<PAGE>
As filed with the Securities and Exchange Commission on May 28, 1998.
Registration No. 333-43443
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 2
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 Steven Wasserman, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP Berlack, Israels & Liberman LLP
1401 Walnut Street 120 West 45th Street
Philadelphia, Pennsylvania 19102 New York, New York 10036
(215) 568-6060 (212) 704-0100
</TABLE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this 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>
<S> <C> <C>
Item No. Form S-1 Caption Prospectus Caption
- -------- ---------------- ------------------
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 of and Dividends on Common Stock
Registrant 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 MAY , 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 listing application or, if the application is
approved, that the Company's listing will be maintained on NASDAQ.
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.
<TABLE>
<CAPTION>
===================================================================================================================================
Underwriting Discounts
Price to Public and Commissions(1) Proceeds to Company(2)
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . . . $ 5.00 $ 0.4375 $ 4.5625
Total(3) . . . . . . . . . . . . . . . $ 15,000,000 $ 1,312,500 $ 13,687,500
===================================================================================================================================
</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), or (ii) the value of
an option entitling the Underwriter to purchase up to 300,000 shares
of Common Stock at a price equal to 165% of the offering price per
share, exercisable for a period of 4 years commencing one year after
to the date of this Prospectus. 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
$400,000, 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 $17,250,000, $1,509,375,
and $15,740,645, 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
<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 OnlineSM, 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 OnlineSM service. In the first
quarter of 1998, the Company recorded its initial revenues from its Coupons
OnlineSM 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, 1996 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 $12,837,500, in the
following approximate amounts: $4,561,000 to repay
short term notes payable including interest, $1,660,000
to repay outstanding accounts payable due and
$6,616,500 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, 2,809,750 shares
of Common Stock issuable upon the exercise of outstanding options and
warrants, 2,723,750 of Common Stock issuable to Rozel International
Holdings Limited ("Rozel") upon the conversion of 217,900 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>
December 16, 1994
Three Months Ended (inception) through
Year Ended December 31, March 31, (Unaudited) March 31, 1998
1995 1996 1997 1997 1998 (Unaudited)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data (1)
Revenues $ 0 $ 0 $ 0 $ 0 $72,000 $ 72,000
Operating expenses 746,945 3,316,522 9,364,898 3,822,153 2,158,681 15,604,188
Loss from operations (746,945) (3,316,522) (9,364,898) (3,822,153) (2,086,681) (15,532,188)
Other income (expense) (615) 2,428 (1,870,339) (225,836) (791,384) (2,659,910)
Net loss $(747,560) $(3,314,094) $ (11,235,237) $(4,047,989) $(2,878,065) $(18,192,098)
March 31, 1998 (Unaudited)
--------------------------------------------------------------
Pro Forma As Adjusted
Actual Transactions (4) Transactions (3)(5)(6)
------ ---------------- ----------------------
<CAPTION>
Balance Sheet Data
<S> <C> <C> <C>
Working capital (deficit) $(5,925,693) $ 98,833 $4,953,861
Total assets 1,406,730 (123,500) 7,451,828
Total liabilities 6,216,911 (222,333) 1,738,346
Notes payable and accrued interest (2) 3,251,065 (654,833) ---
Stockholders' equity (deficit) $(4,810,181) $ 98,833 $5,713,482
</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 March 31, 1998
(unaudited) for each captioned item included under Balance Sheet Data,
plus the sum of the Pro Forma Transactions and "As Adjusted" Transactions.
(4) Includes additional 1998 borrowing, 1998 proceeds from the sale of
preferred stock and the proceeds from the Distribution and Licensing
Agreement which the Company entered into with IQ Value, L.L.C. (The "IQ
Agreement"), collectively used to fund operating losses as part of
Deficits accumulated during the development stage (a component of
stockholders' equity (deficit)) and the payment of the Company's existing
obligations. 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
described under "Use of Proceeds." See "As Adjusted" Transactions table
below.
(6) Does not include 450,000 shares of Common Stock issuable upon the exercise
of the Underwriter's over-allotment option, 2,809,750 shares of Common
Stock issuable upon the exercise of outstanding options and warrants,
2,723,750 shares of Common Stock issuable to Rozel upon the conversion of
217,900 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) Total
----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Working
capital
(deficit) $1,684,000 $ 0 $ 13,750 $110,000 $(1,600,000) $(108,917) $98,833
Total assets 1,684,000 750,000 (750,000) (207,500) (1,600,000) (123,500)
Total
liabilities 750,000 (763,750) (317,500) 108,917 (222,333)
Notes payable
and accrued
interest (763,750) 108,917 (654,833)
Stockholders'
equity
(deficit) $1,684,000 $ 0 $ 13,750 $110,000 $(1,600,000) $(108,917) $98,833
</TABLE>
(a) In April and May 1998, the Company issued an aggregate of 168,400 shares
of Series A Preferred Stock to Rozel International Holdings Limited
("Rozel") and received aggregate proceeds of $1,684,000. At the option of
either the Company or Rozel, all shares of Series A Preferred Stock are
convertible at any time into 12.5 shares of Common Stock . See
"Description of Capital Stock - Preferred Stock." The Company is selling
shares of Series A Preferred Stock in order to satisfy its short term
financing needs through the date on which it receives the proceeds of this
Offering.
(b) Proceeds received from the IQ Agreement pursuant to which the Company
received $500,000 in March 1998 (which was recorded as deferred revenue at
March 31, 1998) and $750,000 upon the execution of the agreement in April
1998 (which the Company intends to record as deferred revenue). The
Company intends to recognize license fee revenue from the IQ Agreement
when the product is delivered to IQ. See "Business - Marketing and Sales
Strategy - Distribution and Licensing Agreement with IQ Value, L.L.C."
(c) In April 1998, the Company satisfied Lancer Partners, L.P. loan obligation
by paying $750,000 out of the proceeds from the IQ Agreement and issuing
2,750 shares of common stock with an ascribed value of $5.00 per share to
pay accrued interest of $13,750.
(d) In April 1998, the Company made the following payments, each of which was
contingent upon the execution of the IQ Agreement: payment of $150,000 to
DMR Consulting Group, Inc. reducing accounts payable and cash at March 31,
1998 by $150,000 (See "Risk Factors - Dependence on DMR Consulting Group,
Inc. to Provide Essential Services to the Company"); payment of $37,500
and issuance of 30,000 shares of common stock with an ascribed value of
$5.00 per share to Promunicom, Inc. reducing accounts payable by $187,500,
cash by $37,500 and increasing equity by $150,000 (See "Business -
Marketing and Sales Strategy - Distribution and Licensing Agreement with
IQ Value, L.L.C."); payment of $20,000 and accrual of an additional
$20,000 related to future payments to Messrs. Braunstein and Barnett
increasing accounts payable by $20,000 and decreasing equity by $40,000
and cash and accounts payable by $20,000 (See "Management -
Employment/Consulting Agreements").
(e) Use of proceeds from sales of Series A Preferred Stock and the IQ
Agreement to pay estimated operating expenses to be incurred by the
Company from April 1, 1998 through June 30, 1998, the anticipated
effective date of the Offering.
(f) Accrued interest on notes payable from April 1, 1998 through June 30,
1998, the anticipated effective date of the Offering.
-5-
<PAGE>
"As Adjusted" Transactions
<TABLE>
<CAPTION>
Total Actual
at March
31, 1998
(Unaudited)
Plus Pro
Forma
Transactions (a) (b) (c) (d) (e) Total
------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital
(deficit) $(5,826,860) $12,837,500 $(1,964,768) $(92,011) $ 0 $ 0 $4,953,861
=
Total assets 1283230 12,837,500 (4,561,000) (92,011) (355,891) (1,660,000) 7,451,828
Total liabilities 5994578 (2,596,232) (1,660,000) 1,738,346
Notes payable and
accrued interest 2596232 -2596232 0
Stockholders' equity
(deficit) $(4,711,348) $12,837,500 $(1,964,768) $(92,011) $(355,891) $ 0 $5,713,482
</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 $2,162,500 (See "Use of
Proceeds").
(b) Repayment of notes payable and accrued interest at the anticipated
effective date of the Offering, including amortization of the balance of
the discount on the Short Term Promissory Notes in the amount of
$1,964,768 (See "Use of Proceeds").
(c) Includes amortization expense for the prepaid financing fees at March 31,
1998 upon the assumed repayment of certain notes payable at the expected
date of repayment which approximates the date of the completion of the
Offering.
(d) Reclassification of deferred offering costs at March 31, 1998 to equity
upon the completion of the Offering.
(e) Payment of delinquent vendor payables at June 30, 1998 (See "Use of
Proceeds").
-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 also temporarily ceased
operations in July 1997 which resulted in the loss of a limited number of
non-essential personnel. Therefore, 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,
and the quarter ended March 31, 1998, the Company incurred net losses of
$747,560, $3,314,094 , $11,235,237 and $2,878,065 (unaudited) respectively. From
its inception on December 16, 1994 through March 31, 1998, the Company has
incurred an accumulated deficit of $18,192,098 (unaudited). 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 March 31, 1998, the Company had a
working capital deficit of ($5,925,693) (unaudited). 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 of this indication based upon the discovery
by the patent examiner assigned to the Company's application of a prior art
patent to the Company's application (i.e. a patent issued prior to the date of
the Company's application which covers material contained in the Company's
application). In April 1998, the Company refiled its application stating more
narrowly defined claims. In April 1998, the Company also filed an application
for an international patent application under the Patent Cooperation Treaty. The
Company is using the technology that is the subject of this patent application
to operate the Programs. See "Business - Patent and Trademark Protection."
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.
-8-
<PAGE>
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 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 through 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 $6,221,000, $4,561,000 of which constitutes
short-term notes and accrued interest thereon, and approximately $1,660,000 of
which will consist primarily of past due accounts payable as of June 30, 1998.
Thus, the Company is highly leveraged and plans to use approximately $6,221,000
or 48.5% 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 has settled three of these
disputes by agreeing to satisfy the terms of extended payment schedules. Through
May 26, 1998, the Company has made all required payments under the terms of
these settlement agreements. The Company is attempting to settle the remaining
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
-9-
<PAGE>
prevail in these legal proceedings. The payment of these amounts could delay the
Company's progress in meeting its business plan.
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. In July
1997, the Company temporarily ceased operations resulting in the loss of a
limited number of non-essential personnel. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Changes in Financial
Position, Liquidity and Capital Resources" and "Business - Employees." Although
the Company has entered into employment agreements with Mr. Clark and Mr. Davey
, there can be no assurance that such individuals will continue to work for the
Company in the event that the Company experiences another cessation of
operations, or at all. 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
In November 1996, the Company 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 , among other
things, are crucial to the success of the Company's products and, therefore, 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 an agreement to distribute the Company's Coupons Online(sm) and
i-Value(sm) products. See "Business -Marketing and Sales Strategy - Distribution
and License Agreement with IQ Value, L.L.C." For services provided under the
agreement, DMR has billed the Company approximately $3,200,000 and the Company
has paid DMR approximately $2,550,000. As of May 26, 1998, the Company owes DMR
approximately $650,000 which includes accrued interest of approximately $40,000.
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."
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
-10-
<PAGE>
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.
Year 2000 Issues
The efficient operation of the Company's business will be dependent in
part on its computer hardware, software programs and operating systems
(collectively, "Programs and Systems"). These Programs and Systems will be used
in all key areas of the Company's business, including the design of customers'
offers and promotions, the delivery of these offers and promotions to
subscribers to the Company's services, recording and reporting of these
transactions, financial reporting and various administrative functions. The
Company has been evaluating its Programs and Systems to identify potential Year
2000 compliance issues. These actions are necessary to ensure that the Programs
and Systems will recognize and process the Year 2000 and beyond. The Company
believes that its Programs and Systems are Year 2000 compliant. The Company is
also communicating with its suppliers, financial institutions and other third
parties to coordinate Year 2000 compliance.
