<PAGE>
As filed with the Securities and Exchange Commission on August 12, 1998.
Registration No. 333-43443
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 3
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)
R. Scott Wills, 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:
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
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;
Registrant Market Price of and Dividends on
Common Stock and Related
Shareholder Matters; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business; Management;
Certain Transactions; Capital Stock
Item 12 Disclosure of Commission Position Not Applicable
on Indemnification for Securities
Act Liabilities
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 12, 1998
PROSPECTUS
3,600,000 SHARES
NETVALUE, INC.
COMMON STOCK
netValue, Inc. ("netValue" or the "Company") hereby offers 3,600,000
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.
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
Underwriting Discounts
Price to Public and Commissions(1) Proceeds to Company(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . . .
- --------------------------------------------------------------------------------------------------------------------------------
Total(3) . . . . . . . . . . . . . . .
================================================================================================================================
</TABLE>
(1) Does not include additional compensation to be paid to J.B. Sutton
Group, LLC (the "Underwriter") in the form of (i) a nonaccountable
expense allowance of $540,000 ($621,000 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 360,000 shares
of Common Stock at a price equal to 165% of the offering price per
share, exercisable for a period of four 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
$500,000, 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 540,000
additional shares on the same terms and conditions as set forth above
solely to cover over-allotments, if any. If the option is exercised in
full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $_____________,
$____________ and $________________, respectively. See "Underwriting."
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, Inc. (the "Company") is a development stage company whose
products incentivize consumers to purchase products and services sold across all
categories of trade. The Company has developed a patent-pending process to
deliver coupons, discounts and other promotional incentives to Internet users.
The netValue system utilizes various sophisticated and unique targeting engines
to deliver these purchase incentives. The Company has also developed a
technology to address coupon industry concerns regarding fraudulent coupon
redemption.
The Company's revenues will be generated by pursuing a combination of
two business plan strategies. One strategy follows a wholesale
software-licensing model. The other strategy follows a direct to consumer
branded web site model. For the wholesale service, the Company plans to generate
revenues through a combination of licensing fees and transaction fees. For its
own branded web site, the Company plans to generate revenues through transaction
fees and advertising fees.
The Company provides software and backend systems that allow its
wholesale business partners to market their own uniquely branded promotional
commerce service. Potential business partners of the Company include
manufacturers, service providers, national retailers, local merchants, wholesale
distributors, traditional web site publishers and Internet Service Providers
(the "Business Partners").
The Company currently has developed and plans to initially market
three separate products to meet the needs of its Business Partners and various
consumer segments. These products are Coupons OnlineSM, PromoCache SM and
i-ValueSM.
The Company's Coupons OnlineSM product allows manufacturers and
service providers 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 manufacturers and marketers desiring to feature single product
promotional offers. The Company's systems provide online targeting and
validation for each consumer as well as delivery and validation of coupons and
other targeted offers.
The Company's PromoCache SM product is wholesaled to a broader range
of manufacturers, retailers and distributors as well as more traditional web
site publishers and Internet Service Providers. PromoCache SM creates themed
promotional offers, in short time spans, from any web site. It automatically
aggregates national and local offers from multiple databases using a series of
simultaneous targeting engines and criteria. Consumers then view their own
unique offer site, the equivalent of a personalized discount catalog.
The Company's i-ValueSM product creates a desktop channel on the
personal computers of consumers who subscribe to this service. It allows
retailers, manufacturers and web site publishers to deliver targeted, secure
coupons and other incentives to these consumers. Consumers subscribe to the
service and receive electronic coupons and promotional incentives which are
updated on a regular basis. Promotional offers can be individually tailored to
meet each consumer's product category and brand shopping preferences.
-3-
<PAGE>
The Company began generating revenues during the first half of 1998.
The Company generated over $70,000 from several major consumer package good
manufacturers who began utilizing and marketing the Company's products.
Separately, the Company has also entered into a licensing agreement with IQ
Value, LLC ("IQ") and is scheduled to receive $3,000,000 in licensing fees. As
of June 30, 1998, the Company had earned $1,250,000 of this fee. Accordingly,
the Company has generated total revenues through June 30, 1998 of approximately
$1,300,000. The Company has also signed major national retailers to contracts
and is in negotiation with several other manufacturers and retailers.
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............................ 3,600,000 shares
Common Stock outstanding before the Offering(1)................ 11,868,756 shares
Common Stock to be outstanding after the Offering(1)........... 15,468,756 shares
Use of proceeds by the Company................................. The Company plans to use the net proceeds from this
Offering, estimated to be $15,385,000, in the following
approximate amounts: $4,634,000 to repay short term
notes payable including interest, $870,000 to pay
outstanding accounts payable due, $183,500 to settle
litigation in which the Company is a defendant and
$9,697,500 to provide funds for working capital and
general corporate purposes. See "Use Of Proceeds."
</TABLE>
- -----------------------
(1) Does not include 540,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 4,029,750 shares
of Common Stock issuable upon the exercise of outstanding options and
warrants, 2,733,750 of Common Stock issuable to Rozel International
Holdings Limited ("Rozel") upon the conversion of 218,700 shares of
Series A Preferred Stock, and 10,000 shares of Common Stock issuable
to Golden Eagle Partners, a creditor of the Company.
-4-
<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>
Year Ended December 31,
----------------------- December 16, 1994
Three Months Ended (inception) through
March 31, (Unaudited) March 31, 1998
1997 1998 (Unaudited)
1995 1996 1997
---- ---- ----
<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)
--------------------------
Actual Pro Forma As Adjusted
---------- Transactions (4) Transactions (3) (5)(6)
---------------- -----------------------
Balance Sheet Data
Working capital (deficit) $ (5,925,693) $2,323,535 $ 9,726,590
Total assets 1,406,730 2,492,000 13,332,057
Total liabilities 6,216,911 168,465 2,845,846
Notes payable and accrued interest (2) 3,251,065 (581,535) 0
Stockholders' equity (deficit) $ (4,810,181) $2,323,535 $10,486,211
</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 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"). 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 540,000 shares of Common Stock issuable upon the exercise
of the Underwriter's over-allotment option, 4,029,750 shares of Common
Stock issuable upon the exercise of outstanding options and warrants,
2,733,750 shares of Common Stock issuable to Rozel International Holdings
Limited ("Rozel") upon the conversion of 218,700 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."
-5-
<PAGE>
Pro Forma Transactions
<TABLE>
<CAPTION>
(a) (b) (c) (d) Total
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Working
capital
(deficit) $2,492,000 $ 0 $ 13,750 $(182,215) $2,323,535
Total assets 2,492,000 750,000 (750,000) 2,492,000
Total
liabilities 750,000 (763,750) 182,215 168,465
Notes payable
and accrued
interest (763,750) 182,215 (581,535)
Stockholders'
equity
(deficit) $2,492,000 $ 0 $ 13,750 $(182,215) $2,323,535
</TABLE>
(a) Subsequent to March 31, 1998, the Company issued an aggregate of 249,200
shares of Series A Preferred Stock to Rozel and received aggregate
proceeds of $2,492,000. Rozel subsequently converted 80,000 shares of
Series A Preferred Stock to 1,000,000 shares of Common Stock. 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 sold
shares of Series A Preferred Stock to raise additional funds needed to
satisfy its working capital needs from January 1, 1998 through June 30,
1998.
(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 its loan obligation to Lancer
Partners, L.P. 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) Accrued interest on notes payable from April 1, 1998 through August 31,
1998, the anticipated effective date of the Offering.
-6-
<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) $(3,602,158) $15,385,000 $(1,964,241) $(92,011) $ 0 $ 0 $ 9,726,590
Total assets 3,898,730 15,385,000 (4,633,771) (92,011) (355,891) (870,000) 13,332,057
Total liabilities 6,385,376 (2,669,530) (870,000) 2,845,846
Notes payable and
accrued interest 2,669,530 (2,669,530)
Stockholders' equity
(deficit) $(2,486,646) $15,385,000 $(1,964,241) $(92,011) $(355,891) $ 0 $10,486,211
</TABLE>
(a) Receipt of gross proceeds from the sale of 3,600,000 shares of Common
Stock offered by the Company at an assumed offering price of $5.00 per
share less receipt of offering costs of $2,615,000 (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
$1,964,241 (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.
(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 August 31, 1998 (See "Use of
Proceeds").
