<PAGE>
Filed Pursuant to Rule 424(b)(4)
File No. 333-74569
2,500,000 SHARES
[LOGO OF NETIVATION.COM APPEARS HERE]
COMMON STOCK
$10.00 per share
This is our initial public offering. We are offering all of the 2,500,000
shares. No public market currently exists for our shares.
Our shares are approved for listing on the Nasdaq National Market under the
symbol "NTVN."
INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS" COMMENCING ON PAGE
3.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price $10.00 $25,000,000
Underwriting discounts $ .75 $ 1,875,000
Proceeds to Netivation.com $ 9.25 $23,125,000
</TABLE>
Solely to cover any over-allotments, we have granted the representatives of
the underwriters a 45-day option to purchase up to 375,000 additional shares of
common stock on these same terms. This is a firm commitment offering.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS A CRIME TO MAKE ANY
REPRESENTATION TO THE CONTRARY.
EBI SECURITIES CORPORATION MILLENNIUM
FINANCIAL GROUP, INC.
PROSPECTUS DATED JUNE 22, 1999
<PAGE>
[Graphic appears here depicting three web home pages from Netivation.com,
Votenet.com and Medinex.com. The web pages appear in a cascading order.]
The information on our Websites is not a part of this prospectus.
We intend to furnish stockholders with annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports containing unaudited financial information for the first three quarters
of each year.
"Netivation.com," "Governet," "Votenet," "Votenet.com," "Votenet (and design),"
"CapitolWatch," "Medinex" and "Medinex.com" are trademarks of Netivation.com,
Inc. We have also applied for federal registration of each of these trademarks.
Our applications for Votenet and CapitolWatch have been initially refused by
the United States Patent and Trademark Office.
<PAGE>
NETIVATION.COM PROSPECTUS
INTRODUCTION
Please read this prospectus carefully. It describes our business, our
products and services and our finances. We have prepared this prospectus so
that you will have the information necessary to make an investment decision.
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
PROSPECTUS DELIVERY OBLIGATIONS
Until July 17, 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 3
Where You Can Find Additional Information................................ 10
About This Prospectus.................................................... 10
Forward Looking Statements............................................... 10
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Dilution................................................................. 13
Selected Financial Data.................................................. 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 22
Management............................................................... 35
Certain Transactions..................................................... 41
Principal Stockholders................................................... 42
Description of Capital Stock............................................. 43
Shares Eligible for Future Sale.......................................... 46
Underwriting............................................................. 48
Legal Matters............................................................ 51
Experts.................................................................. 51
Index to Financial Statements............................................ F-1
Financial Statements of Netivation.com, Inc. .. F-3
Financial Statements of The Online Medical Bookstore, LLC................ F-17
Financial Statements of InterLink Services, Inc.......................... F-24
Unaudited Pro Forma Combined Financial Information....................... F-31
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
We develop and operate topic specific Internet communities designed to
permit persons sharing a common interest to access our suite of services and
the resources of the Internet. Votenet, our public policy and political
community site, includes content, products and services designed for candidates
for political office, voters, political organizations, political action
committees and lobbyists. Our healthcare focused community, Medinex, provides
content, products and services for primary care physicians, healthcare
conscious consumers, patients and their families, pharmaceutical and insurance
companies and others involved in the healthcare market. We foster interaction
and communication among the members of each community by providing them a
comprehensive suite of Internet based products and services. We plan to develop
a sense of loyalty within each community by offering specialized software
applications to key participants that encourage their ongoing involvement
within the community. We believe the involvement of key participants is
essential for the rapid growth of each community.
We were incorporated in Nevada in November 1993. In January 1999, we changed
our name to Netivation.com, Inc. and in May 1999 we reincorporated in Delaware.
Our executive offices are located at 7950 Meadowlark Way, Coeur d'Alene, Idaho
83815. Our Website address is www.netivation.com and our telephone number is
(208) 762-2526.
The Offering
Common stock offered by
Netivation.com...................... 2,500,000 shares
Common stock to be outstanding after
this offering....................... 8,660,070 shares
Use of proceeds...................... To fund the development of our
products and services; to expand our
sales and marketing efforts; to make
complementary acquisitions or
investments; for working capital and
other general corporate purposes; and
to fund operating losses.
Nasdaq National Market symbol........ NTVN
The number of shares of common stock to be outstanding after this offering
does not include shares we have either agreed to issue or reserved for issuance
under our stock option and purchase programs and under our outstanding
warrants. For a complete explanation, please refer to the Dilution section on
page 13.
Unless the context requires otherwise, "Netivation.com," "we," "us" and
"our" in this prospectus refer to Netivation.com, Inc.
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Summary Financial Data
(dollars in thousands, except per share data)
The following table summarizes the financial data for our business. The
unaudited pro forma statement of operations data reflects the acquisitions of
Online Medical Bookstore and InterLink as if they had each occurred on January
1, 1998. Please see our unaudited pro forma combined financial information
beginning on page F-30.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
-------------------- ---------------------
September 26, 1997 Three
(inception) to Months Ended
December 31, 1997 Actual Pro Forma March 31, 1998 Actual Pro Forma
------------------ --------- --------- -------------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues............... $ -- $ -- $ 619 $ -- $ 82 $ 270
Cost of revenues....... -- -- (422) -- -- (134)
--------- --------- --------- ---------- ---------- ---------
Gross profit........... -- -- 197 -- 82 136
Operating expenses:
General and
administrative...... 43 837 1,158 99 246 322
Sales and marketing.. 18 551 556 79 423 424
Stock compensation... -- 586 586 -- 1,032 1,032
Product development.. -- 171 171 12 323 323
Amortization of
intangible assets... -- -- 1,158 -- -- 290
--------- --------- --------- ---------- ---------- ---------
Total operating
expenses.......... 61 2,145 3,629 190 2,024 2,391
--------- --------- --------- ---------- ---------- ---------
Loss from operations... (61) (2,145) (3,432) (190) (1,942) (2,255)
Interest expense....... -- (183) (183) (6) (14) (16)
--------- --------- --------- ---------- ---------- ---------
Net loss............... (61) (2,328) (3,615) (196) (1,956) (2,271)
Preferred stock
dividends............. -- (14) (14) -- (110) (110)
--------- --------- --------- ---------- ---------- ---------
Net loss available to
common stock.......... $ (61) $ (2,342) $ ( 3,629) $ (196) $ (2,066) $ (2,381)
========= ========= ========= ========== ========== =========
Basic and diluted net
loss per share......... $ (.02) $ (.69) $ (.96) $ (.06) $ (.59) $ (.62)
========= ========= ========= ========== ========== =========
Weighted average shares
outstanding............ 3,168,270 3,417,377 3,772,155 3,298,659 3,517,159 3,836,459
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
------------------------------
Pro Forma As
Actual Pro Forma Adjusted
------- --------- ------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and short-term investments................ $ 2,274 $ 2,172 $24,547
Working capital................................ 2,396 2,271 24,646
Total assets................................... 3,115 6,484 28,859
Total stockholders' equity..................... 1,125 4,443 26,818
</TABLE>
The pro forma column reflects:
. the automatic conversion of all outstanding preferred stock at March 31,
1999 into 2,325,000 shares of common stock; and
. the acquisitions of Online Medical Bookstore and InterLink as if they had
each occurred on March 31, 1999.
The pro forma as adjusted column reflects:
. our receipt of the net proceeds from the sale of 2,500,000 shares of
common stock at the initial public offering price of $10.00 per share,
after deducting underwriting discounts and other estimated offering
expenses.
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RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones facing us. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business.
If any of the events described in the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected and cause the price of our common stock to be highly
volatile. In such case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
We had no revenues in 1998, we have a history of losses and we expect future
losses that may adversely affect the value of your investment.
We may never achieve profitability unless we substantially increase our
revenues. We had no revenues from the inception of our current operations in
September 1997 through December 31, 1998. As a result of the acquisitions, we
had pro forma revenues of $619,000 in 1998 and $270,000 for the three months
ended March 31, 1999. We had net losses of $2,389,000 from September 1997 to
December 31, 1998 and a net loss of $2.0 million for the three months ended
March 31, 1999. We had an accumulated deficit of $2.4 million at December 31,
1998 and $4.5 million at March 31, 1999. We expect to incur increasing net
losses and negative cash flow for the foreseeable future which may cause our
stock price to decline.
We are a development stage company, and accordingly, we have only a limited
operating history you can use to evaluate us and our prospects.
We are a development stage company with a very limited operating history.
Our Internet communities were launched in 1998 and have generated minimal
revenues to date.
Investors must consider our business and prospects in light of the risks,
uncertainties, expenses and difficulties frequently encountered by a company in
our early stage of development, particularly those in rapidly evolving markets
such as the Internet. Some of the specific risks include whether we are able
to:
. develop and constantly improve functional and attractive product and
service offerings;
. attract and maintain a large base of members for our Internet
communities;
. provide useful content to our members, either through our search engine
and e-mail delivery services or through strategic relationships with
content providers;
. establish and maintain relationships with advertisers, sponsors, e-
commerce partners, distribution partners, and service and content
providers;
. expand our sales and marketing efforts;
. retain and motivate qualified personnel; and
. respond successfully to competitive developments.
We discuss these and other risks in more detail below.
Because we recently launched the sales and marketing campaign for our Internet
communities, our business model is evolving and unproven and if we do not
generate substantial revenues from our planned sources, the value of your
investment will decline.
Our business model is to generate multiple revenue sources from our targeted
Internet communities. This model is new and largely unproven, it may not be
successful and we may need to change it. Our business model will continue to
develop as we explore opportunities in new and unproven areas. We may not
successfully implement our business model, and if we need to modify our
business model, we may not successfully make such modification.
Our operating results will fluctuate, and if they decline, the value of your
investment will be adversely affected.
We are unable to forecast our revenues with any degree of certainty as a
result of our limited operating history and unproven business model. We base
our current and projected expense levels largely on our estimates of future
revenues.
The success of our business depends on our increasing revenues to offset
expenses. We may not
3
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generate sufficient revenues to offset our expenses. If our revenues are less
than expected, or if our operating expenses are more than expected or cannot be
reduced, our business, financial condition and operating results will be
materially and adversely affected.
We have a limited number of members, advertisers, sponsors and e-commerce
partners.
Our future success depends on our ability to attract members to our communities
to make the communities attractive to advertisers, sponsors and e-commerce
partners and on the acceptance and increased use of our products and services.
Our failure to obtain a sufficiently large number of advertising, sponsorship
and e-commerce relationships and widespread use of our products and services
will have a material and adverse effect on our business, financial condition
and operating results.
As of the date of this prospectus, we have a limited number of members,
advertisers, sponsors and e-commerce partners in our communities. We also have
a limited number of users of our Governet software. Additionally, our online
fundraising system has not yet been used and our physicians' management
software system has not yet been completed and released.
We face risks associated with the two acquisitions we have undertaken and
will face risks with future acquisitions that may dilute our stockholders'
ownership, cause us to incur debt and assume contingent liabilities.
We may acquire or make investments in additional complementary businesses,
technologies, services or products if appropriate opportunities arise. This
acquisition and investment strategy has the following risks:
. we may not be able to identify suitable acquisition or investment
candidates at reasonable prices;
. we may not be able to successfully integrate services, products or
personnel of any acquisition or investment into our operations;
. we may acquire unknown liabilities in these acquisitions or investments;
. costs associated with these acquisitions, including the amortization of
intangible assets, will adversely affect profitability; and
. we may acquire companies or make investments in markets in which we have
little experience.
Our acquisitions of Online Medical Bookstore and Interlink may not succeed
due to some or all of the risks identified above. Additionally, we will
amortize intangible assets associated with the acquisitions of approximately
$3.5 million over a three year period. This amortization will adversely impact
our ability to achieve profitability.
Our business will suffer and the value of your investment will decline if the
Internet is not adopted as a sustainable commercial, advertising and
communications medium.
Our business, financial condition and operating results will be materially
adversely affected if the Internet does not become a sustainable advertising,
commercial and communications medium.
Our future success will depend substantially upon the widespread adoption of
the Internet as an attractive platform for commerce, advertising, communication
and business applications. Most businesses, advertisers and consumers have only
limited experience with the Internet as a commercial, advertising and
communications medium and platform for business applications. In addition, the
adoption of Internet solutions for campaign fundraising and physician's office
management requires the acceptance of new ways of exchanging information and
conducting business.
Our ability to generate revenues from our online fundraising platform,
physician's management software, and other e-commerce initiatives will be
adversely affected if the e-commerce market fails to develop and, as a result,
our stock price could decline.
We anticipate that e-commerce will account for a significant portion of our
future revenues. Our business will suffer if e-commerce does not grow or grows
slower than expected. A number of factors could prevent acceptance of e-
commerce, including:
. e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
. the necessary network and telecommunications infrastructure for
substantial growth in usage of the Internet may not develop;
4
<PAGE>
. increased government regulation or taxation may limit the growth of e-
commerce; and
. adverse publicity and consumer concern about the security of e-commerce
transactions may discourage its acceptance and growth.
These factors could impair our ability to generate revenues from our online
fundraising platform, physician's management software, online sale of medical
books and supplies and other e-commerce initiatives.
IF OUR COMMUNITIES ARE NOT ACCEPTED AS VALUABLE SOURCES OF INFORMATION,
COMMUNICATION AND BUSINESS PRODUCTS AND SERVICES, OUR BUSINESS WILL SUFFER AND
THE VALUE OF YOUR INVESTMENT COULD DECLINE.
The failure of participants in the public policy and healthcare communities
to accept our communities as sources of information, communication and business
products and services, would have a material adverse effect on our business,
financial condition and operating results. Votenet and Medinex are designed to
address many needs of the political and healthcare markets by attracting
individuals, groups and businesses interested in these markets to a designated
Internet location. The Internet in general, and Votenet and Medinex
specifically, may not prove to be viable channels for these products and
services.
IF WE FAIL TO ESTABLISH, MAINTAIN AND STRENGTHEN OUR BRANDS, THE ATTRACTIVENESS
OF OUR COMMUNITIES TO MEMBERS, SPONSORS AND E-COMMERCE PARTNERS WILL DECREASE.
If we are unable to establish, strengthen and maintain our brands, the
attractiveness to our members, advertisers, sponsors and e-commerce partners
will decrease and our business, financial condition and operating results could
be materially and adversely affected. To be successful, we must establish,
maintain and strengthen our community brands as well as the brands associated
with the individual products and services offered in such communities. We
believe that brand recognition will become more important in the future with
the growing number of Websites.
OUR COMMUNITIES MAY NOT ATTRACT USERS WITH DEMOGRAPHIC CHARACTERISTICS VALUABLE
TO ADVERTISERS, SPONSORS OR E-COMMERCE PARTNERS.
Our future success depends upon our ability to deliver compelling Internet
content and attractive products and services that will attract users with
demographic characteristics valuable to our existing and potential advertising
and sponsorship customers and e-commerce partners. If we are unable to offer
Internet content or products and services that attract a loyal membership base
possessing demographic characteristics attractive to advertisers, sponsors and
e-commerce partners, it could have a material adverse effect on our business,
financial condition and operating results.
SYSTEM FAILURES, DELAYS AND CAPACITY RESTRAINTS COULD RESULT IN LOSS OF
CUSTOMERS, ADVERSELY AFFECT OUR FINANCIAL CONDITION AND CAUSE OUR STOCK PRICE
TO DECLINE.
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems. Our computer and communications systems
are located at our main headquarters in Coeur d'Alene, Idaho and at Exodus
Communications, Inc.'s facilities in Seattle, Washington. Although we have not
experienced a system failure or significant interruption, any systems
interruptions that cause our communities to be unavailable or result in slower
response times could result in a loss of potential or existing advertisers,
sponsors, e-commerce partners and community members. Any of these losses could
materially and adversely affect our business, financial condition and operating
results. Interruptions could result from natural disasters as well as power
loss, telecommunications failure and similar events. We do not presently have a
formal disaster recovery plan and our insurance may not be sufficient to cover
losses from these events.
Our Websites must accommodate a high volume of traffic and deliver
frequently updated information. We must be able to expand and upgrade our
systems and network hardware and software capabilities to accommodate increased
use of our Internet communities. If we do not appropriately upgrade our systems
and network hardware and software, our business, financial condition and
operating results will be materially adversely affected.
5
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UNKNOWN SOFTWARE DEFECTS RELATED TO OUR PRODUCTS AND SERVICES COULD RESULT IN
SERVICE INTERRUPTION, DAMAGE OUR REPUTATION AND DECREASE THE VALUE OF YOUR
INVESTMENT.
We may not discover software defects that affect our new or current services
or enhancements until after they are deployed. These defects could cause
service interruptions, which could damage our reputation and brand value,
increase our service costs, cause us to lose revenues, delay market acceptance
or divert our product development resources, any of which could cause our
business to suffer. Many of our product and service offerings depend on complex
software, both internally developed and licensed or purchased from third
parties. Software often contains defects, particularly when first introduced or
when new versions are released.
INCREASED SECURITY AND CONFIDENTIALITY RISKS MAY DETER FUTURE USE OF OUR
COMMUNITIES AND ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES.
A significant barrier to online communications and commerce is the inability
to ensure secure access or transmission of information over the Internet. Our
networks may be vulnerable to unauthorized access, computer viruses and other
disruptions, despite the implementation of security measures. A wrongdoer who
is able to circumvent security measures could misappropriate proprietary
information or cause interruptions in our Internet operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
expend significant capital or other resources to protect against the threat of
security breaches or to alleviate problems caused by such breaches.
Additionally, as we increase our focus on e-commerce, our customers will become
more concerned about security. If we do not adequately address these concerns,
this could adversely affect our business, financial condition and operating
results.
WE MAY NOT COMPETE SUCCESSFULLY AND THE VALUE OF YOUR INVESTMENT MAY DECLINE IF
WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND MARKET CONDITIONS.
Our market is characterized by rapidly changing technology, evolving
industry standards, customer demands, and frequent new product introductions
and enhancements. If we do not successfully respond to new developments or do
not respond in a cost-effective manner, our business, financial condition and
operating results will be materially adversely affected. Significant
technological changes could render our existing community technology obsolete.
We may not be able to improve the performance, content and reliability of our
communities.
OUR FINANCIAL PERFORMANCE WILL BE ADVERSELY AFFECTED IF THE SALES CYCLE FOR OUR
PRODUCTS AND SERVICES IS LONGER THAN ANTICIPATED.
The time between the date of initial contact with a potential advertiser,
sponsor or e-commerce partner and the execution of a contract with such
advertiser, sponsor or partner may be lengthy and may be subject to delays over
which we have little or no control, such as budgetary constraints and internal
acceptance reviews. During such sales cycles, we may expend substantial funds
and management resources and yet not obtain advertising, sponsorship or e-
commerce revenues. Therefore, our results of operations for a particular period
may be adversely affected if sales to such advertisers, sponsors or e-commerce
partners in a particular period are delayed or do not occur.
OUR BUSINESS WILL SUFFER AND THE VALUE OF YOUR INVESTMENT MAY DECLINE IF THE
LICENSE FEES WE PAY TO CONTENT PROVIDERS INCREASE.
If licensing fees for our site content increase, it could materially
adversely affect our business, financial condition and operating results. These
fees may increase as competition for such content increases. Our content
providers may not enter into new agreements with us on similar terms as our
current agreements or at all.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT
OUR COMPETITIVE POSITION.
Trademarks, trade secrets and other proprietary rights are important to our
success and competitive position. Our efforts to protect our proprietary rights
may be inadequate and may not prevent others from claiming violations by us of
their proprietary rights. Existing trade secret, copyright and trademark laws
offer only limited protection. Further, effective
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trademark, copyright and trade secret protection may not be available in every
country in which our services or products are made available through the
Internet, and policing unauthorized use of our proprietary information is
difficult.
We may not be successful in obtaining federal registration of our
trademarks. Our federal trademark applications for Votenet and CapitolWatch
have been refused registration by the examining attorney of the Patent and
Trademark Office because such marks may cause confusion or mistake with other
registered marks. Additionally, a company has been granted a request to extend
the time period during which it may oppose our federal trademark application
for Medinex. Accordingly, we may need to obtain permission to use these
trademarks or expend significant resources to modify or discontinue our use of
these trademarks or to develop and register new trademarks.
The unauthorized misappropriation of our proprietary rights could have a
material adverse effect on our business, financial condition and operating
results. If we resort to legal proceedings to enforce our proprietary rights,
the proceedings could be burdensome and expensive and the outcome could be
uncertain.
CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT EXPOSE US TO COSTS AND POTENTIAL
LOSSES THAT MAY ADVERSELY IMPACT OUR STOCK PRICE.
We may be subject to claims alleging infringement by us of third party
proprietary rights, including claims that Votenet, Medinex and CapitolWatch
violate trademark rights of third parties. If we were to discover that any of
our products or services infringed third party rights, we may not be able to
obtain permission to use such rights on commercially reasonable terms. This
inability may require us to expend significant resources to make our products
and services non-infringing or to discontinue the use of such products and
services. Any claim of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from our business. Further, a party making such a claim could
secure a judgment that requires us to pay substantial damages or that prevents
us from using or selling our products and services. Any of these events could
have a material adverse effect on our business, financial condition and
operating results.
GOVERNMENT REGULATION MAY INCREASE OUR COST OF DOING BUSINESS OR CAUSE US TO
CHANGE THE WAY WE CONDUCT OUR BUSINESS AND, AS A RESULT, THE VALUE OF YOUR
INVESTMENT COULD DECLINE.
Government regulation may impose additional burdens on our business. It may
also impede the growth in Internet use and thereby decrease the demand for our
products and services or otherwise have a material adverse effect on our
business, financial condition and operating results. New laws and regulations
may be adopted because of the Internet's popularity and growth in such areas
as:
. online content;
. user privacy;
. taxation;
. access charges;
. copyrights;
. characteristics and quality of products and services; and
. consumer protection.
Additionally, U.S. and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and there is uncertainty regarding their marketplace impact. Any new
legislation or regulation regarding the Internet, or the application of
existing laws and regulations, to the Internet, could materially adversely
affect us. If we were alleged to violate federal, state or foreign, civil or
criminal law, even if we could successfully defend such claims, it could
materially adversely affect us.
OUR ONLINE FUNDRAISING SYSTEM MAY BE SUBJECT TO COMPLEX REGULATIONS THAT COULD
REQUIRE US TO MODIFY OUR SYSTEM WHICH COULD PREVENT OR DELAY OUR ABILITY TO
GENERATE REVENUES.