Based on present information, the Company believes that there will be no
significant costs associated with achieving Year 2000 compliance. However, no
assurance can be given that the Company will not determine that significant
expenditures are required to achieve Year 2000 compliance.
-11-
<PAGE>
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."
Inexperience of Underwriter
The Underwriter has engaged in only limited underwriting activities and
has not previously been a lead underwriter in any public offerings. Accordingly,
there can be no assurance that the Underwriter's lack of public offering
experience will not affect the proposed public offering of the Company's Common
Stock or the subsequent development of a trading market for the Company's
securities. Therefore, purchasers of the securities offered hereby may suffer a
lack of liquidity in their investment or a material diminution of the value of
their investments. See "Underwriting."
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 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.
-12-
<PAGE>
Broad Discretion Over Use of Proceeds
Approximately $6,221,000 or 48.5%, 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
$6,616,500 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."
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 $4.84 per share, approximately a 96.8% 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."
-13-
<PAGE>
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, 217,900 shares of Series A Convertible Preferred
Stock will be issued and outstanding, 82,100 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 2,723,750
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."
-14-
<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 $1,762,500, and other expenses of the Offering in the amount of
$400,000, are estimated to be approximately $12,837,500 ($14,823,125 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:
<TABLE>
<CAPTION>
<S> <C>
Repayment of Short Term Promissory Notes, including interest................................ $4,561,000 (35.5%)
Repayment of Commercial Accounts Payable.................................................... $1,660,000 (13.0%)
Working Capital Purposes:
Research and Development $1,809,000 (14.1%)
Sales and Marketing $1,757,000 (13.7%)
Systems and Operations $1,493,000 (11.6%)
General and Administrative $1,093,000 ( 8.5%)
Capital Expenditures $ 464,500 ( 3.6%)
-----------------
$6,616,500 (51.5%)
----------------
TOTAL...................................................................................... $12,837,500 (100%)
================
</TABLE>
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 June
30, 1998. If the Company does not receive the proceeds of the Offering on or
before June 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 June 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.
-15-
<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 May 26,
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 March 31, 1998,
the Company had current liabilities of $6,216,911 (unaudited) and had generated
nominal 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."
-16-
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company
at March 31, 1998 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>
Actual Pro Forma As Adjusted
(Unaudited) Transactions (1) Transactions (2)
------------ ---------------- ----------------
<S> <C> <C> <C>
Notes payable and accrued interest $3,251,065 $ (654,833) $ 0
Stockholders' equity (deficit)
Preferred stock 50 168 218
Common Stock 10,686 33 13,719
Additional paid-in capital 16,638,255 10,688,549 39,805,413
Deferred compensation (668,324) 0 (668,324)
Deficit accumulated during the
development stage (20,790,848) (10,589,917) (33,437,544)
Total stockholders' equity (deficit) (4,810,181) 98,833 5,713,482
Total capitalization $(1,559,116) $ (556,000) $ 5,713,482
</TABLE>
(1) Includes proceeds from the sale of preferred stock and the proceeds from
the IQ Agreement, collectively used to fund operating losses as part of
Deficits accumulated during the development stage (a component of
stockholders' equity (deficit)) and the payment of the Company's existing
obligations. See Pro Forma Transactions table below.
(2) Adjusted to reflect the repayment of certain notes payable and accrued
interest arising from the sale of shares of Common Stock offered hereby
and the application of the net proceeds thereof as described under "Use of
Proceeds." See "As Adjusted Transactions" table below.
-17-
<PAGE>
Pro Forma Transactions
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) Total
<S> <C> <C> <C> <C> <C> <C>
Notes payable
and accrued
interest $ 0 $(763,750) $ 0 $ 0 $108,917 $(654,833)
Stockholders'
equity
(deficit)
Preferred 168
Stock 168
Common
Stock 3 30 33
Additional
paid-in
capital 1,0524,832 13,747 149,970 1,0688,549
Deferred 0
compensation
Deficit
accumulated
during the
development
stage (8,841,000) 0 (40,000) (1,600,000) (108,917) (10,589,917)
Total
Stockholders'
equity
(deficit) 1,684,000 13,750 110,000 (1,600,000) (108,917) 98,833
Total
Capitalization $1,684,000 $(750,000) $110,000 $(1,600,000) $ 0 $ (556,000)
</TABLE>
(a) In April and May 1998, the Company issued an aggregate of 168,400 shares
of Series A Preferred Stock to Rozel International Holdings Limited
("Rozel") and received aggregate proceeds of $1,684,000. At the option of
either the Company or Rozel, all shares of Series A Preferred Stock are
convertible at any time into 12.5 shares of Common Stock. See
"Description of Capital Stock - Preferred Stock." The issuance of the
168,400 Series A Shares will result in a preferred dividend of $8,841,000
as a result of the beneficial conversion feature of the Series A Shares
(see Note 11 to the Company's Financial Statements for the Three Years
Ended December 31, 1997). The Company is selling shares of Series A
Preferred Stock in order to satisfy its short term financing needs through
the date on which it receives the proceeds of this Offering.
(b) In April 1998, the Company satisfied Lancer Partners, L.P. loan obligation
by paying $750,000 out of the proceeds from the IQ Agreement and issuing
2,750 shares of common stock with an ascribed value of $5.00 per share to
pay accrued interest of $13,750.
(c) In April 1998, the Company made the following payments, each of which was
contingent upon the execution of the IQ Agreement: payment of $150,000 to
DMR Consulting Group, Inc. reducing accounts payable and cash at March 31,
1998 by $150,000 (See "Risks Factors - Dependence on DMR Consulting Group,
Inc. to Provide Essential Services to the Company"); payment of $37,500
and issuance of 30,000 shares of common stock with an ascribed value of
$5.00 per share to Promunicom, Inc. reducing accounts payable by $187,500,
cash by $37,500 and increasing equity by $150,000 (See "Business -
Marketing and Sales Strategy - Distribution and Licensing Agreement with
IQ Value, L.L.C."); payment of $20,000 and accrual of an additional
$20,000 related to future payments to Messrs. Braunstein and Barnett
increasing accounts payable by $20,000 and decreasing equity by $40,000
and cash and accounts payable by $20,000 (See "Management - Employment/
Consulting Agreements").
(d) Use of proceeds from sales of Series A Preferred Stock and the IQ
Agreement to pay estimated operating expenses to be incurred by the
Company from April 1, 1998 through June 30, 1998, the anticipated
effective date of the Offering.
(e) Accrued interest on notes payable from April 1, 1998 through June 30,
1998, the anticipated effective date of the Offering.
-18-
<PAGE>
"As Adjusted Transactions" (2)
<TABLE>
<CAPTION>
Total Actual
(Unaudited)
Plus Pro
Forma
Amounts (a) (b) (c) (d) Total
<S> <C> <C> <C> <C> <C> <C>
Notes payable and
accrued interest $2,596,232 $ 0 $(2,596,232) $ 0 $ 0 $ 0
Stockholders' equity
(deficit)
Preferred Stock 218 218
Common Stock 10,719 3,000 13,719
Additional paid-in
capital 27,326,804 12,834,500 (355,891) 39,805,413
Deferred (668,324) (668,324)
compensation
Deficit accumulated
during the development
stage (31,380,765) (1,964,768) (92,011) 0 (33,437,544)
Total stockholders'
equity (deficit) (4,711,348) 12,837,500 (1,964,768) (92,011) (355,891) 5,713,482
Total capitalization $(2,115,116) 12,837,500 (4,561,000) (92,011) (355,891) 5,713,482
</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 $2,162,500 (See "Use of Proceeds").
(b) Repayment of notes payable and accrued interest at the anticipated
effective date of the Offering, including amortization of the balance of
the discount on the Short Term Promissory Notes in the amount of
$1,964,768 (See "Use of Proceeds").
(c) Includes amortization expense for the prepaid financing fees at March 31,
1998 upon the assumed repayment of certain notes payable at the expected
date of repayment which approximates the date of the completion of the
Offering.
(d) Reclassification of deferred offering costs at March 31, 1998 to equity
resulting from the completion of the Offering.
Does not include 450,000 shares of Common Stock issuable upon the exercise
of the Underwriter's over-allotment option, 2,809,750 shares of Common
Stock issuable upon the exercise of outstanding options and warrants,
2,723,750 shares of Common Stock issuable to Rozel upon the conversion of
217,900 shares of Series A Preferred Stock, and 10,000 shares of Common
Stock issuable to Golden Eagle Partners, a creditor of the Company.
-19-
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company at March 31, 1998
was ($5,756,325), or ($.54) per share of Common Stock. Net tangible book value
per share is determined by subtracting total liabilities and the Preferred Stock
liquidation value of $495,000 ($10 per share) from total assets less intangible
assets of $3,242, prepaid expenses and registration costs in the aggregate
amount of $447,902, divided by the number of outstanding shares of Common Stock.
Assuming (i) the repayment of an aggregate of $5,311,000 of notes payable (Gross
of Discount) 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 $2,162,500) will be
$2,169,250 or $.16 per share.
Net Tangible
Net Worth
---------
Balance March 31, 1998 $(5,756,325)
(unaudited)
Gross Offering proceeds 15,000,000
Offering costs (2,162,500)
Liquidation Value on Additional
Preferred Stock Issuance (1,402,000)
Issuance of Common Stock in 1998,
prior to the Offering 163,750
Amortization of Discount on Notes
Payable (1,964,768)
Use of proceeds from sales of
Preferred Stock and the IQ Agreement
to fund estimated operating expenses
from April 1, 1998 through June 30, 1998 (1,600,000)
Interest on notes payable prior to
Offering (108,917)
----------
$2,169,250
==========
This represents an immediate increase in net tangible book value per
share of $.70 or 230% to the existing common stockholders and an immediate
dilution of $4.84 per share or 96.8% to the new investors as illustrated in the
following table:
<TABLE>
<CAPTION>
<S> <C>
Assumed public offering price per share $5.00
Net tangible book value (deficit) per share before Offering(1)(2) ($.54)
Increase per share attributable to new investors .70
------
Pro forma net tangible book value per share after Offering .16
------
Immediate dilution to new investors $4.84
======
</TABLE>
-20-
<PAGE>
(1) Does not include 450,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 2,809,750 shares of
Common Stock issuable upon the exercise of outstanding options and
warrants, 2,723,750 shares of Common Stock issuable to Rozel upon the
conversion of 217,900 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 1,026,250 shares of
common stock convertible upon the possible purchase by Rozel, at the
Company's request, of an additional 82,100 shares of Series A Preferred
Stock which would result in an additional liquidation preference to the
Series A Preferred Stockholders of $821,000.