-7-
<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 Internet 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), PromoCache(sm) and i-Value(sm),
its online targeted discount and other incentive distribution products. For a
more complete description of the products, see "Business." Accordingly, the
Company has an extremely limited operating history upon which an evaluation of
the Company's prospects can be made. 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 equity securities and debt financing
transactions. Since its inception, the Company has generated revenues from
operations of approximately $1,300,000. 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, $11,335,763, and
$3,159,010 (unaudited) respectively. From its inception on December 16, 1994
through March 31, 1998, the Company has incurred cumulative losses of
$18,192,098 (unaudited) and has incurred a total accumulated deficit of
$20,790,848. Approximately $7,890,400 of this accumulated deficit is due to
preferred stock dividends and noncash compensation expenses related to the
issuance of the Company's securities at below market prices. Operating losses
are anticipated
-8-
<PAGE>
to continue through at least December 31, 1998. See "Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 ($6,307,164) (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
its assets. 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 products are patented, the Company has applied for a patent entitled
"Method and System for Electronic Distribution of Product Redemption Coupons."
In April 1998, the Company filed a second application with the United States
Patent and Trademark Office (the "USPTO") on the same subject matter, as well as
an international patent application under the Patent Cooperation Treaty. The
Company is using the technology that is the subject of these patent applications
to develop and operate its products. See "Business - Patent and Trademark
Protection."
Pursuant to the advice of the Company's patent counsel, the Company is
in the process of filing additional patent applications. There can be no
assurance that the patent applications filed by the Company 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 exist and patent applications may have been filed by third
parties with respect to online technology. The Company is unaware of any
instances in which its technology infringes on the patent rights of third
parties. However, there can be no assurance that certain aspects of the
Company's technology will not be challenged by the holders of such patents or
that the Company will not be required to license or otherwise acquire from third
parties the right to use certain technology. The failure to overcome such
challenges or obtain such licenses or rights on acceptable terms could have a
material adverse effect on the Company.
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 usually
requires employees, significant consultants, advisors, licensees and Business
Partners with access to confidential and proprietary information to enter into
confidentiality or nondisclosure 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.
-9-
<PAGE>
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 $5,687,500, approximately $4,634,000 of which
will constitute short-term notes and accrued interest thereon, approximately
$183,500 of which will be paid in settlement of litigation in which the Company
has been named a defendant, and approximately $870,000 of which will consist
past due accounts payable as of August 31, 1998. Thus, the Company is highly
leveraged and plans to use approximately $5,687,500 or 37% of the net proceeds
from this Offering to repay all such indebtedness. See "Use of Proceeds."
Reliance on Key Personnel
The Company is dependent upon the services of certain personnel,
particularly R. Scott Wills, its President and Chief Executive Officer, and
certain other key employees. The Company is also dependent upon certain other
individuals 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 June
1998, Michael A. Clark, the former Chairman of the Company's Board of Directors
and the former President and Chief Executive Officer of the Company, resigned
from his positions as an officer and director of the Company. Simultaneous with
the resignation of Mr. Clark, Mr. Wills joined the Company. Mr. Wills entered
into an employment agreement with the Company pursuant to which he agreed to
serve as Chairman of the Board of Directors, President and Chief Executive
Officer of the Company. See "Business-Employment/Consulting Agreements." The
Company was fortunate to locate and hire a replacement for Mr. Clark that has
significant marketing, sales and Internet industry experience. Although the
Company has entered into an employment agreement with Mr. Wills, there can be no
assurance that he will continue to work for the Company. In the event that Mr.
Wills terminates his relationship with the Company or otherwise ceases to be
affiliated with the Company and an acceptable replacement is not identified on a
timely basis, 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 a suitable
replacement 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, sales 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. (formerly d/b/a DMR Trecom, Inc., "DMR") to develop core
software for the Company and perform the Company's initial systems
-10-
<PAGE>
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.
DMR is still developing programs and has delivered some operational programs to
the Company. The Company is currently using these programs to develop and
operate products. However, DMR has not delivered the source code for these
programs to the Company and will not do so until the Company satisfies past due
payable amounts relating to services rendered to the Company in mid-1997 during
Mr. Clark's tenure. The Company has entered into an agreement with DMR
establishing a payment schedule for these past due payable amounts. For services
provided under the agreement, DMR has billed the Company approximately
$3,450,000 and the Company has paid DMR approximately $2,705,000. As of July 31,
1998, the Company owed DMR approximately $745,000 including accrued interest of
approximately $54,000. In the future, the Company may continue to be dependent
on DMR and, possibly, other unaffiliated service providers to carry out its
business plan. Currently, the Company is in the process of converting full time
consultants into employees of the Company, thereby reducing the Company's
dependence on unaffiliated third party service providers. The Company's
dependence on unaffiliated third party service providers creates a risk that
factors outside of the Company's control could have an adverse effect on the
businesses of such service providers, thus causing a delay or failure in the
delivery of services to the Company. See "Financial Statements; Business -
General."
Rapid Technological Changes
The Internet 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, PromoCache(sm) and i-Value SM or other products proposed
to be offered by the Company or could lower the cost of current competing
products and services to the point where the Company's products and services
could become non-competitive. In response to these changes, the Company could be
required to reduce the prices of its products or to increase its research and
development expenses in an effort to develop technological advances in its own
products so that they remain competitive in the marketplace. 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 and the Company's Business Partners.
See "Business -General."
Composition of the Board of Directors
In May 1998, Gary R. Blau was appointed to the Board of Directors. In
June 1998, Mr. Clark resigned from his position as the Chairman of the Board of
Directors and was replaced by Mr. Wills. In July 1998, David Brandkamp resigned
from the Board of Directors. In July 1998, a majority of the shareholders of the
Company voted to remove Richard F. Davey from the Board of Directors. The
Company's Board of Directors currently consists of five 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."
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<PAGE>
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.
RISKS RELATED TO THE OFFERING
Broad Discretion Over Use of Proceeds
Approximately $5,687,000 or 37%, of the estimated net proceeds of this
Offering will be used to repay short term promissory notes, including the
interest accrued thereon, to make a payment in settlement of litigation in which
the Company has been named a defendant, and to pay commercial accounts payable.
The remaining $9,697,500 or 63% of the 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."
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 $4.62 per share, approximately a 92.4% decrease
from the assumed public offering price of $5.00 per share. See "Dilution."
Control by Stockholders
As of the date of this Prospectus, executive officers and directors of
the Company own approximately 9.1% of the issued and outstanding shares of
Common Stock and other significant stockholders own approximately 53.6% of the
issued and outstanding shares of Common Stock for a total of approximately 62.7%
of the issued and outstanding shares of Common Stock. Following the consummation
of this Offering, executive officers and directors of the Company will own
approximately 7.2% of the issued and outstanding
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<PAGE>
shares of Common Stock and other significant stockholders will own approximately
42.8% of the issued and outstanding shares of Common Stock for a total of
approximately 50.0% 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."
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
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<PAGE>
more difficult to sell their Common Stock and such rules may have the effect of
reducing the price of the Company's securities.
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."
Anti-Takeover Effect of Bylaws
The Company's Bylaws contain certain provisions which may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which some stockholders
may deem to be in their best interests). These provisions could delay or
frustrate the removal of incumbent directors or the assumption of control by an
acquirer, even if such removal or assumption of control would be beneficial to
stockholders. These provisions also could discourage or make it more difficult
to consummate a merger, tender offer or proxy contest, even if such events would
be beneficial, in the short term, to the interest of stockholders. These
provisions include a classified Board of Directors serving staggered three-year
terms and the ability of the Board of Directors to issue and determine the terms
of preferred stock. See "Management - Board of Directions."
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market, if
any, or the prospect of such sales, could materially adversely affect the market
price of the Common Stock, depending on the timing of such sales. Additionally,
sales of shares of Common Stock issuable upon conversion or exercise of
securities convertible into or exercisable for Common Stock may effect a
dilution of the book value per share of Common Stock. For a description of the
Company's shares of Common Stock eligible for future sale, see "Shares Eligible
for Future Sale."
Possible Negative Effects of Preferred Stock
The Company's Amended and Restated Certificate of Incorporation
authorizes the issuance of Preferred Stock in one or more series and grants the
Company's Board of Directors broad authority to determine the voting powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions of such series to
the fullest extent permitted by the laws of the State of Delaware. Upon the
completion of this Offering, 218,700 shares of Series A Convertible Preferred
Stock will be issued and outstanding 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 2,733,750 shares of Common
Stock at the option of the holder or the Company. In June 1998, Rozel converted
80,000 shares of Series A Preferred Stock into 1,000,000 shares of Common Stock.