Since we expect to provide fundraising services to political campaigns and
candidates, our activities, as well as the use of our products and services,
may be governed by federal and state campaign finance laws and regulations. We
have not conducted any formal investigation or analysis of the governmental
regulations applicable to our online fundraising system. Any such regulations
may increase our cost of doing business, cause us to modify our system,
decrease the demand for our system or otherwise have a material adverse effect
on our business, financial condition and operating results. Political
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campaigns and campaign fundraising efforts are subject to numerous regulatory
restrictions and reporting obligations at the federal, state and local levels.
Additionally, there have recently been numerous proposals under consideration
by federal, state, local and other organizations regarding changes to the
existing regulatory environment.
Given that these laws and regulations are complex, vary widely from state to
state and are frequently changed, our products and services may not be, or in
the future may not be, legal or practical in all jurisdictions. We could be
subject to liability under Federal Election Commission regulations if we were
found to have participated in a prohibited campaign fund raising effort. Any of
such liability or regulation may place our activities under increased
regulation, increase our cost of doing business, decrease the use of the
Internet for campaign or fundraising efforts and thereby decrease the demand
for our products and services or otherwise have a material adverse effect on
our business, financial condition and operating results.
OUR BUSINESS AND REPUTATION MAY SUFFER, AND THE VALUE OF YOUR INVESTMENT MAY
DECLINE, IF WE ARE HELD LIABLE FOR INFORMATION RECEIVED OVER THE INTERNET AND
PUBLISHED ON OUR SITES.
We may be subject to legal claims relating to the content in our
communities. Our insurance may not cover claims of this type or may not provide
sufficient coverage. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could adversely affect our
business, financial condition and operating results. For example, persons may
bring claims against us if information that is inappropriate for viewing by
young children can be accessed from our communities. Claims could also involve
matters such as defamation, negligence, invasion of privacy, and copyright
infringement. Such claims have been brought, sometimes successfully, against
Internet companies in the past. In addition, some of the content provided on
our communities is drawn from data compiled by other parties, including
governmental and commercial sources, and we may manually re-enter the data.
This data may have errors. If our content is improperly used or if we supply
incorrect information, it could result in unexpected liability. The law in
these or related areas is unclear, and we are unable to predict the possible
existence or extent of our liability in these areas or related areas.
OUR PREDECESSOR OPERATIONS MAY EXPOSE US TO ENVIRONMENTAL LIABILITIES THAT
ADVERSELY AFFECT OUR OPERATING RESULTS AND CAUSE OUR STOCK PRICE TO DECLINE.
We were originally organized to pursue mining claims on public land managed
by the Bureau of Land Management. We may be exposed to liabilities under
existing or future environmental and reclamation laws, regulations and policies
relating to these activities. From approximately 1993 until 1996, the
predecessor company held certain unpatented mining claims on BLM land near
Nelson, Nevada. Our current management has been advised by members of the
predecessor's management team that these mining claims were never patented and
that no commercial mineral extraction or processing activities were performed.
Potential liabilities relate to historic mining-related structures and
disturbances located on the site, including tailings generated from nearby
sites containing cyanide and heavy metals concentrations, and the related
potential for soil and water contamination.
Our past ownership interest in such claims exposes us to the following
risks:
. Potential liability for required cleanup and remediation of soil and
water contamination;
. Potential liability to third parties for claimed personal injuries or
property damages related to potential or actual soil or water
contamination; and
. Potential liability for reclamation and restoration of mining-related
disturbances.
THE LOSS OF KEY PERSONNEL AND OUR FAILURE TO ATTRACT AND RETAIN ADDITIONAL
HIGHLY SKILLED PERSONNEL COULD HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO
FALL.
We believe that our success will depend on the continued services of our
senior management team, especially Anthony J. Paquin, Gary S. Paquin, Lawrence
L. Burch and other key personnel. The loss of the services of any of our senior
management team or other key employees could adversely affect our business,
financial condition and operating results.
8
<PAGE>
We also depend on the ability of our senior management and key personnel to
work effectively as a team. In particular, we hired Lawrence L. Burch as Chief
Financial Officer and Treasurer in February 1999. Accordingly, our senior
management team has had a limited time to work together and they may not be
able to work effectively together.
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial, sales and
marketing personnel. We have expanded our operations and we will continue to
hire additional personnel as our business grows. Competition for such personnel
is intense, and we cannot guarantee that we will successfully attract,
assimilate or retain a sufficient number of qualified personnel. Failure to
retain and attract necessary personnel could adversely affect our business,
financial condition and operating results.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK
PRICE TO FALL AND DECREASE THE VALUE OF YOUR INVESTMENT.
The market price of our common stock could fall if our stockholders sell
substantial amounts of common stock, including shares issued upon the exercise
of outstanding options and warrants, in the public market following this
offering. Such sales might also make it more difficult for us to sell equity
securities in the future at a time and price that we deem appropriate.
Restrictions under the securities laws and certain lock-up agreements limit
the number of shares of common stock available for sale in the public market.
However, EBI Securities Corporation may, in its sole discretion, release all or
any portion of the securities subject to the lock-up agreements.
Upon the closing of this offering, some stock and warrant holders are
entitled to certain registration rights. The exercise of such rights could
adversely affect the market price of our common stock.
CERTAIN PROVISIONS IN OUR CORPORATE DOCUMENTS MAY DISCOURAGE OUR ACQUISITION BY
OTHERS AND THUS DEPRESS OUR STOCK PRICE.
Our corporate documents and Delaware law could make it more difficult for a
third party to acquire us, even if a change in control would be beneficial to
our stockholders.
These and other provisions might discourage, delay or prevent a change in
control of us or a change in our management. These provisions could also limit
the price that investors might be willing to pay in the future for shares of
common stock.
9
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form SB-2 under the Securities Act of 1933, with
respect to the common stock offered hereby. This prospectus does not contain
all of the information in the registration statement and the exhibits and
schedules. For further information about us and our common stock, please refer
to the registration statement and the exhibits and schedules filed. Statements
contained in this prospectus as to the contents of any contract or document
filed as an exhibit to the registration statement are qualified by reference to
such exhibit as filed.
A copy of the registration statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the registration statement may be obtained from such offices upon
the payment of the fees prescribed by the SEC. The SEC maintains a Website that
contains registration statements, reports, proxy and other information
regarding registrants that file electronically with the SEC. The address of
this Website is http://www.sec.gov.
ABOUT THIS PROSPECTUS
Effective as of the date of this prospectus, we completed our acquisitions
of The Online Medical Bookstore, LLC, a company selling medical books and
medical supplies via the Internet, and InterLink Services, Inc., a company
providing Website design and hosting services. The acquisitions of these
businesses are reflected in the pro forma financial information contained in
this prospectus as if they had occurred during 1998.
Unless otherwise indicated, all information in this prospectus:
. assumes that our date of inception was September 26, 1997, which is the
date we acquired the technology used in our current business operations;
. reflects the conversion of all shares of preferred stock outstanding as
of March 31, 1999 into 2,325,000 shares of common stock upon the closing
of this offering;
. includes approximately 319,300 shares of common stock issuable on the
closing of the acquisitions of Online Medical Bookstore and InterLink;
and
. assumes that the representatives of the underwriters do not exercise
their over-allotment option or their warrants and that no other person
exercises any other outstanding option or warrant.
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "estimates," "anticipates,"
"intends," "plans" and similar expressions. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors, including all the risks discussed in "Risk Factors" and
elsewhere in this prospectus.
10
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from this offering of approximately $22.4
million or $25.8 million if the underwriters exercise their over-allotment
option in full.
We have not identified specific uses for the net proceeds from this
offering. Accordingly, management will have broad discretion over the use and
investment of the proceeds.
The principal reasons for this offering are to raise funds to use for the
following purposes and in the following priorities:
. to fund the development of our products and services;
. to expand our sales and marketing efforts;
. to make complementary acquisitions or investments;
. for working capital and other general corporate purposes; and
. to fund operating losses.
As noted above, we may acquire or invest in complementary businesses,
technologies, services or products and a portion of the net proceeds may be
used for such acquisitions or investments. However, other than with respect to
our recently completed acquisitions of Online Medical Bookstore and InterLink,
we currently have no understandings, commitments or agreements for any material
acquisition or investment. No proceeds from the offering will be used to
finance the acquisitions of Online Medical Bookstore or Interlink.
Pending use of the net proceeds of this offering, we intend to invest the
net proceeds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. The
shares of preferred stock outstanding prior to the completion of this offering
are entitled to an annual dividend of eight percent (8%) of the original
purchase price per share of such preferred stock. For a period of three years
from the date of original issuance of the preferred stock, we have the option
to satisfy any accrued preferred stock dividend, or portion thereof, in either
preferred stock or cash. The right to receive dividends will terminate upon
closing of this offering when all outstanding shares of preferred stock
automatically convert into common stock. For purposes of computing any accrued
preferred stock dividend, this prospectus assumes that the preferred stock
dividend will be paid in cash on June 1, 1999. The total amount of cash to be
paid for preferred stock dividends is estimated to be $200,000 as of June 1,
1999. As of the date of this prospectus, there are 2,325,000 shares of
preferred stock outstanding.
We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future, other than for the preferred stock
dividends.
11
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999. Our
capitalization is presented:
. on an actual basis;
. on a pro forma basis to give effect to:
. the automatic conversion of all outstanding shares of preferred stock
into 2,325,000 shares of common stock; and
. the issuance of approximately 319,300 shares of common stock on
closing of the acquisitions of Online Medical Bookstore and
InterLink;
. on a pro forma as adjusted basis to reflect:
. our receipt of the net proceeds from the sale of 2,500,000 shares of
common stock at the initial public offering price of $10.00 per
share, after deducting underwriting discounts and estimated offering
expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
8% Convertible preferred stock, $.01
par value per share; 3,500,000
shares authorized, 2,325,000 shares
issued and outstanding, actual; no
shares issued, pro forma and pro
forma as adjusted.................. $ 4,899 $ -- $ --
Common stock and additional paid in
capital, $.01 par value per share,
25,000,000 shares authorized,
3,515,770 shares issued and
outstanding, actual; 6,160,070
shares issued and outstanding, pro
forma: 8,660,070 shares issued and
outstanding pro forma as adjusted.. 695 8,912 31,287
Deficit accumulated in the devel-
opment stage..................... (4,469) (4,469) (4,469)
----------- ----------- -----------
Total capitalization.............. $ 1,125 $ 4,443 $ 26,818
=========== =========== ===========
</TABLE>
Based on the number of shares outstanding as of March 31, 1999, we expect
there to be 8,660,070 shares of common stock outstanding after this offering.
In addition to the shares outstanding after the offering, we may issue
additional shares of common stock under the following plans and arrangements:
. 278,875 shares issuable upon the exercise of stock options outstanding
under the 1999 equity incentive plan at a weighted average exercise price
of $2.03 per share;
. 428,625 additional shares which have been reserved for issuance and may
be granted under such plan, of which 155,000 options are to be granted to
certain key employees of Online Medical Bookstore and InterLink upon the
closing of those acquisitions;
. 200,000 shares issuable upon the exercise of stock options issued outside
of any plan at a weighted average exercise price of $.056 per share; and
. 500,000 shares available for issuance under the 1999 employee stock
purchase plan.
12
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was approximately
$1.1 million, or approximately $.18 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding,
assuming:
. the conversion of 2,325,000 shares of preferred stock into common stock;
and
. the issuance of 319,300 shares of common stock on closing of the
acquisitions of Online Medical Bookstore and InterLink.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
of the 2,500,000 shares of common stock offered at the initial public offering
price of $10.00 per share, and after deducting the underwriting discounts and
estimated offering expenses payable by us, our pro forma net tangible book
value at March 31, 1999 would have been approximately $23.5 million, or $2.71
per share. This represents an immediate increase in pro forma net tangible book
value of $2.53 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $7.29 per share to purchasers of common
stock in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $10.00
Pro forma net tangible book value per share before this offer-
ing............................................................ $ .18
Increase per share attributable to new investors................ 2.53
-----
Pro forma net tangible book value per share after this offering... 2.71
------
Dilution in pro forma net tangible book value per share to new in-
vestors.......................................................... $ 7.29
======
</TABLE>
The following table sets forth, on a pro forma basis, the differences
between the number of shares of common stock purchased from Netivation.com, the
total consideration paid and the average price per share paid by existing
holders of common stock and by the new investors at the initial public offering
price of $10.00 per share, before deducting underwriting discounts and other
estimated offering expenses payable by Netivation.com.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 6,160,070 71.13% $ 6,043,500 19.47% $ .98
New investors............... 2,500,000 28.87 25,000,000 80.53 10.00
--------- ----- ----------- -----
Total..................... 8,660,070 100.0% $31,043,500 100.0%
========= ===== =========== =====
</TABLE>
Based on the number of shares outstanding as of March 31, 1999, we expect
there to be 8,660,070 shares of common stock outstanding after this offering.
In addition to the shares outstanding after the offering, we may issue
additional shares of common stock under the following plans and arrangements:
. 278,875 shares issuable upon the exercise of grants outstanding under the
1999 equity incentive plan at a weighted average exercise price of $2.03
per share;
. 428,625 additional shares which have been reserved for issuance and may
be granted under such plan, of which 155,000 options are to be granted to
certain key employees of Online Medical Bookstore and InterLink upon the
closing of those acquisitions;
. 200,000 shares issuable upon the exercise of grants issued outside of any
plan at a weighted average exercise price of $.056 per share; and
. 500,000 shares available for issuance under the 1999 employee stock
purchase plan.
13
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes beginning on page F-2. The
historical statements of operations data set forth below for the periods ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
and the historical balance sheet data at March 31, 1999 are derived from and
qualified by reference to our financial statements included elsewhere in this
prospectus. The historical results are not necessarily indicative of results to
be expected for any future period.
We prepared the unaudited pro forma statements of operations data to reflect
the acquisitions of Online Medical Bookstore and InterLink as if they had each
occurred on January 1, 1998. These results have been prepared using the
purchase method of accounting. We have presented this information to give you a
better picture of what our business might have looked like if we had owned
Online Medical Bookstore and InterLink since January 1, 1998. These companies
may have performed differently if they had actually been combined with our
operations. You should not rely on the unaudited pro forma information as being
indicative of the historical results that we would have had or the future
results that we will experience after the acquisitions. Please see our
unaudited pro forma combined financial information beginning on page F-30.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 26, 1997 DECEMBER 31, 1998 THREE MARCH 31, 1999
(INCEPTION) TO ---------------------- MONTHS ENDED ----------------------
DECEMBER 31, 1997 ACTUAL PRO FORMA MARCH 31, 1998 ACTUAL PRO FORMA
------------------ ---------- ---------- -------------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues............... $ -- $ -- $ 619 $ -- $ 82 $ 270
Cost of revenues....... -- -- (422) -- -- (134)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... -- -- 197 -- 82 136
Operating expenses:
General and adminis-
trative............. 43 837 1,158 99 246 322
Sales and marketing.. 18 551 556 79 423 424
Stock compensation... -- 586 586 -- 1,032 1,032
Product development.. -- 171 171 12 323 323
Amortization of in-
tangible assets..... -- -- 1,158 -- -- 290
---------- ---------- ---------- ---------- ---------- ----------
Total operating ex-
penses............ 61 2,145 3,629 190 2,024 2,391
---------- ---------- ---------- ---------- ---------- ----------
Loss from operations... (61) (2,145) (3,432) (190) (1,942) (2,255)
Interest expense....... -- (183) (183) (6) (14) (16)
---------- ---------- ---------- ---------- ---------- ----------
Net loss............... (61) (2,328) (3,615) (196) (1,956) (2,271)
Preferred stock divi-
dends................. -- (14) (14) -- (110) (110)
---------- ---------- ---------- ---------- ---------- ----------
Net loss available to
common stock.......... $ (61) $ (2,342) $ (3,629) $ (196) $ (2,066) $ (2,381)
========== ========== ========== ========== ========== ==========
Basic and diluted net
loss per share......... $ (.02) $ (.69) $ (.96) $ (.06) $ (.59) $ (.62)
========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding............ 3,168,270 3,417,377 3,772,155 3,298,659 3,517,159 3,836,459
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments.................. $2,274 $2,172 $24,547
Working capital.................................. 2,396 2,271 24,646
Total assets..................................... 3,115 6,484 28,859
Total stockholders' equity....................... 1,125 4,443 26,818
</TABLE>
14
<PAGE>
The pro forma column reflects:
. the automatic conversion of all outstanding preferred stock as of March
31, 1999 into 2,325,000 shares of common stock; and
. the acquisitions of Online Medical Bookstore and InterLink as if they had
each occurred on March 31, 1999.
The pro forma as adjusted column reflects:
. our receipt of the net proceeds from the sale of 2,500,000 shares of
common stock at the initial public offering price of $10.00 per share,
after deducting underwriting discounts and other estimated offering
expenses.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PLAN OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Netivation.com's actual results could differ
materially from those discussed in the forward-looking statements as a result
of certain factors, including those set forth under "risk factors" and
elsewhere in this prospectus. The following discussion and analysis should be
read in conjunction with "selected financial data," and the financial
statements and notes thereto, appearing elsewhere in this prospectus.
GENERAL
Since commencement of our current operations in September 1997, we have been
in the development stage and have not generated revenues from operations
through December 31, 1998. In the first quarter of 1999, we began to generate
revenues from advertising and sponsorships. In accordance with generally
accepted accounting principles, the date of inception for our financial
statements is September 26, 1997 ("inception"). As a result, all information
reflected herein for 1997 represents the results between inception and December
31, 1997. We continue to be in the development stage and expect to incur
additional substantial operating expenses and net losses for the balance of
fiscal 1999 and for one or more years thereafter.
Recent Acquisitions
On March 4, 1999, we entered into an agreement to acquire Online Medical
Bookstore, a company selling medical books and medical supplies via the
Internet. The acquisition was completed on the date of this prospectus and
Online Medical Bookstore was merged into a newly formed, wholly owned
subsidiary of Netivation.com. The consideration paid to the sole member of
Online Medical Bookstore consisted of:
. $75,000 paid on execution of the agreement;
. $175,000 cash payment upon the effectiveness of this offering; and
. 192,857 shares of common stock.
On March 9, 1999, we entered into an agreement to acquire InterLink, a
company providing Website design and hosting services. The acquisition was
completed on the date of this prospectus and InterLink was merged into a newly
formed, wholly owned subsidiary of Netivation.com. The consideration paid to
the stockholders of InterLink consisted of 126,429 shares of common stock.
Additionally, the Company paid a $50,000 capital contribution to InterLink upon
execution of the agreement.
We will use the purchase method of accounting for the acquisitions.
With the completion of the acquisitions of Online Medical Bookstore and
InterLink, we expect our general and administrative expenses to grow
significantly, due to the amortization of intangible assets associated with the
acquisitions. We expect this amortization expense to approximate $1.2 million
on an annual basis for a three-year period. In addition, we have entered into
employment agreements with key employees which will result in increased salary
expenses above historical levels reflected in the financial statements of
Online Medical Bookstore and InterLink.
Any reference in the following discussion to information on a pro forma
basis assumes the acquisitions of Online Medical Bookstore and InterLink were
completed as of January 1, 1998. We have presented this information to give you
a better picture of what our business might have looked like if we had owned
these companies since January 1, 1998. These companies may have performed
differently if they had actually been combined with our operations. You should
not rely on the unaudited pro forma information as being indicative
16
<PAGE>
of the historical results that we would have had or the future results that we
will experience after the acquisitions are completed.
PREDECESSOR OPERATIONS
We were formerly named Nelloro Corporation. Nelloro was formed in 1993 to
own interests in mineral properties. From September 1993 until 1996, Nelloro
owned mining claims near Nelson, Nevada. No mineral extraction or processing of
the mining claims occurred, and, in 1996, the claims were abandoned. We began
our current operations in September 1997 after a change of control resulting
from the acquisition of technology developed by our existing management team in
consideration for 81% of the outstanding shares of Nelloro.
REVENUES
In January 1999, we commenced selling advertising and sponsorships. We did
not recognize any revenues from inception to December 31, 1998 and have
generated minimal revenues since January 1, 1999. On a pro forma basis, during
the year ended December 31, 1998, we generated revenues of $619,000, $290,000
primarily from the sales of medical books over the Internet and $329,000 from
Website development activities and Internet hosting services. In the first
three months of 1999, we generated $270,000 in pro forma revenues. Our business
model is new and untested. Because of our lack of experience in generating
revenues, we can not predict our ability to generate revenues in the future.
Further, we expect to experience significant fluctuations in our operating
results in the future as a result of our early stage of development.
We expect to derive substantially all of our revenues for the foreseeable
future from:
. e-commerce opportunities;
. Website development and hosting;
. the sale of advertising space;
. corporate sponsorships and alliances;
. licensing and support of physicians' office management software; and
. commissions from online political fundraising.
Seasonality
We expect that some of our revenues will be seasonal. We may experience
seasonality in our advertising revenues and in our membership traffic. We also
expect that business usage of the Internet, and of our products and services,
will typically decline during the summer and year-end vacation and holiday
periods.
COST OF REVENUES
On a pro forma basis, our cost of revenues during the year ended December
31, 1998 was $422,000. In the first three months of 1999, our pro forma cost of
revenues was $134,000. These costs consisted primarily of the direct cost of
books sold over the Internet, network access for Website hosting and personnel
costs on Website development projects.
The cost of our revenues will likely consist primarily of expenses related
to the maintenance and technical support of our network, costs associated with
Website development projects and direct costs of e-commerce retailing. These
expenses are comprised principally of personnel costs, telecommunications
costs, equipment depreciation and costs related to revenue sharing agreements.
Commencing with the introduction of the Medinex physician's office
management system, we will be required to add a customer service and support
group. This group will be responsible for call center technical
17
<PAGE>
support and the provision of professional training. We anticipate hiring
approximately eight people in 1999 to
handle such functions and will rely on outside vendors for additional capacity
as necessary.
GROSS MARGIN
In the future, our gross margin will be affected by the mix of products and
services sold. Because of our lack of experience in predicting revenues and
product mix, we are not able to predict the gross margin we may generate in
future years. Periodically, we may sell our products and services at a loss and
experience negative gross margins as we attempt to develop market share and
attract members to our communities. Further, we expect to experience
significant fluctuations in our operating results in the future as a result of
our early stage of development.