The following table summarizes on a pro forma basis as of March 31,
1998, 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
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing common stockholders 10,718,756 78.1% $11,805,893 44.0% $ 1.10
New investors 3,000,000 21.9 15,000,000 56.0 $5.00
----------- ----- ----------- ------ -------
Total 13,718,756 100% $26,805,893 100% $ 1.95
========== ===== =========== ===== =======
</TABLE>
-21-
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for each of the three year
periods ended December 31, 1997 have been derived from the Company's audited
financial statements. The financial data for the periods ended March 31, 1998
and 1997 have been derived from financial statements which have not been
audited, but which, in the opinion of management, include all adjustments
necessary for a fair presentation of such data. The results of operations for
the three months ended March 31, 1998 (unaudited) are not necessarily indicative
of the results for the full year. 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>
Three Months
Ended December 16, 1994
Year Ended Year Ended Year Ended March 31, (inception) through
December 31 December 31 December 31 (unaudited) March 31, 1998
1995 1996 1997 1997 1998 (unaudited)
---- ---- ---- ---- ---- -------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 0 $ 0 $ 0 $ 0 $72,000 $72,000
Operating Expenses
Compensation and
related expenses 131,174 742,545 3,589,616 773,754 761,130 5,224,465
Professional fees 38,436 399,356 405,193 121,077 69,249 912,234
Advertising 236,775 219,760 832,340 603,619 114,251 1,403,126
Consulting 9,492 869,693 984,590 633,502 102,822 1,966,597
Research and
development
expenses 142,224 809,491 2,588,748 1,434,094 834,971 4,375,434
Depreciation and
amortization 7,570 13,148 179,304 28,198 55,500 255,522
=
Other general and
administrative 181,274 262,529 785,107 227,909 220,758 1,466,810
--------- ---------- ---------- ---------- ---------- -----------
Total Operating Expenses 746,945 3,316,522 9,364,898 3,822,153 2,158,681 15,604,188
--------- ---------- ---------- ---------- ---------- -----------
Loss from Operations (746,945) (3,316,522) (9,364,898) (3,822,153) (2,086,681) (15,532,188)
Other Income (Expense)
Interest Income 1,405 4,953 5,627 0 4,712 16,697
Interest Expense (2,020) (2,525) (1,805,470) (225,836) (642,684) (2,452,699)
Financing Fees 0 0 0 (153,412) (223,908)
--------- ---------- ---------- ---------- ---------- -----------
Total Other Income (Expense) (615) (2,428) (1,870,339) (225,836) (791,384) (2,659,910)
--------- ---------- ---------- ---------- ---------- -----------
Net Loss $(747,560) $(3,314,094) (11,235,237) (4,047,989) (2,878,065) $18,192,098
========= =========== ===========
Preferred Stock Dividend (1,181,250) 0 (1,417,500)
------------- ----------- -----------
Net loss to common
stockholders $ (12,416,487) ($4,047,989) $(4,295,565)
============= ============ ============
Basic and diluted net loss per
common share $ (1.72) $ (0.63) $ (0.40)
============= ============ ===========
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Basic and diluted weighted
average number of common
shares outstanding 7,218,801 6,432,513 10,686,006
============= ============ ===========
<S> <C> <C>
Pro forma Information
(Unaudited)
Net Loss (747,560) (3,314,094)
Pro forma Tax
Provision 0 0
Pro forma Net Loss (747,560) (3,314,094)
Net Loss Per Share
Data
Basic and diluted net
loss per common share (0.24) $ (0.89)
Basic and diluted weighted
average number of common
shares outstanding 3,074,000 3,739,236
</TABLE>
<TABLE>
<CAPTION>
December 31,1996 December 31, 1997 March 31, 1998
---------------- ----------------- --------------
(unaudited)
Balance Sheet Data
<S> <C> <C> <C>
Cash and cash equivalents $299,351 $671,508 $158,847
Working capital (deficit) (792,841) (3,427,635) (5,925,693)
Total assets 794,592 1,800,402 1,406,730
Total liabilities 1,099,684 4,227,058 6,216,911
Notes payable and accrued interest 0 1,882,591 3,251,065
Stockholders' deficit $ (305,092) $(2,426,656) $(4,810,181)
</TABLE>
-23-
<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 $11,235,237 in 1997, compared to a net loss of $3,314,094 in 1996
(an increase of $7,921,143). Approximately $1,300,000 of this increase was due
to additional non-cash compensation expense in 1997 due to grants of stock
options that carry exercise prices which were less than the fair value of the
common stock at the date of grant. Approximately $1,900,000 of this increase was
due to additional interest expense in 1997. The remaining approximate $4,700,000
increase reflects primarily the change in focus from concept development to
actual product and business development . See "Business - Program Development."
In addition, during 1997 the Company granted a preferred stock dividend of
$1,181,250 related to the issuance of shares of Series A Convertible Preferred
Stock pursuant to the
-24-
<PAGE>
terms of a preferred stock purchase agreement (See Note 9 of the Company's
Financial Statements for the Three Years Ended December 31, 1997).
Compensation and related expenses increased from $742,545 in 1996 to
$3,589,616 in 1997 (an increase of $2,847,071). Approximately $1,262,000 of this
increase was due to a non-cash charge resulting from grants of stock options
that carry exercise prices which were less than the fair value of the common
stock at the date of grant. The remainder of this increase was due to the hiring
of additional employees in anticipation of commencing commercial operations and
the payment of a full year of compensation to employees hired during the fourth
quarter of 1996. The Company began hiring additional full-time employees in
October 1996, primarily to commence product development, as well as marketing
and sales activities, and had 17 full-time employees at December 31, 1996. 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.
Advertising expenses increased from $219,760 in 1996 to $832,340 in 1997
(an increase of $612,580). This increase was due to the development of sales
collateral and 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.
Consulting expenses were $869,693 in 1996 and $984,590 in 1997. The
increase of $114,897 was primarily attributable to a $265,000 expense related to
the settlement of a consulting agreement between the Company and Promunicom,
Inc. (See "Business - Marketing and Sales Strategy - Distribution and License
Agreement with IQ Value, LLC), offset by the Company's conversion of consultants
to full-time employees to manage the day-to-day operations, sales and marketing
activities of the Company.
Research and development expenses increased from $809,491 in 1996 to
$2,588,748 in 1997 (an increase of $1,779,257). This increase was due to
increased development activities related to the Company's Coupons OnlineSM and
i-Value(sm) products and an approximate $240,000 use tax expense related to the
Company's retention of consultants located outside of the State of Connecticut
to perform development activities for the Company. The Company's use tax
obligation related to the procurement of such services was immaterial in 1996.
Accordingly, no use tax expense was recorded in 1996. 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
capital equipment base consisting primarily of 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 $1,805,470 in 1997. The increase
of $1,802,945 was attributable to interest expense related to various debt
obligations incurred by the Company throughout 1997.
Financing fees increased by $70,496 in 1997. The fees were primarily
expenses associated with the issuance of common stock as additional
consideration pursuant to a financing agreement (See Note 8(b) of the Company's
Financial Statements for the Three Years Ended December 31, 1997).
Three Months Ended March 31, 1998 Compared to the Three Months Ended
March 31, 1997. 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 form these results regarding future revenue potential of its
products. See "Business." During the three months ended March 31, 1998, the
Company recognized revenues of $72,000 related to the commercial operation of
its Coupons OnlineSM service. Revenues were derived from five national
manufacturers promoting a total of nine brands using the Coupons OnlineSM
service. No revenues were recognized during the three months ended March 31,
1997.
-25-
<PAGE>
The Company incurred net losses of $2,878,065 and $4,047,989 in the
three months ended March 31, 1998 and the three months ended March 31, 1997,
respectively (a decrease of $1,169,924). Approximately $760,000 of this decrease
was related to additional non-cash compensation expense during the three months
ended March 31, 1997 for grants of options that carry exercise prices which are
less than the fair value of the Common Stock at the date of the grant and common
stock issued in exchange for consulting services performed for the Company.
Approximately $599,000 of this decrease is due to substantial decreases in
software development costs related to the Coupons OnlineSM service. In addition,
during the three months ended March 31, 1998, the Company granted a preferred
stock dividend of $1,417,500 related to the issuance of shares of Series A
Convertible Preferred Stock pursuant to the terms of a preferred stock purchase
agreement. (See note 9 of the Company's Financial Statements for the Three Years
Ended December 31, 1997).
Compensation and related expenses decreased to $761,130 during the three
months ended March 31, 1998 from $773,754 during the three months ended March
31, 1997. This decrease of $12,624 was due to additional compensation expense
incurred of approximately $223,000 related to the hiring of additional
personnel, primarily in the sales and operations areas, offset by a decrease of
approximately $236,000 in non-cash compensation charges related to the issuance
of stock options at exercise prices which were less than the fair value of the
Common Stock at the date of grant. As of March 31, 1998 and 1997, the Company
had 26 and 20 full-time employees, respectively.
Professional fees were $69,249 during the three months ended March 31,
1998 and $121,077 during the three months ended March 31, 1997 (a decrease of
$51,828). The Company had incurred additional fees during the three months ended
March 31, 1997 related to capital raising activities.
Advertising expenses decreased to $114,251 during the three months ended
March 31, 1998 from $603,619 during the three months ended March 31, 1997.
During the three months ended March 31, 1997, the Company had incurred
significant costs in connection with hiring an outside marketing firm to develop
and initiate advertising and promotional campaigns to support the introduction
of Coupons OnlineSM.
Consulting expenses decreased to $102,822 during the three months ended
March 31, 1998 from $633,502 during the three months ended March 31, 1997. The
decrease of $530,680 was primarily attributable to non-cash consulting cost of
approximately $554,000 in 1997 related to the issuance of the Company's common
stock pursuant to an agreement whereby AML provided investment banking services
in exchange for shares of the Company's Common Stock. (See Note 9 of the
Company's Financial Statements for the Three Years December 31, 1997).
Research and development expenses decreased to $834,971 during the three
months ended March 31, 1998 from $1,434,094 during the three months ended March
31, 1997. This decrease of $599,123 is primarily attributable to additional
development costs incurred in the 1997 period related to Coupons OnlineSM, which
was completed in July 1997.
Depreciation and amortization expenses increased to $55,500 during the
three months ended March 31, 1998 from $28,198 during the three months ended
March 31, 1997. The increase was attributable to the increased base of computer
equipment required to support the growth of the Company's operations.
Other general administrative expenses remained consistent at $220,758
during the three months ended March 31, 1998 and $227,909 during the three
months ended March 31, 1997.
Interest expense increased to $642,684 during the three months ended
March 31, 1998 from $225,836 during the three months ended March 31, 1997. The
increase of $416,848 was attributable to non-cash amoritization of debt discount
of $498,849 during the three months ended March 31, 1998 as compared to $200,000
during the three months ended March 31, 1997 related to various debt
obligations.
Financing fees increased by $153,412 during the three months ended March
31, 1998. This increase was due to the amortization of prepaid financing fees
related to financing agreements which the Company entered into during the fourth
quarter of 1997 and shares of the Company's Common Stock issued pursuant to the
terms of an intercreditor agreement (See note 8(b) of the Company's Financial
Statements for the Three Years Ended December 31, 1997).
-26-
<PAGE>
As of March 31, 1998, the Company had an accumulated deficit of
$20,790,848. The Company believes approximately $12,299,000 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.
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. The notes payable were scheduled to mature in January 1998 and, at
the time the conversion was negotiated, the Company did not believe that it
would have a sufficient amount of cash to pay the principal balance and accrued
interest at the maturity date. 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 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 March 31, 1998, 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
accrued interest at the rate of 10% per annum and was scheduled to mature on the
earlier of August 2, 1998 or the date on which IQ provided funds to the Company
totaling $750,000 pursuant to a distribution and license agreement. See
"Business - Marketing and Sales Strategy - Distribution and License Agreement
with IQ Value, L.L.C." SPH Equities, Inc. ("SPH"), an investment banking firm,
received a fee of
-27-
<PAGE>
$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 December 1997, the Company issued 22,500 shares of its Series A
Preferred Stock to Rozel, generating gross proceeds of $225,000. 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 91,000 shares of its Series A Preferred Stock to
Rozel, generating gross proceeds of $910,000. In May 1998 the Company has issued
77,400 shares of its Series A Preferred Stock to Rozel, generating gross
proceeds of $774,000. 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." All shares of
Series A Preferred Stock are convertible at the option of the Company or Rozel
into 12.5 shares of Common Stock. There can be no assurance that Rozel will
continue to purchase additional shares of the Company's Series A Preferred
Stock. If Rozel fails to purchase shares of the Company's Series A Preferred
Stock on a timely basis, or if the proceeds from sales of the remaining shares
of Series A Preferred Stock under the Rozel Agreement are insufficient to
satisfy the Company's short term financing needs until such time as it receives
the proceeds of this Offering, the Company will be required to locate and
procure an additional source of financing in order to maintain its liquidity.
