SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
NetWolves Corporation
(Exact Name of Registrant as Specified in its Charter
New York 11-3439392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 Broadhollow Road, Melville, New York 11747
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 516-393-5016
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0033 per share
(Title of Class)
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ITEM 1. BUSINESS
General
NetWolves Corporation ("NetWolves" or the "Company") designs, develops and
sells products which provide a secure, integrated, modular internet gateway. The
products connect business networks [Local Area Networks (LANs) and Wide Area
Networks (WANs)] to the Internet. The primary product, the FoxBox, is
multi-functional. It supports secure access to the Internet for 3 to 400 users
through a single dedicated connection or up to 8 users simultaneously through a
non-dedicated connection, provides advanced electronic mail functions for
unlimited users and delivers firewall security. The Company's initial target
markets are the end users in the small and mid-sized businesses and large
organizations with satellite offices. Larger end users to whom the product is
intended to be marketed are companies with multi-state locations, government
agencies and educational markets. NetWolves products are designed to service
numerous markets, including the financial, medical, legal, travel, hospitality,
entertainment, hotel and auto industries.
The Company's strategy is to establish the FoxBox as the standard for
enterprise-wide network connectivity worldwide. To achieve its objectives
worldwide, NetWolves seeks to form relationships with leading companies in their
respective areas to deliver application-specific internet solutions to
organizations worldwide. In furtherance of this objective, the Company has
recently entered into agreements with Anicom, Inc. and The Sullivan Group and is
negotiating additional relationships.
In January 1999, NetWolves entered into a distribution agreement with
Anicom, Inc. appointing Anicom, Inc. as the exclusive master distributor of its
products in North America subject to certain minimum purchase requirements.
Anicom is one of the largest distributors in the United States of multimedia
wiring systems with customers including Cisco Systems and Fast Com and intends
to sell the Company's products to its 75 offices located in the United States.
In addition, Anicom will maintain inventory of the FoxBox from all 75 locations
and intends to distribute the FoxBox nationwide. The Company delivered its first
significant order, in excess of $1,500,000, in March/April 1999.
In January 1999, the Company entered into an agreement with The Sullivan
Group, a leading consulting organization serving the needs of the automobile
aftermarket, convenience stores and oil industry. It maintains an extensive
library of training modules available to its client base which includes Amoco
Oil, British Petroleum, Chevron, Chrysler, Exxon, General Motors, Mobil Oil
Shell, Tosco and Unocal. Pursuant to its agreement, The Sullivan Group has
appointed NetWolves as its exclusive provider in the United States of a delivery
system whereby The Sullivan Group intends to sell its proprietary training
programs to approximately 40,000 retail locations throughout the United States.
NetWolves is customizing an Internet solution specifically to deliver distance
learning to these locations utilizing its FoxBox technology; and it anticipates
sales of this customized product to commence this summer.
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NetWolves, LLC was an Ohio limited liability company formed on February 13,
1998, which was merged into Watchdog Patrols, Inc. on June 17, 1998. Watchdog,
the legal surviving entity of the merger was incorporated under the laws of the
State of New York on January 5, 1970. As a result of the merger and subsequent
sale of Watchdog's business, Watchdog changed its name to NetWolves Corporation.
Products and Services
The FoxBox is a multi-services internet communications gateway that offers
a combined internet access and firewall security solution. The FoxBox costs less
than purchasing its functionality in separate products and its "all-in-one"
solution significantly reduces costly network administration overhead, since
there are less divergent components to administer in the FoxBox. Each of the
features in the FoxBox is designed to work together using integrated hardware
and software, and a common interface. This facilitates expansion and support of
the converging voice and data industries. NetWolves currently offers five FoxBox
models: FoxBox DDR, dial on demand; FoxBox ISDN, dial on demand; FoxBox 56K,
dedicated; FoxBox T1, dedicated; and FoxFox S2E, dedicated.