OPERATING EXPENSES
Our operating expenses have increased in absolute dollar amounts from
inception through the date of this prospectus. Our total operating expenses
were $61,000 and $2.1 million for 1997 and 1998, respectively. In the first
quarter of 1999 our operating expenses were $2.0 million. On a pro forma basis,
our operating expenses were $3.6 million during 1998 and $2.4 million in the
first quarter of 1999.
Our 1998 historical operating expenses include non-cash compensation expense
of approximately $586,000 in connection with certain stock option grants and
our pro forma operating expenses include approximately $1.2 million of goodwill
amortization related to the acquisitions. The increase in operating expenses
primarily reflects our transition from the conceptual stage to the product
development stage to the stage of marketing and offering our services. For
example, the number of employees increased from five in December 1997 to 15 in
June 1998 to 29 in December 1998 to 29 at March 31, 1999. Although we plan to
hire additional personnel in 1999, including approximately ten individuals in
connection with the acquisitions, we expect the rate of increase in the number
of employees to decrease from 1998 to 1999. We believe that expansion of our
operations is essential to achieve a strong market position. As a consequence,
we intend to continue to increase our expenditures in all operating areas for
the foreseeable future.
General and administrative
General and administrative expenses consist principally of administrative
and executive personnel costs, travel and related expenses in connection with
financing activities and fees for professional services. General and
administrative expenses were $43,000 and $837,000 in 1997 and 1998,
respectively. In the first quarter of 1999, our general and administrative
expenses were $246,000. On a pro forma basis, our general and administrative
expenses were $1.1 million during 1998 and $322,000 during the first quarter of
1999.
We expect general and administrative expenses to increase for the balance of
fiscal 1999 and for the following few years thereafter. This dollar increase in
general and administrative expenses will be due to increased personnel,
increased professional service fees and relocation to new facilities to support
our planned growth. In particular, we currently anticipate relocating our
headquarters locally in mid 1999.
We also anticipate that our general and administrative expenses will
continue to increase substantially due to expenses associated with this
offering, the operation of Netivation.com as a public reporting entity and
negotiation, closing and assimilation of our planned acquisitions.
In the event that we identify and pursue other acquisition opportunities or
significant corporate alliances, we will incur additional professional fees and
other expenses associated with such transactions.
18
<PAGE>
Sales and marketing
Our sales and marketing expenses consist principally of sales and marketing
personnel costs, consulting fees, commissions, allocation of overhead, creative
services, and promotional and advertising expenses. Sales and marketing
expenses were $18,000 and $551,000, in 1997 and 1998, respectively. In the
first quarter of 1999, our sales and marketing expenses were $423,000. On a pro
forma basis, our sales and marketing expenses were $556,000 during 1998 and
$424,000 during the first quarter of 1999.
We commenced selling advertising and product sponsorships in January 1999.
As a result, sales and marketing expenses will increase substantially during
fiscal 1999 and in the future as we complete the introduction of our existing
products and services and introduce new product and service offerings. In 1999,
the increase will be due primarily to the launch of a significant media
advertising campaign, increased sales personnel costs resulting from the
development of a direct sales force and increases in other advertising and
promotional expenses. In particular, we expect to incur substantial additional
sales and marketing expenses associated with the anticipated opening of branch
offices in Washington, D.C. and San Francisco.
Stock Compensation
Stock compensation relates to non-cash charges incurred in connection with
certain stock option grants with exercise prices below the fair market value of
the common stock. During the first quarter of 1999, we recognized significant
non-cash charges related to stock options granted to employees, consultants and
directors. Approximately $1 million was charged to first quarter earnings as a
result of our issuing a stock option with a mandatory buyback provision during
1998. Once we become a public company, we will not need to record additional
charges for this stock option as the buyback provision will have expired. To
attract key employees, we may grant options at prices below fair market value,
resulting in additional earnings charges.
Product development
Our product development expenses consist principally of engineering and
editorial personnel costs, allocation of overhead, equipment depreciation,
consulting and supplies. Product development expenses were $171,000 in 1998 and
$323,000 during the first quarter of 1999. Costs related to research, design
and product development have been charged to product development expense as
incurred. Product development expenses will increase substantially for 1999 and
one or more of the following fiscal years. In 1999 alone, we expect that
product development expenditures could exceed $1,000,000. This dollar increase
is due primarily to the increased engineering and editorial staff required to
develop and enhance our services.
In particular, in October 1998 we contracted for the services of
Technicalities, Inc., an outside software development firm, to develop the
Medinex physician's office management software. Technicalities is paid on an
hourly basis for work performed at the fees set forth on applicable work
orders. The initial commercial version of the product is scheduled to be
completed in the second half of 1999. As a result, we expect our product
development expenses to be greater during the period prior to introduction of
the new software application.
We believe that a significant level of product development expenses is
required to remain competitive. Accordingly, we anticipate devoting substantial
resources to product development beyond fiscal year 1999.
Amortization of intangible assets
Pro forma amortization of intangible assets related to our acquisitions
totals $1.2 million on an annual basis. Once we complete these acquisitions, we
will amortize intangible assets associated with the acquisitions of
approximately $3.5 million over a three year period. This amortization will
adversely impact our ability to achieve profitability.
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Interest expense
Our interest expense grew from $0 in 1997 to $183,000 in 1998, due to our
dependence on debt financing to fund operations during the majority of 1998. In
the first quarter of 1999, interest expense, net of interest income of $38,000,
was $14,000. Upon the completion of our preferred stock offering in January
1999, we repaid our remaining debt obligations. We anticipate that interest
expense will decrease in 1999. However, if this offering is delayed, we may be
forced to use alternative sources of financing, including borrowing, which may
result in increased interest expense.
Our interest income will increase in 1999. This increase will reflect
earnings on higher average investment balances, due primarily to cash received
from our private placement of preferred stock in January 1999 and cash to be
received from this offering.
Income Taxes
We have not paid income taxes as we have lost money since inception.
As of December 31, 1998, we had net operating loss, or "NOL," carryforwards
of approximately $1.8 million that expire between 2012 and 2018. In accordance
the Internal Revenue Code of 1986, as amended, a change in ownership of greater
than 50% within a three year period results in an annual limitation of our
ability to utilize our NOL carryforwards to offset future taxable income. Such
a change in ownership occurred in December 1998. Accordingly, at December 31,
1998, use of NOL carryforwards is restricted to annual amounts of approximately
$900,000, which accumulate to the extent not used and are subject to the
expiration of these carryforwards. Any future significant changes in ownership
interests could further limit the NOL carryforwards.
Liquidity and Capital Resources
Prior to this offering, we financed our operations and met our capital
expenditure requirements primarily from net proceeds of the private sale of
equity and debt securities totaling approximately $5.9 million. As of March 31,
1999, we had $2.3 million in unrestricted cash, cash equivalents and short-term
investments. We maintain our cash and cash equivalents in short-term and
medium-term interest-bearing investment-grade securities until required for
other purposes.
Our principal commitments at March 31, 1999 consisted of additional current
liabilities of $568,000. Capital expenditures have been, and future
expenditures are anticipated to be, primarily for facilities and equipment to
support expansion of our operations and management information systems. We
expect that our capital expenditures will increase as our employee base grows.
As of March 31, 1999, we did not have any material commitments for capital
expenditures, although we anticipate that our planned purchases of capital
equipment will require additional expenditures of approximately $150,000 for
1999. A portion of these expenditures may be financed from proceeds of this
offering and a portion we will be able to obtain through future equipment
leases and bank borrowings. There can be no assurance that we will be able to
obtain equipment leases or borrowings on favorable terms to us, or at all.
In the first quarter of 1999, we paid a total of $125,000 to the sole member
of Online Medical Bookstore and the stockholders of InterLink. This amount is
non-refundable. Furthermore, upon the closing of the Online Medical Bookstore
acquisition, we paid an additional $175,000.
We expect to use the net proceeds of this offering to fund the development
of products and services, to expand our sales and marketing efforts, to fund
our operating losses and for working capital and other general corporate
purposes. We also expect that we may use a portion of the net proceeds to
acquire or invest in complementary businesses, technologies, services or
products. However, other than with respect to the recently completed
acquisitions of Online Medical Bookstore and InterLink, we do not have any
understandings, commitments or agreements with respect to any acquisitions.
We believe that the net proceeds from this offering, together with available
funds will be sufficient to meet our anticipated cash needs for working
capital, capital expenditures and business expansion through 2000.
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Year 2000 Compliance
We may realize exposure and risk if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. All of the production
and operation systems for our Websites are undergoing a complete re-
engineering. All new programs are being tested and validated for Year 2000
compliance as part of an ongoing process which we expect to continue through
the end of 1999. We expect to resolve Year 2000 compliance issues by the end of
1999 primarily through normal upgrades of our software or by replacing existing
software with Year 2000 compliant applications. The cost of these upgrades or
replacements is included in our capital expenditure budget and is not expected
to be material to our financial position or operating results. However, we
cannot assure you that such upgrades and replacements can be completed on
schedule or within estimated costs or will successfully address our Year 2000
compliance issues.
In addition to our internally developed software, we use software and
hardware developed by third parties both for our network and internal
information systems. We are currently conducting an analysis to determine the
extent to which vendors and suppliers have Year 2000 issues. If they are not
yet Year 2000 compliant, we are asking them to provide a description of their
plans to become so. As of March 1999, we have received certification from all
of our vendors and suppliers that they are either Year 2000 compliant or are
taking the necessary steps to become Year 2000 compliant.
In addition, we are in the process of seeking verification from our key
distributors, vendors and suppliers that they are Year 2000 compliant or, if
they are not presently compliant, to provide a description of their plans to
become so. As of March 1999, we have received certification from all of our
distributors, vendors and suppliers that they are either Year 2000 compliant or
are taking the necessary steps to become Year 2000 compliant.
In the event that our production and operational facilities that support our
Websites are not Year 2000 compliant, small portions of our Websites may become
unavailable. Our review of our systems has shown that there is no single
application that would make our Websites totally unavailable and we believe
that we can quickly address any difficulties that may arise. In the event that
our Website hosting facilities are not Year 2000 compliant, our Websites would
be unavailable and we would not be able to deliver services to our users.
Given the extent to which we rely on external vendors, suppliers and other
third parties, we expect to continue to seek assurances from these third
parties as to their Year 2000 compliance through 1999. We expect that we will
have resolved all material Year 2000 compliance issues by the end of 1999.
If our present efforts to address the Year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties with which we
conduct business do not successfully address such issues, our business,
operating results and financial position could be materially and adversely
affected.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." Statement of Position 98-1 is
effective for financial statements for years beginning after December 15, 1998.
Statement of Position 98-1 provides guidance over accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. We do not expect the
adoption of this standard to have a material effect on our financial condition
or operating results.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
Statement of Position 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start up activities and
organization costs to be expensed as incurred. As we have expensed these costs
historically, the adoption of this standard is not expected to have a
significant impact on our financial condition or operating results.
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BUSINESS
Industry background
The Internet has emerged as a significant global communications and commerce
medium, enabling millions of people to share information, create community
among users with similar interests and conduct business electronically.
According to an August 1998 report, International Data Corporation, or IDC,
estimates that the number of Internet users will increase from approximately
100 million in 1998 to approximately 320 million by the end of 2002.
Additionally, according to IDC, worldwide commerce revenue on the Internet is
expected to increase from approximately $32 billion in 1998 to more than $400
billion in 2002. The rapid growth of the content and services on the Internet
attracts more users, fueling a cycle of growth where users demand more content
and services. This cycle facilitates the growth of topic specific Internet
communities.
The Internet has features and functions that are unavailable in traditional
media. Online businesses can interact effectively with customers and
advertisers and can target advertisements to defined audiences, specific
regional populations, special interest groups or select individuals. As a
result, companies from a wide variety of industries are using the Internet for
commerce and advertising. For example, Jupiter Communications in its 1998
Online Advertising Report estimates that the amount of advertising dollars
spent on the Internet is expected to increase from approximately $1.9 billion
in 1998 to $7.7 billion by 2002.
The need for targeted internet communities
The rapid growth of the Internet and the proliferation of Websites have made
it increasingly difficult for Internet users, content providers and businesses
with a common interest to efficiently reach and interact with one another using
general interest search engines and Internet portals. Users struggle to easily
find the most relevant information, products or services related to a
particular topic. Content providers are challenged to differentiate their
offerings in an increasingly crowded medium and to improve the visibility of
their sites. Businesses are challenged to more effectively deliver their
messages to highly targeted audiences within a more personalized context.
Internet communities that bring together persons with a common interest
increase the opportunity for advertising efficiency and the likelihood of a
successful e-commerce transaction.
Politics and the Internet
Millions of people in the U.S. are politically active. In 1996, according to
the Federal Election Commission and Congressional Research Service Reports,
more than 96 million people voted in elections for state and federal offices.
In addition, there are millions of individual members in hundreds of various
special interest and advocacy organizations such as the Sierra Club, American
Association of Retired Persons, National Rifle Association, National
Organization of Women. According to a March 1998 news article by The Associated
Press citing the Center For Responsive Politics, businesses, interest groups
and labor unions spend approximately $1.2 billion annually to lobby the federal
government.
We estimate that there are thousands of political campaigns in the U.S. each
year, including primary elections, ballot measures, bond elections and
elections for political offices ranging from local school boards to the
presidency. With an estimated 250,000 political campaigns each year in the
U.S., the Center for Responsive Politics estimated that more than $2 billion
was spent in 1996 on U.S. congressional and presidential races alone. We also
believe that significant funds are spent on state and local campaigns. For
example, according to a March 1998 news report from the California Secretary of
State, five candidates running for California statewide offices in the 1998
primary elections spent more than $10 million. In Florida, according to the
Florida Department of State Division of Elections, candidates for governor in
the 1998 election spent more than $13 million. Almost all campaigns generate
and use extensive voter and contributor data files and are subject to complex
campaign finance reporting obligations. However, Netivation.com believes that
only a small percentage of these campaigns use dedicated campaign management
software to generate voter and contributor data files and manage recordkeeping
and reporting requirements.
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We believe that politically active persons are using the Internet more and
more. A survey conducted in April and May of 1996 by the Georgia Institute of
Technology's Graphics, Visualization and Usability Center of 11,700 online
participants revealed that 91.9% are registered voters and approximately 60%
participated in the most recent local, legislative and national elections. More
than 40% of the survey respondents reported that they are more involved in
political issues since coming online.
Despite politically active persons increasingly using the Internet,
political campaigns and special interest organizations communicate their
messages and solicit campaign contributions primarily through direct mail
campaigns, fundraising events and personal solicitation. Each of these can be
an expensive and inefficient means by which to reach a targeted audience.
Political contributions are generally made by cash or check and few campaign
contributions are raised online. For example, a 1998 article entitled
"Untangling the Web: Internet use in the 1998 Election" indicated that less
than one percent of the campaign contributions made in the 1998 California
senate race were raised online. Moreover, political candidates and causes are
searching for more effective and efficient means of communicating their message
to prospective voters and voters are seeking more timely and accurate
information about elected officials, candidates and legislation.
Healthcare and the Internet
A 1998 study by the Internet Strategies group of Cyber Dialogue, Inc.
estimates that the market for healthcare products and services is approximately
$1 trillion. According to the U.S. Department of Commerce's Bureau of Economic
Development, healthcare services account for more than one quarter, or
approximately $460 billion, of the U.S. gross domestic product. The healthcare
industry has a variety of participants, including patients, physicians, medical
practice groups, hospitals and other medical care providers, government
agencies, insurance companies and managed care organizations. According to a
February 1999 report by IMS Health Incorporated, a pharmaceutical consulting
firm, pharmaceutical companies in the U.S. spent over $1.2 billion on direct-
to-consumer advertising in 1998.
We believe that the healthcare industry, particularly individual physicians
and small practice groups, presents a substantial opportunity for the Internet
for the marketing of Internet based products and services. According to the
American Medical Association, there are over 300,000 physicians in the U.S. At
the same time, patients are increasingly utilizing the Internet to become
better informed about healthcare. During 1998, according to a 1998 study by the
Internet Strategies Group of Cyber Dialogue, over 17 million adults in the U.S.
searched online for health and medical information. A June 1998 Ohio State
University study reported that, although medical information proliferated on
the Internet, much of that information may be inaccurate or out of date. While
patients are searching the Internet for health related information,
Netivation.com believes that very few physicians have an Internet presence or
an ability to monitor for accuracy much of the information their patients
receive from the Internet. As the use of the Internet for healthcare research
and information exchange increases, physicians will be required to invest in
increasing this Internet presence to improve the quality of information
patients access to market their services.
Additionally, healthcare providers rely heavily upon information to perform
their roles. Physicians need easy access to patient records and office
administrators require patient scheduling, accounting, insurance and billing
information. Often this information needs to be shared and used by multiple
users in multiple locations. For example, physicians often maintain multiple
offices or they require access to patient records while "on call" at home.
Netivation.com believes that patient care could be greatly enhanced by the
deployment of technology to assist in the management of this information,
particularly on a shared basis. The large number of participants, complexity of
healthcare transactions and high cost of technology acquisition and
implementation have historically impeded the adoption of technology solutions
that would assist in the delivery of healthcare information, connectivity and
automated workflows. These problems are particularly evident in smaller
organizations.
According to an American Academy of Family Physicians member profile survey
completed in January 1995, more than 46% of physician offices are either
single-doctor offices or two-person partnerships. Because
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of the cost and complexity of the technology environment, Netivation.com
believes that many physicians' offices have been reluctant to fully embrace
technology as a key component of their healthcare services or office
management. Although many physicians utilize desktop software packages to
perform certain applications, this software is not well integrated and can be
costly to install in multi-office environments. Moreover, software applications
are constantly being upgraded and require the physician's office to
periodically upgrade their applications.
Implementation of multi-location capabilities generally requires the
installation of local and wide area networks. In addition to bearing the cost
of the networks' deployment, the physician will also be required to hire
network administration services to maintain it. Accordingly, for a small
medical practice to implement sophisticated solutions, they will need
technology that can eliminate or greatly reduce these barriers to adoption.
Netivation.com solution
We are addressing many needs of the political and healthcare markets by the
development of Internet communities targeted at individuals, groups and
businesses interested in these markets. Our two current communities, Votenet
and Medinex, are designed to bring together this mix of participants. At our
community sites, users can quickly access and exchange relevant information. We
have developed a complementary suite of Internet based tools and services
specifically for members of each community, including targeted search engine
technology, Internet-based retail sales capabilities, e-mail, Website design
and hosting services and discussion forums. The acquisition of Online Medical
Bookstore will provide us with the ability to conduct the retail sale of books
and the acquisition of InterLink will enable us to extend our Web design and
hosting service offerings. It is part of our strategy to acquire other products
and services through further acquisitions and investments.
Additionally, we have designed business application software and service
offerings for key participants of each community, such as politicians and
physicians. The provision of such application software is designed to nurture
the further development of the community. For the Votenet community, we have
developed campaign management software that can be used to manage voter data
and interaction, fundraising and reporting. We also recently completed
development of an online fundraising service that allows political campaigns to
use Netivation.com to facilitate their online fundraising activities. For the
Medinex community, we are in the process of developing a Website-based
physicians' office management application, incorporating accounting and other
business management applications, and a personalized Internet "portal"
providing a physician a turnkey Website solution incorporating our search
tools, content and other community features. By offering these integrated
services, physicians can gain the benefits of an automated business environment
and an Internet "presence."
Netivation.com strategy
Our objective is to build significant revenues by developing leading
Internet communities for large targeted markets. The strategy to achieve this
objective is to:
Focus on community growth and loyalty
We intend to expand our membership base and promote our members' continued
involvement in the communities by:
. providing access to useful content for our members through our targeted
search engine and e-mail delivery programs;
. aggressively developing and marketing our business software applications
to key participants of the community;
. launching new services to enhance the community; and
. increasing the functionality and ease-of-use of existing products and
services.
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Build multiple revenue sources
Our Website communities offer scalable business platforms from which we plan
to generate revenue from multiple sources. We are positioning our business to
capitalize on revenue sources such as:
. advertising revenues from traditional banner advertisements, e-mail based
advertisements and product sponsorships;
. e-commerce opportunities including product sales and online campaign
fundraising;
. software subscription and training fees for the Medinex office management
software; and
. premium membership services, such as custom Website hosting and design.
Build our community brands
Well-recognized brands will be attractive to existing and potential
advertising customers and e-commerce partners. Following the offering, we
intend to:
. launch an aggressive promotional campaign to increase awareness of our
communities through both online and offline advertising;
. undertake direct mail and telemarketing campaigns to the key participants
in each of the communities; and
. pursue additional cross-linking arrangements with Internet content
providers.
Pursue business alliances and acquisitions
We plan to pursue business alliances designed to mutually increase traffic
and memberships. We also intend to acquire or invest in companies that can
provide synergies with our products or services. For example, we:
. are acquiring Online Medical Bookstore, a company focused on the discount
sale of medical books and medical supplies via the Internet;
. are acquiring InterLink, a company that provides advanced Website design
and hosting services; and
. have established cross-linking relationships with over 20 NBC television
affiliates in small and mid-size markets in the U.S. pursuant to
informal, oral arrangements that may be terminated at any time.
Development of additional communities
We believe that business strategies and resources developed for our first
two communities can be used in additional communities. Significant portions of
our technology can be applied to these new communities as well. We will
consider developing more communities when we identify new market opportunities
and if we conclude we have sufficient resources and expertise to achieve a
market leadership position in the prospective community.
The Votenet and Medinex communities
Votenet
Votenet is a political community designed for voters, politicians, advocacy
and special interest organizations, lobbyists, students, members of the media
and others interested in public policy and the political process. In January
1999, the Votenet community Websites and services delivered 1.2 million page
views. Additionally, in June 1998, PC Magazine Online, in a quarterly review,
named Votenet as one of the top 100 Websites on the Internet.
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Existing products and services
Members access the Votenet community at www.votenet.com. From there, the
community members can take advantage of Votenet's suite of Internet based tools
and services:
Governet campaign management software. Netivation.com believes that Governet
is the first interactive campaign management system using the power of the
Internet. Political candidates and campaigns at the federal, state and local
levels can use the Governet software product to perform a range of tasks,
including managing voter and contributor contact and information, and
maintaining recordkeeping and reporting requirements. Netivation.com
distributes the Governet product without charge to encourage ongoing
involvement in the Votenet community. Traditional campaign management systems,
such as Campaign Manager III and Trailblazer, range in cost from $400 to
$4,000. As of January 31, 1999, Netivation.com had given away more than 12,000
copies of Governet to candidates, political parties and state parties.