In March and April 1998, the Company received licensing fees in the
aggregate amount $1,250,000 from IQ pursuant to the terms of the Distribution
and License Agreement between the Company and IQ (the "IQ Agreement"). See
"Business - Marketing Strategy - Distribution and License Agreement With IQ
Value, L.L.C."
As of March 31, 1998, the Company had cash of $158,847 available for
operating expenses and capital equipment purchases; however, at that date, the
Company had accounts payable of $2,141,638, short-term debt of $3,060,759 and
accrued expenses of $505,814. At May 22, 1998, the Company had cash of
approximately $255,000 available for operating expenses and capital equipment
purchases, short term debt of $4,275,000 and accounts payable of approximately
$1,830,000. 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 $12,837,500 the Company expects to receive as net
proceeds from this Offering, management expects that approximately $6,221,000
(48.5%) will be used to repay short term notes payable and commercial accounts
payable due. Management intends to use the remaining net proceeds of
approximately $6,616,500 (51.5%) as follows:
$1,809,000 (14.1%) Research and Development
$1,757,000 (13.7%) Sales and Marketing
$1,493,000 (11.6%) Systems and Operations
$1,093,000 ( 8.5%) General and Administrative
$ 464,500 ( 3.6%) Capital Expenditures
Management has estimated that the net proceeds of this Offering, when
combined with other financial commitments, including the Rozel Preferred Stock
Purchase Agreement, 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 and Rozel may
decline to satisfy the terms of the Rozel Agreement. If the Company's results of
operations in 1998 are less than projected or Rozel does not satisfy the terms
of the Rozel Agreement on a timely basis, the Company may be required to seek
additional financing 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
-28-
<PAGE>
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."
Commitments
Pursuant to the IQ Agreement, the Company is obligated to relocate the
Company's Data Center to a reputable facility approved by IQ. The Data Center
contains all of the hardware and operating systems used in the processing of
transactions through the Coupons OnlineSM systems. Pursuant to the terms of the
IQ Agreement, the relocated facility must have the capability to operate 24
hours a day for seven days a week. The Company retains the right to operate
mirror facilities in its sole discretion. The Company has completed a request
for proposal and has selected a reputable contractor to complete the relocation
of the facility. The Company is in the process of negotiating a contract with
this party and believes that such contract will require the Company to incur a
one time non-recurring cost of approximately $250,000 to relocate the facility,
capital expenditures of approximately $400,000 to purchase computer equipment
necessary to operate the Data Center, and a monthly fee of approximately $25,000
to maintain operations at the facility. While there is no assurance that the
Company will enter into an agreement with this contractor, management is
confident that it will be required to enter into an agreement with a third party
at these approximate terms in order to satisfy its obligations under the IQ
Agreement. See "Business - Marketing and Sales Strategy - Distribution and
License Agreement with IQ Value, L.L.C."
As of May 22, 1998, the Company owes DMR approximately $650,000 for
consulting services performed in connection with the initial systems integration
of its Coupons OnlineSM and i-ValueSM products. 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 the services provided to the Company. On March 9,
1998, the parties entered into an agreement whereby 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 on which the Company
expects to receive payments pursuant to the IQ Agreement. Under the terms of
this Agreement, DMR agreed to grant a license to the Company in order to allow
the Company to grant a sublicense of the Coupons OnlineSM and i-ValueSM products
to IQ in exchange for a security interest in the Company's proceeds from the IQ
Agreement. See "Business - Marketing and Sales Strategy - Distribution and
License Agreement with IQ Value, L.L.C."
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. The Company has included an accrual for these unpaid use
taxes in the March 31, 1998 financial statements. On May 1, 1998, the Company
entered into an agreement with the State of Connecticut, Department of Revenue
Services (the "Department"), whereby the Company will pay the past due use taxes
and all accrued interest thereon pursuant to a payment schedule which requires
the Company to pay the Department $5,000 per week until the Company receives the
proceeds of this Offering. Upon the earlier of June 30, 1998 or the Company's
receipt of the proceeds of this Offering, the Company is required to pay the
entire remaining balance due to the Department. See "Business - Regulatory
Matters."
Pursuant to the terms of an agreement between the Company and
Promunicom, Inc. regarding the termination of a consulting agreement between the
parties, the Company has an outstanding commitment to pay Gary R. Blau, a
principal of Promunicom, $37,500 upon the earlier of July 6, 1998 or the
Company's receipt of the proceeds of this Offering. See "Business - Marketing
and Sales Strategy - Distribution and License Agreement with IQ Value, LLC."
-29-
<PAGE>
In March and April 1998, the Company entered into settlement agreements
regarding three separate contract related disputes. In each of these instances,
the claimant has agreed to refrain from further collection actions against the
Company provided that the Company comply with the terms of negotiated repayment
schedules. As of May 22, 1998, the Company has complied with these repayment
schedules. Pursuant to the terms of these settlement agreements, the Company is
committed to repaying approximately $9,500 on or before May 29, 1998 and
approximately $70,000 on or before July 30, 1998 to these claimants. See
"Business - Legal Proceedings."
Contingencies
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. However, there can be no assurance that this third party will
not file a lawsuit against the Company seeking damages or injunctive relief
preventing the Company from any further use of its Internet coupon distribution
process. If this third party were to prevail in such a lawsuit, the Company may
not be permitted to satisfy its obligations under the IQ Agreement or any
similar agreements which the Company may enter into in the future. The Company's
inability to satisfy its obligations under the IQ Agreement or any similar
agreements would have a material adverse effect on its liquidity and financial
condition. See "Risk Factors - No Assurance of Protection of Patents and
Proprietary Technology," and "Business - Patent and Trademark Protection".
The Company is currently subject to litigation filed by the Guild Group
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 approximately
$245,000 from the Company for services allegedly provided. If the Company does
not prevail in this lawsuit, it may be required to pay this amount of damages to
Guild. As of March 31, 1998 the Company has included this amount in accounts
payable. See "Risk Factors - Pending Legal Proceedings," and "Business - Legal
Proceedings."
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.
-30-
<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. In the first
quarter of 1998, the Company recorded its initial revenues from 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.
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.
-31-
<PAGE>
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
Based upon its research of the most recent information available from
industry sources, the Company believes that in 1995 combined advertising and
promotion spending by retailers and product and service marketers totaled more
than $293 billion. The Company has determined that over 291 billion coupons were
delivered to U.S. consumers in 1995 and that the percentage of coupons redeemed
by consumers fell to approximately 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,
televisions to access multimedia information and transact business. The Company
believes that the base of consumers reportedly using the Internet has grown from
2 million in 1994 to approximately 62 million as of 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. The Company has determined that Internet advertising spending
totaled approximately $597.1 million in 1997 and the Company expects Internet
advertising spending to grow to approximately $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 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.
-32-
<PAGE>
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 SM 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 and e-mail address 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 OnlineSM 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 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 and e-mail address 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
-33-
<PAGE>
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 CDS; (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.
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.
-34-
<PAGE>
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 positioning, 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
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 has received an exclusive
right to distribute the Company's Coupons OnlineSM product for use in
-35-
<PAGE>
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. IQ is not required to
meet a minimum level of transaction fees in order to maintain its 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.
Pursuant to the IQ Agreement, the Company is obligated to relocate the
Company's Data Center to a facility approved by IQ. The Data Center contains all
of the hardware and operating systems used in the processing of transactions
through the Coupons OnlineSM systems. Pursuant to the terms of the IQ Agreement,
the relocated facility must have the capability to operate 24 hours a day, seven
days a week. The Company retains the right to operate mirror facilities in its
sole discretion.
The Company has completed a request for proposal process and has
selected a contractor to complete the relocation of the facility. The Company is
in the process of negotiating a contract with this party and believes that such
contract will require the Company to incur a one time non-recurring cost of
approximately $250,000 to relocate the facility, capital expenditures of
approximately $400,000 to purchase computer equipment necessary to operate the
Data Center, and a monthly fee of approximately $25,000 to maintain operations
at the facility. While there is no assurance that the Company will enter into an
agreement with this contractor, management is confident that it will be required
to enter into an agreement with a third party at these approximate terms in
order to satisfy its obligations under the IQ Agreement.
Pursuant to the terms of the IQ Agreement, the Company is obligated to
provide its customers with the same level of customer support that the Company
provides to its direct customers. The Company is also obligated to generate and
provide periodic sales and operational reports to IQ regarding the volume of IQ
customers' offers and promotions delivered to consumers using the Company's
Coupons OnlineSM and i-Value(sm) products. However, the Company has no
obligation to provide invoices or perform any billing, collection or other
accounts receivable functions on behalf of IQ or its customers.
Pursuant to the terms of the IQ Agreement, the Company is obligated to
maintain its website for access by IQ customers and to allow IQ to use the
website for purposes of marketing the Coupons OnlineSM and i-Value(sm) products.
Pursuant to the terms of the IQ Agreement, the Company is obligated,
upon delivery of such items to the Company by DMR, to deposit in escrow one copy
of the software, hardware designs, operating documentation and manuals related
to the Coupons OnlineSM and i-Value(sm) products.
In February 1998, the Company received notice the United States Patent
and Trademark Office (USPTO) rejected the Company's patent application based
upon the discovery by the patent examiner assigned to the Company's application
of a prior art patent to the Company's application. See "Risk Factors - No
Assurance of Projection of Patents and Proprietary Technology," "Business -
Patent and Trademark Protection." Under the terms of the IQ Agreement, the
Company is not obligated to obtain patents for either of the Coupons OnlineSM
and i-Value(sm) products, nor does the Company make any covenants stating that
it has been granted patents covering either the Coupons OnlineSM and i-Value(sm)
products. Accordingly, the USPTO rejection of the Company's patent application
has no effect on the Company's rights and obligations under the IQ Agreement.
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
-36-
<PAGE>
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 - 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
rejected the Company's application based upon the discovery by the patent
examiner assigned to the Company's application of a prior art patent to the
Company's application (i.e. a patent issued prior to the date of the Company's
application which covers material contained in the Company's application). On
April 30, 1998, the
-37-
<PAGE>
Company's attorneys filed a response to the rejection which narrowed the
application's claims to define over this prior art patent. On April 24, 1998,
the Company also filed a continuation application seeking the broader coverage
initially indicated to be patentable and filed an international patent
application under the Patent Cooperation Treaty. The Company does not believe
that any of the pending patents will provide material commercial value to the
Company or that their 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
As of May 22, 1998, the Company employed 21 full-time employees. These
employees include 12 operations and software development staff, six marketing
and sales staff and three 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 facility consisted of
approximately 9,287 square feet of office space in Stamford, Connecticut. The
Company subleased this facility under an agreement which expired 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 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
-38-
<PAGE>
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 four contract-related disputes. To date, all of these
matters have related to amounts payable to trade creditors for services
rendered. The Company has settled three of these disputes by agreeing to satisfy
the terms of extended payment schedules. Through May 22, 1998, the Company has
made all required payments under the terms of these settlement agreements.
Management of the Company does not believe that the remaining unsettled actions
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.
On May 1, 1998, the Company entered into an agreement with the State of
Connecticut, Department of Revenue Services (the "Department"), whereby the
Company will pay the past due use taxes and all accrued interest thereon
pursuant to a payment schedule which requires the Company to pay the Department
$5,000 per week until the Company receives the proceeds of this Offering. Upon
the earlier of June 30, 1998 or the Company's receipt of the proceeds of this
Offering, the Company is required to pay the entire remaining balance due to the
Department.
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 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."
-39-
<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 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
-40-
<PAGE>
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).