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."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,600,000 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 $2,115,000, and other expenses of the Offering in the amount of
$500,000, are estimated to be approximately $15,385,000 ($17,767,750 if the
Underwriter's over-allotment option is exercised in full). At this time, the
Company plans to use the net proceeds of this Offering as follows:
<TABLE>
<CAPTION>
<S> <C>
Repayment of Short Term Promissory Notes, including interest..................................$ 4,634,000 (30.1%)
Repayment of Commercial Accounts Payable......................................................$ 870,000 (5.7%)
Settlement of Litigation with Guild Concepts Limited..........................................$ 183,500 (1.2%)
Working Capital Purposes:.....................................................................$ 9,697,500 (63.0%)
TOTAL.........................................................................................$15,385,000 (100%)
</TABLE>
The Company plans to use the net proceeds of this Offering allocated to
Working Capital Purposes for a variety of research and development, sales and
marketing, systems and operations and general and administrative activities.
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
August 31, 1998. If the Company does not receive the proceeds of the Offering on
or before August 31, 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 August 31, 1998
through various short term loans from third parties. If the Company is unable to
procure such financing, then 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.
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
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<PAGE>
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 July
31, 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."
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<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 $ (581,535) $ 0
Stockholders' equity (deficit)
Preferred stock 50 169 219
Common Stock 10,686 1,003 15,289
Additional paid-in capital 16,638,255 15,587,578 47,251,342
Deferred compensation (668,324) 0 (668,324)
Deficit accumulated during the
development stage (20,790,848) (13,265,215) (36,112,315)
Total stockholders' equity (deficit) (4,810,181) 2,323,535 10,486,211
Total capitalization $(1,559,116) $ 1,742,000 $10,486,211
</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.
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Pro Forma Transactions
<TABLE>
<CAPTION>
(a) (b) (c) Total
<S> <C> <C> <C> <C>
Notes payable and accrued interest $ 0 $ (763,750) $ 182,215 $(581,535)
Stockholders' equity (deficit)
Preferred Stock 169 169
Common Stock 1,000 3 1003
Additional paid-in capital 15,573,831 13,747 15,587,578
Deferred compensation 0
Deficit accumulated during the (13,083,000) 0 (182,215) (13,265,215)
development stage
Total Stockholders' equity (deficit) 2,492,000 13,750 (182,215) 2,323,535
Total Capitalization $ 2,492,000 $ (750,000) $ 0 $1,742,000
</TABLE>
(a) In April, May and June 1998, the Company issued an aggregate of 249,200
shares of Series A Preferred Stock to Rozel and received aggregate proceeds
of $2,492,000. 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. In June 1998, Rozel converted 80,000 shares of Series A
Preferred Stock into 1,000,000 shares of Common Stock. See "Description of
Capital Stock - Preferred Stock." The issuance of the 249,200 shares of
Series A Preferred Stock will result in a preferred dividend of $13,083,000
as a result of the beneficial conversion feature of the Series A Preferred
Stock (see Note 11 to the Company's Financial Statements for the Three
Years Ended December 31, 1997). The Company sold shares of Series A
Preferred Stock to raise additional funds needed to satisfy its working
capital needs from January 1, 1998 through June 30, 1998.
(b) In April 1998, the Company satisfied its loan obligation to Lancer
Partners, L.P. 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) Accrued interest on notes payable from April 1, 1998 through August 31,
1998, the anticipated effective date of the Offering.
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"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 $2,669,530 $ 0 $(2,669,530) $ 0 $ 0 $ 0
Stockholders' equity (deficit)
Preferred Stock 219 219
Common Stock 11,689 3,600 15,289
Additional paid-in capital 32,225,833 15,381,400 (355,891) 47,251,342
Deferred compensation (668,324) (668,324)
Deficit accumulated during the
development stage (34,056,063) (1,964,241) (92,011) 0 (36,112,315)
Total stockholders' equity (deficit) (2,486,646) 15,385,000 (1,964,241) (92,011) (355,891) 10,486,211
Total capitalization $ 182,884 15,385,000 (4,633,771) (92,011) (355,891) 10,486,211
</TABLE>
(a) Receipt of gross proceeds from the sale of 3,600,000 shares of Common
Stock offered by the Company at an assumed offering price of $5.00 per
share less of offering costs of $2,615,000 (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
$1,964,241 (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 540,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 4,029,750 shares of
Common Stock issuable upon the exercise of outstanding options and
warrants, 2,733,750 shares of Common Stock issuable to Rozel upon the
conversion of 218,700 shares of Series A Preferred Stock, and 10,000
shares of Common Stock issuable to Golden Eagle Partners, a creditor of
the Company.
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 3,600,000
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 $2,615,000) will be
$5,003,445 or $.38 per share.
-19-
<PAGE>
<TABLE>
<CAPTION>
Net Tangible Net Worth
<S> <C>
Balance March 31, 1998 (unaudited) $(5,756,325)
Gross Offering proceeds 18,000,000
Offering costs (2,615,000)
Liquidation Value on Additional Preferred Stock
Issuance (1,692,000)
Issuance of Common Stock in 1998, prior to the
Offering 13,750
Amortization of Discount on Notes Payable (1,964,768)
Interest on notes payable prior to Offering (182,212)
--------
$5,803,445
</TABLE>
This represents an immediate increase in net tangible book value per
share of $.92 or 270% to the existing common stockholders and an immediate
dilution of $4.62 per share or 92.4% to the new investors as illustrated in the
following table:
<TABLE>
<CAPTION>
<S> <C>
Assumed public offering price per share $5.00
Net tangible book value (deficit) per share before Offering(1) ($.54)
Increase per share attributable to new investors .92
------
Pro forma net tangible book value per share after Offering .38
-------
Immediate dilution to new investors $4.62
</TABLE>
(1) Does not include 540,000 shares of Common Stock issuable upon the
exercise of the Underwriter's over-allotment option, 4,029,750 shares of
Common Stock issuable upon the exercise of outstanding options and
warrants, 2,733,750 shares of Common Stock issuable to Rozel upon the
conversion of 218,700 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.
The following table summarizes on a pro forma basis as of March 31,
1998, the number of shares of Common Stock issued or issuable by the Company to
officers, directors or affiliates, the total consideration received, including
compensatory costs, 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 11,394,994 76.0% $27,243,667 60.2% 2.39
New investors 3,600,000 24.0% 18,000,000 39.8 $5.00
----------- ----- ----------- ----- ------
Total 14,994,994 100% $45,243,667 100% $ 3.02
========== ===== =========== ===== ======
</TABLE>
-20-
<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 December 16,
Ended 1994
Year Ended Year Ended Year Ended March 31, (inception)
December 31 December 31 December 31 (unaudited) through
1995 1996 1997 1997 1998 March 31, 1998
---- ---- ---- ---- ---- -------------
(unaudited)
<S> <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 (70,496) 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) (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)
============= ============ ============
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 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
December 31,1996 December 31, 1997 March 31, 1998
---------------- ----------------- --------------
(unaudited)
Balance Sheet Data
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>
-21-
<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 acquirer 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 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. This was a noncash dividend that
resulted from the issuance of shares of Series A Convertible Preferred Stock
bearing a conversion price which was below the fair
-22-
<PAGE>
market value of the Common Stock at the date of issuance. (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.
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,
PromoCache(sm) 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. The Company will ultimately
pay approximately $92,508 of this expense in cash. The remaining $992,962 of
this expense represents noncash charges resulting from amortization of debt
discounts and interest remunerated with stock issuances.
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 products, 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
-23-
<PAGE>
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.
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). This decrease is due to the Company's
recognition of $72,000 in revenues during the three months ended March 31, 1998,
offset by an aggregate decrease of approximately $1,664,000 in operating
expenses such as advertising, consulting and professional fees. Also,
approximately $600,000 of this decrease was due to substantial decreases in
software development costs related to the Coupons OnlineSM and PromoCache(sm)
products. These decreases were offset by a $570,000 increase in interest expense
and financing fees during the three months ended March 31, 1998.
In addition, during the three months ended March 31, 1998, the Company
granted a preferred stock dividend of $1,417,500. This was a noncash dividend
that resulted from the issuance of shares of Series A Convertible Preferred
Stock bearing a conversion price which was below the fair market value of the
Common Stock at the date of issuance. (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 aborted restructuring and 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 (a
decrease of $489,368). 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 and PromoCache(sm).
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 and
PromoCache(sm).
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.