CapitolWatch. Community members can subscribe for CapitolWatch, Votenet's
free e-mail political news delivery service. Subscribers can customize the
reports they receive each day to include:
. the top ten political news stories as provided by the Associated Press
and selected by Netivation.com;
. daily voting of the U.S. House and Senate tailored to a subscriber's
Senators and Representative;
. congressional transcripts; and
. ""Inside the Beltway" provided by a political commentator pursuant to an
informal oral relationship that may be terminated at any time.
CapitolWatch is currently delivered to over 45,000 email addresses.
Sponsored CapitolWatch services. In February 1999, we launched co-branded or
personalized CapitolWatch e-mail delivery services for special interest and
advocacy organizations. With these programs, special interest or advocacy
organizations are able to attach advertising and personalized messages to the
CapitolWatch content delivered to their members. The program also allows
sponsors to develop a database of member e-mail addresses, permitting these
sponsors to communicate quickly and cost-effectively with their membership
base. Subscribers receive the sponsored or co-branded CapitolWatch free of
charge. Netivation.com plans to receive monthly or annual sponsorship fees from
the CapitolWatch sponsors. As of February 1999, we had two paying CapitolWatch
sponsors. However, certain initial organizations received free sponsorships for
a limited time pursuant to informal, oral arrangements.
Votenet's political search engine. Members can use Votenet's political
search engine, a powerful context based search engine customized for political
Websites, including Websites hosted within the Votenet community. This search
engine allows members to research political issues and causes, locate other
high quality online political resources, provide access to background data on
members of U.S. Congress and all 50 state legislatures and conduct online
legislation research. To enhance the quality of searches, we employ staff
members who search the Internet daily and register political sites in the
Votenet political search engine. As of January 31, 1999, Votenet's search
engine contained approximately 7,000 indexed Websites.
E-mail, Website design and Website hosting. Votenet offers all community
members a free Website-based e-mail account. As of February 22, 1999,
approximately 4,000 community members had a Votenet e-mail account. Votenet
also provides free Website publishing tools and Website hosting services,
providing community members with a platform for contributing their talents and
ideas and interacting with others with similar interests.
Discussion forums. Votenet includes a variety of member discussion groups on
political topics. In February 1999, we held 15 scheduled discussion groups.
Custom Website design and hosting services. Votenet also offers community
members the ability to create more comprehensive and robust Websites than those
created with the free, basic tools provided to all members. For a fee, members
are able to access through Netivation.com a Website design and technical staff
to
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create completely customized and unique Websites. On March 9, 1999, we entered
into an agreement to acquire InterLink, an advanced Website design and hosting
services company, to enhance these services.
Planned products and services
We strive to create new and improved products and services to enhance
Votenet community members' experiences and expand our revenue generating
opportunities. Our primary product under development is our online fundraising
system.
Online fundraising. Fundraising is a critical aspect of any political
campaign. Most campaigns currently raise funds through direct marketing
efforts, fundraising events or personal solicitations. Further, campaign funds
generally are raised by cash or check, rather than by credit cards. We believe
online fundraising will become an attractive method because of its cost
effectiveness, efficiency and ability to target specific demographic groups. We
plan to establish merchant accounts on behalf of political candidates or causes
wishing to use our online fundraising system. Fundraisers will have a feature
on a Website page or advertisement allowing potential contributors to click a
button and contribute funds through the Internet. Netivation.com expects to
receive a commission for facilitating online contributions. We plan to
introduce our online fundraising system commercially in the second half of
1999.
Medinex
Medinex is a healthcare community designed for primary care physicians,
healthcare conscious consumers, patients and their families, pharmaceutical and
insurance companies and others involved in the healthcare market. In January
1999, the Medinex community Websites delivered 63,000 page views.
Existing products and services
Members access the Medinex community at www.medinex.com. From there, the
community members can take advantage of Medinex's suite of Internet based tools
and services:
Medinex medical search engine. Similar to the Votenet political search
engine, members can use Medinex's medical search engine to search healthcare
related Websites, including Websites hosted within the Medinex community. To
enhance the quality of searches, we employ staff members who search the
Internet daily and register healthcare related sites in the Medinex medical
search engine. As of January 31, 1999, the Medinex search engine contained
approximately 9,500 indexed Websites.
Medinex health site certification. According to a recent Ohio State
University study, much of the medical information on the Internet may be
inaccurate or out of date. To counteract this problem, and to provide Medinex
community members with increased comfort that the information they receive
through Medinex is accurate, Netivation.com has developed a health site
certification process. Participating healthcare Websites that agree to adhere
to Medinex's healthcare code of ethics receive a "Medinex Seal of Approval"
icon on their Website free of charge. The icon provides a link back to
Medinex's code of ethics statement and further links to the Medinex community.
As of January 31, 1999, there were approximately 1,000 Websites containing the
Medinex icon.
Discussion forums. Medinex includes a variety of member discussion groups on
healthcare topics. In February 1999, we held 30 scheduled discussion groups.
Premium Website hosting services. Netivation.com provides physicians with
premium Website publishing tools and hosting services. We offer physicians the
ability to personalize their private Medinex community Website for a monthly
charge. This program will allow a physician to develop on a "turn-key" basis a
sophisticated and dynamic Website presence for use by his or her patients. We
believe that our acquisition of InterLink will enhance our ability to provide
these premium services.
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Planned products and services
Products and services under development include:
Physician's office management system. We have contracted with a third party
software development company to develop a java-based Internet physicians'
office management information system via the Internet. We intend to offer this
system on a monthly subscription fee basis. The software program will provide
physicians with solutions to basic and multiple medical office application
needs, such as:
. patient account ledgers;
. medical records management;
. accounts receivable;
. scheduling;
. insurance billing; and
. other services and applications designed to increase office efficiency
and productivity.
The software will reside on a Netivation.com application server and will be
accessed via the Internet through the Medinex community Website. Accordingly,
medical offices will only require a standard personal computer, a Website
browser and an Internet service account. The office management software is also
intended to confidentially and securely store patient medical records on the
Internet, allowing physicians, specialists, patients and other permitted users
to access medical records online. All information stored on the database
servers will regularly be copied to backup media and stored at an off-site
storage facility. We also plan to enter into alliances with high speed Internet
access providers to improve the speed of the system.
Medical e-commerce. Netivation.com intends to form business alliances with
or pursue acquisitions of online medical retailers to permit Medinex members to
purchase medical supplies and other medical products via the Medinex community.
Netivation.com believes these strategic relationships can create revenue
sharing opportunities and increased traffic to both partners. On March 4, 1999,
Netivation.com entered into an agreement to acquire Online Medical Bookstore, a
company selling discount medical books and medical supplies via the Internet.
E-mail, Website design and Website hosting. Medinex plans to provide all
community members with free Website based e-mail accounts and free Website
publishing tools and hosting services similar to those offered to Votenet
community members.
MedNews. We plan to offer MedNews, a free e-mail medical news delivery
service. MedNews will provide subscribers with current medical news and updates
from leading medical news sources, medical organizations and journals, such as
Medical Tribune News Service, New York Times Syndicate, U.S. Newswire, United
Press International, Associated Press Online and Biomedical Market Newsletter.
We also intend to offer MedNews co-branding or personalization opportunities to
select sponsors similar to those presented with Votenet's CapitolWatch service.
Revenue opportunities
Advertising
We expect that a significant portion of our revenues will be generated
through advertising arrangements with groups and businesses interested in
targeting the Votenet and Medinex communities. Netivation.com believes that
political candidates, parties and action committees, as well as advocacy and
special interest organizations, will benefit by advertising to the Votenet
community. Similarly, Netivation.com believes that pharmaceutical and medical
supply companies will benefit by advertising to the Medinex community.
We plan to work closely with our advertising customers and their agencies on
design and placement of Website-based advertising, providing customers with
advertising measurement analysis and a high level of
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customer service and satisfaction. Initially, Netivation.com expects that
advertising will consist primarily of banner, ticker or billboard style
advertisements that rotate throughout the designated community. From each
advertisement, viewers will be able to hyperlink directly to the advertiser's
own Website, thus providing the advertiser with the opportunity to interact
directly with an interested consumer.
Our standard cost per thousand impressions generally range from $15 to $35,
depending on the location of the advertisement, the extent to which it is
targeted for a particular audience, the duration of the advertising contract
and the number of impressions purchased. Additionally, we may explore other
payment approaches in the future.
Corporate sponsorships and alliances
Netivation.com also plans to offer corporate sponsorship programs and
alliances. For example, starting in February 1999, we started seeking sponsors
for co-branded or private-label CapitolWatch products allowing the sponsor to
attach advertising and personalized messages to the CapitolWatch content
delivered to their members. This program also enables these groups to develop a
database of member e-mail addresses, permitting these sponsors to communicate
quickly and cost-effectively with their membership base.
Votenet online fundraising
Fundraising is a critical aspect of any political campaign. Most campaigns
currently raise funds through direct marketing efforts, fundraising events or
personal solicitations. Further, most campaign funds are generally raised by
cash or check, rather than by credit cards. We recently completed development
of our online fundraising system to permit campaigns to raise funds online. We
believe online fundraising will become an attractive method for raising
campaign funds because of its cost-effectiveness, efficiency and ability to
target specific demographic groups. We plan to establish merchant accounts on
behalf of all political candidates or causes wishing to use our online
fundraising system. Fundraisers will have a feature on a Website page or
advertisement allowing potential contributors to click a button and contribute
funds through the Internet. Netivation.com expects to receive a fee for
facilitating online contributions. Campaign financing is highly regulated and
our online fundraising system may be subject to governmental regulation at the
federal, state and local levels.
E-commerce opportunities
Netivation.com believes that Website commerce naturally fits into the
Votenet and Medinex community models. We plan to partner with merchants and
service providers to integrate their products and services into the Votenet and
Medinex communities, making them available for sale to the community members.
For example, we participate in Amazon.com's commonly available affiliate
program whereby we receive a fee for each Votenet or Medinex community member
that clicks through to the Amazon.com Website to purchase books or other
products. In addition to our acquisition of Online Medical Bookstore, we
believe that we can increase our e-commerce revenues by attracting other e-
commerce partners to our Votenet and Medinex communities and making strategic
acquisitions or investments in other businesses.
Medinex software and training fees
Netivation.com plans to deliver a comprehensive, Internet based physician's
office management software program to individual physicians and small physician
practice groups. We plan to charge each user a monthly fee to use the software.
Additional revenue sources for the software program are expected to include
training fees for physicians and staff members on the software.
Since the software application is being designed as a java, Website-based
application that will reside on our application servers, we believe that high
speed Internet access will greatly enhance physicians' use of the Medinex
system. We plan to develop partnering arrangements with high speed Internet
access providers to market their services to physicians using the Medinex
office management software. We expect to receive revenue from the access
provider in the form of a percentage of the revenue received by the Internet
access provider or in the form of a monthly surcharge.
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We anticipate introducing the office management software in the second half
of 1999, but do not expect to recognize any significant revenue during 1999.
Premium membership services
In addition to our free services and products, Netivation.com plans to offer
fee-based premium services for Votenet and Medinex community members. For
example, Netivation.com provides enhanced Website-page publishing and hosting
services to physicians in the Medinex community and to all members in the
Votenet community to create robust, customized Websites. Our acquisition of
InterLink will enhance our Website design and hosting services. We intend to
introduce additional features and premium service levels to appeal to a broad
range of community members.
Sales, marketing and public relations
As of February 1999, Netivation.com had a direct sales organization
consisting of four sales professionals located in northern Idaho and two sales
professionals located in Washington, D.C. Our sales group plans to consult
regularly with advertisers and agencies on design and placement of Website
based advertising, provide customers with advertising management analysis and
focuses on providing a high level of customer satisfaction. Netivation.com
generally seeks to hire individuals with significant experience in selling
advertising and preexisting relationships with advertisers in a variety of
media.
We employ a variety of methods to promote the Votenet and Medinex
communities and to attract traffic and new members, including advertising on
other Internet sites, targeted publications, direct mail, cross-linking and
other cross-promotional relationships. Netivation.com may also use the services
of outside telemarketing companies to promote the sale and distribution of
certain of products and services, such as the Medinex physician's office
management software.
Additionally, Netivation.com plans to seek relationships designed to drive
additional traffic to its communities, create brand building activities and
allow for the marketing of products and services to the community membership
bases. For example, Netivation.com has relationships with over 20 NBC
television affiliates in small and mid-size markets in the U.S. pursuant to
which the news affiliates market the Votenet community Websites by indicating
in their news broadcasts that additional information about political news
stories can be found on the Votenet.com site. The program includes reciprocal
promotion on the stations' and Votenet community Websites, as well as on-air
promotion by the stations.
Operations and technology
Our strategy is to apply existing technologies in novel ways to deliver
content, products and services to members of our Internet communities. We have
developed and implemented a broad array of products and services for our
communities using a combination of our own proprietary technologies as well as
technologies and content purchased or licensed from third parties. We limit
internal development of software to those components which are either
unavailable on the market or which have major strategic advantages when
developed internally. We believe that this approach is more manageable,
reliable and scalable than single-source solutions. In addition, the emphasis
on commercial components speeds development time, which is an advantage when
competing in a rapidly evolving market.
Our community Websites' content is developed using commercially available
utilities, software and database packages. Other Website features, such as
Website creation tools, e-mail, chat rooms are either provided through internal
development and maintenance, purchased or licensed from a third party vendor
and maintained internally or provided and maintained by third party vendors.
Our search engine technology has been developed internally to provide powerful
context based searching capabilities for the political and healthcare
communities. We do not believe that we are dependent on any single licensor or
technology.
The Governet campaign management software has been developed internally
using shrink-wrap software development tools. This software also uses off-the-
shelf database technology provided by Inprise Corporation and runs on the
Microsoft Windows platform.
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We have contracted with a third party developer, Technicalities, Inc., to
develop our Medinex physician's office management software. Technicalities,
Inc. is the development resource for the Medinex office management software.
Technicalities, Inc. is writing the source code and creating the software that
Netivation.com will market to primary care physicians as part of its Medinex
community.
Our hardware systems also consist of commercially available components. We
believe that this architecture provides the ability to increase scale more
quickly and reliably. We have plans to make additional upgrades in anticipation
of increased demand for our Website communities.
We maintain all of our Internet servers at Exodus Communications Inc.'s
facilities in Seattle, Washington. Exodus provides professional data center
hosting facilities and redundant high-speed Internet connectivity. Exodus also
provides monitoring and support 24 hours a day, seven days a week,
supplementing our system administrators and copies our production data to
backup tapes each night and stores them at their facilities. Netivation.com is
in the process of developing a comprehensive disaster recovery plan to respond
to system failures.
Competition
The markets for developing Internet communities and providing Internet
services and products are relatively new, intensely competitive and rapidly
changing. Since the Internet's commercialization in the early 1990's, the
number of Websites on the Internet competing for users' attention has
proliferated with no substantial barriers to entry. We expect that competition
will continue to intensify. Barriers to entry are minimal, and competitors can
launch new Websites or new products and services at a relatively low cost.
Netivation.com competes, directly or indirectly, for members, consumers,
subscribers, content and service providers, advertisers, e-commerce partners
and acquisition candidates with the following categories of companies:
. online services or Websites targeted to the political and healthcare
markets generally;
. general purpose consumer online services providing access to political
and healthcare content and services;
. Website search and retrieval services and other high-traffic Websites;
and
. vendors and distributors of political and healthcare information,
products and services distributed through other means, including direct
sales, mail and other offline media.
Netivation.com believes that the primary competitive factors in creating
communities on the Internet and in attracting key participants to those
communities are functionality, brand recognition, member affinity and loyalty,
demographic focus, variety of value-added services, and critical mass. Other
important factors include ease-of-use, quality, and reliability of the
communities' services and products. We believe that the principal competitive
factors in attracting advertisers and e-commerce partners include price, the
number of community members, the aggregate traffic to the communities, the
demographics of the community membership base and the creative implementation
of advertising placements and e-commerce transaction opportunities.
Other providers currently offer many of the individual services and products
and certain combinations of the services and products offered by
Netivation.com:
. our e-mail delivery service competes against other e-mail and "push"
technology providers;
. our search engine competes against other Website directories and search
engine providers;
. our free Website based e-mail products compete against products offered
by other Website based e-mail providers;
. our Website design and hosting services compete against numerous other
companies providing such capabilities; and
. our online fundraising system competes against traditional methods by
which campaigns raise funds, such as direct mail, fundraising events and
personal solicitation.
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Although we face a broad range of competition from a variety of Internet
service and product providers, we believe that we can compete effectively by
targeting specific communities and offering greater depth of products,
information and services than our competitors. Specifically, competitors for
our Medinex community include other healthcare Websites such as those provided
by Healtheon and Dr. Koop. To effectively compete, we are offering advanced
search engine capabilities, as well as offering the physicians office
consulting services for the development of their own Websites. By bringing the
physician's office together with patients and other members of the healthcare
community, we believe we can generate additional traffic through our Medinex
site.
With respect to the Votenet community, we face competition from news
services and organizations such as ABC News and other online services
specializing in politics, such as C-Span.org and Roll Call. However, we are not
aware of any competitor that offers all of the services and products of
Votenet. For example, we are not aware of any organization that offers Website
development services and e-mail accounts to politicians and other politically
active persons, as well as real-time congressional voting information delivered
electronically to a user. We believe that the robust nature of our product and
service offerings will position us to compete in our markets.
With respect to Votenet's Governet software program, Netivation.com competes
with existing campaign management software products, the largest of which has
approximately 2,500 users according to the 1998 Campaign and Elections software
buyers' guide. Netivation.com believes that most campaigns are managed Excel
and Microsoft Access or standard personal computer based business accounting
packages. Governet's primary competitive challenge will be to convince
campaigns to switch from these manual and semi-manual methods to Internet-based
technologies.
Similarly, with respect to Medinex's physician's office management software,
Netivation.com believes its primary competition will be manual processes,
standard personal computer based business accounting and billing packages or
single or limited payor functions. Most of these systems are based on desktop
PC applications offering limited access to information managed by the system.
These systems include those offered by Medisoft, KIP Medical Office Software,
Techsoft Medical Systems and CCA Medical Practice Software. Because these
desktop systems are not Internet-based, only users directly networked to the
system and running the software can access or update information. We believe
that our Internet-based solution offers the convenience of remote access
without special equipment or software, other than a PC and a standard web
browser. Additionally, because the systems software application components and
"backbone" are managed on our servers remotely, we believe that our office
management software will be attractive to physician offices concerned with the
cost of implementing and maintaining information technology solutions.
Netivation.com believes that many physicians and small physicians' offices have
been reluctant to invest in information technology solutions and
Netivation.com's primary competitive challenge will be to convince these groups
to switch to an Internet-based solution.
We may not compete successfully against our current or future competitors.
Our inability to successfully respond to competitive pressures could have a
material adverse effect on our business, financial condition and operating
results.
Many of our competitors have greater brand recognition and greater
financial, marketing and other resources than we have. Additionally, our
competitors may develop products and services that are superior to ours or that
achieve greater market acceptance. These factors may place us at a disadvantage
in responding to our competitors' pricing strategies, technological advances,
advertising, sponsorship and e-commerce efforts and other initiatives.
Governmental Regulation and Legal Uncertainties
Netivation.com is currently subject to various laws and regulations relating
to our business. Few laws or regulations are currently directly applicable to
the Internet and our current and expected activities on the Internet. However,
new laws and regulations relating to the following areas may be adopted because
of the Internet's popularity and growth:
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. online content;
. user privacy;
. taxation;
. access charges;
. copyrights;
. characteristics and quality of products and services; and
. consumer protection.
Such government regulation may impose additional burdens on our business.
They may also impede the growth in Internet use and thereby decrease the demand
for our products and services or otherwise have a material adverse effect on
Netivation.com's business, operations and financial condition.
Additionally, U.S. and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and there is uncertainty regarding their impact on the marketplace. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could materially adversely
affect us. If we were alleged to violate federal, state or foreign civil or
criminal laws, even if we could successfully defend such claims, it could
materially adversely affect us.
Several telecommunications carriers are supporting regulation of the
Internet by the FCC in the same manner that the FCC regulates other
telecommunications services. These carriers have alleged that the growing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure, resulting in interruptions in phone service. Local telephone
carriers such as Pacific Bell, a subsidiary of SBC Communications Inc., have
petitioned the FCC to regulate Internet service providers in a manner similar
to long-distance telephone carriers and to impose access fees on Internet
service providers. Any such regulations could substantially increase the costs
of communicating on the Internet. This, in turn, could slow the growth in
Internet use and thereby decrease the demand for our products and services or
otherwise have a material adverse effect on our business, financial condition
and operating results.
Political campaigns and campaign fundraising efforts are subject to numerous
regulatory restrictions and reporting obligations at the federal, state and
local levels. Additionally, there have recently been numerous proposals under
consideration by federal, state, local and other organizations regarding
changes to the existing regulatory environment, including proposals addressing
Internet fundraising. Since we expect to provide fundraising services to
political campaigns and candidates, our activities, as well as the use of our
products and services, may be governed by federal and state campaign finance
laws and regulations. Since these policies are continuing to develop, it is
possible that we may be exposed to regulation in the future. Any such
regulation may increase our cost of doing business, cause us to modify our
system, decrease the demand for our system or otherwise have a material adverse
effect on our business, results of operations and financial condition.
Given that these laws and regulations are complex, vary widely from state to
state and are frequently changed, our products and services may not, or in the
future may not be, legal or practical in all jurisdictions. We could be subject
to liability under Federal Election Commission regulations if we were found to
have participated in a prohibited campaign fund raising effort. Such liability
may place our activities under increased regulation, increase our cost of doing
business, decrease the use of the Internet for campaign or fundraising efforts
and thereby decrease the demand for our products and services or otherwise have
a material adverse effect on our business, results of operations and financial
condition.
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Patents and trademarks
We own no patents on our technology or products. We have applied for federal
registration of each of the following trademarks: "Netivation.com," "Governet,"
"Votenet," "Votenet.com," "Votenet (and design)," "CapitolWatch," "Medinex" and
"Medinex.com." If we receive the registration for these trademarks, the
trademark will be effective for ten (10) years and may be renewed every ten
(10) years indefinitely. Under common law, these trademarks have an unlimited
duration. In addition, we have applied for a federal copyright registration for
our "Governet" software.