-41-
<PAGE>
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>
Long-Term
Annual Compensation Compensation Awards
Name and ------------------- -------------------
Principal Position Year Salary Bonus Number of Options
------------------ ---- ------ ----- -----------------
<S> <C> <C> <C> <C>
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.
-42-
<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)
% of Total
Options
Number of Granted
Options to Exercise
Name Granted Employees or Expiration Date 5% 10%
---- --------- in Fiscal Base Price --------------- -- ---
Year ----------
---------
<S> <C> <C> <C> <C> <C> <C> <C>
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.
-43-
<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)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
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 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
-44-
<PAGE>
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
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
-45-
<PAGE>
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 IQ Agreement .
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 Braunstein. 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
1,907,250 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.
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.
-46-
<PAGE>
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.
-47-
<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.
-48-
<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 May 26, 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 May 26, 1998, an
aggregate of 10,718,756 shares of Common Stock were issued and outstanding.
Assuming the consummation of this Offering, as of May 26, 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>
Shares of Common Stock Beneficially Owned
-----------------------------------------
Name and Address Number Percent of Class
- ---------------- ------ ----------------
Before Offering After Offering
<S> <C> <C> <C> <C>
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>
-49-
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
-----------------------------------------
Name and Address Number Percent of Class
- ---------------- ------ ----------------
Before Offering After Offering
--------------- --------------
<S> <C> <C> <C> <C>
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 6,707,127 (10) 49.9 40.8
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)
- ----------------
* Less than 1%
</TABLE>
(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 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.
-50-
<PAGE>
(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 2,723,750 shares of Common Stock issuable upon the conversion of
217,900 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.
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
-51-
<PAGE>
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.
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
217,900 shares for $2,179,000. The Company can request that Rozel purchase an
additional 44,600 Series A Shares at any time and an additional 37,500 Series A
Shares at any time subsequent to June 1, 1998. As of May 26, 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. 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
-52-
<PAGE>
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. 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 APP warrant) and (iv) 2,723,750
shares of Common Stock were reserved for issuance upon the conversion of the
Series A Preferred Stock. As of the date of this Prospectus, 217,900 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
-53-
<PAGE>
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.
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 initial listing application 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
-54-
<PAGE>
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 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
20,000 October 7, 1998
97,500 October 17, 1998
182,500 October 31, 1998
102,500 December 11, 1998
155,000 February 19, 1999
37,500 March 24, 1999
102,500 May 31, 1999
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
-55-
<PAGE>
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, 2,723,750 shares of Common Stock reserved for issuance upon the conversion
of the 217,900 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 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 8.75% 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 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 the Offering exercisable for a
period of 4 years commencing one year subsequent to the date of this Prospectus
at an exercise price equal to 165% of the public offering price set forth on the
cover page of this Prospectus.
The Company has 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.
-56-
<PAGE>
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.
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.
The underwriter has been actively engaged in the securities brokerage
and investment banking business since November 1995. However, the Underwriter
has engaged in only limited underwriting activities, and the Underwriter has not
previously been a lead underwriter in any public offerings. Accordingly, there
can be no assurance that the Underwriter's lack of public offering experience
will not affect the proposed public offering of the Company's Common Stock or
the subsequent development of a trading market for the Company's securities.
Therefore, purchasers of the securities offered hereby may suffer a lack of
liquidity in their investment or a material diminution of the value of their
investments. See "Risk Factors - Risks Related to the Offering - Underwriter's
Limited Underwriting Experience."
Two principals of the Underwriter each own 5,000 shares of the
Company's Common Stock. All of these shares were purchased in September 1996 at
$3.50 per share. These shares are subject to the Lock-Ups and may be sold
pursuant to Rule 144 subsequent to the expiration of the Lock-Ups. See "Shares
Eligible for Future Sale."
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. Legal matters for the Underwriter will be passed upon by Berlack,
Israels & Liberman LLP, New York, New York.
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,
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. LJ Soldinger Associates has
consented to the use of its report herein and in the Registration Statement.
-57-
<PAGE>
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 F9
- 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. 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, 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 described in Note 3.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
March 30, 1998
(except for Note 3, paragraph two, Note 8(a) and Note 11, paragraphs one, two,
and three, as to which the date is April 15, 1998, and Note 11, paragraphs four,
five, six, seven and eight, as to which the date is May 26, 1998)
- F2 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
---------------------------- -----------
1996 1997 1998
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 299,351 $ 671,508 $ 158,847
Accounts receivable - - 350
Prepaid financing fees, net - 120,423 92,011
Other 7,492 7,492 40,010
---------- ---------- -----------
Total Current Assets 306,843 799,423 291,218
Property and Equipment, Net 432,049 684,174 660,873
Intangibles (Net of accumulated amortization of $3,508
in 1996, $5,321 in 1997 and $5,821 in 1998) 5,555 3,742 3,242
Deferred Registration Costs - 218,773 355,891
Deposits 50,145 94,290 95,506
---------- ---------- -----------
$ 794,592 $1,800,402 $ 1,406,730
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Notes payable, net of discounts $ - $1,811,910 $ 3,060,759
Accounts payable 885,052 2,071,948 2,141,638
Accrued salaries and other expenses 156,299 343,200 505,814
Accrued expenses - related parties 58,333 - -
Deferred revenue - - 508,700
---------- ---------- -----------
Total Current Liabilities 1,099,684 4,227,058 6,216,911
---------- ---------- -----------
</TABLE>
Commitments and Contingencies
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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; $225,000
liquidation preference. At March 31, 1998, 1,000,000 shares
authorized; 49,500 shares issued
and outstanding; $495,000 liquidation preference. - 22 50
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 and March 31,1998, 24,000,000
shares authorized; 10,686,006
shares issued and outstanding. 6,270 10,686 10,686
Additional paid-in-capital 3,767,434 14,555,669 16,638,255
Deferred compensation - (497,750) (668,324)
Deficit accumulated during the development stage (4,078,796) (16,495,283) (20,790,848)
------------ ------------ ------------
Total Stockholders' Deficit (305,092) (2,426,656) (4,810,181)
------------ ------------ ------------
$ 794,592 $ 1,800,402 $ 1,406,730
============ ============ ============
</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>
Three Months Ended
Year Ended December 31 March 31 December 16, 1994
------------------------------- ------------------ (Inception) through
1995 1996 1997 1997 1998 March 31, 1998
---- ---- ---- ---- ---- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ 72,000 $ 72,000
Operating Expenses
Compensation and related expenses 131,174 742,545 3,589,616 773,754 761,130 5,224,465
Professional fees 38,436 399,356 405,193 121,077 69,249 912,234
Advertising 236,775 219,760 832,340 603,619 114,251 1,403,126
Consulting 9,492 869,693 984,590 633,502 102,822 1,966,597
Research and development expenses 142,224 809,491 2,588,748 1,434,094 834,971 4,375,434
Depreciation and amortization 7,570 13,148 179,304 28,198 55,500 255,522
Other general and administrative 181,274 262,529 785,107 227,909 220,758 1,466,810
--------- ----------- ----------- ---------- ---------- ----------
Total Operating Expenses 746,945 3,316,522 9,364,898 3,822,153 2,158,681 15,604,188
--------- ----------- ----------- ---------- ---------- ----------
Loss From Operations (746,945) (3,316,522) (9,364,898) (3,822,153) (2,086,681) (15,532,188)
Other Income (Expense)
Interest income 1,405 4,953 5,627 - 4,712 16,697
Interest expense (2,020) (2,525) (1,805,470) (225,836) (642,684) (2,452,699)
Financing fees - - (70,496) - (153,412) (223,908)
--------- ----------- ----------- ---------- ---------- ----------
Total Other Income (Expense) (615) 2,428 (1,870,339) (225,836) (791,384) (2,659,910)
--------- ----------- ----------- ---------- ---------- ----------
Net Loss $(747,560) $(3,314,094) (11,235,237) (4,047,989) (2,878,065) $(18,192,098)
========= =========== ===========
Preferred stock dividend (1,181,250) - (1,417,500)
----------- ---------- ----------
Net loss to common stockholders $(12,416,487) $(4,047,989) $(4,295,565)
=========== ========== ==========
Basic and diluted net loss per common share $ (1.72) $ (.63) $ (.40)
=========== ========== ==========
Basic and diluted weighted average number
of common shares outstanding 7,218,801 6,432,513 10,686,006
=========== ========== ==========
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:
Basic and diluted net loss per
common share $ (.24) $ (.89)
========= ===========
Basic and diluted weighted average
number of common shares
outstanding 3,074,000 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 During the
Preferred ---------------------- Paid-In Members' Deferred Development
Stock Shares Amount Capital Capital Compensation Stage
--------- ----------- --------- ----------- ----------- ------------ ------------
<S> <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 $0.001 Additional During the
Preferred ----------------------- Paid-In Members' Deferred Development
Stock Shares Amount Capital Capital Compensation Stage
--------- ----------- --------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996, brought forward$ - 6,270,430 $ 6,270 $ 3,767,434 $ - $ - $(4,078,796)
Common stock granted for
consulting services - 174,999 175 612,322 - - -
Compensatory common
stock options issued - - - 1,932,150 - (1,932,150) -
Amortization of deferred
compensation - - - - - 1,434,400 -
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 1,300,680 - - -
Common stock and warrants;
issued in connection with
short-term bridge financing
(net of offering costs of
$286,109) - 402,500 403 2,410,239 - - -
Common stock; issued in
connection with
conversion of note and
accrued interest - 3,222,877 3,223 2,575,078 - - -
Issuance of preferred stock 22 - - 224,978 - - -
Preferred stock dividend - - - 1,181,250 - - (1,181,250)
Net loss for period - - - - - - (11,235,237)
--------- --------- --------- ----------- ----------- ----------- -----------
Balances at December 31,
1997 $ 22 10,686,006 $ 10,686 $14,555,669 $ - $ (497,750) $(16,495,283)
========= ========== ========= =========== =========== =========== ===========
Issuance of preferred stock 28 - - 269,971 - - -
Compensatory common stock
options issued - - - 320,115 - (320,115) -
Amortization of deferred
compensation - - - - - 149,541 -
Financing fee - - - 75,000 - - -
Preferred stock dividend - - - 1,417,500 - - (1,417,500)
Net loss for period - - - - - - (2,878,065)
--------- --------- --------- ----------- ----------- ----------- ----------
Balances at March 31, 1998
(Unaudited) $ 50 10,686,006 $ 10,686 $16,638,255 $ - $ (668,324) $(20,790,848)
========= ========== ========= =========== =========== =========== ==========
</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>
Three Months Ended
Year Ended December 31 March 31 December 16, 1994
----------------------------------- ------------------------ (Inception) through
1995 1996 1997 1997 1998 March 31, 1998
--------- ---------- ----------- ---------- ----------- ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Activities
Net Loss $(747,560) $(3,314,094)$(11,235,237) $(4,047,989) $(2,878,065) $(18,192,098)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 7,570 13,148 179,304 28,198 55,500 255,522
Amortization of financing fees - - 70,496 - 153,412 223,908
Amortization of note payable
discount - - 583,660 200,000 498,849 1,082,509
Interest expense paid with
stock issuance - - 1,129,301 - - 1,129,301
Compensatory common stock,
options and warrants issued
and issuable - 786,704 2,046,896 971,096 149,541 2,983,141
Increase in assets and
liabilities
Increase in accounts
receivable - - - - (350) (350)
Increase (decrease) in
other current assets
and deposits (358) (57,279) (44,145) 1,278 (33,734) (135,516)
Increase in accounts
payable and accrued
expenses 248,691 671,806 1,344,949 549,892 189,037 2,454,483
Increase in deferred
revenue - - - - 508,700 508,700
Increase (decrease) in
accrued expenses -
related parties - 58,333 (58,333) (58,333) - -
--------- --------- -------- -------- --------- -----------
Net Cash Used in
Operating Activities (491,657) (1,841,382) (5,983,109) (2,355,858) (1,357,110) (9,690,400)
========= ========== ========= ========== ========== ==========
Investing Activities
Payments for organization costs (9,063) - - - - (9,063)
Purchase of furniture and equipment (19,509) (308,896) (544,618) (433,963) (31,699) (904,722)
--------- --------- -------- -------- --------- -----------
Net Cash Used in
Investing Activities (28,572) (308,896) (544,618) (433,963) (31,699) (913,785)
--------- --------- -------- -------- --------- -----------
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 2,400,000 - 3,601,000
Proceeds from notes payable - - 1,728,250 - 750,000 2,478,250
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 - 2,487,000 551,833 344,046 - 3,038,833
Net proceeds from issuance of stock
and warrants - - 2,560,641 - - 2,560,641
Proceeds from purchase of preferred
stock - - 225,000 - 270,000 495,000
Payment of financing fees - - (140,919) - (50,000) (190,919)
Registration costs - - (124,921) - (93,852) (218,773)
--------- --------- -------- -------- --------- -----------
Net Cash Provided by
Financing Activities 522,636 2,447,222 6,899,884 2,744,046 876,148 10,763,032
========= ========= ========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- F7 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31 December 16, 1994
---------------------- ----------------------- (Inception) through
1995 1996 1997 1997 1998 March 31, 1998
------ ------ --------- --------- --------- --------------
(Unaudited) (Unaudited ) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Increase (Decrease) in Cash and
Cash Equivalents $ 2,407 $ 296,944 $ 372,157 $ (45,775) $ (512,661) $ 158,847
Cash and Cash Equivalents at
Beginning of Period - 2,407 299,351 299,351 671,508 -
----------- ----------- ----------- ---------- ----------- ---------------
Cash and Cash Equivalents at End of
Period 2,407 $ 299,351 $ 671,508 $ 253,576 $ 158,847 $ 158,847
=========== =========== =========== ========== =========== ===============
Cash and Cash Equivalents Paid for
Interest and Taxes $ - $ - $ 3,200 $ 394 $ 2,605 $ 5,805
=========== =========== =========== ========== =========== ===============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- F8 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
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 acquirer 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 acquirer 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 is currently using the
technology that is the subject of this patent application to operate its
products. The Company had previously received an indication from the United
States Patent and Trademark Office ("USPTO") that certain of the claims for its
patent application were allowable; however, in February 1998, the Company
received a reversal of the allowable indication. The Company is currently
intending to refile its patent application in April 1998 with modifications of
certain previously defined claims (see Note 11).