The FoxBox offers the following features:
-- It can securely connect any number of users on a LAN (Local
Area Network) to the Internet through a single dial-up or dedicated
connection.
-- All LAN users can simultaneously connect to the Web/Internet.
-- Up to eight users at one time can connect to the Web/Internet on non-
dedicated connections.
-- Hierarchical caching gives the FoxBox more efficient web viewing
and FTP downloads.
-- Any number of users can send and receive e-mail individually, while
sharing one ISP (Internet Service Provider) account.
-- A firewall protects the LAN from Internet-borne attacks.
-- Advanced Network Address Translation (ANAT) module allows
the creation of powerful address translation rules for greater
firewall flexibility.
-- Logging capabilities ensure appropriate use of Internet resources.
-- Scalability allows Internet usage to grow as a company expands.
-- It contains a network file server.
-- It can be used as a stand-alone firewall.
-- It allows a company to publish and host a web site.
-- It assists a company to create and customize an
Intranet/Extranet.
The FoxBox also offers the following optional features:
-- SCSI tape backup/restore module allows all stored data on
the FoxBox to be backed up onto a standard DAT tape.
-- Fast SCSI hard drive provides extra storage for shared files
and Web data at faster access speeds.
-- Extra 9.1 GB SCSI hard drive provides extra storage for
shared files and Web data.
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-- E-Mail Archive module allows all inbound and outbound e-mail to be
saved for archival/compliance
purposes.
-- Advanced Access Control (AAC) module allows control over who
can access the Web and what sites they have access to.
-- Virtual Private Networking (VPN) module allows the creation
of a virtual Wide Area Network (WAN) over the Internet between
different office locations.
Firewall and Security Functions
NetWolves believes that security is an essential element of any Internet
connectivity solution. For this reason, the FoxBox includes a high end firewall
security protection, without requiring the purchase of additional components.
The FoxBox is designed to protect a company's private data and systems from
outside intruders with its firewall security system, incorporating three
separate firewall technologies:
-- Stateful packet filters verify that all incoming data
packets coming from the Internet have been requested by an authorized
user on the LAN.
-- Proxy applications prevent unauthorized Internet
applications from accessing the LAN.
-- Network Address Translation (or NAT) makes the network
invisible to outside Internet users by hiding the internal network's
IP addresses.
All packets of data entering the FoxBox from the Internet are first checked
for validity against a series of stateful packet filters. FTP, HTTP, SMTP and
DNS data is then forwarded to proxy applications that further inspect the
contents of the packets for potential security violations. If the data is
determined to be valid by both the stateful packet filters and proxy
applications, it is allowed to enter the secure LAN.
The FoxBox DDR and FoxBox ISDN dial on demand units come with a
preconfigured firewall and NAT rules that allow these products to securely
connect the LAN to the Internet. The FoxBox 56K, FoxBox T1 and FoxBox S2E are
designed with fully configurable firewalls and NAT rules that give the network
administrator greater flexibility in allowing or denying incoming and outgoing
data.
E-Mail Services
A key feature of the FoxBox is its advanced and powerful management of
electronic mail. With only one Internet account, an unlimited number of users
can send and receive e-mail. In addition, the FoxBox supports e-mail standards.
For e-mail between a FoxBox and the Internet, NetWolves uses the standard Simple
Mail Transfer Protocol (SMTP) protocol, which is the standard for e-mail
<PAGE>
transmission on the Internet. SMTP is accomplished using a product called
Sendmail, version 8.8.8, which is the standard SMTP server on the Internet.