We may not be successful in obtaining federal registration of our
trademarks. The federal trademark application for "CapitolWatch" in
International Class 42 has been refused by the examining attorney on the basis
that the mark, when used on or in connection with the identified services, so
resembles a registered mark held by another party as to be likely to cause
confusion, to cause mistake, or to deceive. Additionally, the federal trademark
applications for "Votenet" in Classes 35 and 42 have been refused by the
examining attorney on the basis that use of the mark, when used on or in
connection with the identified services, so resembles a mark held by another
party as to be likely to cause confusion, to cause mistake, or to deceive.
Medinox, Inc. has also filed a request to extend time to file notice of
opposition to our federal trademark application for "Medinex" in International
Class 35. The request was granted until July 21, 1999. As a result of these
activities, we are reviewing whether to appeal such actions or to develop and
apply for different trademarks and change our brand names.
Predecessor operations
We were formerly named Nelloro Corporation. Nelloro was formed in 1993 to
own interests in mineral properties. From September 1993 until 1996, Nelloro
owned mining claims near Nelson, Nevada. No mineral extraction or processing of
the mining claims occurred, and, in 1996, the claims were abandoned. There were
no other business operations conducted by Nelloro. We began our current
operations in September 1997 after acquiring the technology developed by our
existing management team in consideration for 2,500,000 shares of common stock
of Nelloro.
Employees
As of March 31, 1999, Netivation.com had 29 employees including seven part-
time employees. Of our 22 full-time employees, seven were in marketing and
sales, three were in senior management, three were in administration, six were
in development and three were in operations. We plan to add approximately ten
employees as a result of the acquisitions. We also plan to hire approximately
eight people to handle customer support functions.
We believe that our relations with our employees are satisfactory. We are
not a party to any collective bargaining agreements and we have never
experienced any work stoppage. As Netivation.com continues to grow and
introduce more products and services, we expect to hire additional personnel.
Our future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical personnel.
Facilities
The current term of our Coeur d'Alene, Idaho lease expires on December 31,
2000. We intend to relocate our headquarters in the first half of 1999 to a
larger facility and are currently evaluating a number of locations in the Coeur
d'Alene area. Additionally, we lease approximately 600 square feet of office
space in Washington, D.C.
Legal Proceedings
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
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MANAGEMENT
Executive officers and directors
Our executive officers and directors are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Anthony J. Paquin................ 40 Chairman of Board of Directors, President
and Chief Executive Officer
David C. Paquin.................. 44 Chief Operating Officer
Lawrence L. Burch................ 59 Chief Financial Officer and Treasurer
Chief Marketing Officer, Secretary and
Gary S. Paquin................... 48 Director
Douglas K. Carnahan.............. 57 Director
T.A. (Drew) Wahlin............... 51 Director
Donna L. Weaver.................. 55 Director
Key employees
Our other key employees are:
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Dr. Robert D. Gober.............. 46 Medical Director
Russell D. Reese................. 42 Product Development Manager
</TABLE>
Anthony J. Paquin has served as Netivation.com's Chairman of the board of
directors, President and Chief Executive Officer since September 1997. Mr.
Paquin was a candidate in the primary elections for the United States House of
Representatives in Idaho's First Congressional District during 1997 and 1998.
Mr. Paquin co-founded Agency One Corporation, a company that developed software
for the insurance industry, in 1989 and served as its President and Chief
Executive Officer until 1993. Agency One Corporation was acquired in 1993 by
Agency Management Services, an insurance software company ("AMS"), and a
subsidiary of CNA Financial Corporation. Mr. Paquin served as the Senior Vice
President of Marketing of AMS from 1993 to March 1997. Mr. Paquin also founded
and is the President of the Idaho Technology Association.
David C. Paquin joined Netivation.com in June 1998 as a General Manager and
has served as its Chief Operating Officer since March 1999. From April 1994 to
June 1998, Mr. Paquin served as the Manager of Customer Service, Human
Resources and Sales at AMS. From April 1989 to April 1994, he served as the
Manager of Technical and Manager Training at Mohawk Power Corporation, an
electric power utility in Oswego, New York. Mr. Paquin holds a B.S. from the
State University of New York and an M.S. from the New York Institute of
Technology.
Lawrence L. Burch joined Netivation.com in February 1999 as its Chief
Financial Officer and Treasurer. From April 1996 to February 1999, Mr. Burch
served as a financial and administrative consultant to various software,
telecommunications and development companies. From January 1993 to March 1996,
Mr. Burch served as the Chief Financial Officer and Executive Vice President of
Pegasus Airwave Inc., a healthcare company in Boca Raton, Florida. In March
1999, Mr. Burch and his spouse filed a Chapter 7 bankruptcy petition with the
United States Bankruptcy Court, Southern District of Florida. The bankruptcy
filing resulted from the default by Mr. and Mrs. Burch on a note that they had
personally guaranteed for the purchase of equipment in a restaurant in which
they had invested. Although the restaurant was sold in 1998 and the direct
obligations under the note were assumed by the purchaser, the purchaser
defaulted on the note. As a result, Mr. and Mrs. Burch remained personally
liable on the note. Mr. Burch holds a B.A from the University of Miami and is a
Certified Public Accountant.
Gary S. Paquin has served as Netivation.com's Chief Marketing Officer since
January 1999, as a director of Netivation.com since September 1997 and as
Netivation.com's Secretary since August 1998. From August
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1998 to January 1999, he served as Netivation.com's Chief Operating Officer.
From August 1998 to February 1999, he served as Netivation.com's Treasurer.
From 1997 to July 1998, Mr. Paquin served as Netivation.com's Vice President of
Sales and Corporate Development. Mr. Paquin co-founded Agency One Corporation
in 1989 and served as its Vice President until 1997. Previously, Mr. Paquin
served as a regional manager for Computer Associates International, Inc.
(NYSE--CA), a software, support and integration services company, and held
various management and marketing positions with International Business Machines
Inc. (NYSE--IBM). Currently, Mr. Paquin serves on the local United Way Board of
Directors and as chairman of the 1998 fund drive.
Douglas K. Carnahan has served as a member of Netivation.com's board of
directors since August 1998. Mr. Carnahan served as Senior Vice President of
Hewlett-Packard Company, a computer manufacturing company, from 1995 to 1998.
He also served as general manager of the Measurement Systems Organization from
1993 to 1998. Currently, Mr. Carnahan serves on the Board of Directors of
Molex, Inc. (Nasdaq MOLX), an electronic components company. Mr. Carnahan holds
a B.S. from San Jose State University and an M.B.A. from Santa Clara
University.
T.A. (Drew) Wahlin has served as a member of Netivation.com's board of
directors since August 1998. Mr.Wahlin has served as the managing principal of
Idaho Consulting International, a consulting firm, since January 1994.
Previously, Mr. Wahlin served as President and Chief Operating Officer of White
Cloud Mountain Company, Inc., a wholesaler of coffee products, from January
1991 to March 1993. He holds a B.A. from the University of California, Davis
and an M.B.A. from the University of Puget Sound. Mr. Wahlin is a Certified
Public Accountant.
Donna L. Weaver has served as a member of Netivation.com's board of
directors since August 1998. In 1985, Ms. Weaver founded Weaver, Field &
London, Inc., an investor relations and corporate communications firm, and has
served as its Chairman since inception. Ms. Weaver currently serves as a
director of Ross Stores Inc. (Nasdaq--ROST), a retail store chain, Crown
Vantage Inc. (Nasdaq--CVAN), a producer of paper products, and Hancock Fabrics
Inc. (NYSE--HKF), a retail and wholesale fabric company. Ms. Weaver served as
volunteer campaign chairman of the successful 1996 Congressional Term Limits
Initiative and the 1998 Congressional Term Limits Pledge Initiative in Idaho.
She holds a B.S. from the University of Arizona and an M.S. from the Stanford
Graduate School of Business.
Dr. Robert D. Gober has served as Netivation.com's Medical Director since
February 1999. He is both a practicing physician and attorney. Dr. Gober has a
general medical practice in Baltimore, Maryland and has been a clinical
instructor at the Osteopathic Medical Center of Philadelphia, Pennsylvania
since January 1981. Dr. Gober served as the medical director at the Inns of
Evergreen South in Baltimore from May 1987 to May 1990. In March 1981, Dr.
Gober was a guest lecturer at the Delaware Law School of Widener University.
Dr. Gober simultaneously earned a J.D. from Delaware Law School of Widener
University, and a D.O. from Philadelphia College of Osteopathic Medicine.
Additionally, Dr. Gober holds a B.S. from Muhlenberg College in Allentown,
Pennsylvania.
Russell D. Reese has served as Netivation.com's Product Development Manager
since January 1999. He manages Netivation.com's technical staff and directs
product development. Mr. Reese was previously employed at AMS from August 1994
to December 1998, where he served as a development project manager. While at
AMS, Mr. Reese was responsible for the design and development of AMS' Prime
2000 system, a software package for independent insurance agencies. At both
Netivation.com and at AMS, Mr. Reese implemented the Microsoft Software
Development Discipline and was responsible for initiating code reviews and
computer bug tracking procedures. From September 1989 to August 1994, Mr. Reese
served as the information technology and sales manager at Data Pro Corporation,
a computer hardware reseller in the City of Industry, California, where he
developed internal systems to automate sales and marketing efforts. Mr. Reese
attended Whittier College and holds an A.S. from Riverside College.
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Anthony J. Paquin, David C. Paquin and Gary S. Paquin are brothers. There is
no other family relationship among any of the directors, executive officers and
key employees of Netivation.com.
BOARD OF DIRECTORS
We currently have five directors. In March 1999, our board of directors
approved, subject to stockholder approval, an amendment to our certificate of
incorporation to provide for, among other things, a classified board of
directors. The restated certificate of incorporation states that the terms of
office of the board of directors will be divided into three classes: class I,
whose term will expire at the annual meeting of stockholders to be held in
2000, class II, whose term will expire at the annual meeting of stockholders to
be held in 2001 and class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. Mr. Wahlin and Mr. Gary Paquin are the class I
directors, Mr. Carnahan is the class II director and Mr. Anthony Paquin and Ms.
Weaver are the class III directors. At each annual meeting of stockholders
beginning with the 2000 annual meeting, the successors to directors whose terms
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election and until their successors
have been elected.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee consists of Mr. Carnahan, Mr. Wahlin and Ms.
Weaver. The compensation committee reviews and approves Netivation.com's
compensation and benefits for its executive officers, administers
Netivation.com's compensation and stock option plans and makes recommendations
to the board of directors regarding such matters.
The audit committee consists of Mr. Carnahan, Mr. Wahlin and Ms. Weaver. The
functions of the audit committee are:
. to review the scope of the audit procedures utilized by our independent
auditors;
. to review with the independent auditors our accounting practices and
policies;
. to consult with Netivation.com's independent auditors during the year;
. to approve the audit fee charged by the independent auditors; and
. to report to the board of directors with respect to such matters and to
recommend the selection of independent auditors.
DIRECTOR COMPENSATION
Annually, each non-employee director is entitled to receive restricted stock
having a value of $25,000. Additionally, each non-employee director of
Netivation.com is paid $150 for each meeting he or she attends, as well as a
per diem amount for each meeting.
In January 1999, each non-employee director was granted 10,000 shares of
common stock pursuant to our equity incentive plan in consideration for
services rendered. These shares are subject to forfeiture by each non-employee
director if he or she is not serving as a director on December 31, 1999.
Additionally, in January 1999, each non-employee director was granted an option
to purchase 2,500 shares of common stock at an exercise price of $2.50 per
share, which options vest annually over three years beginning on December 31,
1999.
STOCK PLANS
1999 equity incentive plan. Netivation.com's non-qualified stock option and
restricted stock plan was adopted on July 24, 1998. The board amended and
restated this initial plan as the 1999 equity incentive plan in March 1999. The
stockholders approved the plan in April 1999. The plan will terminate on March
2, 2009. The plan is administered by the board or a committee appointed by the
board.
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Grants may be made to employees, including officers and employee directors,
consultants and non-employee directors of Netivation.com or any of its
subsidiaries. Grants under the plan may consist of:
. options intended to qualify as incentive stock options within the meaning
of Section 422 of the Internal Revenue Code;
. nonqualified stock options that are not intended to so qualify;
. stock bonuses; and
. restricted stock.
No employee is eligible to be granted options covering more than 375,000
shares of our common stock in any calendar year.
Under the plan, 750,000 shares of common stock have been reserved for
issuance. On January 1 of each year, starting in the year 2000, the aggregate
number of shares reserved for issuance will automatically be increased to a
number equal to 15% of the outstanding shares of our common stock. However, the
number of shares that may be issued pursuant to incentive stock options may not
exceed 500,000 shares of common stock. As of March 31, 1999, we granted,
pursuant to the plan, options to purchase an aggregate of 278,875 shares of
common stock at a weighted average exercise price of approximately $2.03, none
of which have been exercised and none of which have been forfeited.
The board determines the exercise price of options granted under the plan in
accordance with the guidelines set forth in the plan. The exercise price of
incentive stock options granted pursuant to the plan cannot be less than 100%
of the fair market value of the common stock on the date of the grant. The
exercise price of incentive stock options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of the company's capital stock or any of its affiliates
must be at least 110% of the fair market value of the company's common stock on
the date of grant and the term of such incentive stock options cannot exceed
five years. The board determines the exercise price of a nonstatutory stock
option. Options granted under the plan vest at the rate specified in the option
agreement.
Any stock bonuses or restricted stock purchase awards granted under the plan
will contain terms and conditions as the board deems appropriate. The board
determines the purchase price under any restricted stock purchase agreement.
Stock bonuses may be awarded for no consideration other than services already
rendered.
Upon certain changes in control of the company, all outstanding options and
awards under the plan must either be assumed or substituted by the surviving
entity. In the event the surviving entity determines not to assume or
substitute such options and awards, then the exercise of such non-assumed
options and awards held by persons whose continuous service did not terminate
prior to the change of control will be accelerated. Such options and awards
will terminate if not exercised prior to such change in control event.
Additional options. We have granted two fully vested nonstatutory stock
options to purchase an aggregate of 200,000 shares of common stock outside of a
written plan at a weighted average exercise price of approximately $.056 per
share.
1999 employee stock purchase plan. In March 1999, the board adopted the 1999
employee stock purchase plan to provide employees of Netivation.com and its
affiliates with an opportunity to purchase common stock through payroll
deductions. The purchase plan will terminate at the board's discretion.
Under the purchase plan, 500,000 shares of common stock have been reserved
for issuance. As of the date of this prospectus, the company had granted no
options and issued no shares pursuant to the purchase plan.
The purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. The board may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the purchase plan. A new offering period
38
<PAGE>
begins every 12 months. The board has currently authorized an offering
commencing on the effectiveness of this offering and ending January 31, 2000,
with sequential 12-month offerings thereafter.
No employee is eligible to participate in the purchase plan if, immediately
after any rights are granted under the purchase plan, the employee owns stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the company or of any affiliate. All other employees are
eligible to participate in the currently authorized offerings if they have been
employed by Netivation.com or an affiliate of Netivation.com incorporated in
the U.S. for at least ten days preceding the beginning of the offering and work
at least 20 hours per week and at least five months per calendar year.
Employees may have up to 15% of their earnings withheld pursuant to the
purchase plan and applied on specific purchase dates. The purchase dates are
currently the last day of each of the two shorter purchase periods during an
authorized offering to the purchase of shares of common stock. The price of
common stock purchased under the purchase plan will be equal to 85% of the
lower of the fair market value of the common stock on the commencement date of
each offering or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering. Participation
ends automatically on termination of employment.
In the event of certain changes of control, Netivation.com and the board
have discretion to provide that each right to purchase common stock will be
assumed or an equivalent right substituted by the successor corporation.
Additionally, the board may also shorten an offering and provide for all sums
collected by payroll deductions to be applied to purchase stock immediately
prior to the change in control.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by our Chief
Executive Officer and the one other most highly compensated executive officer
whose total annual salary and bonus exceeded $100,000 for services rendered
during the fiscal year ended December 31, 1998 (collectively, the "named
executive officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION
- --------------------------- ---- ------ ------------
<S> <C> <C> <C>
Anthony J. Paquin.............. 1998 $100,600 $432
Chairman of the Board of Di-
rectors, President and Chief
Executive Officer
Gary S. Paquin................. 1998 100,200 817
Chief Marketing Officer,
Secretary and Director
</TABLE>
The amounts set forth in "All Other Compensation" represent payments for term
life insurance. No options were granted to the named executive officers during
the year ended December 31, 1998. As of December 31, 1998 the named executive
officers held no options to purchase shares of our common stock. Please see the
information below with respect to options granted to the named executive
officers in January 1999.
EMPLOYMENT AGREEMENTS
In January 1999, Netivation.com entered into separate employment agreements
with each of Mr. Anthony J. Paquin and Mr. Gary S. Paquin. Additionally,
Netivation.com has key-man life insurance policies in the amount of $1,000,000
on each of Mr. Anthony J. Paquin and Mr. Gary S. Paquin.
Under Mr. Anthony Paquin's employment agreement, which expires on December
31, 2001, he is entitled to receive an annual base salary of $150,000.
Additionally, in January 1999, pursuant to his employment
39
<PAGE>
agreement, Netivation.com granted Mr. Paquin an option to purchase 25,000
shares of common stock at an exercise price of $2.50 per share. These options
vest over a period of three years beginning on December 31, 1999. We also
granted Mr. Paquin an option to purchase 37,500 shares of common stock at an
exercise price of $1.25 per share. These options vest in full on December 31,
2003, with acceleration of vesting on December 31, 1999 if certain revenue
goals are met.
Under Mr. Gary Paquin's employment agreement, which expires on December 31,
2001, he receives an annual base salary of $125,000. Additionally, in January
1999, pursuant to his employment agreement, Netivation.com granted Mr. Paquin
an option to purchase 25,000 shares of common stock at an exercise price of
$2.50 per share. These options vest over a period of three years beginning on
December 31, 1999. We also granted Mr. Paquin an option to purchase 18,750
shares of common stock at an exercise price of $1.25 per share. These options
vest in full on December 31, 2003, with acceleration of vesting on December 31,
1999 if certain revenue goals are met.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our bylaws provide that we will indemnify our directors, officers, employees
and agents to the fullest extent permitted by Delaware law. In addition, our
certificate of incorporation provides that, to the fullest extent permitted by
Delaware law, our directors will not be liable for monetary damages for breach
of the directors' fiduciary duty to Netivation.com and its stockholders. This
provision of the certificate of incorporation does not eliminate the duty of
care. In appropriate circumstances, equitable remedies such as an injunction or
other forms of non-monetary relief are available under Delaware law. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws.
Each director will continue to be subject to liability for:
. breach of the director's duty of loyalty to Netivation.com;
. acts or omissions not in good faith or involving intentional misconduct;
. knowing violations of law;
. any transaction from which the director derived an improper personal
benefit;
. improper transactions between the director and Netivation.com; and
. improper distributions to stockholders and improper loans to directors
and officers.
We have entered into indemnity agreements with each of our directors and
executive officers to indemnify them against expenses and losses incurred for
claims brought against them in their capacities as directors or executive
officers. Netivation.com's board of directors has authorized its officers to
investigate and obtain directors' and officers' liability insurance.
There is no pending litigation or proceeding involving a director or officer
as to which indemnification is being sought. We are not aware of any pending or
threatened litigation that may result in claims for indemnification by any
director or officer.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and control persons of
Netivation.com pursuant to the foregoing provisions, or otherwise,
Netivation.com has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable.
40
<PAGE>
CERTAIN TRANSACTIONS
On September 26, 1997, Netivation.com issued 1,057,500 shares of common
stock to Mr. Anthony J. Paquin, 1,057,500 shares of common stock to Mr. Gary S.
Paquin and 250,000 shares of common stock to Mr. David C. Paquin in exchange
for the contribution to Netivation.com of rights to certain computer software
applications and related technology. No value was assigned to the technology as
it had no cost basis and the common stock was deemed to have minimal value.
On October 24, 1997, Ms. Donna L. Weaver and her spouse purchased an
aggregate of 150,000 shares of Netivation.com's common stock at a purchase
price of $.70 per share. Ms. Weaver was elected to Netivation.com's board of
directors in August 1998.
On March 16, 1998, Netivation.com issued a promissory note in the principal
amount of $550,000, at an interest rate of 8% per annum, to Britannia Holdings
Ltd. In connection with such note, Netivation.com issued 137,500 shares of its
common stock to Britannia. This promissory note was amended on July 9, 1998
whereby we issued Britannia an additional 12,500 shares of common stock. The
principal amount and all accrued interest outstanding under the note was paid
by Netivation.com in full on January 8, 1999.
On June 25, 1998, Netivation.com granted Idaho Consulting International, a
sole proprietorship owned by Mr. Wahlin, an option to purchase 125,000 shares
of Netivation.com's common stock at an exercise price of $.03 per share and
paid $35,637 in cash in consideration for professional consulting services
provided by ICI to Netivation.com. Mr. Wahlin was elected to Netivation.com's
board of directors in August 1998.
On June 25, 1998, ICI assigned its option to purchase 62,500 of
Netivation.com's common stock to Moffatt, Thomas, Barrett, Rock & Fields,
Chartered, our legal counsel, in consideration of legal services rendered to us
and to ICI.
On August 18, 1998, Ms. Donna L. Weaver and her spouse purchased 33,750
shares of Netivation.com's common stock from each of Mr. Anthony J. Paquin and
Mr. Gary S. Paquin at a purchase price of $1.50 per share.
On October 1, 1998, Britannia purchased 50,000 shares of Netivation.com's
common stock from each of Mr. Anthony J. Paquin and Mr. Gary S. Paquin at a
purchase price of $1.00 per share.
On October 31, 1998, Netivation.com issued unsecured promissory notes in the
principal amounts of $88,300 and $88,800 to each of Mr. Anthony J. Paquin and
Mr. Gary S. Paquin. These promissory notes did not bear interest. We imputed
interest at an effective rate consistent with the promissory note to Britannia
discussed above. The notes were paid in full in January 1999.
