolidation, or sale of all or
substantially all of such party's assets. Any attempt to do so in
contravention of this Section shall be void and of no force and effect.
k. Certain Terms. All personal pronouns used in this Master Agreement
and the Work Documents, whether used in the masculine, feminine or neuter
gender, shall include all other genders; the singular shall include the
plural, and vice versa. "Including," "includes" and "include" means,
respectively, "including, without limitation," "includes, without limitation"
and "include, without limitation." In addition, the words "hereof," "herein"
and "hereunder" and words of similar import when used in this Master Agreement
or any Work Documents shall refer to this Master Agreement as a whole and not
to any particular provision of this Master Agreement or such Work Document.
25
<PAGE>
IN WITNESS WHEREOF, TRECOM and Customer have caused this Master
Agreement be effective as of the date first herein above written.
DMR TRECOM, INC.
By: ___________________________
Title: ___________________________
Date: ___________________________
nETVALUE, INC.
By: ___________________________
Title: ___________________________
Date: ___________________________
26
<PAGE>
Exhibit 10.12
[DMR TRECOM LETTERHEAD]
June 19, 1997
Mr. Rick Davey
netValue, Inc.
1 Stamford Landing
Stamford, CT 06902
Dear Mr. Davey:
We are extremely pleased that DMR TRECOM, Inc. ("DMR TRECOM") has
previously been selected by netValue, Inc. ("netValue") to provide system
integration and development necessary for the following projects: In-Home
(Schedule A), Coupons On-Line (Schedule B), Value Valet Scope Changes
(Schedule C), COL Plug-Ins (Schedule D) and Maintenance (Schedule E), each as
more fully described on the indicated Schedules attached hereto (each a
"Project," collectively, the "Projects"). This letter will serve to (i)
confirm our understanding regarding the mutual intent of the parties to enter
into good faith negotiations relating to the Projects and (ii) memorialize
certain terms and conditions of the prior agreements of the parties regarding
the services provided by DMR TRECOM on behalf of netValue prior to the date
hereof and during the period of such negotiations.
The parties currently intend to enter into good faith negotiations to
agree upon and memorialize the terms and conditions of a System Integration
and Development Master Services Agreement for which will govern the Projects
(the "Master Agreement"). A final Statement of Work will set forth the scope
of each Project, and will be made a part of the Master Agreement.
netValue and DMR TRECOM have agreed that it is in their mutual best
interests for the parties to memorialize certain terms and conditions relating
to services on each Project performed by DMR TRECOM prior to the parties'
finalizing and entering into the Master Agreement (with respect to each
Project, the "Initial Services"). DMR TRECOM has commenced the Initial
Services for each Project on the date indicated on the Schedule attached
hereto relating to such Project. netValue shall pay DMR TRECOM for the Initial
Services performed by DMR TRECOM for each Project according to the payment
terms set forth on the attached Schedule relating to such Project. In
addition, netValue shall pay all reasonable out-of-pocket travel, living and
other ancillary
1
<PAGE>
Mr. Rick Davey
June 19, 1997
Page 2
expenses incurred by DMR TRECOM in performing the Initial Services for each
Project.
In the event that netValue and DMR TRECOM are unable to enter into a
mutually acceptable Master Agreement for any reason whatsoever on or before
July 9, 1997, DMR TRECOM may, or netValue may require DMR TRECOM to, cease
performance of the Initial Services at any time thereafter. In such event,
netValue shall pay to DMR TRECOM fees for any services rendered prior to the
cessation of the Initial Services, together with expenses ancillary thereto.
Upon DMR TRECOM's and netValue's execution and delivery of the Master
Agreement, this Letter Agreement shall be automatically deemed to be
terminated and superseded by the Master Agreement and the Master Agreement
shall be deemed to govern and apply to the Initial Services for each Project,
all without the necessity of any further action by either party. Nothing
contained in this Letter Agreement or otherwise shall obligate DMR TRECOM or
netValue to enter into the Master Agreement.