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. In
addition, there can be no assurance that the Company's patents will be approved
by the USPTO on a timely basis or that any patents issued will provide
protection against competitors with similar technologies. Further, there can be
no assurance that the Company will have adequate resources to maintain a patent
infringement lawsuit should such action be deemed necessary by management. The
impact on the Company's future operations for the uncertainties relating to the
Company's patent applications and future patents is presently indeterminable.
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.
- F9 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Research and Development Costs
Through March 31, 1998, 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.
Revenue Recognition
The Company generates revenue in the form of license fees, transaction fees and
setup fees. Revenue from license fees is recognized when the license agreement
is in effect, delivery of the product has occurred, the license fee is fixed or
determinable and collectibility is reasonably assured. Revenue representing
transaction fees is recognized as manufacturer promotions are requested for
viewing on the Internet. Setup fees are recognized as revenue when manufacturer
promotions are loaded into the Company's coupon distribution system. Certain
customers pay the Company in advance for license, setup, and transaction fees,
and these amounts are being recorded as deferred revenue until earned.
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, 1997 and for the three month periods ended March 31, 1997 and
1998 was $1,812, $1,696, $1,813, $291 and $500, 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, 1997 and
for the three month periods ended March 31, 1997 and 1998, the Company incurred
advertising expenses of $236,775, $219,760, $832,340, $603,619 and $79,251,
respectively.
- F10 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. Loss per share under SFAS 128 does not differ from prior period
presentations under APB 15. Under SFAS 128, diluted loss per share does not
differ from basic loss per share, since options and warrants increase the
weighted average number of shares under the diluted loss per share presentation
and are therefore anti-dilutive.
The Company formerly presented loss per share in accordance with Staff
Accounting Bulletin No. 83 "Earnings Per Share Computations in an Initial Public
Offering" ("SAB 83"). SAB 83 required that the presentation of common stock and
common stock subject to options and warrants issued during the twelve months
preceding the initial filing of the registration statement at prices less than
the contemplated initial public offering price be presented as outstanding for
all periods presented. Staff Accounting Bulletin No. 98 "Earnings Per Share
Computations in an Initial Public Offering" ("SAB 98"), issued in February 1998,
amended SAB 83 to require that historical earnings per share be presented in
accordance with SFAS 128. The Company has therefore followed the requirements of
SFAS 128 for all applicable periods presented in these financial statements (see
Note 9).
Prepaid Expenses
Prepaid expenses consist of prepaid financing fees, which include commissions
and professional fees incurred by the Company on borrowings received during 1997
and 1998. These prepaid expenses are being charged to expense over the remaining
term of the outstanding borrowings (see Note 8).
Interim Financial Information
The balance sheets as of March 31, 1998 and the related statements of
operations, stockholders' deficit and cash flows for the three month periods
ended March 31, 1997 and 1998 and for the period from December 16, 1994
(inception) through March 31, 1998, are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of such financial statements
have been included. Such adjustments consisted of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
Deferred Registration Costs
Deferred 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.
Fair Value of Financial Instruments
The carrying value of the Company's cash and cash equivalents, notes payable,
accounts payable and accrued expenses approximates the fair market value due to
the relatively short maturity of these instruments.
- F11 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment Information
The Company conducts its business within one industry.
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 and at March 31, 1998, net deferred
tax assets and liabilities, relating primarily to federal and state net
operating loss carryforwards, stock-based compensation, financing costs
associated with 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 pro forma
financial information below.
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 (see
Notes 7 and 9). Deferred compensation represents the intrinsic value of the
options to purchase common stock that were granted to employees for future
services that are to be provided to the Company by such employees.
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. The Company had uninsured cash balances
of $229,975, $732,756 and $123,034 as of December 31, 1996 and 1997 and March
31, 1998, 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).
- F12 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pro Forma Financial Information (Continued)
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. 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 1996 prior to the LLC's
termination (see Note 5).
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS 130"). SFAS
130 established standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
Company adopted SFAS No. 130 in 1998. The Company has determined that it has no
additional reporting requirements as a result of its adoption of SFAS 130.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports. The
Company has adopted SFAS No. 131 in fiscal 1998. The Company has determined that
it currently does not have any additional reporting requirements as a result of
its adoption of SFAS 131.
NOTE 3 - CONTINGENCY - GOING CONCERN
At December 31, 1996 and 1997 and March 30, 1998, the Company is in arrears in
its obligations to a significant number of its key vendors. Further, management
anticipates the Company will need to expend an aggregate of approximately $4.3
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.
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, filed an amended
registration statement on April 15, 1998 and currently intends to file an
additional amended registration statement. 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)
and (ii) a preferred stock purchase agreement (see Note 9) 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.
- F13 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, March 31,
------------------- -----------
1996 1997 1998
---- ---- -----------
(Unaudited)
Leasehold Improvements $ -- $ 6,066 $ 6,066
Computer Equipment 327,878 748,723 776,644
Office Equipment 46,087 48,792 48,792
Office Furniture 75,294 75,294 79,073
--------- --------- ---------
449,259 878,875 910,575
Less Accumulated Depreciation (17,210) (194,701) (249,702)
--------- --------- ---------
$ 432,049 $ 684,174 $ 660,873
========= ========= =========
Depreciation expense for 1995, 1996, 1997 and for the three month periods ended
March 31, 1997 and 1998 was $5,758, $11,452, $177,491, $27,907 and $55,000,
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 and
March 31, 1998 are presented below:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- ----------
1996 1997 1998
---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Temporary differences:
Vesting of non-qualified stock options $ 69,000 $ 72,000 $ 83,000
Accrued salaries and compensation
to related parties 30,000 - -
Amortization of debt discount - 21,000 53,000
Common stock warrants issued 1,000 1,000 1,000
Depreciation - (27,000) (33,000)
-------------- ------------- --------------
Total temporary differences $ 100,000 $ 67,000 $ 104,000
Federal and state deferred tax benefits arising
from net operating loss carryforwards 667,000 4,043,000 4,920,000
Research and development credit -- 168,000 222,000
-------------- ------------- --------------
$ 767,000 $ 4,278,000 5,246,000
Less valuation allowance (767,000) (4,278,000) (5,246,000)
-------------- ------------- --------------
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.
- F14 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 5 - INCOME TAXES (Continued)
The following table presents the principal reasons for the difference between
the income tax benefit using the Company's effective tax rates and the United
States federal statutory income tax rate of 35%:
<TABLE>
<CAPTION>
Years Ended Three Months Ended Pro Forma
December 31, March 31, December 31,
--------------------------- --------------------------- ----------------------------
1996 1997 1997 1998 1995 1996
------------- ------------- ----------- ------------ ------------ --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit
at statutory rate $ 1,160,000 $ 3,932,000 $ 1,417,000 $ 1,007,000 $ 262,000 $ 1,160,000
State and local income tax
benefits, net of effect of
federal income tax benefit 166,000 561,000 202,000 145,000 37,000 166,000
Research and development credit,
net of effect of asset basis
reduction - 101,000 56,000 32,000 - -
Nondeductible research and
development costs (342,000) - - - (57,000) (354,000)
Nondeductible stock-based
compensation and interest - (1,083,000) (143,000) (216,000) - -
Net loss for LLC in 1996 prior to
date of Merger passed through to
the LLC members (see below) (217,000) - - - - -
---------- ---------- --------- ---------- ---------- ----------
767,000 3,511,000 1,532,000 968,000 242,000 972,000
Valuation allowance for deferred
income tax benefit (767,000) (3,511,000) (1,532,000) (968,000) (242,000) (972,000)
---------- ---------- ---------- ---------- ---------- ----------
Income tax benefit $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========== ========== ========= ========== ========== ==========
Effective income tax rate 0% 0% 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 March 31, 1998, the Company had losses which resulted
in net operating loss carryforwards for income tax purposes amounting to
approximately $12,299,000, which expire in 2011 through 2013. 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 $222,000 that expire in 2012 and
2013.
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 net 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, $4,278,000 and $5,246,000 as of December 31, 1996 and 1997 and March
31, 1998, 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.
- F15 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 6 - OPERATING LEASES (Continued)
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.
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.
Total rental expense amounted to $10,584, $29,300, $145,682, $35,249 and $41,002
in 1995, 1996, 1997 and for the three month periods ended March 31, 1997 and
1998, respectively. Future minimum payments required under the terms of the
Company's lease agreements are as follows:
December 31, March 31,
1997 1998
------------ ------------
(Unaudited)
1998 $ 159,408 $ 162,406
1999 159,408 210,828
2000 159,408 210,828
2001 - 8,570
------------ ------------
$ 478,224 $ 592,632
============ ============
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),
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 and $10,000 at December 31, 1996 and March 31, 1998,
respectively. 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).
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
- F16 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
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 and at March 31, 1998,
the Company owed DMR $300,000, $818,368 and $752,793, respectively, net of
agreed upon prepayments and accrued interest. These amounts have been included
in accounts payable. As of March 30, 1998, the Company had paid DMR, under the
DMR Agreement, approximately $2,350,000 of the $3,100,000 incurred on the
project. 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. The delinquency resulted in DMR discontinuing providing its
services to the Company. On September 26, 1997, the Company and DMR entered into
a letter agreement to address repayment of the Company's delinquent balance
("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 balance due DMR. The remaining
$900,000 of past due balances were to be paid to DMR 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
previously due $900,000 balance. 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). DMR received a security interest in the Company's
future proceeds to be derived under the sublicense agreement granted to IQ (see
Note 11) in exchange for granting the license to the Company. The Amendment
provides for a disbursing arrangement pursuant to which the balance due to DMR
is paid out of the proceeds of the earlier of the sublicense agreement payment
received by the Company or two days subsequent to the closing of the Company's
contemplated IPO.