Netivation.com believes that the transactions summarized above were made on
terms no less favorable than terms Netivation.com could have obtained from
unaffiliated third parties. The board of directors has determined that any
future transactions between Netivation.com and its officers, directors or
principal stockholders will be approved by a majority of the disinterested
directors and will be on terms no less favorable than Netivation.com could
obtain from an unaffiliated third party. The board of directors may obtain
independent counsel or other independent advice to assist in that
determination.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table details certain information with respect to the
beneficial ownership of Netivation.com's common stock as of January 31, 1999
by:
. each stockholder known by Netivation.com to beneficially own more than 5%
of its common stock;
. each named executive officer;
. each director; and
. all directors and executive officers as a group.
The table also presents information as adjusted to reflect the sale by
Netivation.com of the shares offered hereby (assuming no exercise of the
representatives' over-allotment option). The table reflects the conversion of
all outstanding shares of preferred stock into shares of common stock on the
closing of this offering.
<TABLE>
<CAPTION>
Percentage of Shares Percentage of Shares
Shares Beneficially Owned Beneficially Owned Beneficially Owned
Prior To Offering Prior to Offering After Offering
------------------------- -------------------- --------------------
<S> <C> <C> <C>
Anthony J. Paquin....... 973,750 16.67% 11.24%
Gary S. Paquin.......... 973,750 16.67 11.24
Donna L. Weaver......... 227,500 3.90 2.63
1677 East Miles Avenue
Hayden Lake, ID 83835
Douglas K. Carnahan .... 10,000 * *
4410 W. Chiden
Meridian, ID 83642
T. A. Drew Wahlin....... 72,500 1.23 *
P. O. Box 20082
Boise, ID 8701-2082
All directors and
executive officers as a
group (seven persons).. 2,507,500 42.48% 28.75%
</TABLE>
Asterisks on the foregoing table indicate beneficial ownership of less than
1%.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
or warrants held by that person that are currently exercisable or will become
exercisable within 60 days after January 31, 1999 are deemed outstanding, while
such shares are not deemed outstanding for purposes of computing percentage
ownership of any other person. Applicable percentages are based on 5,840,770
shares of common stock outstanding as of January 31, 1999 and 8,660,070 shares
of common stock outstanding after completion of this offering. Unless otherwise
indicated in the following paragraphs, the persons and entities named in the
table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Unless
otherwise indicated in the table above, the address of each individual is
Netivation.com, Inc., 7950 Meadowlark Way, Suite B, Coeur d'Alene, Idaho 83815.
The shares listed as being owned by Mr. Wahlin include 62,500 shares subject
to a stock option granted to ICI. This option is currently exercisable in full
and has no expiration date.
The shares listed as being owned by all directors and executive officers as
a group consists of:
. 2,445,000 shares; and
. 62,500 shares subject to stock options exercisable within 60 days of
January 31, 1999 held by directors and executive officers of
Netivation.com and entities affiliated with such persons.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description summarizes certain terms of our capital stock and
certain provisions of our restated certificate of incorporation and bylaws.
Please refer to our restated certificate of incorporation and bylaws, which
have been filed as exhibits to this registration statement.
On the closing of this offering, our authorized capital stock will consist
of 30,000,000 shares of common stock, $.01 par value per share, and 2,000,000
shares of preferred stock, $.01 par value per share. As of January 31, 1999
there were 5,840,770 shares of common stock outstanding held of record by 262
stockholders.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
common stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of preferred
stock, holders of common stock are entitled to receive ratably such dividends
as may be declared by the board out of funds legally available.
In the event of a liquidation, dissolution or winding up, holders of the
common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
preferred stock. Holders of common stock have no preemptive rights and no right
to convert their common stock into any other securities. There are no
redemption provisions applicable to the common stock. All outstanding shares of
common stock are, and all shares of common stock to be outstanding on
completion of this offering will be, fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without further action by the
stockholders, to issue up to 2,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including:
. dividend rights;
. conversion rights;
. voting rights;
. terms of redemption;
. liquidation preferences;
. sinking fund terms; and
. the number of shares constituting any series or the designation of such
series.
Any such issuance could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the company. We have no present plan to issue
any shares of preferred stock.
Warrants
Upon completion of this offering, we will sell to the representatives of the
underwriters for $25 warrants to purchase 250,000 shares of common stock. These
warrants will become exercisable one year after the effective date of the
offering at a per share exercise price of $16.50 and will expire five years
from the effective date of the offering. The common stock issuable on exercise
of the representatives' warrants is subject to adjustment in certain events to
prevent dilution.
43
<PAGE>
REGISTRATION RIGHTS
We have granted registration rights to the holders of 2,325,000 shares of
common stock issuable upon conversion of the preferred stock, referred to as
registrable securities. Following the one year anniversary of the completion of
this offering, these holders may require Netivation.com on one occasion to use
its best efforts to effect the registration of such registrable securities,
subject to certain conditions. In addition, whenever we propose to register any
of our securities under the Securities Act, the holders of registrable
securities are entitled, subject to certain restrictions, to include their
registrable securities in such registration. We are required to bear all
registration expenses in connection with the registration of registrable
securities.
Additionally, the holders of the representatives' warrants are entitled to
certain demand and incidental rights with respect to the shares of common stock
issuable upon exercise of those warrants.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Netivation.com is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. For purposes of Section 203, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock. The existence of this
provision would be expected to have anti-takeover effects with respect to
transactions not approved in advance by the board of directors, such as
discouraging takeover attempts that might result in a premium over the market
price of the common stock.
Upon the closing of this offering, our restated certificate of incorporation
will provide for a board of directors that is divided into three classes:
. the directors in class I will hold office until the first annual meeting
of stockholders following this offering;
. the directors in class II will hold office until the second annual
meeting of stockholders following this offering; and
. the directors in class III will hold office until the third annual
meeting of stockholders following this offering (or in each case, until
their successors are duly elected and qualified or until their earlier
resignation, removal from office or death).
After each such election, the directors in each such class will then serve
in succeeding terms of three years and until their successors are elected. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
Netivation.com and may maintain the incumbency of the board of directors, as
the classification of the board of directors generally increases the difficulty
of replacing a majority of the directors.
Our corporate documents contain other provisions that might discourage,
delay or prevent a change in control of Netivation.com or of our management.
These provisions could also limit the price that investors might be willing to
pay for shares of our common stock. These provisions provide that:
. stockholders may not act by written consent;
. special meetings of stockholders may be called by the board of directors,
the chairman of the board or the chief executive officer;
44
<PAGE>
. only the board of directors may change the authorized number of
directors;
. no director can be removed without cause, subject to the right of any
holders of preferred stock; and
. directors may be removed for cause only by a majority vote of the
stockholders.
Listing
Our common stock has been approved for listing on the Nasdaq National Market
under the trading symbol "NTVN."
Transfer Agent and Registrar
American Securities Transfer & Trust, Inc. has been appointed as the
transfer agent and registrar for our common stock.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for Netivation.com's
common stock, and there can be no assurance that a significant public market
for its common stock will develop or be sustained after this offering. Future
sales of substantial amounts of common stock in the public market could
adversely affect market prices prevailing from time to time.
After this offering, Netivation.com will have a total of 8,660,070 shares of
outstanding common stock. Of these shares, the 2,500,000 shares sold in this
offering will be freely tradable in the public market without restriction under
the Securities Act, except for any shares held by "affiliates" of
Netivation.com, as that term is defined in Rule 144 under the Securities Act.
The remaining 6,160,070 shares of common stock held by existing stockholders
are "restricted securities," as that term is defined in Rule 144 under the
Securities Act. All restricted shares were issued and sold by Netivation.com in
private transactions, which relied on the registration exemptions detailed in
the Securities Act. Restricted shares may be sold in the public market only if
they are registered or if they qualify for an exemption from registration, such
as Rule 144 or Rule 701 under the Securities Act.
Netivation.com's executive officers, directors, stockholders and employees,
who collectively hold an aggregate of approximately 3,370,762 restricted
shares, have agreed not to offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any such shares for a period ranging from
eight months to one year, with a few isolated exceptions, from the date of this
prospectus. EBI Securities Corporation may, in its sole discretion and at any
time without prior notice, release all or any portion of the common stock
subject to these lock-up agreements. EBI Securities Corporation currently has
no plans to release any portion of the securities subject to these lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, EBI Securities Corporation will consider, among other factors,
market conditions at the time, the number of shares proposed to be released,
and a stockholder's reasons for requesting the release. In addition, the
holders of 2,325,000 shares of common stock to be issued upon the conversion of
outstanding preferred stock upon the closing of the offering may not sell,
pledge, hypothecate, transfer, margin or enter into any swap transaction or
other transaction which transfers the economic incidents of ownership for a
period of 230 days from the date of this prospectus. Neither EBI Securities
Corporation nor Netivation.com may waive the provisions of this lock-up.
Netivation.com has also agreed with the representatives that Netivation.com
will not offer, sell or otherwise dispose of common stock for a period of 12
months from the date of this prospectus, subject to exceptions for acquisitions
approved by the board and the issuance of shares under our existing
compensatory plans.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year is entitled to sell within any three-month period
a number of shares that does not exceed the greater of (i) 1% of the number of
shares of common stock then outstanding (which will equal approximately 86,600
shares immediately after this offering); or (ii) the average weekly trading
volume of the common stock during the four calendar weeks preceding the filing
of a Form 144. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about Netivation.com. Under Rule 144(k), a person who is not deemed
to have been an affiliate of Netivation.com at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner except
an affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to Netivation.com who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 further provides that non-affiliates may sell such shares
in reliance on Rule 144 without having to comply with the holding period,
46
<PAGE>
public information, volume limitation or notice provisions of Rule 144. All
holders of Rule 701 shares are required to wait until 90 days after the date of
this prospectus before selling such shares.
Taking into account the 3,370,762 shares subject to lock-up agreements, the
number of restricted shares that will be available for sale in the public
market under the provisions of Rules 144, 144(k) and 701 will be as follows:
. approximately 145,008 shares will be eligible for sale 0 to 90 days after
the date of this prospectus;
. approximately 7,500 shares will be eligible for sale 91 to 179 days after
the date of this prospectus;
. approximately 3,353,262 shares will be eligible for sale 180 to 364 days
after the date of this prospectus upon expiration of lock-up agreements
and holding periods; and
. approximately 2,335,000 shares will be eligible for sale 365 days after
the date of this prospectus upon expiration of lock-up agreements and
holding periods.
The foregoing does not take into account any early release from the lock-up
agreements or for sales in reliance on Rule 701 with the consent of EBI
Securities Corporation.
Within 90 days following the effectiveness of this offering, Netivation.com
plans to file a registration statement on form S-8 registering shares of common
stock subject to outstanding options or reserved for future issuance under its
stock plans. As of March 31, 1999, options to purchase a total of 478,875
shares (including options granted to purchase 200,000 shares outside of any
plan) were outstanding and 428,625 shares were reserved for future issuance
under Netivation.com's stock plans. Common stock issued upon exercise of
outstanding vested options, other than common stock issued to affiliates of
Netivation.com and subject to certain lock-up agreements, is available for
immediate resale in the open market.
Registration of any shares under the Securities Act pursuant to outstanding
registration rights would result in such shares becoming freely tradable
without restriction.
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement,
the underwriters named below, for which EBI Securities Corporation and
Millennium Financial Group, Inc. are acting as representatives, have severally
agreed to purchase from Netivation.com the respective number of shares of
common stock set forth opposite each underwriter's name.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
EBI Securities Corporation..................................... 825,000
Millennium Financial Group, Inc................................ 775,000
Southwest Securities, Inc...................................... 200,000
National Securities Corporation................................ 300,000
American Fronteer Financial Corporation........................ 100,000
La Salle St. Securities, Inc................................... 100,000
Marion Bass Securities Corporation............................. 100,000
Redwine & Company, Inc......................................... 100,000
---------
Total........................................................ 2,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in Netivation.com's business and the receipt of
certain certificates, opinions and letters from Netivation.com, its counsel and
independent auditors. The nature of the underwriters' obligations is that they
are obligated to purchase and pay for all the shares of common stock offered
hereby, if any shares are purchased.
The underwriters propose initially to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession not
in excess of $.40 per share. After the initial public offering of the shares,
the offering price and other selling terms may be changed by the
representatives of the underwriters. The representatives have advised
Netivation.com that the underwriters do not expect any sales to accounts for
which any of the underwriters will exercise discretion as to such sale.
Netivation.com has granted to the representatives an option, expiring at the
close of business on the 45th day after the date of this prospectus, to
purchase up to 375,000 additional shares at the initial public offering price,
less the underwriting discounts, all as set forth on the cover page of this
prospectus. The representatives may exercise such option only to cover over-
allotments made in connection with the sale of common stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Upon completion of this offering, Netivation.com will sell to the
representatives for $25 warrants to purchase 250,000 shares of common stock.
The representatives' warrants will become exercisable one year after the
effective date of this offering at a per share exercise price of $16.50 and
will expire five years from the effective date of this offering. The
representatives' warrants and underlying shares of common stock will be
restricted from sale, transfer, assignment or hypothecation for a period of one
year from the date of this prospectus, except to the representatives,
underwriters, selling group members and their officers or partners. During the
exercise period, holders of the representatives' warrants are entitled to
certain demand and incidental rights with respect to the shares of common stock
issuable upon exercise of the representatives' warrants. The common stock
issuable on exercise of the representatives' warrants is subject to adjustment
in certain events to prevent dilution.
48
<PAGE>
Netivation.com will pay the representatives a nonaccountable expense
allowance of 3% of the gross proceeds of the offering, which will include
proceeds from the over-allotment option, if exercised. The representatives'
expenses in excess of the nonaccountable expense allowance, including their
legal expenses, will be borne by the representatives. Netivation.com has paid
$85,000 to the representatives as an advance for expenses. Netivation.com has
also paid EBI Securities Corporation $23,000 in consulting fees pursuant to an
engagement agreement executed in July 1998. As a result of EBI Securities
Corporation's participation in the placement of Netivation.com's shares of
convertible preferred stock, EBI Securities Corporation and its affiliates
became entitled to the issuance of warrants to purchase 258,000 shares of
common stock of Netivation.com. EBI Securities Corporation has advised
Netivation.com to refrain from issuing such warrants and has renounced any
right to receive such warrants on a non-recourse basis. In addition, four
purchasers of the convertible preferred stock entered into non-recourse
repurchase agreements with Netivation.com in June 1999 as a result of such
purchasers having indirect affiliations with member firms of the National
Association of Securities Dealers, Inc.
Netivation.com has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, and to
contribute to payments which the underwriters may be required to make regarding
these liabilities.
Netivation.com has agreed to give notice to the representatives of meetings
of the board of directors and to grant access to such meetings to nominees of
the representatives to attend the meetings as observers. EBI Securities
Corporation also has the right, but not the obligation, to nominate one
director to Netivation.com's board of directors until July 2003. EBI Securities
Corporation has no current intention to exercise this right in the near future
and has not identified a designee to serve in such capacity if it elects to
exercise such right in the future.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Neither Netivation.com nor the underwriters can predict the effect that the
transactions described above may have on the price of the common stock. In
addition, neither Netivation.com nor the underwriters represent that the
underwriters will engage in such transactions. If commenced, such transactions
may be discontinued at any time without notice. It is anticipated that certain
of the underwriters will make a market in the common stock on completion of
this offering, as permitted by applicable law. The underwriters are not
obligated to make a market in the common stock and if they do so may
discontinue making a market at any time. There is no assurance an active
trading market will ever develop for the common stock.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price was determined by negotiations between
Netivation.com and the representatives. The principal factors considered in
determining the initial public offering price included:
. the information set forth in this prospectus and otherwise available;
. the history and the prospects for the industry in which Netivation.com
will compete;
. the ability of Netivation.com's management;
49
<PAGE>
. the prospects for future earnings of Netivation.com;
. the present state of Netivation.com's development and its current
financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded stock of
generally comparable companies.
Millenium Financial Group, Inc., an underwriter of this offering, has been a
registered broker-dealer since September 1996. Millenium is actively engaged in
corporate finance activities including public and private equity offerings.
Millenium has participated as a syndicate member in nine public offerings, has
served as a co-manager of four public offerings and is currently lead manager
of two pending public offerings. There is no material relationship between
Millenium and any promoter of Netivation.com.
50
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Netivation.com by Moffatt, Thomas, Barrett, Rock & Fields, Chartered, Boise,
Idaho and by Cooley Godward LLP, Boulder, Colorado. As of the date of this
prospectus, Moffatt, Thomas, Barrett, Rock & Fields, Chartered beneficially
owns an option to purchase 62,500 shares of Netivation.com's common stock.
Certain legal matters will be passed upon for the representatives by Berliner
Zisser Walter & Gallegos, P.C., Denver, Colorado.
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Netivation.com, Inc.
Report of Independent Public Accountants................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
The Online Medical Bookstore, LLC
Report of Independent Public Accountants................................... F-16
Balance Sheets............................................................. F-17
Statements of Operations................................................... F-18
Statements of Member's Interests........................................... F-19
Statements of Cash Flows................................................... F-20
Notes to Financial Statements.............................................. F-21
</TABLE>
<TABLE>
<S> <C>
InterLink Services, Inc.