netValue and DMR TRECOM shall each (a) hold the Confidential
Information (as defined below) of the other in trust and confidence and
neither disclose nor release the Confidential Information of the other to any
person or entity, and (b) not use the Confidential Information of the other
for any purpose whatsoever except for the purposes of the services to be
provided hereunder. The standard of care imposed on each party pursuant to
this paragraph shall be the same degree of care as it uses to avoid the
unauthorized use, disclosure, or dissemination of its own Confidential
Information of a similar nature, but not less than a reasonable degree of
care. Each party shall disclose the Confidential Information of the other only
to those of its employees having a need to know such Confidential Information
and shall take all reasonable precautions to ensure that its employees comply
with the provisions of this paragraph. The term "Confidential Information"
shall mean any and all information (in every form and media) not generally
known in the relevant trade or industry and which has been or is hereafter
disclosed by either party to the other in connection with the efforts
contemplated hereunder including, without limitation, (a) all trade secrets,
(b) information relating to existing or contemplated products, services,
designs, technology, processes, technical data, engineering, methodologies and
concepts, and (c) information relating to business plans, sales or marketing
methods and customer lists or requirements. The obligations of either party
under this paragraph will not apply to information that the receiving party
can establish (i) was in its possession at the time of disclosure and without
restriction as to confidentiality, (ii) at the time of disclosure is generally
available to the public or after disclosure becomes generally available to the
public through no breach of agreement or other wrongful act by the receiving
party, (iii) has been received from a third party without restriction on
disclosure and without breach of agreement or other wrongful act by the
receiving party, (iv) is independently developed by the receiving party
without regard to the Confidential Information of the other party, or (v) is
legally required to be disclosed (but only to the extent of such legal
requirement).
<PAGE>
Mr. Rick Davey
June 19, 1997
Page 3
The ownership of all Work Product for any Project (as defined below),
including all related intellectual property rights thereof, shall upon payment
in full for all Initial Services by netValue for that Project, be assigned by
DMR TRECOM to netValue. The term "Work Project" shall mean for any Project,
any inventions, programming, documentation, reports, designs or specifications
created or produced by DMR TRECOM consultants performing services for netValue
during the performance of such Initial Services on such Project.
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER OR ANY OTHER
PERSON OR ENTITY FOR ANY SPECIAL, EXEMPLARY, INDIRECT, CONSEQUENTIAL OR
PUNITIVE DAMAGES OF ANY KIND OR NATURE WHATSOEVER, WHETHER OR NOT THE
POSSIBILITY OF SUCH DAMAGES HAS BEEN DISCLOSED TO SUCH PARTY IN ADVANCE OR
COULD HAVE BEEN REASONABLY FORESEEN BY SUCH PARTY AND WHETHER IN AN ACTION
BASED ON CONTRACT, WARRANTY, STRICT LIABILITY, TORT OR OTHERWISE.
NETVALUE AGREES THAT DMR TRECOM'S LIABILITY FOR DAMAGES ARISING OUT
OF THIS LETTER AGREEMENT, ANY OF THE INITIAL SERVICES PERFORMED HEREUNDER OR
OTHERWISE RELATED TO THE PROJECTS OR THE NEGOTIATIONS RELATING THERETO,
WHETHER IN AN ACTION BASED ON CONTRACT, WARRANTY, STRICT LIABILITY, TORT OR
OTHERWISE, SHALL NOT EXCEED THE TOTAL AMOUNT PAID BY NETVALUE TO DMR TRECOM
UNDER THIS LETTER AGREEMENT FOR SERVICES PERFORMED.
DMR TRECOM and netValue hereby agree that this Letter Agreement shall
be effective for each Project as of the starting date indicated on the
attached Schedule relating to such Project.
Kindly arrange for an authorized officer of netValue to sign a copy
of this letter in the space provided below and return a copy to the
undersigned to indicate your agreement to the terms and conditions set forth
above in this Letter Agreement.
<PAGE>
Mr. Rick Davey
June 19, 1997
Page 4
We look forward to continuing working with you and your team on these
projects.
Very truly yours,
DMR TRECOM, Inc.
By: /s/ Peter Strauss
------------------------------
Name: Peter Strauss
Title: Practice Director
ACKNOWLEDGED AND AGREED:
netValue, Inc.
By: /s/ Richard F. Davey
- -------------------------------------------------------
Name: Richard F. Davey
Title: Vice President - Chief Technology Officer
<PAGE>
Exhibit 10.13
netValue, inc.
1960 Bronson Road
Building Two
Fairfield, Connecticut 06430
March 9, 1998
DMR Consulting Group Inc.
333 Thornall Street
Edison, NJ 08837
Attention: Ms. Janet Rotchford
Dear Janet:
On September 26, 1997, netValue, Inc. ("netValue") and DMR Consulting
Group Inc. (formerly known as DMR TRECOM, Inc.), a Delaware corporation
("DMR"), entered into a letter agreement (the "Letter Agreement") regarding
the payment of approximately $1.2 million owed by netValue to DMR for services
rendered in connection with the development of netValue's core software and
the performance of initial system integration pursuant to a System Integration
and Development Agreement dated November 22, 1996 and a System Integration and
Development Agreement Master Services Agreement effective as of November 11,
1996 (collectively, the "Agreements"). Pursuant to the Letter Agreement,
netValue has paid DMR $300,000 to reduce the outstanding debt to approximately
$900,000 (the "Outstanding Balance"). The parties now wish to amend the Letter
Agreement with respect to the provisions for the repayment of the Outstanding
Balance and memorialize certain other agreements between the parties all as
set forth below. All terms set forth in paragraphs 2 and 3 of the Letter
Agreement are hereby superseded by this letter with such amended terms being
effective as of September 26, 1997. All other terms of the Letter Agreement
shall remain in full force and effect.