-24-
<PAGE>
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 amortization of debt
discount and interest remunerated with stock issuances of $498,849 during the
three months ended March 31, 1998 as compared to $225,836 during the three
months ended March 31, 1997. The remaining $131,085 of interest expense incurred
during the three months ended March 31, 1998 was a cash expense to the Company.
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.
As of March 31, 1998, the Company had incurred cumulative losses of
$18,192,098. 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.
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
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 believed it was advantageous
to convert this debt to an equity position on the balance sheet in order to
enhance the marketability of the Company's securities in an initial public
offering. 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 and the
issuance of promissory notes in the aggregate principal amount of $4,025,000.
See "Description of Capital Stock - Common Stock Purchase Warrants." 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
-25-
<PAGE>
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 $50,000 for assisting the Company in obtaining this loan. SPH
and a related entity own approximately 130,000 shares or approximately 1.1% 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 order to satisfy its short term financing needs during the period
from December 1997 through June 1998, the Company sold 298,700 shares of its
Series A Preferred Stock to Rozel International Holdings, Limited ("Rozel"), as
follows:
<TABLE>
<CAPTION>
Date Number of Shares Gross Proceeds
---- ---------------- --------------
<S> <C> <C>
December 1997 22,500 $ 225,000
March 1998 27,000 270,000
April 1998 91,000 910,000
May 1998 77,400 774,000
June 1998 80,800 808,000
------ --------
TOTAL 298,700 $2,987,000
======= =========
</TABLE>
All shares of Series A Preferred Stock are convertible at the option of
the Company or Rozel into 12.5 shares of Common Stock. In June 1998, Rozel
converted 80,000 shares of Series A Preferred Stock into 1,000,000 shares of
Common Stock.
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 IQ Agreement.
See "Business - Marketing Strategy - Distribution and License Agreement With IQ
Value, L.L.C."
In order to satisfy its short term financing needs during July and
August 1998, the Company has received short term loans in the principal amount
of $868,000 from various third parties.
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. On August 7, 1998, the Company had cash of
approximately $250,000 available for operating expenses and capital equipment
purchases, short term debt of $4,275,000 and accounts payable of approximately
$1,600,000. The Company anticipates that it will spend approximately $4,800,000
during the remainder of 1998 in order to complete its systems development,
perform its market research and to launch its products in accordance with the
business plan developed under the tenure of Mr. Clark.
Of the approximately $15,385,000 the Company expects to receive as net
proceeds from this Offering, management expects that approximately $5,687,500
(37%) will be used to repay short term notes payable and to pay commercial
accounts payable due and a payment in settlement of litigation in which the
Company has been named
-26-
<PAGE>
a defendant. Management intends to use the remaining net proceeds of
approximately $9,695,500 (63%) for working capital purposes, including research
and development, sales and marketing, systems and operations and general and
administrative activities.
Management has estimated that the net proceeds of this Offering, when
combined with other financial commitments and projected cash flow from
operations will be sufficient to meet the Company's cash requirements through at
least July 31, 1999. However, operating revenues may fall short of, and expenses
may exceed, the Company's projections. If the Company's results of operations
during the remainder 1998 are less than projected, then the Company may be
required to seek additional financing sooner than expected. Because of the lack
of an annualized revenue 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. Due to the limited operating history of the Company, it is
impossible to predict with any degree of certainty the extent to which the
Company must expand its operations in order to become profitable. There can be
no assurance that the Company will be able to sustain or expand its operations,
that needed financing will be available on acceptable terms or at all, that the
Company will not require further financing to sustain or expand its operations,
or that the Company will become profitable in the future. See "Risk Factors -
Risks Related to the Company - Development Stage Company; Limited Operating
History; Significant Cumulative Operating Losses; Auditor Report Modification
for Going Concern,""Risk Factors - Risks Related to the Company - Need for
Additional Financing," "Use of Proceeds" and "Business."
Commitments
As of July 31, 1998, the Company owes DMR approximately $745,000 for
consulting services performed in connection with the initial systems integration
of its Coupons OnlineSM, PromoCache(sm) 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 the Company satisfies past due payable amounts relating to services
rendered to the Company in mid- 1997 during Mr. Clark's tenure. The Company has
entered into an agreement with DMR establishing a payment schedule for these
past due payable amounts. 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, PromoCache(sm) 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 due to the failure of DMR, as
an out-of-state consultant providing services to the Company, to submit bills to
the Company related to these taxes and to collect and remit these taxes to the
State of Connecticut. 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 August 15, 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. Through July 31, 1998, the Company has paid
$83,725 of this tax liability, has incurred additional tax and interest
liabilities in 1998 of approximately $47,745 and has a remaining obligation to
pay $204,000. See "Business - Regulatory Matters."
As a result of expenses incurred and not paid by the Company under the
tenure of Mr. Clark, the Company is currently named as a defendant in litigation
filed by Guild Concepts, Limited d/b/a The Guild Group ("Guild"). In this
lawsuit, Guild alleges 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. In June
1998,
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<PAGE>
the Company entered into a stipulation and order of settlement whereby it agreed
to pay Guild the aggregate amount of $183,538 upon the earlier of (i) 10 days
after the Company's receipt of the proceeds of the Offering or (ii) August 31,
1998. As of the date hereof, the Company has paid Guild $50,000 of the amount
due and, therefore, has a commitment to pay Guild $183,538. As of March 31, 1998
the Company has included this amount in accounts payable. See "Risk Factors -
Pending Legal Proceedings," and "Business - Legal Proceedings." In 1998 and
since the departure of Mr. Clark, the Company has continued to meet is financial
commitments for expenditures incurred and has continued to make payments for all
work that has been properly completed and delivered to the Company.
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
Internet 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.
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<PAGE>
BUSINESS
General
The Company is a development stage company whose products incentivize
consumers to purchase products and services sold across all categories of trade.
The Company has developed a patent-pending process to deliver coupons, discounts
and other promotional incentives to Internet users. The netValue system utilizes
various sophisticated and unique targeting engines to deliver these purchase
incentives. The Company has also developed a technology to address coupon
industry concerns regarding fraudulent coupon redemption.
The Company's revenues will be generated by pursuing a combination of
two business plan strategies. One strategy follows a wholesale
software-licensing model. The other strategy follows a direct to consumer
branded web site model. For the wholesale service, the Company plans to generate
revenues through a combination of licensing fees and transaction fees. For its
own branded web site, the Company plans to generate revenues through transaction
fees and advertising fees.
The Company provides software and backend systems that allow its
wholesale business partners to market their own uniquely branded promotional
commerce service. Potential business partners of the Company include
manufacturers, service providers, national retailers, local merchants, wholesale
distributors, traditional web site publishers and Internet Service Providers
(the "Business Partners").
The Company currently has developed and plans to initially market three
separate products to meet the needs of its Business Partners and various
consumer segments. These products are Coupons OnlineSM, PromoCache SM and
i-ValueSM.
The Company's Coupons OnlineSM product allows manufacturers and service
providers 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 manufacturers and marketers desiring to feature single product
promotional offers. The Company's systems provide Online targeting and
validation for each consumer as well as delivery and validation of coupons and
other targeted offers.
The Company's PromoCache SM product is wholesaled to a broader range of
manufacturers, retailers and distributors as well as more traditional web site
publishers and Internet Service Providers. PromoCache SM creates themed
promotional offers, in short time spans, from any web site. It automatically
aggregates national and local offers from multiple databases using a series of
simultaneous targeting engines and criteria. Consumers then view their own
unique offer site, the equivalent of a personalized discount catalog.
The Company's i-ValueSM product creates a desktop channel on the
personal computers of consumers who subscribe to this service. It allows
retailers, manufacturers and web site publishers to deliver targeted, secure
coupons and other incentives to these consumers. Consumers subscribe to the
service and receive electronic coupons and promotional incentives which are
updated on a regular basis. Promotional offers can be individually tailored to
meet each consumer's product category and brand shopping preferences.
The Company began generating revenues during the first half of 1998. The
Company generated over $70,000 from several major consumer package good
manufacturers who began utilizing and marketing the Company's products.
Separately, the Company has also entered into a licensing agreement with IQ and
is scheduled to receive $3,000,000 in licensing fees. As of June 30, 1998, the
Company had earned $1,250,000 of this fee. Accordingly, the Company has
generated total revenues through June 30, 1998 of approximately $1,300,000. The
Company has also signed major national retailers to contracts and is in
negotiation with several other manufacturers and retailers.