Report of Independent Public Accountants................................... F-23
Balance Sheet.............................................................. F-24
Statement of Operations.................................................... F-25
Statement of Stockholders' Equity.......................................... F-26
Statement of Cash Flows.................................................... F-27
Notes to Financial Statements.............................................. F-28
Unaudited Pro Forma Financial Information
Unaudited Pro Forma Combined Financial Information......................... F-30
Unaudited Pro Forma Combined Balance Sheet ................................ F-31
Unaudited Pro Forma Combined Statement of Operations....................... F-32
Notes to Unaudited Pro Forma Combined Balance Sheet and Statement of
Operations................................................................ F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netivation.com, Inc.:
We have audited the accompanying balance sheets of Netivation.com, Inc. (a
Delaware corporation in the development stage) as of December 31, 1997 and
1998, and the related statements of operations, stockholders' equity and cash
flows for the periods from inception (September 26, 1997) to December 31, 1998
and 1997 and for the year ended December 31, 1998. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether these 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 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 Netivation.com, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the periods from inception (September 26, 1997) to December 31, 1998
and 1997 and for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Seattle, WA
March 10, 1999
(except for the stock split and reincorporation discussed in Note 2 for which
the date is May 17, 1999)
F-2
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity (Note 2) at
December 31, December 31, March 31, March 31,
1997 1998 1999 1999
------------ ------------ ----------- ------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $47 $1,907 $1,385
Short-term investments....................... -- 880 889
Subscriptions receivable for preferred
stock....................................... -- 1,183 --
Prepaids and other........................... -- 35 690
--- ------ ------
Total current assets....................... 47 4,005 2,964
Equipment and furniture, net................... 10 94 151
--- ------ ------
Total assets................................... $57 $4,099 $3,115
=== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $13 $ 172 $ 394
Accrued compensation......................... -- 163 41
Other accrued expenses....................... -- 28 133
Convertible note payable to stockholder,
net......................................... -- 501 --
Advances from stockholders................... -- 95 --
--- ------ ------
Total current liabilities.................. 13 959 568
Mandatorily redeemable common stock option..... -- 391 1,406
Other long-term liabilities.................... -- 24 16
--- ------ ------
Total liabilities.......................... 13 1,374 1,990
--- ------ ------
Commitments (Note 7)
Stockholders' equity
8% Convertible preferred stock, $.01 par
value, 3,500,000 shares authorized and no
shares, 1,575,000, 2,325,000 and no shares
issued and outstanding, respectively,
preference in liquidation of $3,938 at
December 31, 1998........................... -- 3,317 4,899 --
Subscriptions receivable for 5,840,770 shares
of preferred stock.......................... -- 1,183 -- --
Common stock and additional paid-in capital,
$.01 par value, 25,000,000 shares autho-
rized, 3,218,270, 3,473,270, 3,515,770 and
5,592,218
shares issued and outstanding, respectively.. 105 628 695 $5,594
Deficit accumulated in the development
stage....................................... (61) (2,403) (4,469) (4,469)
--- ------ ------ ------
Total stockholders' equity................. 44 2,725 1,125 $1,125
--- ------ ------ ======
Total liabilities and stockholders' equity..... $57 $4,099 $3,115
=== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Period from Period from
Inception Inception Three Months
(September 26, (September 26, Ended March 31,
1997) to 1997) to Year Ended --------------------
December 31, 1998 December 31, 1997 December 31, 1998 1998 1999
----------------- ----------------- ----------------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ -- $ -- $ 82
--------- --------- --------- --------- ---------
Expenses
Operating expenses
General and
administrative....... 880 43 837 99 246
Sales and marketing... 569 18 551 79 423
Stock compensation.... 586 -- 586 -- 1,032
Product development... 171 -- 171 12 323
--------- --------- --------- --------- ---------
Total operating
expenses............... 2,206 61 2,145 190 2,024
--------- --------- --------- --------- ---------
Loss from
operations......... (2,206) (61) (2,145) (190) (1,942)
Interest expense, net... (183) -- (183) (6) (14)
--------- --------- --------- --------- ---------
Loss before income
taxes.................. (2,389) (61) (2,328) (196) (1,956)
Provision for income
taxes.................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net loss................ $ (2,389) $ (61) $ (2,328) $ (196) $ (1,956)
Preferred stock
dividends earned....... (14) -- (14) -- (110)
--------- --------- --------- --------- ---------
Net loss available to
common stock........... $ (2,403) $ (61) $ (2,342) $ (196) $ (2,066)
========= ========= ========= ========= =========
Historical basic and
diluted loss per
share.................. $ (.71) $ (.02) $ (.69) $ (.06) $ (.59)
========= ========= ========= ========= =========
Historical weighted
average shares
outstanding used to
compute loss per
share.................. 3,372,483 3,168,270 3,417,377 3,298,659 3,517,159
========= ========= ========= ========= =========
Pro forma basic and
diluted loss per
share.................. $ (.70) $ (.02) $ (.67) $ (.06) $ (.35)
========= ========= ========= ========= =========
Weighted average shares
outstanding used to
compute pro forma loss
per share.............. 3,430,450 3,168,270 3,490,589 3,298,659 5,832,437
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock and
8% Convertible Additional Paid-
Preferred Stock In Capital Deficit
---------------- Subscriptions ---------------- Accumulated in
Number of Receivable for Number of the Development
Shares Amount Preferred Stock Shares Amount Stage Total
--------- ------ --------------- --------- ------ --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares in
September 1997 in
exchange for technology
rights and previously
existing corporate
entity (Note 1)........ -- $ -- $ -- 3,068,270 $ -- $ -- $ --
Issuance in October 1997
of shares for cash at
$.70 per share......... -- -- -- 150,000 105 -- 105
Net loss................ -- -- -- -- -- (61) (61)
--------- ------ ------- --------- ---- ------- ------
Balances at December 31,
1997................... -- -- -- 3,218,270 105 (61) 44
Issuance in February
1998 of shares for cash
at $1.20 per share..... -- -- -- 105,000 126 -- 126
Issuance in March 1998
of shares in connection
with issuance of 8%
convertible debenture.. -- -- -- 137,500 165 -- 165
Issuance in July 1998 of
shares in connection
with modification of
terms of 8% convertible
debenture.............. -- -- -- 12,500 15 -- 15
Grant in August 1998 of
75,000 common stock op-
tions at $.10 per
share.................. -- -- -- -- 180 -- 180
Grant in August 1998 of
12,000 common stock op-
tions at $1.25 per
share.................. -- -- -- -- 15 -- 15
Issuance in November and
December 1998 of 8%
convertible preferred
stock at $2.50 per
share, net of issuance
costs of $621.......... 1,575,000 3,317 -- -- -- -- 3,317
Subscriptions to 543,948
shares of preferred
stock, net of issuance
costs of $177.......... -- -- 1,183 -- -- -- 1,183
Preferred stock divi-
dend................... -- -- -- -- -- (14) (14)
Imputed interest on
advances from
stockholders........... -- -- -- -- 22 -- 22
Net loss................ -- -- -- -- -- (2,328) (2,328)
--------- ------ ------- --------- ---- ------- ------
Balances at December 31,
1998................... 1,575,000 $3,317 $ 1,183 3,473,270 $628 $(2,403) $2,725
Issuance in January 1999
of 8% convertible pre-
ferred stock at $2.50
per share, net of issu-
ance costs of $116..... 750,000 1,582 (1,183) -- -- -- 399
Issuance in January 1999
of restricted stock as
compensation for direc-
tors................... -- -- -- 30,000 19 -- 19
Grant in January 1999 of
73,875 common stock op-
tions at $1.25 per
share.................. -- -- -- -- 5 -- 5
Grant in February 1999
of 10,000 common stock
options at $2.50 per
share.................. -- -- -- -- 2 -- 2
Grant in March 1999 of
25,000 common stock op-
tions at $2.50 per
share.................. -- -- -- -- 9 -- 9
Grant in March 1999 of
15,000 common stock op-
tions at $1.25 per
share.................. -- -- -- -- 1 -- 1
Issuance of shares in
March 1999 in
satisfaction of
services rendered...... -- -- -- 12,500 31 -- 31
Preferred stock divi-
dend................... -- -- -- -- -- (110) (110)
Net loss................ -- -- -- -- -- (1,956) (1,956)
--------- ------ ------- --------- ---- ------- ------
Balances at March 31,
1999 (unaudited)....... 2,325,000 $4,899 -- 3,515,770 $695 $(4,469) $1,125
========= ====== ======= ========= ==== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period from Period from
inception inception Three Months
(September 26, (September 26, Ended March 31,
1997) to 1997) to Year Ended ----------------
December 31, 1998 December 31, 1997 December 31, 1998 1998 1999
----------------- ----------------- ----------------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(2,389) $ (61) $(2,328) $ (196) $(1,956)
Adjustments to
reconcile net loss
to net cash used by
operating
activities:
Depreciation........ 17 -- 17 1 8
Expense associated
with the issuance
of stock options... 586 -- 586 -- 1,082
Imputed interest on
advances from
stockholders....... 22 -- 22 -- --
Amortization of debt
discount........... 131 -- 131 7 49
Changes in assets and
liabilities:
Prepaids and other.. (35) -- (35) (54) (664)
Accounts payable.... 172 13 159 2 222
Accrued expenses.... 177 -- 177 20 (127)
------- ----- ------- ------ --------
Net cash used by
operating
activities....... (1,319) (48) (1,271) (220) (1,386)
------- ----- ------- ------ --------
Cash flows from
investing activities:
Purchase of equipment
and furniture........ (87) (10) (77) (4) (65)
Purchase of short-
term investments..... (880) -- (880) -- --
------- ----- ------- ------ --------
Net cash used by
investing activities.. (967) (10) (957) (4) (65)
------- ----- ------- ------ --------
Cash flows from
financing activities:
Proceeds from 8%
convertible note
payable to
stockholder.......... 550 -- 550 550 --
Repayment of 8%
Convertible note
payable.............. -- -- -- -- (550)
Proceeds from
advances from
stockholders......... 189 -- 189 -- --
Repayment of advances
from stockholders.... (94) -- (94) -- (95)
Proceeds from sale of
8% preferred stock... 3,938 -- 3,938 -- 1,582
Preferred stock
offering costs....... (621) -- (621) -- --
Issuance of common
stock for cash....... 231 105 126 126 --
Repayment of other
long-term
liabilities.......... -- -- -- -- (8)
------- ----- ------- ------ --------
Net cash provided by
financing
activities......... 4,193 105 4,088 676 929
------- ----- ------- ------ --------
Net increase (decrease)
in cash and cash
equivalents........... 1,907 47 1,860 452 (522)
Cash and cash
equivalents at
beginning of period... -- -- 47 47 1,907
------- ----- ------- ------ --------
Cash and cash
equivalents at end of
period................ $ 1,907 $ 47 $ 1,907 $ 499 $ 1,385
======= ===== ======= ====== ========
Supplemental cash flow
disclosures:
Income taxes paid..... $ -- $ -- $ -- -- --
Interest paid......... $ 33 $ -- $ 33 -- $ 14
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Dollars in thousands, except per share data)
(Information relating to the three months ended March 31, 1999 and 1998 is
unaudited)
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Netivation.com, Inc. ("Netivation" or the "Company"), a Delaware
corporation, formerly named Nelloro Corporation (Nelloro), was originally
formed in 1993 for the purposes of acquiring interests in mineral properties.
The Company commenced its current operations after acquiring the technology
developed by the existing management team in exchange for 2,500,000 shares of
Nelloro common stock on September 26, 1997. No value was assigned to the
technology as it had no net book value at the time of the transaction and the
common stock was deemed to have minimal value. The transaction has been
accounted for as a reverse acquisition with Netivation as the acquiror.
Netivation's existing business operations commenced upon the acquisition of the
technology. Therefore, historical financial statements prior to September 26,
1997 are not presented. Additionally pro forma financial information for
Nelloro is not presented as the assets and results of operations for Nelloro
were not significant.
The company was formed to develop, design and market software and websites
focused on topic specific internet communities. These communities, known as
vertical portals, are for individuals, groups and businesses sharing a common
interest. The company's activities to date have been primarily related to
organization, raising capital, personnel recruitment, marketing studies, and
the research and development of the company's Votenet.com and Medinex.com
websites, the Governet software product for campaign finance management and the
Medinex software product for back office software support for physician
practices.
The company is in the development stage, has yet to generate any revenues
and has no assurance of future revenues. The company is subject to the risks
and challenges associated with other companies at a similar stage of
development including dependence on key individuals, successful development and
marketing of its products and services, the acceptance of the Internet as a
medium for advertising, competition from substitute services and larger
companies with greater financial, technical, management and marketing
resources. Further, during the period required to develop commercially viable
products, services and sources of revenues, the company may require additional
funds that may not be readily available to it.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Data
The unaudited interim financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999 have been prepared on the same basis
as the audited financial statements and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
generally accepted accounting principles. The Company believes that the results
of operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for any future period.
F-7
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Stock Split and Reincorporation
On May 17, 1999, the company effected a one-for-two reverse split of its
common and preferred stock and reincorporate in Delaware. All share and per
share amounts in the accompanying financial statements have been adjusted
retroactively to give effect to this reverse stock split.
Loss Per Share
In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic
earnings per share is computed by dividing net loss available to common stock
(net loss less preferred stock dividend requirements) by the weighted average
number of shares of common stock outstanding during the period. Dilutive
earnings per share is computed by dividing net loss by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the shares of common stock issuable
upon the conversion of the convertible preferred stock (using the if-converted
method) and shares issuable upon the exercise of stock options and warrants
(using the treasury stock method); common equivalent shares are excluded from
the calculation if their effect is antidilutive. The company has not had any
issuances or grants for nominal consideration as defined under Staff Accounting
Bulletin 98.
Diluted net loss per share for all periods shown does not include the
effects of the convertible preferred stock and shares issuable upon the
exercise of stock options and warrants as the effect of their inclusion is
antidilutive during each period.
Pro forma basic and diluted net loss per share is computed based on the
weighted average number of shares of common stock outstanding giving effect to
the conversion of convertible preferred stock outstanding as of December 31,
1998 and March 31, 1999 that will automatically convert upon completion of the
company's initial public offering (using the if-converted method from the
original issuance date). Pro forma diluted net loss per share excludes the
impact of stock options and warrants as the effect of their inclusion would be
antidilutive.
Cash Equivalents
The company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Short-Term Investments
Short-term investments consist of U.S. treasury bills with a maturity date
of July 1999. The company classifies short-term investments as available for
sale under Statement of Financial Accounting Standards No. 115. The short-term
investments are carried at fair value, with unrealized holding gains and losses
reported as a separate component of stockholders' equity. As the short-term
investments were acquired on December 31, 1998, there were no unrealized
holding gains or losses during the year ended December 31, 1998.
Advertising Costs
The cost of advertising is expensed as incurred. During the periods ending
December 31, 1997 and 1998, the company incurred advertising expense of $0 and
$50, respectively.
Research and Development
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services.
F-8
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The company's accounting policy is to capitalize eligible computer software
development costs upon the establishment of technological feasibility, which
the company has defined as a completion of a working model. For the periods
ended December 31, 1997 and 1998, the amount of eligible costs to be
capitalized has not been material and accordingly, the company has charged all
software development costs to product development in the accompanying
statements of operations.
Income Taxes
The company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted laws, of temporary
differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized.
Stock-Based Compensation
The company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS 123, the company
applies Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option plan.
Equipment and Furniture
Equipment and furniture are recorded at cost. Major additions and
improvements are capitalized. Minor replacements, maintenance and repairs that
do not increase the useful life of the assets are expensed as incurred.
Depreciation is determined using the straight-line method over the expected
useful lives of the assets which range from three to five years.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding and subscribed to as of the closing date will
automatically be converted into an aggregate of 2,325,000 shares of common
stock. Unaudited pro forma stockholders' equity at March 31, 1999, as adjusted
for the conversion of preferred stock, is presented in the accompanying balance
sheet.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 is not expected to
have a material impact on the company's financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
is not expected to have a material impact on the company's financial position
or results of operations.
F-9
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 3--FEDERAL INCOME TAXES
The company did not provide an income tax benefit for any of the periods
presented because it has experienced operating losses since inception. The
company's total tax net operating loss carryforwards were approximately $1,800
at December 31, 1998 which expire between 2012 and 2018. The significant
components of the deferred tax asset at December 31, 1997 and 1998, were as
follows:
<TABLE>
<CAPTION>
1997 1998
---- -----
<S> <C> <C>
Net operating loss carryforward................................. $ 21 $ 609
Stock compensation.............................................. -- 199
---- -----
Deferred tax asset.............................................. 21 808
Deferred tax asset valuation allowance.......................... (21) (808)
---- -----
$-- $ --
==== =====
</TABLE>
The valuation allowance on deferred tax assets increased by $21 and $787
during 1997 and 1998, respectively.
In accordance with certain provisions of the Internal Revenue Code, as
amended, a change in ownership of greater than 50% of a company within a three
year period results in an annual limitation on the company's ability to utilize
its net operating loss ("NOL") carryforwards from tax periods prior to the
ownership change. Such a change in ownership occurred with respect to the
company in December 1997. Accordingly, at December 31, 1998, use of NOL
carryforwards is restricted to annual amounts of approximately $900 which
accumulate to the extent not used and are subject to the expiration of these
carryforwards. Any future significant changes in ownership interests could
further limit the NOL carryforward.
NOTE 4--DEBT
Convertible Note Payable to Stockholder
At December 31, 1998, the company had an 8% convertible note (the "Note")
with a principal balance of $550, and accrued interest payable quarterly. The
Note was due on March 16, 1999, and was paid in full by the company in January
1999. The company issued 137,500 shares of the company's common stock to the
lender in connection with the granting of the loan in March 1998 and issued an
additional 12,500 shares of common stock in July 1998 in exchange for a
modification of the escrow requirements. The fair market value of these shares
at the date of issuance has been reflected as a debt discount in the
accompanying financial statements and is being accreted to interest expense
over the original one year life of the agreement, using the effective interest
rate method.
As of December 31, 1998, the unamortized debt discount on the Note was $49.
Amortization expense related to the debt discount was $131 for the year ended
December 31, 1998.
Advances From Stockholders
During 1998, the company obtained advances totaling $189 from principal
stockholders for working capital purposes. These loans were payable on demand.
The advances were non-interest bearing, and were not collateralized. Interest
totaling $22 was imputed on these advances based on an effective interest rate
consistent with the convertible note payable discussed above. The balance of
these advances to stockholders at December 31, 1998 was $95. In January 1999,
all advances were paid in full by the company.
F-10
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
NOTE 5--STOCKHOLDERS' EQUITY
Convertible Preferred Stock
In January 1999 the company increased the authorized amount of preferred
stock to 3,500,000 shares, with a par value of $.01. Shares of preferred stock
may be issued from time to time in one or more series, with designations,
rights, preferences and limitations established by the company's board of
directors (the Board of Directors).
The company has designated shares of preferred stock as Series A Convertible
preferred stock (Series A). Holders of Series A are entitled to annual
dividends at 8% of the original issue price of the shares held. No
distributions may be made to holders of common stock until all cumulative
dividends on Series A have been paid.
If the net profits in any year are not sufficient to pay this dividend,
either in whole or in part, then any unpaid portion of the dividend will become
a charge against the net profits of the company, and will be paid in full out
of the net profits of the company in subsequent years before any dividends are
paid on the common stock of the company in those years. For a period of three
(3) years from the issue date at the company's option, the company may satisfy
any accrued preferred stock dividend, or portion thereof, with preferred stock
in lieu of cash. After three (3) years from the date hereof, if the company has
a positive cash flow in sufficient amount to pay accrued preferred stock
dividends, ("Sufficient Positive Cash Flow"), then any accrued preferred stock
dividend will be payable in cash. If, after three (3) years from the date
hereof, the company does not have Sufficient Positive Cash Flow, then any
accrued preferred stock dividend will be payable in preferred stock. To account
for the preferred stock dividend, the company has recorded $14 as a charge to
deficit accumulated in the development stage in the accompanying 1998 statement
of stockholders' equity.
The shares of preferred stock are not entitled to vote at meetings of the
stockholders of the company and are not entitled to participate in the profits
of the company beyond the fixed, preferential annual dividend provided herein.
Each share of Series A is convertible, at the option of the holder, into one
half share of common stock, subject to adjustment to prevent dilution. Each
share of Series A is automatically convertible into common stock upon the
closing of a public offering or other change in control that meets certain
conditions.
During 1998, the company issued 1,575,000 shares of Series A preferred stock
and received subscriptions for 543,948 shares of Series A preferred stock at
$2.50 per share. The cash from these subscriptions was received in January
1999. The company has reflected these subscriptions receivable in the
accompanying financial statements net of offering costs.
In January 1999, the company received net proceeds of approximately $450
related to the sale of an additional 206,052 shares of Series A preferred
stock.
Stock Option Plan
In July 1998, the stockholders and Board of Directors approved a
Nonqualified Stock Option and Restricted Stock Plan (the Plan). In March 1999,
the company amended and restated this plan as the 1999 Equity Incentive Plan.
The Board of Directors has the authority to determine all matters relating to
incentive and non-qualified stock options and restricted stock to be granted
under the Plan, including the selection of individuals to be granted options,
number of shares to be subject to each option, the exercise price and the term
F-11
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
and vesting period, if any. Options generally vest over periods ranging up to
five years and have lives up to ten years from date of grant. Options
outstanding at December 31, 1998 have an average remaining contractual life of
4.6 years. At December 31, 1998, exercise prices ranged from $.03 to $2.50 per
share.
The following table summarizes the company's stock option activity:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance at December 31, 1997........................ -- --
Options granted................................... 274,500 $.66
------- ----
Balance at December 31, 1998........................ 274,500 $.66
======= ====
</TABLE>
The company had reserved a total of 750,000 shares of common stock for
issuance to its stock option holders under the plan and had 675,500 shares
available for future grant.
Stock options exercisable were 274,500 at December 31, 1998. The following
table summarizes information about all stock options, including those issued
outside of the Plan, outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------
Weighted-
Average Weighted Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Outstanding Price
-------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .03 125,000 Indefinite $ .03 125,000 $ .03
$ .10 75,000 4.6 .10 75,000 .10
$1.25 12,000 4.6 1.25 12,000 1.25
$2.50 62,500 4.6 2.50 62,500 2.50
</TABLE>
Under APB 25, the company records compensation expense over the vesting
period for the difference between the exercise price and the deemed fair market
value for financial reporting purposes of stock options granted. In conjunction
with grants made in 1998, the company recorded $586 as stock compensation
expense in the accompanying 1998 statement of operations.
The company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation expense been recognized on stock options issued based on the fair
value of the options at the date of grant and recognized over the vesting
period, the company's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss:
As reported...................................... $ (61) $(2,328)
Pro forma........................................ $ (61) $(2,342)
Basic and diluted loss per share:
As reported...................................... $(.02) $ (.69)
Pro forma........................................ $(.02) $ (.67)
</TABLE>
F-12
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
The weighted average grant date fair value of options granted in 1998 was
$1.93. The fair value of each option grant is estimated on the date of grant
using the fair value based method prescribed by SFAS No. 123 for private
companies, which considers only the time value of money. Assumptions used for
the grants were: expected life of three years, risk free interest rate of 5.5%
and no dividend yield.
Stock Options Issued Outside of the Plan
In June 1998, the company issued an option to purchase 125,000 shares
(option shares) of common stock at a price of three cents ($.03) per share in
exchange for consulting services. These options are fully vested and have no
expiration date. The optionee has the right to tender all of its option shares
back to the company for cash and notes payable five years from the date of the
original grant. The price to repurchase the option shares is equal to the
number of shares multiplied by the fair market value of the underlying common
stock, multiplied by 1.25. The right to tender the option shares back to the
company will expire if the company's stock becomes publicly traded. As the
measurement date is not known until a public offering is consummated or the
right to tender shares expires, the company has recorded $391 as stock
compensation expense in the accompanying 1998 statement of operations and as a
long-term liability in the accompanying balance sheet as of December 31, 1998
based on the difference between the exercise price of the option and the
estimated underlying fair market value of the common stock at December 31,
1998.
In August 1998, the company issued an option to purchase 75,000 shares of
common stock at a price of ten cents ($.10) per share in exchange for
consulting services. The company has recorded stock compensation expense of
$180 in the accompanying statement of operations based on the fair market value
of the stock option on the date of the grant.
Employee Stock Purchase Plan
In March 1999, the board adopted the 1999 Employee Stock Purchase Plan, to
provide employees of the company and its affiliates with an opportunity to
purchase common stock through payroll deductions. The purchase plan will
terminate at the board's discretion.
Under the purchase plan, 500,000 shares of common stock have been reserved
for issuance.
The purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. The board may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the purchase plan. A new offering period
begins every 12 months. The board has currently authorized an offering
commencing on the effectiveness of an initial public offering of the company's
common stock and ending January 31, 2000, with sequential 12-month offerings
thereafter.
Stock Option and Restricted Stock Grants Subsequent to Year End
Subsequent to year end, the company's Board of Directors approved the
issuance of 204,375 options to purchase common stock priced at $1.25 to $2.50
per share. These options vest over terms ranging from three to five years, but
vesting may accelerate if certain revenue targets are achieved.
In addition, the company issued 30,000 shares of restricted stock to three
outside directors in exchange for services to be performed during 1999. The
shares of restricted stock are forfeited if the individuals are not directors
at December 31, 1999.
F-13
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Stock Warrants
In connection with the company's Series A preferred stock financing which
closed in January 1999, the company agreed to issue warrants to purchase
258,000 shares of Series A preferred stock at $2.50 per share. The warrants
expire in 2006.
Reserved for Future Issuance
The following common shares have been reserved for future issuance as of
December 31, 1998:
<TABLE>
<S> <C>
Series A convertible preferred stock............................. 1,750,000
Employee stock options........................................... 750,000
Warrants......................................................... 258,000
---------
2,758,000
=========
</TABLE>
NOTE 6--RELATED PARTY TRANSACTIONS
For the period ended December 31, 1997, two principal stockholders of the
company were entitled to receive base compensation totaling $42. These salaries
were not paid. Had the officers received their 1997 salary, it would have
increased loss per share by $.01 for the period ended December 31, 1997. (Also
see Note 4.)
NOTE 7--COMMITMENTS
Internet Access
In September 1998, the company entered into an agreement with a third party
for the provision of internet access and hosting services. This agreement
expires in September 1999. Under the terms of this agreement, the company is
obligated to pay a total of $12 per month.
Leases
The company has entered into noncancelable operating lease agreements
involving equipment and facilities through the year 2000. Rent expense totaled
$0 and $16 for the years ended December 31, 1997 and 1998, respectively. Future
minimum payments under the operating leases, as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999.................................................................. $21
2000.................................................................. 22
2001.................................................................. 6
---
Total minimum lease payments.......................................... $49
===
</TABLE>
NOTE 8--CONTINGENT ACQUISITIONS
In March 1999, the company entered into an agreement to acquire the
membership interest of The Online Medical Bookstore, LLC (Online) and the stock
of InterLink Services, Inc. (InterLink). The acquisitions will be completed
upon the effectiveness of an initial public offering of the company's common
stock.
The acquisitions will be accounted for by the purchase method of accounting.
Accordingly, the results of operations will be included with the results of
operations of the company for periods subsequent to the date of acquisition. In
connection with the acquisitions, the company made nonrefundable payments of
$75 to
F-14
<PAGE>
NETIVATION.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share data)
Online and $50 to InterLink. Should the company effect an initial public
offering, the company would issue shares of common stock valued at $1,929 to
Online and $1,264 to InterLink, based on the price obtained upon the
effectiveness of an initial public offering by the company. In addition, the
sole member of Online will also receive another cash payment totaling $175.
Goodwill from these acquisitions is estimated to be $3,475.