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 and for the three month period ended March 31, 1998 on the DMR obligation
amounted to $18,503 and $36,028, respectively, and has been included in the
accompanying statements of operations.
In October 1997, the Company began contracting with Task Management, Inc.
("Task") for Task to provide consultants to perform programming services for the
development the Company's products. The Company incurred $262,782 and $374,369
of software development expenses with Task in 1997 and for the three month
period ended March 31, 1998, respectively. As of December 31, 1997 and March 31,
1998 the Company owed Task $66,108 and $134,621, respectively.
In February of 1998 the Company discovered a past due obligation to the State of
Connecticut for use taxes and interest thereon related to out-of-state
consulting services which had been incurred by the Company. 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 (see Note 11). As of December 31, 1997 and March 31, 1998, the
Company owed the State of Connecticut approximately $240,000 and $265,000,
respectively, which has been included in accounts payable. Expense of
approximately $240,000, $135,000 and $25,000 was recorded in 1997 and the three
month periods ended March 31, 1997 and 1998, respectively, and included as
research and development expenses in the accompanying statements of operations.
<PAGE>
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 expenses at December 31, 1996, 1997 and March
31, 1998.
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 and March 31, 1998, the
balance due Guild has been included in accounts payable.
- F17 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
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 and March 31,
1998 (see Note 11).
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 obligated in the amount of $115,000 and 30,000 shares
of common stock to PI for 1997 consulting services. $15,000 of this expense was
paid in 1997, $25,000 was paid in March 1998, $75,000 is to be paid by July 1998
and 30,000 shares of common stock, with an ascribed value of $5.00 per share,
are to be issued by July 1998 in complete settlement of the balance due. At
December 31, 1997 and March 31, 1998, $250,000 and $225,000, respectively, has
been included in accounts payable and accrued expenses 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%, an expense allowance of 3% of the IPO's gross proceeds and an option to
purchase 300,000 shares of the common stock at 120% of the price per share to be
realized in the Company's contemplated IPO. The option to purchase common stock
is exercisable for an eighteen-month period commencing on the effective date of
the Company's IPO (see Note 11). 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.
NOTE 8 - NOTES PAYABLE
Notes payable consisted of the following:
December 31, March 31,
1997 1998
------------ ------------
(Unaudited)
Lancer Partners (a) $ - $ 750,000
Golden Eagle Partners (b) 250,000 250,000
Bridge Offerings (c) 4,025,000 4,025,000
------------ ------------
4,275,000 5,025,000
Less discount on notes payable (2,463,090) (1,964,241)
------------ ------------
$ 1,811,910 $ 3,060,759
============ ============
There were no outstanding notes or loans payable at December 31, 1996.
- F18 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 8 - NOTES PAYABLE (Continued)
(a) 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. Expense related to this financing fee is being recognized over
the term of the note. Financing fee expense of $43,182 was recorded in
the three month period ended March 31, 1998 with the unexpired portion of
$6,818 reflected as a prepaid financing fee at March 31, 1998. Upon
repayment of the note, the lender agreed to accept 2,750 shares of common
stock as payment in full for $13,750 of interest expense which has been
included in accrued expenses at March 31, 1998. The note was repaid on
April 9, 1997.
(b) 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. $50,000 of financing fee 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 and March 31, 1998.
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, 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. This consideration
amounting to $75,000 (based upon an ascribed value of $5.00 per share)
has been reflected as financing fee expense in the three month period
ended March 31, 1998.
<PAGE>
(c) 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
(collectively "Equity Instruments") [see Note 9(l)]. 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)].
- F19 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 8 - NOTES PAYABLE (Continued)
Proceeds of $2,696,750 were allocated to the Equity Instruments based
upon the relative fair market values of the Notes and Equity Instruments.
Of these proceeds, $2,012,500 has been allocated to common stock, based
upon an ascribed value of $5.00 per share, and $684,250 has been
allocated to the warrants based upon a value of $1.70 per warrant, as
determined by an independent valuation company (see Note 9). The
remaining proceeds from the Bridge Offerings amounting to $1,328,250 from
the sale of the Units were recorded as notes payable, reflecting an
aggregate discount of $2,696,750 at the date of issuance. The discount on
the Notes is being amortized as interest expense over the term of the
Notes. Amortization of the discount for 1997 and for the three month
period ended March 31, 1998 amounted to $233,660 and $498,849,
respectively, and is reflected as interest expense in the accompanying
statements of operations. At December 31, 1997 and March 31, 1998, the
unexpired portion of the discount amounting to $2,463,090 and $1,964,241,
respectively, has been reflected as a reduction in notes payable.
Financing fees, consisting of commissions and legal fees, amounting to
$427,028 were incurred in connection with the Bridge Offerings. $286,109
of the financing fees are related to the Company's issuance of Equity
Instruments and has been determined by an allocation of the fair market
values of the Notes and Equity Instruments. These financing fees have
been recorded as an increase to stockholder's deficit in 1997. The
remaining portion of the financing fees incurred in the Bridge Offerings
amounted to $140,919 and has been recorded as prepaid financing costs
related to the Notes. The unexpired portion of these financing fees
amounting to $120,423 and $85,193 at December 31, 1997 and March 31,
1998, respectively, have been reflected as prepaid financing fees.
Financing fee expense in 1997 and for the three month period ended March
31, 1998 amounted to $20,496 and $35,230, respectively.
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 Financing, the Company issued
100,000 shares of common stock to VDC, a non-cash transaction, which was
recorded as interest 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(d) and (o)]. 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 amounting to $951,000 (based on an
ascribed value of $5.00 per share) has been recorded as interest 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 resulting in $150,000 of interest expense,
based on an ascribed value of $5.00 per share. 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.
- F20 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 9 - CAPITAL STOCK ACTIVITY
Common stock activity for the years ended December 31, 1996 and 1997 and the
three month period ended March 31, 1998 (unaudited) 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>
<TABLE>
<CAPTION>
Purchase Price Consulting Cost
-------------- ---------------
Shares Date Per Share Total Per Share Total
------------------- ------ --------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
174,999 (f) various $ - $ - $ 3.50 $ 612,496
192,500 (i) 3/97 $ 2.00 385,000 - -
102,500 (j) 5/97 $ 2.00 205,000 - -
130,000 (k) various $ - - - -
402,500 (l) various $ - - - -
3,222,877 (m) 11/97 $ - - - -
190,200 (n) 12/97 $ - - - -
- Costs of issuance (38,167)
--------------- ----------
1997 Net Proceeds $ 551,833
==========
Balances December 31, 1997
and March 31, 1998
(Unaudited) 10,686,006
==========
</TABLE>
(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.
- F21 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
(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).
(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 $1,225,000.
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, 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 $554,000 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 acquirer 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 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.
- F22 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
(j) 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.
(k) 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).
(l) 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(c)]. 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.
(m) 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).
(n) 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).
(o) 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.
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. As of March 31, 1998, such fees amounted
to $355,891, of which $137,118 is included in accounts payable.
Options and Warrants
A summary of stock warrants as of December 31, 1996 and 1997 and March 31, 1998
(unaudited) is as follows:
<TABLE>
<CAPTION>
Grant Date Exercise Price Expiration
Warrants Granted and Outstanding Shares Date Exercisable per 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 (l) 402,500 10/97-12/97 IPO Date $4.00 Five Years
----------- from IPO
Balance at December 31, 1997
and March 31, 1998 (Unaudited) 902,500
===========
</TABLE>
- F23 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
A summary of the Company's Stock Option Plan as of December 31 is as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------ -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 515,968 $ 3.25
Granted 515,968 3.25 1,614,000 4.15
Canceled - - (455,968) (3.59)
-------- ----------- ---------- -----------
Outstanding at end of year 515,968 $ 3.25 1,674,000 $ 4.02
======== =========== ========== ===========
Options exercisable at end of year 60,000 407,500
======== =========
Shares available for grant 684,032 826,000
======== =========
Weighted average fair value of options
granted during the year as determined
by an independent valuation company $ 0.01 $ 2.10
======== =========
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Outstanding Contractual Exercise Outstanding Exercise
Options Life Price Options Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
From $.063 to $.080 461,500 4.68 $ 0.76 407,500 $ 0.75
From $4.00 to $5.00 703,000 6.34 4.50 - -
From $6.00 to $7.00 509,500 8.11 6.31 - -
---------- --------- -----------
From $.063 to $7.00 1,674,000 6.42 $ 4.02 407,500 $ 0.75
========== =========
A summary of stock options as of March 31, 1998 (unaudited) is as follows:
Exercised/
Outstanding Other Exercisable
------------- ------------- -------------
From $.063 to $.080 461,500 - 407,500
From $4.00 to $5.00 876,500 - -
From $6.00 to $7.00 630,000 - -
--------- ------------- -------------
1,968,000 - 407,500
========= ============= =============
Shares authorized for grant 2,500,000
=========
Shares available for grant 532,000
=========
</TABLE>
- F24 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
Under the Company's 1996 Stock Option Plan (the "Plan"), stock options to
purchase shares of the Company's common stock may be granted to officers,
directors, employees, consultants and independent contractors. Accordingly, the
Company, as of December 31, 1996, had reserved a total of 1,200,000 shares of
the Company's common stock for issuance upon the exercise of options granted
pursuant to the Plan. Options granted under the Plan generally expire five years
following the date of vesting and are subject to limitations on transfer. During
1997, the Board of Directors approved an amendment to and a restatement of the
Plan and authorized the issuance of an additional 1,300,000 shares of common
stock resulting in 2,500,000 shares of common stock available for issuance over
the term of the Plan. Option grants under the Plan are subject to various
vesting provisions. The exercise price of options granted under the Plan are
determined by the Board of Directors. The Board may amend, suspend or terminate
the Plan at any time, subject to restrictions imposed by applicable law.
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. 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 in 1997, 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 (see Note 10).
In January 1998, the Company granted additional options to acquire 294,000
shares of common stock to certain directors, officers, employees and
consultants. 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 to be ultimately
realized in the Company's contemplated IPO (see Notes 10 and 11).
Of the outstanding options as of December 31, 1996, 1997 and March 31, 1998 that
had been granted by the Company to acquire 515,968, 1,674,000 and 1,968,000
shares of common stock, respectively, options to acquire 60,000, 407,500 and
407,500 shares of common stock, respectively, were exercisable. Certain options
that carry exercise prices that were less than the fair value of the common
stock at the date of grant resulted in compensation and consulting expense of
$172,200, $1,434,400, $358,600 and $149,541 in the years ended December 31, 1996
and 1997, and the three month periods ended March 31, 1997 and 1998,
respectively.
Preferred Stock
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"). The
Series A Shares bear no dividends, and the preferred shareholders are to receive
the stated value of their shares as a priority over common stock shareholders in
the event of a liquidation of the Company. Each Series A Share may be converted
into 12.5 shares of common stock at the option of the Company or Rozel. These
conversion rights provide the Series A shareholders with a beneficial conversion
feature upon issuance, valued at $52.50 per Series A Share, or $4.20 per each
converted common share, based upon the ascribed value of $5.00 per share of
common stock. This beneficial conversion feature results in a preferred dividend
upon the issuance of Series A Shares in accordance with Emerging Issues Task
Force D-60 "Accounting for the Issuance of Convertible Preferred Stock and Debt
Securities with a Nondetachable Conversion Feature" ("EITF D-60").