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<PAGE>
The Company expects its principal customers and sources of revenue to
be national, regional and local retailers, manufacturers of consumer products,
consumer service providers, online web publishers and Internet service
providers. The Company plans to generate revenues through a combination of
software licensing, advertising and transaction fees charged to its Business
Partners. To date, sales of the Company's Programs have been accomplished mostly
through the Company's direct sales force; in the future, the Company expects to
expand its direct selling efforts, create a business development group and
increase its selling efforts through third party resellers.
In developing its products, 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 convenient and
meaningful consumer experience by targeting more relevant offers than
traditional alternatives (such as freestanding inserts and coupon mailers) for
online consumers to receive on the Internet. The Company also believes that the
system it has conceived and its products provide a more cost-effective and
secure means for marketers to distribute and track targeted coupons, discounts
and other promotional incentives.
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.
The Company has since expanded its efforts and products to extend beyond the
delivery of coupons.
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) developing its business plans and models and (iv)
seeking additional development capital.
Market
Based upon its research of the most recent information available from
industry sources, the Company believes that in 1997, media spending on coupon
and price discount delivery totaled $25.8 billion. One segment alone, consumer
package goods manufacturers, issued approximately 250 billion coupons directly
to U.S. consumers in 1997. This segment of manufacturers accounted for less than
20% of the total spending in this coupon and price discount category. Despite
the large number of coupons issued to consumers, redemption rates for consumer
packaged goods manufacturer coupons have fallen to approximately 2%. The Company
believes that redemption rates have fallen due to the inefficiencies of
traditional mass media delivery vehicles. Conversely, the Company believes that
the more targeted coupon delivery vehicles available to the market today are not
cost effective for many marketers. 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 Internet and the World
Wide Web, 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 over 50 million today. 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 conservatively totaled approximately $544.8
million in 1997 and the Company expects Internet advertising spending to grow to
approximately $5 billion annually by the year
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<PAGE>
2000. Additionally, Online consumer spending by United States and European
consumers is projected to exceed $5.1 billion in 1998.
Products and Services
The Company has developed and is focusing on commercialization of three
products in response to what the Company believes are three distinct market
needs relating to online consumer promotion. Although each of the Company's
products seeks to address security and targeting issues associated with
electronic delivery of consumer promotions, each product presents a different
solution: (i) Coupons Online SM provides an online marketing solution that meets
the needs of manufacturers who want to promote a single product at one time.
Coupons Online(sm) allows consumers who have registered with the Company and
have installed the plug-in to browse participating websites and access the
promotional offers they view; (ii) PromoCache(sm) allows a broader range of
Business Partners to utilize the Company's technology to create themed
promotional content areas that display multiple promotional offers at a time;
and (iii) i-Value SM provides a 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.
Coupons Online SM and PromoCache(sm) allow consumer marketers to deliver
secure, targeted promotions to consumers from Internet web sites. To receive
promotional offers from the Company's Business Partners, consumers first
register online, then download and install the netValue 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. The registration process has been designed so that
other forms of information may also be obtained from consumers during the
registration process.
The netValueSM 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 netValue(sm) Plug-In currently supports consumers using
Microsoft's Internet Explorer or Netscape Navigator web browsers (release 3.0 or
higher) in a Windows 98 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; and (ii) the printable offer is assembled by the plug-in
responding to a print command and never appears on the consumer's computer
screen.
Business Partners 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).
These products currently feature three primary methods of targeting
offers: (i) zip code-based targeting can be used by Business Partners to deliver
different offers to consumers based on geographic, demographic, lifestyle and
cultural marketing criteria; (ii) source-based targeting can be used by Business
Partners 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 Business Partners to program a series of
different offers to be delivered to consumers over time or based on the results
of prior interaction. Other unique and proprietary targeting engines have also
been developed for this system.
Business Partners license the Company's Coupons Online(sm) and
PromoCache(sm) technology and systems and contract with the Company to perform
the online targeting, control and delivery functions. Generally, the Company
charges a licensing fee and a transaction fee for each offer delivered online to
a consumer, which fee varies based on whether the offer is universal or
targeted.
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<PAGE>
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 consumers via the Internet. A profiling feature enables consumers
to customize the product 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 category and brand shopping preferences
which can be used by the Company's Business Partners to target their promotional
offers more effectively and efficiently.
Similar to the Company's Coupons Online(sm) and PromoCache(sm) products:
(i) consumers register to use the i-Value(sm) product; (ii) the software program
for each consumer is encoded with a unique serial number providing consumer
identification and tracking capabilities; and (iii) the Company provides
consumer and Business Partner software, and targeting, control, validation and
reporting services. The i-Value(sm) product allows consumers to store, sort,
review and print offers off-line.
To access i-Value(sm) product 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 a retail store tell the consumer
where various types of products are located.
As the Company has designed i-Value(sm), initially both product content
of promotional offers and consumer enrollment (i.e. consumer awareness, software
distribution and registration) will be accomplished through cooperative
marketing partnerships. To incentivize retailer participation, the Company is
offering its Business Partners, among other things: (i) co-branding of the
product whereby each participating retailer can distribute a customized version
of the i-Value(sm) product to his customers, which distribution can be
accomplished either via download from the Internet or through the physical
distribution of CD's; and (ii) competitive advantage - participating retailers
can have their own unique "tab" in their version of the product providing the
retailer with a level of distinction from competitors among his customers. The
i-Value(sm) has been developed for initial consumer testing with a retail
Business Partner.
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 and PromoCache(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 products to access promotions of its
Business Partners; (ii) the Company's ability to attract and maintain Business
Partners using its products; 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.
The Company's Privacy Policy. 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 whereby it will not give
individual consumer information to any commercial third parties. 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 Business Partners and consumers.
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<PAGE>
Customer Positioning and Sales Strategies. The Company has structured
its product development and management efforts to reflect five primary market
segments of potential Business Partners: (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; (iii) local area
merchants - independent retail and consumer service providers operating within a
limited trading area; (iv) online website publishers and Internet services
providers; and (v) licensees, newspaper groups and industry consortiums. The
Company believes that the benefits of its products and services, while largely
applicable to each of these five segments, will require different approaches in
order to maximize the Company's sales opportunities.
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 and PromoCache(sm) products
for use in electronically delivering coupons promoting the products and services
of Local Merchants, and the nonexclusive right to distribute the Company's
Coupons OnlineSM, PromoCache(sm) 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 and PromoCache(sm)
with respect to Local Merchants, IQ must meet annual minimum transaction fees.
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 data side processing of
transactions through the Coupons OnlineSM and PromoCache(sm) 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.
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, PromoCache(sm) 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 Online(SM), PromoCache(sm) 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, PromoCache(sm) and i-Value(sm) products.
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<PAGE>
American Maple Leaf Financial Corporation ("AML") received an
investment banking fee of $30,000 as compensation for its efforts in identifying
IQ and assisting in the negotiations which resulted in the parties entering into
the Letter of Intent. The Company also entered into an agreement with
Promunicom, Inc., Gary R. Blau, and any other entities with which Mr. Blau is
affiliated. Pursuant to this Agreement, the Company and Mr. Blau agreed to
terminate a consulting agreement between the Company and Promunicom, Inc. dated
May 1, 1997 (the "Consulting Agreement") effective January 15, 1998. The Company
agreed to pay Mr. Blau the aggregate amount of $100,000 and to issue to Mr. Blau
30,000 shares of the Company's Common Stock in connection with the execution of
the IQ Agreement. The Company has paid Mr. Blau $62,500 and has issued 30,000
shares of the Company's Common Stock to Mr. Blau. The remaining $37,500 payment
was originally scheduled to be paid to Mr. Blau upon the earlier of July 6, 1998
or the Company's receipt of the proceeds of this Offering, but the parties have
agreed to extend this payment date to the earlier of August 20, 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. Mr. Blau is also a member of the Company's Board of Directors. See
"Certain Transactions - Transactions with Promunicom, Inc. and IQ."
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 System for
Electronic Distribution of Product Redemption Coupons," which describes what the
Company believes to be a proprietary process for executing its products and
services. In April 1998, the Company filed a second application with the USPTO
on the same subject matter. In April 1998, the Company also filed an
international patent application under the Patent Cooperation Treaty. The
Company does not believe that either 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 applied for federal registration of its
trademarks and/or service marks COUPONS ONLINE, 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."
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<PAGE>
Employees
As of August 4, 1998, the Company employed 17 full-time employees. These
employees include 11 operations and software development staff, three 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.