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netivation.com, Inc.:
We have audited the accompanying balance sheets of The Online Medical
Bookstore, LLC, (a Delaware limited liability corporation) as of December 31,
1997 and 1998, and the related statements of operations, member's interests and
cash flows for the period from inception (May 1, 1997) to December 31, 1997 and
for the year ended December 31, 1998. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether these 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 The Online Medical
Bookstore, LLC, as of December 31, 1997 and 1998 and the results of its
operations and its cash flows for the period from inception (May 1, 1997) to
December 31, 1997 and for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington
February 4, 1999
(Except for the matter discussed in Note 4
for which the date is March 4, 1999)
F-16
<PAGE>
THE ONLINE MEDICAL BOOKSTORE, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $1,579 $53,937
Accounts receivable.......................................... -- 11,188
Other........................................................ -- 1,140
------ -------
Total current assets....................................... 1,579 66,265
Equipment and furniture, net................................... 1,800 3,091
------ -------
Total assets................................................... $3,379 $69,356
====== =======
LIABILITIES AND MEMBER'S INTERESTS
Current liabilities:
Accounts payable............................................. $ -- $68,394
Deferred revenue............................................. -- 2,683
Note payable to related party................................ 2,000 --
------ -------
Total current liabilities.................................. 2,000 71,077
Member's interests (deficit)
Contributed capital.......................................... 2,300 2,300
Accumulated deficit.......................................... (921) (4,021)
------ -------
Total member's interests (deficit)........................... 1,379 (1,721)
------ -------
Total liabilities and member's interests................... $3,379 $69,356
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
THE ONLINE MEDICAL BOOKSTORE, LLC
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
(May 1, 1997) to Year Ended
December 31, December 31,
1997 1998
---------------- ------------
<S> <C> <C>
Revenues.......................................... $ -- $ 290,498
Cost of revenues.................................. -- (272,985)
----- ---------
-- 17,513
Expenses
General and administrative...................... 921 4,324
Sales and marketing............................. -- 1,000
----- ---------
Total operating expenses.......................... 921 5,324
----- ---------
Net income (loss) (Note 3)........................ $(921) $ 12,189
===== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
THE ONLINE MEDICAL BOOKSTORE, LLC
STATEMENTS OF MEMBER'S INTERESTS
<TABLE>
<CAPTION>
Contributed Accumulated
Capital Deficit Total
----------- ----------- --------
<S> <C> <C> <C>
Balance at inception (May 1, 1997)........... $ -- $ -- $ --
Net loss..................................... -- (921) (921)
Contribution of equipment.................... 2,300 -- 2,300
------ -------- --------
Balance at December 31,1997.................. 2,300 (921) 1,379
Net income................................... -- 12,189 12,189
Distributions to member...................... -- (15,289) (15,289)
------ -------- --------
Balance at December 31, 1998................. $2,300 $ (4,021) $ (1,721)
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
THE ONLINE MEDICAL BOOKSTORE, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Inception
(May 1, 1997) to
December 31, Year Ended
1997 December 31, 1998
--------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $ (921) $ 12,189
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation........................ 500 1,178
Changes in assets and liabilities:
Increase in accounts payable........ -- 68,394
Increase in deferred revenue........ -- 2,683
Increase in accounts receivable..... -- (11,188)
Increase in other assets............ -- (1,140)
------ --------
Net cash provided (used) by operating
activities.......................... (421) 72,116
------ --------
Cash flows from investing activities:
Purchase of equipment and furniture.. -- (2,469)
Cash flows from financing activities:
Distributions of cash................ -- (15,289)
Increase (decrease) in notes
payable............................. 2,000 (2,000)
------ --------
Net cash provided by financing
activities.......................... 2,000 (17,289)
------ --------
Net increase in cash and cash
equivalents......................... 1,579 52,358
Cash and cash equivalents at
beginning of period................. -- 1,579
------ --------
Cash and cash equivalents at end of
period.............................. $1,579 $ 53,937
====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
THE ONLINE MEDICAL BOOKSTORE, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
The Online Medical Bookstore, LLC (the "company"), a Delaware limited
liability corporation, was operated as a sole proprietorship by the company's
sole member from inception (May 1, 1997) to December 28, 1998. The company
converted to a limited liability corporation on December 28, 1998. During the
period from May 1997 through December 1997, the company was in its development
stage and its activities primarily related to the research, design and
development of the company's e-commerce website, discountmedbooks.com.
Discountmedbooks.com became commercially operational in January 1998 and sells
medical textbooks and certain supplies for medical students, physicians, nurses
and other healthcare providers via the Internet. (See Note 3)
The company is subject to the risks and challenges associated with other
companies at a similar stage of early operations including dependence on key
individuals, successful sales and marketing of products, the continued
acceptance of the Internet as a medium for purchasing goods and services. The
company is also subject to risks of competition from larger e-commerce Websites
and competition from companies with greater financial, technical, management
and marketing resources. Further, the company may require additional funds that
may not be readily available to it.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Income Taxes
The company passes through to the individual member all taxable income and
deductions of the company under income tax reporting regulations governing
limited liability corporations.
Equipment and Furniture
Equipment and furniture are recorded at cost. Major additions and
improvements are capitalized. Minor replacements, maintenance and repairs that
do not increase the useful life of the assets are expensed as incurred.
Depreciation of equipment and furniture is determined using the straight-line
method over the expected useful lives of the assets, which range from three to
five years.
Revenue Recognition
Revenues from product sales are generally recognized at the time of shipment
to the customer.
F-21
<PAGE>
THE ONLINE MEDICAL BOOKSTORE, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 3--RELATED PARTY TRANSACTIONS
The sole member of the company serves as the company's president and
performs substantially all management and operational functions of the company
at no charge to the company. The company occupies facilities and uses telephone
and other equipment that is rented or owned by the sole member of the company.
The company is not charged for the use of such facilities, telephone and other
equipment. A relative of the sole member of the company provided initial
financing through a note payable of $2,000 and provides administrative,
shipping and receiving services and customer service to the company at no cost
to the company. The company's e-commerce Website, discountmedbooks.com, was
researched, designed, developed and implemented by the company's sole member,
and the company was not charged for any time or materials related to making the
e-commerce Website operational. (See Note 4)
NOTE 4--ACQUISITION AGREEMENT
On March 4, 1999, the sole member of the company entered into an agreement
to sell all of his membership interests in the company to Netivation.com, Inc.
(Netivation) for $250,000 and common stock in Netivation valued at $1,929,000.
Upon signing the agreement, the member received $75,000 in cash, which is
nonrefundable. If the agreement is consummated, the sole member and the
relative discussed in Note 3 will be compensated through annual salaries
totaling $80,000, and stock options in Netivation. The sale is contingent upon
the effectiveness of an initial public offering of Netivation's common stock.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netivation.com, Inc.:
We have audited the accompanying balance sheet of InterLink Services, Inc.
(a Washington corporation) as of December 31, 1998, and the related statements
of operations, stockholders' equity and cash flows for the year then ended.
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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 InterLink Services, Inc. as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Seattle, Washington
March 10, 1999
F-23
<PAGE>
INTERLINK SERVICES, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 986
Accounts receivable ............................................... 26,252
--------
Total current assets............................................. 27,238
Equipment and furniture, net......................................... 24,225
--------
Total assets......................................................... $ 51,463
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 16,000
Accrued expenses................................................... 3,638
Line of credit..................................................... 11,198
--------
Total current liabilities........................................ 30,836
--------
Commitments (Note 5)
Stockholders' equity
Common stock and additional paid-in capital (par value $1.00,
authorized 50,000 shares; issued and outstanding, 12,750 shares).. 34,430
Accumulated deficit................................................ (13,803)
--------
Total stockholders' equity....................................... 20,627
--------
Total liabilities and stockholders' equity........................... $ 51,463
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-24
<PAGE>
INTERLINK SERVICES, INC.
STATEMENT OF OPERATIONS
For The Year Ended December 31, 1998
<TABLE>
<S> <C>
Revenues............................................................. $328,705
Cost of revenues..................................................... 149,289
--------
Gross profit....................................................... 179,416
--------
Operating expenses
General and administrative......................................... 194,019
Sales and marketing................................................ 4,175
--------
Total operating expenses............................................. 198,194
--------
Loss before income taxes............................................. (18,778)
Provision for income taxes........................................... --
--------
Net loss......................................................... $(18,778)
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-25
<PAGE>
INTERLINK SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Common Stock
and Additional
Paid- Retained
in Capital Earnings
-------------- (Accumulated
Shares Amount Deficit) Total
------ ------- ------------ -------
<S> <C> <C> <C> <C>
Balance, January 1, 1998................... 12,750 $34,430 $ 4,975 $39,405
Net loss................................. -- -- (18,778) (18,778)
------ ------- -------- -------
Balance, December 31, 1998................. 12,750 $34,430 $(13,803) $20,627
====== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-26
<PAGE>
INTERLINK SERVICES, INC.
STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $(18,778)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation..................................................... 14,400
Changes in operating assets and liabilities:
Accounts receivable............................................ (8,079)
Prepaid expenses and other current assets...................... 6,250
Accounts payable and accrued expenses.......................... (7,414)
--------
Net cash used by operating activities........................ (13,621)
--------
Cash flows from investing activities:
Purchases of computer equipment.................................... (6,244)
--------
Cash flows from financing activities:
Borrowings on line of credit....................................... 9,843
--------
Net decrease in cash and cash equivalents............................ (10,022)
Cash and cash equivalents, beginning of year......................... 11,008
--------
Cash and cash equivalents, end of year............................... $ 986
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-27
<PAGE>
INTERLINK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. ORGANIZATION OF THE COMPANY AND NATURE OF OPERATIONS
InterLink Services, Inc., a Washington corporation (the "company"), was
incorporated in June 1995, and specializes in website design and hosting
services. These services include development of Internet application software,
software consulting services, and the design of working website pages primarily
for customers in the Pacific Northwest.
The company is subject to the risks and challenges associated with other
companies at a similar stage of development including dependence on key
individuals, successful sales and marketing of products, and competition from
companies with greater financial, technical, management and marketing
resources. Further, the company may require additional funds that may not be
readily available to it.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The company considers all highly liquid short-term investments with a
maturity of three months or less at the date of purchase to be cash
equivalents.
Equipment and Furniture
Equipment and furniture consist primarily of computer equipment and are
stated at cost less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of three to five years
and totals $49,018 at December 31, 1998. Maintenance and repairs are expensed
as incurred. When properties are retired or otherwise disposed, gains and
losses are reflected in the income statement.
Revenue Recognition
The company's revenues are derived primarily from website design and hosting
services and are recognized as follows:
Time and Material Consulting Contracts--The company recognizes revenue
as services are rendered.
Fixed-Price Consulting Contracts--Revenue from fixed-price contracts is
recognized on the percentage-of-completion method, measured primarily by
output measures established in the specific contract. This method is used
as management considers output measures to be the best available measure of
contract performance.
Website Hosting--Revenue is recognized ratably over the service period.
Income Taxes
The company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the
F-28
<PAGE>
INTERLINK SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
company's assets and liabilities. Deferred tax assets and liabilities are
measured using currently enacted tax rates that are expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. A valuation allowance is established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
3. INCOME TAXES
The company did not provide an income tax benefit for the period presented
because, based on a number of factors, there is sufficient uncertainty
regarding the realizability of carryforwards that a full valuation allowance
has been recorded against the net deferred tax asset. The company's total tax
net operating loss carryforwards were approximately $30,000 at December 31,
1998 which expire between 2011 and 2018. The significant components of the
deferred tax asset at December 31, 1998, were as follows:
<TABLE>
<S> <C>
Net operating loss carryforward..................................... $11,000
Cash to accrual adjustment.......................................... (8,000)
-------
Deferred tax asset.................................................. 3,000
Deferred tax asset valuation allowance.............................. (3,000)
-------
--
=======
</TABLE>
The valuation allowance on the deferred tax asset increased by $2,000 during
1998.
In accordance with certain provisions of the Internal Revenue Code, as
amended, a change in ownership of greater than 50% of a company within a three
year period results in an annual limitation on the company's ability to utilize
its net operating loss ("NOL") carryforwards from tax periods prior to the
ownership change.
4. BANK LINE OF CREDIT
On February 4, 1998, the company obtained a $15,000 revolving line of credit
from a financial institution to support working capital. The line of credit is
secured by substantially all of the company's assets, has been guaranteed by
certain stockholders and bears interest at the financial institution's index
rate plus 1.50% (9.0% at December 31, 1998). Interest is payable monthly. The
line of credit expires March 20, 1999.
5. COMMITMENTS
The company leases its office space under noncancelable operating leases
expiring December 31, 1999. Future minimum lease payments under noncancelable
operating leases at December 31, 1998, are $10,410.
Rental expense amounted to approximately $10,000 for the year ended December
31, 1998
6. ACQUISITION AGREEMENT
On March 9, 1999, the company entered into an agreement to sell its stock to
Netivation.com, Inc. (Netivation) for $50,000 and common stock in Netivation
valued at $1,264,000. Upon signing the agreement, the stockholders received
$50,000 in cash which is nonrefundable. The sale is contingent upon the
successful completion of an initial public offering of Netivation's common
stock.
F-29
<PAGE>
NETIVATION.COM, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined balance sheet of Netivation.com at March
31, 1999 gives effect to the acquisitions of The Online Medical Bookstore, LLC
and InterLink Services, Inc. as if they were consummated on March 31, 1999. The
unaudited pro forma combined statement of operations of Netivation.com for the
year ended December 31, 1998 and for the three months ended March 31, 1999
gives effect to the acquisition of The Online Medical Bookstore, LLC and
InterLink Services, Inc. as if they had been acquired on January 1, 1998.
The unaudited pro forma combined balance sheet and statement of operations
are presented for informational purposes only and do not purport to represent
what the company's financial position and results of operations for the year
ended December 31, 1998 or for the three months ended March 31, 1999 would
actually have been had the acquisitions, in fact, occurred on January 1, 1998,
or the company's results of operations for any future period. The unaudited pro
forma combined balance sheet and statement of operations should be read in
conjunction with the Financial Statements and related notes thereto included
elsewhere in this prospectus and the information set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
F-30
<PAGE>
NETIVATION.COM, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1999
<TABLE>
<CAPTION>
The
Netivation.com, Online Medical InterLink Pro Forma Pro Forma
Inc. Bookstore, LLC Services, Inc. Adjustments Combined Total
--------------- -------------- -------------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets
Cash and short-term
investments.......... $2,274 $ 35 $ 38 $ (175)(a)(b) $ 2,172
Accounts receivable... -- 3 25 -- 28
Prepaids and other.... 690 -- -- -- 690
Equipment and
furniture, net....... 151 3 22 -- 176
Intangible assets..... -- -- -- 3,418(a)(b) 3,418
------ ---- ---- ------ -------
Total assets......... $3,115 $ 41 $ 85 $3,243 $ 6,484
====== ==== ==== ====== =======
Liabilities and
stockholders' equity
Accounts payable and
accruals............. $ 568 $ 39 $ 12 $ -- $ 619
Other long term
liabilities.......... 16 -- -- -- 16
Redeemable common
stock option......... 1,406 -- -- -- 1,406
------ ---- ---- ------ -------
Total liabilities..... 1,990 39 12 -- 2,041
------ ---- ---- ------ -------
Preferred stock......... 4,899 -- -- -- 4,899
Common stock and paid in
capital................ 695 2 84 3,232(a)(b)(c) 4,013
Deficit................. (4,469) -- (11) 11(c) (4,469)
------ ---- ---- ------ -------
Total stockholders'
equity............... 1,125 2 73 3,243 4,443
------ ---- ---- ------ -------
Total liabilities and
stockholders'
equity.............. $3,115 $ 41 $ 85 $3,243 $ 6,484
====== ==== ==== ====== =======
</TABLE>
F-31
<PAGE>
NETIVATION.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
The
Online Medical InterLink Pro Forma Pro Forma
Netivation.com, Inc. Bookstore, LLC Services, Inc. Adjustments Combined Total
-------------------- -------------- -------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ -- $290 $ 329 $ -- $ 619
Cost of revenues................... -- (273) (149) -- (422)
--------- ---- ----- ------- ---------
Gross profit....................... -- 17 180 -- 197
Expenses
Operating expenses
General and administrative....... 837 4 194 123(e) 1,158
Sales and marketing.............. 551 1 4 -- 556
Stock compensation............... 586 -- -- -- 586
Product development.............. 171 -- -- -- 171
Amortization of intangible
assets.......................... -- -- -- 1,158(d) 1,158
--------- ---- ----- ------- ---------
Total operating expenses........... 2,145 5 198 1,281 3,629
--------- ---- ----- ------- ---------
Income (loss) from operations...... (2,145) 12 (18) (1,281) (3,432)
Interest expense................... (183) -- -- -- (183)
--------- ---- ----- ------- ---------
Income (loss) before income taxes.. (2,328) 12 (18) (1,281) (3,615)
Provision for income taxes......... -- -- -- -- --
--------- ---- ----- ------- ---------
Net (loss) income.................. $ (2,328) $ 12 $ (18) $(1,281) $ (3,615)
Preferred stock dividends ......... (14) -- -- -- (14)
--------- ---- ----- ------- ---------
Net income (loss) available to com-
mon stock......................... $ (2,342) $ 12 $ (18) $(1,281) $ (3,629)
========= ==== ===== ======= =========
Basic and diluted net loss per
share ............................ $ (.69) $ (.96)
========= =========
Weighted average shares outstanding
.................................. 3,417,377 3,772,155
========= =========
</TABLE>
F-32
<PAGE>
NETIVATION.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the three months ended March 31, 1999
<TABLE>
<CAPTION>
The
Online Medical InterLink Pro Forma Pro Forma
Netivation.com, Inc. Bookstore, LLC Services, Inc. Adjustments Combined Total
-------------------- -------------- -------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 82 $112 $ 76 $ -- $ 270
Cost of revenues................... -- (104) (30) -- (134)
--------- ---- ---- ----- ---------
Gross profit....................... 82 8 46 -- 136
Expenses
Operating expenses
General and administrative....... 246 4 41 31(e) 322
Sales and marketing.............. 423 -- 1 -- 424
Stock compensation............... 1,032 -- -- -- 1,032
Product development.............. 323 -- -- -- 323
Amortization of intangible
assets.......................... -- -- -- 290(d) 290
--------- ---- ---- ----- ---------
Total operating expenses........... 2,024 4 42 321 2,391
--------- ---- ---- ----- ---------
Income (loss) from operations...... (1,942) 4 4 (321) (2,255)
Interest expense................... (14) -- (2) -- (16)
--------- ---- ---- ----- ---------
Income (loss) before income taxes.. (1,956) 4 2 $(321) (2,271)
Provision for income taxes......... -- -- -- -- --
--------- ---- ---- ----- ---------
Net (loss) income.................. $ (1,956) $ 4 $ 2 $(321) $ (2,271)
Preferred stock dividends ......... (110) -- -- -- (110)
--------- ---- ---- ----- ---------
Net income (loss) available to com-
mon stock......................... $ (2,066) $ 4 $ 2 $(321) $ (2,381)
========= ==== ==== ===== =========
Basic and diluted net loss per
share ............................ $ (.59) $ (.62)
========= =========
Weighted average shares outstanding
.................................. 3,517,159 3,836,459
========= =========
</TABLE>
F-33
<PAGE>
NETIVATION.COM, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET AND STATEMENT OF OPERATIONS
March 31, 1999
(Dollars in thousands, except per share data)
1. BASIS OF PRESENTATION
The unaudited pro forma combined balance sheet gives effect to the
acquisitions of The Online Medical Bookstore, LLC and InterLink Services, Inc.
as if they were consummated on March 31, 1999. The pro forma adjustments are
based on consideration exchanged, including the estimated fair value of assets
acquired, liabilities assumed and common stock issued. The actual adjustments,
which will be based on valuations of fair value as of the date of acquisition,
may differ from that made herein.
The pro forma combined statement of operations for the year ended December
31, 1998 and for the three months ended March 31, 1999 gives effect to the
acquisition of (1) The Online Medical Bookstore, LLC and (2) InterLink
Services, Inc., as if these entities had been acquired January 1, 1998. As
both entities will be acquired subsequent to March 31, 1999 the results of
operations of Netivation for the year ended December 31, 1998 and for the
three months ended March 31, 1999 do not include any amounts related to these
acquisitions.
The pro forma combined financial statements are presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the cash and common stock consideration exchanged by
Netivation for the fair value of the assets acquired and liabilities assumed.
The consummation of these acquisitions is dependent upon Netivation
effecting an initial public offering.
2. PRO FORMA ADJUSTMENTS
(a) To record the acquisition of The Online Medical Bookstore, LLC as
follows:
<TABLE>
<S> <C>
Purchase price.................................................... $ 2,179
Net assets acquired............................................... 2
-------
Purchase price allocated to goodwill.............................. $ 2,177
=======
</TABLE>
The purchase price of The Online Medical Bookstore, LLC is $250 in cash
plus $1,929 of Netivation's common stock based on the price of its common
stock upon the effectiveness of an initial public offering.
(b) To record the acquisition of InterLink Services, Inc. as follows:
<TABLE>
<S> <C>
Purchase price.................................................... $ 1,314
Net assets acquired............................................... 73
-------
Purchase price allocated to goodwill.............................. $ 1,241
=======
</TABLE>
The purchase price of InterLink Services, Inc. is $50 in cash plus $1,264
of Netivation's common stock based on the price of its common stock upon the
effectiveness of an initial public offering.
(c) To eliminate the equity of the acquired businesses.
(d) To record annual and quarterly goodwill amortization totaling $1,158
and $290, respectively. Goodwill is amortized over three years.
(e) To record annual and quarterly salary expense totaling $123 and $31,
respectively, for key employees of acquired companies. This amount
represents compensation above historical levels and is $80 for The
Online Medical Bookstore, LLC and $43 for InterLink Services, Inc.
F-34
<PAGE>
[LOGO OF NETIVATION.COM, INC. APPEARS HERE]
CAPITOLWATCH.COM
GOVERNET.COM
MEDINEX.COM
VOTENET.COM
<PAGE>
[LOGO OF NETIVATION.COM, INC. APPEARS HERE]
2,500,000 Shares
Common Stock
-------------------------
PROSPECTUS
June 22, 1999
-------------------------
EBI Securities Corporation
Millenium Financial Group, Inc.