- F25 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
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:
Date Purchase 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. In March 1998 Rozel purchased an additional 27,000 shares of
Series A Shares which resulted in the Company receiving $270,000 of aggregate
proceeds. 250,500 Series A Shares remained reserved for issuance at March 31,
1998 (see Note 11). Pursuant to the requirements of EITF D-60, the issuance of
the Series A Shares resulted in preferred stock dividends of $1,181,250 and
$1,417,500 in 1997 and in the three month period ended March 31, 1998,
respectively. 700,000 shares of authorized and unissued Preferred Stock remained
undesignated at March 31, 1998.
Stock-Based Compensation
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, 1997 and the three month period ended March 31, 1998 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>
Three Months Ended
December 31, 1996 December 31, 1997 March 31, 1998
--------------------------- ------------------------ ------------------------
Pro Forma (Unaudited)
Net Loss Per Share Net Loss Per Share Net Loss Per Share
------------- ------------ ------------ ----------- -------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
As Reported Under APB 25 $ (3,314,094) $ (.89) $(11,235,237) $ (1.72) $ 2,878,06 $ (.27)
========== ========= =========== ======== ============ =========
Pro Forma Under SFAS 123 $ (3,149,487) $ (.84) $(12,854,814) $ (1.78) $ 2,899,93 $ (.27)
========== ========= =========== ======== ============ =========
</TABLE>
The fair market value of the options and warrants used in the above computation
were determined by an independent valuation company, using a simulation model
which simulates many potential outcomes for the value of the Company's stock
over the period during which the options or warrants may be exercised. Because
of the expected high volatility of the value of the Company's stock and the
long-term nature of some of the options and warrants, standard models were not
deemed appropriate by the independent valuation company. The independent
valuation company determined the potential stock price outcomes using a
log-normal distribution with expected returns of between 20% (after the
Company's stock price had reached $5.00 per share) and 29% (prior to that), a
standard deviation of 30% to 100%, and a risk-free interest rate of 5%. The
independent valuation company determined that there was also a 50% likelihood
that the value of the stock would drop to zero in any one year before reaching a
$5.00 per share level.
- F26 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 9 - CAPITAL STOCK ACTIVITY (Continued)
No such differences between the application of APB 25 and SFAS 123 existed for
1995.
Loss Per Share
As discussed in Note 2, the Company adopted SFAS 128 in 1997, and has followed
the guidelines of SFAS 128 in the presentation of loss per share for all periods
presented in the financial statements. Options and warrants to purchase common
stock and convertible preferred stock are not included in the computation of
diluted loss per share because the effect of these instruments would be
antidilutive for all periods presented. The common shares potentially issuable
arising from these instruments which were outstanding during the periods
presented in the financial statements are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
Exercise ---------------------------------------------- ----------------------
Price 1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- ------------- ----------
(Unaudited) Unaudited)
<S> <C> <C> <C> <C> <C>
Options $0.63-$5.00 - - 973,250 60,000 1,146,750
Convertible
preferred stock $0.80 - - 281,250 - 281,250
Warrants $4.00 - - 402,500 - 402,500
------------- ------------- ------------- ----------- ------------
Total common shares
potentially issuable - - 1,657,000 60,000 1,830,500
============= ============= ============= =========== ============
</TABLE>
NOTE 10 - RELATED PARTIES
Related party transactions not disclosed elsewhere in the financial statements
and notes 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 Note 9).
In February 1998, the Company and the Co-Founders agreed to terminate the
Co-Founders' employment agreements (see Note 9). 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
- F27 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 10 - RELATED PARTIES (Continued)
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 Note 9).
NOTE 11 - SUBSEQUENT EVENTS
On April 7, 1998, the Company entered into a distribution and license agreement
with IQ (see Note 7) 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 IQ Agreement requires the Company to provide and
manage a data center facility to be used to service IQ's customers. The Company
anticipates operating costs of the facility to include a one time non-recurring
cost of approximately $250,000 in 1998 in order to relocate the facility, and
monthly maintenance fees thereafter of approximately $25,000. The Company has
also estimated capital expenditures of approximately $400,000 to be required for
operating the facility. 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 April 15, 1998. Of this amount, $500,000 was
received in March 1998 and has been reflected as deferred revenue at March 31,
1998. $750,000 was collected upon the execution of the IQ Agreement in April of
1998. 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. 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).
In April 1998 the Company paid PI $37,500 and issued 30,000 shares of common
stock to PI pursuant to the Termination Agreement (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.
On April 28, 1998, the Company and the State of Connecticut agreed upon a
schedule to pay the Company's use tax obligation (see Note 7). The schedule
requires the Company to make monthly payments of $5,000 commencing May 1, 1998.
The unpaid balance of the use tax obligation will become immediately due upon
the Company's receipt of proceeds from its contemplated IPO.
On April 30, 1998, the Company refiled its patent application with modifications
to its previously defined claims with the USPTO, (see Note 1). The Company also
filed an application for an international patent application on April 24, 1998.
For the period from April 1, 1998 through May 26, 1998, the Company received an
aggregate of $1,684,000 in proceeds from the issuance of 168,400 Series A
Shares. The issuance resulted in a preferred dividend of $8,841,000 pursuant to
the requirements of EITF D-60 (see Note 9) and resulted in an additional
2,105,000 dilutive shares of common stock pursuant to SFAS 128. On May 26, 1998,
82,100 Series A Shares remained unissued and reserved for issuance.
- F28 -
<PAGE>
netValue, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 1998 and for the
Three Month Periods Ended March 31, 1997 and 1998 is Unaudited)
NOTE 11 - SUBSEQUENT EVENTS (Continued)
In April and May 1998, the Company settled outstanding lawsuits aggregating
approximately $85,000 in claims against the Company. As of May 26, 1998, the
Company was in compliance with the terms of these settlement agreements (see
Note 7).
In May 1998, the Underwriter notified the Company of its intention to amend the
Letter of Intent by (i) reducing its commissions to 8.75% of the gross proceeds
from the contemplated IPO, (ii) waiving the $10,000 per month fee previously
required by the Underwriter's proposed consulting agreement, (iii) increasing
the exercise price of the Underwriter's option to purchase 300,000 shares of
common stock from a price of 120% of the contemplated IPO price to 165% of such
price and (iv) increasing the maximum exercise period from eighteen months to
four years from the effective date of the contemplated IPO.
- F29 -
<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........................................................ 15
Market Price of and Dividends on Common
Stock and Related Shareholder Matters................................ 16
Capitalization......................................................... 17
Dilution............................................................... 20
Selected Financial Data................................................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................................... 24
Business............................................................... 31
Management ............................................................ 40
Security Ownership of Principal Stockholders
and Management....................................................... 49
Certain Transactions .................................................. 51
Description of Capital Stock........................................... 53
Shares Eligible for Future Sale........................................ 55
Underwriting........................................................... 56
Legal Matters.......................................................... 57
Experts................................................................ 57
Index to Financial Statements.......................................... F1
<PAGE>
-------------------------------
NETVALUE, INC.
3,000,000 SHARES OF COMMON STOCK
-------------
PROSPECTUS
--------------
May 28, 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........................ 170,000.00
Accounting Fees and Expenses................... 130,000.00
Blue Sky Fees and Expenses..................... 40,000.00
Transfer Agent's Fees and Expenses............. 15,000.00
Miscellaneous Expenses......................... 1,271.00
----------
Total*................................ $400,000.00
============
* 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.
II-1
<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 offered, sold and issued an aggregate
of 581,429 shares of Common Stock pursuant to Section 4(2) of the Securities Act
to a group of five "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). The Company sold these
securities directly to this group of accredited investors, consisting of two
individuals and three corporations, and did not use a registered broker-dealer
in connection with this transaction.
On September 6, 1996, the Company offered, sold and issued an aggregate
of 250,000 shares of Common Stock pursuant to Section 4(2) of the Securities Act
to a group of nine accredited investors for an aggregate purchase price of
$350,000 ($1.40 per share of Common Stock). The Company sold these securities
directly to this group of accredited investors, consisting of five individuals,
three corporations and one limited liability company, and did not use a
registered broker-dealer in connection with this transaction.
On September 6, 1996, the Company offered, sold and issued 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). The
Company sold these securities directly to VDC, a corporation, and did not use a
registered broker-dealer in connection with this transaction.
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, pursuant to Section 4(2) of the
Securities Act, 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") including the COL Operating Agreement
and an Investors Agreement by and among COL and the Gordon Group; 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. The Operating Agreement was the corporate
governance document for COL. The Investors Agreement controlled the amount of
investment made by the Gordon Group, a group of members of COL, and controlled
the timing and manner in which these funds could be released from escrow for use
in funding COL operations. While there is no specific dollar value that can be
attributed to the termination of these agreements, the termination of these
agreements provided the Company with certainty that its operations would not be
disrupted by legal disputes involving these agreements. Similarly, the waiver
was a general waiver which provided the Company with certainty that its
operations would not be disrupted by lawsuits against the Company brought by
former members of COL regarding matters that did not involve the Company.
On September 19, 1996, the Company issued and sold an aggregate of
450,000 shares of Common Stock to a group of fifty accredited investors pursuant
to Section 4(2) of the Securities Act for an aggregate purchase price of
II-2
<PAGE>
approximately $1,575,000 ($3.50 per share of Common Stock). The Company paid an
aggregate of $78,750 from the proceeds of such transaction as commissions to
First Hanover Securities, Inc., a registered broker-dealer.
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.
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 91,000 shares of Preferred Stock to an accredited
investor for an aggregate purchase price of $910,000.
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.
II-3
<PAGE>
In May 1998, pursuant to Section 4(2) of the Securities Act, the
Company issued and sold 77,400 shares of Preferred Stock to an accredited
investor for an aggregate purchase price of $774,000.
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
* 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
II-4
<PAGE>
23.1 Consent of LJ Soldinger Associates, independent
auditors to the Company
- ----------------------------------
* 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 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to Registration Statement ton
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Fairfield, Connecticut, on May 28, 1998.
NETVALUE, INC.
By: /s/ Michael A. Clark
-------------------------------
Michael A. Clark, President
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 May 28, 1998.
Signature Title
- --------- -----
/s/ Michael A. Clark President and Director
- -------------------------------- (Principal Executive, Financial
Michael A. Clark and Accounting Officer)
* Director
- --------------------------------
David E. Brandkamp
*
- -------------------------------- Director
Michael Cirillo
* Director
- --------------------------------
Richard F. Davey
* Director
- --------------------------------
Steven B. Rosner
* Director
- --------------------------------
Andrew P. Panzo
* Attorney-in-fact pursuant to power of attorney filed as part of the original
filing of this Registration Statement.
II-6
<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 11
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------------------- -------------------------------------
1995 1996 1997 1997 1998
-------------------------------------------------------- -------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net loss $ (11,235,237) $ (4,047,989) $ (2,878,065)
Preferred stock dividend (1,181,250) - (1,417,500)
------------------- --------------------------------
Net loss to common
stockholders $ (12,416,487) $ (4,047,989) $ (4,295,565)
=================== ================================
Basic and diluted weighted
average number of common
shares outstanding 7,218,801 6,432,513 10,686,006
=================== ================================
Basic and diluted net
loss per common share $ (1.72) $ (0.63) $ (0.40)
=================== ================================
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:
Basic and diluted weighted
average number of common
shares outstanding 3,074,000 3,739,236
==================================
Basic and diluted net
loss per share common share $ (0.24) (0.89)
==================================
</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 2 to the Company's financial
statements included herein.
<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 3, paragraph two, Note 8(a)
and Note 11, paragraphs one, two and three, as to which the date is April 15,
1998, and Note 11, paragraphs four, five, six, seven and eight, as to which the
date is May 26, 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/ L J SOLDINGER ASSOCIATES
--------------------------------
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
May 28, 1998