Facilities
In November 1997, the Company signed a lease for its executive offices
located at 1960 Bronson Road, Building No. 2, Fairfield, Connecticut. The
offices consist of approximately 8,800 square feet. Pursuant to the terms of
lease, the Company is required to pay rent 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
Under the tenure of Mr. Clark, in November 1997, 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. On June 19, 1998,
the Company entered into a Stipulation and Order of Settlement (the "Settlement
Order") with Guild resolving the claims asserted in the litigation. Pursuant to
the Settlement Order, the Company has agreed to pay Guild the aggregate amount
of $233,538 (the "Settlement Amount") as full and final satisfaction of all
claims asserted by Guild upon the earlier of (i) ten days after the Company's
receipt of the proceeds of the Offering or (ii) August 31, 1998. The Company
paid Guild $30,000 on the date it entered into the Settlement Order and made
interim payments of $10,000 on each of July 1, 1998 and August 1, 1998. If the
Company fails to pay the Settlement Amount, Guild may enter the Stipulated
Judgment against the Company without further notice for the full unpaid
Settlement Amount plus interest thereon at the rate of nine percent per annum
calculated from June 1, 1998. See "Risk Factors - Risks Related to 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 due to the failure of DMR, as
an out-of-state consultant providing services to the Company, to submit bills to
the Company related to these taxes and collect and remit these taxes to the
State of Connecticut. Immediately upon making this discovery, the Company
voluntarily notified the appropriate taxing authorities of the delinquency and
began 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
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. Under the initial terms of the Agreement, the Company was
required to pay the entire remaining balance due to the Department upon the
earlier of June 30, 1998 or the Company's receipt of the proceeds of this
Offering The Company has reached an agreement with the Department whereby the
remaining balance is due to the Department upon the earlier of August 15, 1998
or the Company's receipt of the proceeds of this offering. Through July 31,
1998, the Company has paid $83,725 of this tax liability, has incurred
additional tax and interest liabilities in 1998 of approximately $47,745 and has
a remaining obligation to pay approximately $204,000.
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<PAGE>
Independent Accountants
In September 1997, the Company selected LJ Soldinger Associates ("LJSA")
to serve as its independent accountant. The Company believes that LJSA is better
suited and more willing to devote the appropriate level of resources to meet the
needs of a development stage company than a "Big-Six" public accounting firm.
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." In September 1997, Ernst & Young, LLP ("E&Y") resigned
its position as the Company's independent accounting firm. E&Y has confirmed
that, prior to E&Y's resignation 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.
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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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
R. Scott Wills 45 President and Chief Executive Officer, Assistant Secretary and Chairman
of the Board of Directors
Michael Cirillo 50 Director
Steven B. Rosner 47 Director
Andrew P. Panzo 34 Director, Secretary
Gary R. Blau 53 Director
</TABLE>
R. Scott Wills has served as President, Chief Executive Officer and
Chairman of the Board of Directors since June 1998. In April 1996, Mr. Wills
joined Netcom On-Line Communications, Inc. ("Netcom"), a large global Internet
Service Provider based in San Jose, California. While at Netcom, Mr. Wills held
multiple positions. His most recent responsibilities were as Senior
Vice-President of Strategic Planning and Business Development. He also started
and led Netcom's advertising/e-commerce sales effort. Mr. Wills also actively
participated in merger negotiations, resulting in the sale of Netcom to ICG
Communications, Inc. Prior to joining Netcom, Mr. Wills held positions on both
the advertising agency and client side of the business. In January 1983, he
founded his own advertising agency, Wills and Evans, in New York City, New York.
Wills and Evans specialized in developing strategic business plans and executing
integrated, multi-level marketing programs for a select group of Fortune 1000
and blue chip media companies. Mr. Wills operated Wills and Evans for over ten
years and then sold the agency in June 1993. In March 1994, Mr. Wills joined
Zing Systems, LLC ("Zing Systems"), a pioneering interactive television company
based in Englewood, Colorado, and a former client of Wills and Evans. Mr. Wills
served as Senior Vice President of Zing Systems. Mr. Wills presently serves on
the Board of Advisers of Ram Works, a web site development firm based in
Jacksonville, Florida.
Michael Cirillo was elected a Director of the Company in December 1997.
Mr. Cirillo has been a director of Aviation, Inc. since May 1997, has been the
President of D.A.R. Group, Inc., a New York based investment banking firm, since
1995, and has been President of CBM Consultants, Inc., a New York based
marketing and consulting firm since 1995. From 1987 to 1995, Mr. Cirillo was an
officer and director of Flex Resources, a temporary and permanent employment
firm based in New Jersey, which was a major contractor of employment services
for the Resolution Trust Corporation and Fidelity National Bank.
Steven B. Rosner was elected a Director of the Company in December 1997.
Mr. Rosner is the sole shareholder of SLD Capital Corporation, which specializes
in providing consulting and investment banking services. Previously, Mr. Rosner
served as President of Centaur Financial Corporation an investment banking firm,
from 1984 to 1996. He also serves as a director of several privately held
corporations including Tradewinds, Inc. and Informatix, Inc. Mr. Rosner also
served as 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 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
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<PAGE>
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.
Gary R. Blau was elected a Director of the Company in May 1998. Mr. Blau
has served as the Managing Member of IQ since its formation in April 1998. IQ is
a strategic sales and marketing organization based in New York, New York which
provides clients with global Internet promotional solutions. IQ presently
licenses the Company's products and distributes them for use in electronically
delivering coupons promoting the products and services of IQ's clients. Since
its inception in 1992, Mr. Blau has also served as President of Promunicom,
Inc., a management consulting firm based in New York City, New York.
During the last five years, 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
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.
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 former Chief Executive Officer, the Company's
Chief Technology Officer and one other highly compensated employee 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, Former President and 1996 $ 62,598(2) 0 350,000(3)
Chief Executive Officer(1) 1997 $ 150,577 0 790,000(3)
Richard F. Davey, Vice President, Chief 1996 $ 52,022(5) 0 60,000(6)
Technology Officer, and Secretary 1997 $ 134,231 0 137,000(6)
Bruce Malinowski, Vice President 1996 $ 175,879(7) 0 0
1997 $ 115,000 0 48,000
</TABLE>
(1) On June 1, 1998, the Company entered into a Separation Agreement with Mr.
Clark. See "Business--Employment/Consulting Agreements."
(2) 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.
(3) 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. Pursuant to the terms of the
Separation Agreement which
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<PAGE>
the Company entered into with Mr. Clark on June 1, 1998, all of Mr. Clark's
options have vested. Such options are exercisable as follows:
Number of Shares Exercise Price Per Share
---------------- ------------------------
110,000 $.63
158,000 .80
158,000 4.00
158,000 5.00
158,000 6.00
158,000 7.00
(4) On July 16, 1998, Mr. Davey was terminated from his position as the
Company's Chief Technology Officer. Effective July 28, 1998, the Board of
Directors revoked Mr. Davey's appointment as the Secretary of the Company and a
majority of the Company's shareholders voted to remove him from the Board of
Directors.
(5) 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.
(6) 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.
(7) Includes $144,918 that was earned by Mr. Malinowski prior to the formation
of the Company. Of this amount, $130,819 has been paid to Mr. Malinowski and
$14,099 remains unpaid and is recorded in accounts payable as of the date of
this Offering.
-39-
<PAGE>
The following table contains information concerning the grant of stock
options during Fiscal 1997 to the Named Executive Officers.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
% of Total at Assumed Annual Rates
Number of Options Granted of Stock Price Appreciation
Options to Employees in Exercise or for Option Term (1)
------------------------
Name Granted Fiscal Year Base Price Expiration Date 5% 10%
---- ------- ------------ ---------- --------------- ------- ----------
<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.
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.
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<PAGE>
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.
In May 1998, Mr. Blau was appointed to the Board of Directors. In June
1998, Mr. Clark resigned from his position as Chairman of the Board of Directors
and Mr. Wills was appointed as his replacement. In July 1998, David Brandkamp
resigned from his position on the Board of Directors. Effective July 28, 1998,
the majority of the Company's shareholders voted to remove Mr. Davey from the
Board of Directors. The Board of Directors currently consists of five 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: R. Scott Wills, Andrew Panzo
Class of 1999: Michael Cirillo
Class of 1998: Steven B. Rosner, Gary R. Blau
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 R. Scott Wills, Steven B. Rosner
and Michael Cirillo. The Pricing Committee consists of R. Scott Wills.