1. The payment due date for the Outstanding Balance shall be extended to
the earlier to occur of (i) two (2) business days following the
closing date of the initial public offering (the "IPO") of netValue
common stock (the "IPO Date") or (ii) the payment dates set forth in
Exhibit A. In addition, the Outstanding Balance shall accrue simple
interest at a rate equal to the prevailing prime rate of interest (as
published by First Union National Bank as of October 1, 1997).
Interest shall be calculated from October 1, 1997 through the date
the Outstanding Balance is paid in full.
2. The Company is currently contemplating entering into a definitive
agreement (the "IQ Contract") with IQ Value, L.L.C. ("IQ") pursuant
to which, among other things, the Company would grant IQ a license to
market certain Company software products developed for the Company by
DMR (the "Software"). The parties acknowledge that until all amounts
due under the Agreements are paid in full by the Company, DMR is the
owner of such Software. DMR agrees to grant the Company a license for
the Company to grant a sublicense to IQ for the Software, provided
the following provisions are complied with:
a. Unless the Outstanding Balance has been previously paid from
the proceeds of the IPO, Company shall pay DMR the amounts
set forth on Exhibit A attached hereto in conjunction
<PAGE>
with the payments to be received by Company from IQ under
the IQ Contract;
b. Prior to the execution of the IQ Contract, Company will
grant to DMR a first priority perfected security interest in
all of Company's right, title and interest in the IQ
Contract and the Company's right to receive the proceeds
therefrom (the "Security Interest") and the Company will
cooperate in taking all actions requested by DMR to enable
DMR to perfect the Security Interest, including without
limitation, the preparation and execution of (x) a Security
Agreement on terms acceptable to DMR and (y) the appropriate
financing statements in order to perfect the Security
Interest;
c. The Company will take all appropriate actions with regard to
the establishment of a disbursement arrangement pursuant to
which the funds due to DMR as set forth on the right hand
column of Exhibit "A" are paid to it out of the proceeds of
the IQ Contract; and
d. The Company agrees to inform DMR of all material
developments in connection with the Company's negotiations
with IQ and, subsequent to entering into the IQ Contract,
agrees to the extent permissible under any confidentiality
provisions of the IQ Contract, to inform DMR of the status
of its performance under the IQ Contract.
Please acknowledge your agreement with these arrangements by signing, dating
and returning two copies of this letter to me.
Very truly yours,
netValue, inc.
/ s / Michael A. Clark
--------------------------------
By: Michael A. Clark, President
Agreed to and accepted
this 9th day of March, 1998
DMR Consulting Group Inc.
By: / s / Janet Rotchford
- -------------------------------------------
Name: Janet Rotchford
Title: Vice President
<PAGE>
Exhibit A
Payment Date Payment from IQ to netValue Payment from netValue to DMR
- ------------ --------------------------- ----------------------------
3/9/98 $500,000 $100,000
4/1/98 $750,000 $150,000
7/1/98 $500,000 $400,000
10/1/98 $500,000 Remainder of Outstanding
Balance
<PAGE>
Exhibit 11
Computation of Net Income Per Share
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1997
---------------------------- ----------------------------
<S> <C> <C>
Net loss (3,314,094) (8,316,597)
Weighted average number of
common shares outstanding 3,739,236 7,218,801
Net loss per common shares
outstanding $ (.89) $ (1.15)
</TABLE>
*In 1997 the Company adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" for all applicable periods presented in the
accompanying financial statements. See Note 3 to the Company's financial
statements included herein.
<PAGE>
Exhibit 16
[Letterhead of Ernst & Young LLP
One North Broadway
White Plains, New York 10601]
April 2, 1998
Mr. H. Christopher Owings
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Dear Mr. Owings:
We have read the section "Independent Accountants" in the Registration
Statement (Form S-1 No. 333-43443) of netValue, Inc. for the registration of
3,450,000 shares of its Common Stock, $.001 par value and are in agreement
with the statement contained in the first paragraph therein. We have no basis
to agree or disagree with other statements of the Registrant contained in the
second paragraph therein.
Very truly yours,
/s/ Ernst & Young LLP
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and the
use of our report dated March 30, 1998 (except for Note 11, as to which the
date is April 14, 1998), in the Registration Statement (Form S-1 No. 333-43443)
and related Prospectus of netValue, inc. for the registration of 3,450,000
shares of its common stock.
/s/ LJ SOLDINGER ASSOCIATES
Arlington Heights, Illinois
April 14, 1998