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:
In September 1997, Mr. Clark entered into an employment agreement
pursuant to which he had agreed to serve as the Company's President and Chief
Executive Officer through September, 2002. Pursuant to the terms of the
agreement, Mr. Clark was paid an annual base salary of $165,000 and was 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, which are exercisable as follows:
Number of Shares Exercise Price Per Share
---------------- ------------------------
110,000 $.63
158,000 .80
158,000 4.00
158,000 5.00
158,000 6.00
158,000 7.00
-41-
<PAGE>
On June 1, 1998, Mr. Clark resigned from all of his positions, as an
officer and director of the Company and entered into a Separation Agreement with
the Company (the "Separation Agreement"). Under the terms of the Separation
Agreement, the Company agreed to pay deferred compensation and severance
benefits to Mr. Clark and all of his options to purchase the Company's common
stock became vested immediately. In June 1998, the Company made certain deferred
compensation and severance payments to Mr. Clark and, in accordance with the
Separation Agreement, he released all of his rights under his lien and security
interests in certain of the Company's assets. Additional severance compensation
payments are to be paid to Mr. Clark in monthly installments through October
1999.
On June 1, 1998, Mr. Wills entered into an employment agreement with
the Company pursuant to which he has agreed to serve as Chairman of the Board of
Directors, and President and Chief Executive Officer of the Company. Pursuant to
the terms of the agreement, Mr. Wills is paid an annual base salary and is
eligible to receive an annual bonus based on the attainment of specific
performance goals established by the Board of Directors. Any bonus may be
allocated between awards of cash and shares of Common Stock.
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, (1) 38,000 vested and
became exercisable on September 19, 1997 at an exercise price of $.80 per shares
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." On July 16, 1998, Mr. Davey was terminated from his
position as the Company's Chief Technology Officer and his employment agreement
was terminated.
Each of Craig W. 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 Messrs.
Barnett and 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 cancelled 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
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<PAGE>
granted options to purchase an aggregate of 60,000 shares of Common Stock. These
options were scheduled to 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 and Messrs. Barnett and Braunstein
signed a mutual release from their respective obligations under the employment
agreements. IQ believed that by hiring Messrs. Barnett and Braunstein, it would
be able to take advantage of their relationships with potential Customers and
thus enhance IQ's performance under the IQ Agreement. Since the Company earns
transactions fees based on IQ's performance, the Company was willing to release
Messrs. Barnett and Braunstein from their employment agreements so that IQ could
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 Messrs. Barnett and Braunstein will continue to receive their
salaries and commission draws until September 30, 1998, they will each receive
cash payments of $20,000, and they will each receive options to purchase 75,000
shares of the Company's Common Stock at the per share price of this Offering.
The mutual releases became effective on April 7, 1998, concurrent with the
execution of the 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 August 20, 1998 or the Company's receipt of the proceeds of this
Offering.
Each of Messrs. Clark, Wills, 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 4,000,000 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
3,127,250 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
-43-
<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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.
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<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 off July 31, 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 July 31, 1998, an
aggregate of 11,868,756 shares of Common Stock were issued and outstanding.
Assuming the consummation of this Offering, as of July 31, 1998, an aggregate of
14,868,756 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) 10.4 8.4
Financial Corporation
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
APP Investments, Inc. 1,291,850 (2) 10.4 8.4
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Craig W. Barnett 827,000 (3) 6.9 5.5
300 E. 71st Street, #3E
New York, NY 10021
Gary R. Blau 30,000 * *
171 East 62nd Street
New York, NY 10021
Mark D. Braunstein 732,000 (4) 6.1 4.9
405 E. 54th Street, #11H
New York, NY 10022
Michael Cirillo 40,000 (5) * *
55 Eastwood Blvd.
Manalopan, NJ 07726
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
Name and Address Number Percent of Class
- ---------------- ------ ----------------
Before Offering After Offering
<S> <C> <C> <C>
Andrew P. Panzo 1,291,850 (6) 10.4 8.4
c/o American Maple Leaf Financial
Corporation
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Steven B. Rosner 232,500 (7) 1.9 1.5
1220 Mirabeau Lane
Gladwyne, PA 19035
Rozel International Holdings Limited 7,717,127 (8) 52.8 43.9
c/o Whitehill House
Newby Road-Industrial Estate
Stratford Chesire, United Kingdom
R. Scott Wills 466,666 (9) 3.8 3.0
1960 Branson Road, Building Two
Fairfield, Connecticut 06430
All directors and executive officers 2,061,016 16.0 13.0
as a group (5 people)
</TABLE>
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* Less than 1%
(1) Consists of 791,850 shares of Common Stock and the 500,000 APP Warrant
Shares (as defined under "Certain Transactions - Organization of the
Company") issuable to APP Investments, Inc. ("APP"). Andrew P. Panzo is
the controlling shareholder, President and a director of both AML and
APP and as a result thereof, the 500,000 APP Warrant 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.
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(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. Includes 10,000 shares of Common
Stock issuable upon the exercise of certain outstanding options held by
Mr. Cirillo which are exercisable at any time after December 31, 1998
at a price of $4.00 per share.
(6) 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.
(7) Includes 32,500 shares of Common Stock owned by the Steven B. Rosner
Money Purchase Pension Plan of which Mr. Rosner is a trustee. Includes
10,000 shares of Common Stock issuable upon the exercise of certain
outstanding options held by Mr. Rosner which are exercisable at any
time after December 31, 1998 at a price of $4.00 per share.
(8) Includes 2,733,750 shares of Common Stock issuable upon the conversion
of 218,700 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.
(9) Consists of 466,666 shares of Common Stock issuable upon the exercise
of certain outstanding options held by Mr. Wills which are currently
exercisable at a price of $1.60 per share.
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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 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 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
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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 IQ Agreement. On June 1, 1998, Mr. Clark resigned all
of his positions as an officer and director of the Company and entered into a
separation agreement with the Company. On June 1, 1998, the Company entered into
an Employment Agreement with Mr. Wills. 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 December 1997, Rozel purchased 3,972,877 shares of the Company's
Common Stock from VDC.
In connection with a Preferred Stock Purchase Agreement (the "Rozel
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 Rozel 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 298,700 shares for $2,987,000. In July 1998, the Company informed
Rozel that it did not intend to request that Rozel purchase the remaining shares
available under the Rozel Agreement. In July 1998, pursuant to the terms of the
Rozel Agreement, the Company issued 150,000 shares of Common Stock to Rozel as
additional consideration for meeting all of the Company's requests under the
Rozel Agreement. Each Series A Share is convertible at any time at the option of
either Rozel or the Company into 12.5 shares of the Company's Common Stock. Upon
any conversion of Series A Shares by either Rozel or the Company, Rozel shall
turn over its certificates representing the Series A Shares and the Company
shall issue a certificate for that number of shares of Common Stock into which
the Series A Shares are convertible. The Series A Shares will be canceled and
will no longer be issued and outstanding. As of the date of this Prospectus,
Rozel has converted 80,000 shares of Series A Preferred Stock into 1,000,000
shares of Common Stock. See "Description of Capital Stock - Preferred Stock."
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In June 1998, Rozel entered into a Guarantee Agreement with Mr. Wills
whereby it agreed to guarantee payment of all amounts which become payable to
Mr. Wills by the Company upon the termination of Mr. Wills' Employment
Agreement.
Transactions with Promunicom, Inc. and IQ
On May 1, 1997, the Company entered into a consulting agreement with
Promunicom (the "Consulting Agreement") whereby the Company agreed to pay
Promunicom a retainer fee of $10,000 per month in exchange for receiving the
services of Mr. Blau, President of Promunicom, for a minimum of five days per
month. During the period from May 1, 1997 through December 31, 1997, the Company
paid Promunicom $15,000.
On March 13, 1998, the Company entered into an agreement with
Promunicom, Mr. Blau and any other entities with which Mr. Blau is affiliated.
Pursuant to this agreement, the Company and Mr. Blau agreed to terminate 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 was originally
scheduled to be paid to Mr. Blau upon the earlier of July 6, 1998 or the
Company's receipt of the proceeds of this Offering, but the parties have agreed
to extend this payment date to the earlier of August 20, 1998 or the Company's
receipt of the proceeds of this Offering.
On April 7, 1998, the Company entered into the IQ Agreement. See
"Business - Marketing and Sales Strategy Distribution and License Agreement With
IQ Value, L.L.C." Through June 30, 1998, substantially all of the Company's
revenues have been generated pursuant to the IQ Agreement. 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.
Mr. Blau was appointed to the Board of Directors in May 1998.
Transactions with Ram Works
The Company has paid Ram Works approximately $125,000 for (i) web
development consulting services related to redesigning and reengineering of the
Company's netValue(sm) product; and (ii) providing personnel to perform services
equal to that of an interim chief technology officer. Mr. Wills presently serves
on the Board of Advisers of Ram Works and receives a stipend of $2,000 per
month. In exchange for these services, Mr. Wills is entitled to receive a
finder's fee equal to 10% of the gross billings for all business which Mr. Wills
refers to Ram Works. In June and July 1998, when Ram Works provided these
services to the Company, Mr. Wills has not requested payment of this stipend and
has permanently waived any finder's fee related to any services provided to the
Company by Ram Works.
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.
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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"). The Company's shareholders
recently approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock to
49,000,000. As of the date of this Prospectus, (i) 11,868,756 shares of Common
Stock were issued and outstanding, (ii) 4,000,000 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) 2,733,750 shares of Common Stock were reserved for
issuance upon the conversion of the Series A Preferred Stock. As of the date of
this Prospectus, 218,700 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 the Rozel Agreement, 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." Each Series A Share is convertible at any time at the option of
either Rozel or the Company into 12.5 shares of the Company's Common Stock. Upon
any conversion of Series A Shares by either Rozel or the Company, Rozel shall
turn over its certificates representing the Series A Shares and the Company
shall issue a certificate for that number of shares of Common Stock into which
the Series A Shares are convertible. The Series A Shares will be cancelled and
will no longer be issued and outstanding. As of the date of this Prospectus,
Rozel has converted 80,000 Series A Shares into 1,000,000 shares of Common
Stock.
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."
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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 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 14,868,756
shares of Common Stock outstanding (15,318,756 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 3,660,929 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 3,600,000 shares (4,140,000 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 79.8% of the Company's
outstanding shares of Common Stock (including the 3,510,929 Registrable Shares
until the resale of such shares is registered as described above) will be
"restricted securities" and may, subject to the transfer restrictions described
above, in the future be sold in compliance with Rule 144 adopted under the
Securities Act ("Rule 144"). Rule 144 generally provides that beneficial owners
of Common Stock who have held such Common Stock for one year may sell within a
three-month period a number of shares not exceeding the greater of (i) 1% of the
total outstanding shares or (ii) the average weekly trading volume of the shares
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale limitations, notice requirements and the
availability of current public information about the Company. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has beneficially
owned shares for at least two years is entitled to sell such shares at any time
under Rule 144 without regard to the limitations described above. Prior to this
Offering, 6,240,429 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.
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In addition to the outstanding shares of Common Stock described above,
as of the date of this Prospectus, the Company has 4,000,000 shares of Common
Stock reserved for issuance upon the exercise of outstanding options under the
Plan, 2,733,750 shares of Common Stock reserved for issuance upon the conversion
of the 218,700 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
3,600,000 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 540,000 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.
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.
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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 3,600,000 shares (4,140,000 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>
netValue, Inc.
(A Development Stage Entity)
INDEX TO THE FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F2
Balance Sheets F3
Statements of Operations F4
Statements of Stockholders' Deficit F5
Statements of Cash Flows F7
Notes to Financial Statements 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
------------ ------------ ------------
Commitments and Contingencies
Stockholders' Deficit
Preferred stock, $.001 par value per share. At December 31, 1996 1,000,000
shares authorized; none outstanding. At December 31, 1997, 1,000,000
shares authorized; 22,500 shares issued and outstanding; $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> <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 proforma
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:
<TABLE>
<CAPTION>
December 31, March 31,
------------------------- -----------
1996 1997 1998
--------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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.
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.
(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:
<TABLE>
<CAPTION>
Common Stock Issued and Issuable
- --------------------------------
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
----------
<CAPTION>
Purchase Price Consulting Cost
--------------------- --------------------
Shares Date Per Share Total Per Share Total
--------------- ---- --------- ----------- --------- -----
<S> <C> <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
============= =============
</TABLE>
A summary of stock options as of March 31, 1998 (unaudited) is as follows:
<TABLE>
<CAPTION>
Exercised/
Outstanding Other Exercisable
------------- ------------- -------------
<S> <C> <C> <C>
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) $ 2,878,065 $ (.27)
============ =========== ============= ======== =========== =========
Pro Forma Under SFAS 123 $ (3,149,487) $ (.84) $ (12,854,814) $ (1.78) $ 2,899,932 $ (.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> <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.
EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS REPORT
On June 1, 1998, the Company and the CEO entered into a separation agreement
pursuant to which the CEO's employment agreement was terminated (see Note 7),
and the CEO agreed to immediately resign from all of his positions as an officer
and director of the Company. Under the terms of the agreement, the Company
agreed to pay deferred compensation and severance benefits to the CEO, and all
of the CEO's options to purchase the Company's common stock became vested
immediately. In June 1998, the Company made certain deferred compensation and
severance payments to the former CEO and, in accordance with the terms of the
separation agreement, the former CEO released all of his rights under his lien
and security interests in certain of the Company's assets. Additional severance
compensation payments are to be paid to the former CEO in monthly installments
through October 1999.
Effective June 1, 1998, the Company entered into a three-year employment
agreement with a new chief executive officer ("New CEO"), pursuant to which the
New CEO will also assume the positions of Chairman of the Company's Board of
Directors and President ("Employment Agreement"). Pursuant to the Employment
Agreement, the New CEO is paid an annual base salary and is eligible to receive
an annual bonus based upon the attainment of specific performance goals
established by the Board of Directors. Any bonus may be allocated between awards
of cash and shares of common stock. In addition, the Employment Agreement
requires the Company to grant the New CEO options to purchase a specified number
of shares of the Company's common stock, that will vest over a specified period,
pursuant to the Company's nonqualified stock option plan.
In July 1998, the Company terminated the CTO's employment agreement with the
Company, effective from that date, the Company's Board of Directors removed the
CTO from his position as Secretary of the Corporation, and a majority of the
stockholders of the Company voted to remove the CTO from the Board of Directors.
The Company has determined that its product I-value will not be released in the
third quarter of 1998 as previously planned. A launch date for this product has
not been established.
- 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............................................8
Risk Factors .........................................................8
Use of Proceeds......................................................14
Market Price of and Dividends on Common
Stock and Related Shareholder Matters..............................15
Capitalization.......................................................16
Dilution.............................................................19
Selected Financial Data..............................................21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.........................................................22
Business.............................................................28
Management ..........................................................35
Security Ownership of Principal Stockholders
and Management.....................................................44
Certain Transactions ................................................47
Description of Capital Stock.........................................50
Shares Eligible for Future Sale......................................52
Underwriting.........................................................53
Legal Matters........................................................54
Experts..............................................................54
Index to Financial Statements........................................F1
================================================================================
<PAGE>
================================================================================
NETVALUE, INC.
3,600,000 SHARES OF COMMON STOCK
-------------
PROSPECTUS
--------------
August _____, 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............................. 200,000.00
Accounting Fees and Expenses........................ 200,000.00
Blue Sky Fees and Expenses.......................... 40,000.00
Transfer Agent's Fees and Expenses.................. 15,000.00
Miscellaneous Expenses.............................. 1,271.00
---------
Total*..................................... $500,000.00
===========
* 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 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., a 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 20 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.
II-2
<PAGE>
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
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.
II-3
<PAGE>
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.
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.
In June 1998, pursuant to Section 4(2) of the Securities Act, the
Company issued and sold 80,800 shares of Preferred Stock to an accredited
investor for an aggregate purchase price of $808,000.
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.)
II-4
<PAGE>
* 10.13 Letter Agreement dated March 9, 1998 between the
Registrant and DMR Consulting Group, Inc.
* 16 Letter from Ernst & Young, LLP dated April 2, 1998
- ------------------------------------
* 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 Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fairfield, Connecticut,
on August 12, 1998.
NETVALUE, INC.
By: /s/ R. Scott Wills
----------------------
R. Scott Wills, President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints R. Scott Wills his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on August 12, 1998.
Signature Title
- --------- -----
/s/ R. Scott Wills President, Chief Executive Officer,
- ----------------------------------- Assistant Secretary and
R. Scott Wills Director (Principal Executive,
Financial and Accounting Officer)
/s/ Andrew P. Panzo Director, Secretary
- -----------------------------------
Andrew P. Panzo
Director
- -----------------------------------
Gary R. Blau
/s/ Michael Cirillo Director
- -----------------------------------
Michael Cirillo
/s/ Steven B. Rosner Director
- -----------------------------------
Steven B. Rosner
II-6