Sendmail manages the sending of e-mail from a FoxBox to any other host on the
Internet. For LAN users, the FoxBox supports a number of different protocols. If
the FoxBox is used as the LAN's e-mail server, two common client-server e-mail
protocol standards are supported:
-- POP-3
-- IMAP
The FoxBox supports several e-mail clients, including:
-- Microsoft Exchange
-- Microsoft Internet Mail
-- Netscape Navigator Mail
-- Eudora
-- Pegasus
The FoxBox supports several e-mail gateways, including:
-- Microsoft Exchange Server
-- Lotus cc: Mail
-- GroupWise Mail
-- Others with SMTP gateways
Graphical User Interface for Administration/Management
A Web-based Graphical User Interface, or GUI allows the network
administrator to configure the various subsystems of the FoxBox. The FoxBox is
completely transparent to the Internet user. Likewise, because the FoxBox is
easy to setup, it will feel transparent to the administrator. This is especially
true should changes be required following initial installation. Since all
administration of the FoxBox is performed through a Web browser, the
administrator can be on any workstation on the LAN.
Agreements With Anicom and The Sullivan Group
In January 1999, NetWolves entered into an agreement with Anicom. The
agreement appoints Anicom as NetWolves' exclusive master distributor of its
products throughout North America for a five year period. There are minimum
purchase requirements under the agreement to maintain exclusivity though there
are no specific purchase commitments beyond its initial order which was
<PAGE>
delivered in March/April 1999. NetWolves has also reserved the right to make
direct sales or leases of its products to customers, distributors and Anicom
resellers during the term of the agreement provided that it pays a stipulated
commission to Anicom of such sales. The agreement further provides for Anicom to
maintain inventory of NetWolves' products and to distribute these products
throughout its 75 locations in the United States. The agreement provides for
certain rights of termination, including the option of NetWolves to terminate
during the first two years of the agreement on 30 days prior written notice
provided that, as a condition to the effectiveness of such termination,
NetWolves shall pay Anicom a stipulated fee.
In connection with the agreement and for cash consideration paid to the
Company of $300,000, the Company issued Anicom 300,000 warrants to purchase
common stock of the Company at an exercise price of $5 per share. The warrants
issued to Anicom shall vest in equal installments over three years, commencing
on the first anniversary of the agreement and shall expire in January 2004.
Anicom also obtained piggyback registration rights with respect to the issuable
shares of common stock.
In January 1999, NetWolves entered into an agreement with The Sullivan
Group, a leading consulting organization serving the needs of the automotive
aftermarket, convenience store and oil industry and, through its subsidiary, The
Duffy-Vinet Institute, maintains an extensive library of training modules
available to its client customer base. Under the agreement, NetWolves has been
appointed as the exclusive provider of multi-services internet gateway products,
which is intended to enable The Sullivan Group and its subsidiary to sell its
proprietary training programs to approximately 40,000 retail locations
throughout the United States. This combined technology is intended to facilitate
simultaneous interactive distance learning at all sites. The agreement is for a
period of five years with an automatic five year renewal unless previously
terminated. NetWolves has agreed to customize its FoxBox to serve the needs of
The Sullivan Group.
Initial deliveries are scheduled to commence in the summer of 1999. While
deliveries will be made against specific purchase orders yet to be received,
NetWolves has agreed to deliver approximately 40,000 units over a five-year
period ranging from 350 units in 1999 and 4,150 units in 2000 to 14,000 in 2003.
It is intended that the units will be leased over a 48 month term at a monthly
rate of $200 per unit. One year of maintenance is included with each leasing
agreement and extended maintenance contracts may be purchased for a fee.
Research and Development
The internet and the computer hardware and software industry are
characterized by rapid technological change, which requires ongoing development
and maintenance of products. It is customary for modifications to be made to
products as experience with its use grows or changes in manufacturer's hardware
and software so require.
NetWolves' research and development organization is comprised of a core
team of engineers who specialize in different areas of product development.
NetWolves engineering team has experience in a variety of industries, including
information security, designing networking protocols, building interfaces,
<PAGE>
designing databases, and computer telephony. Their expertise is used in the
design of the FoxBox and seeking improved methods for the FoxBox to meet
customer needs. As of March 31, 1999, the Company's research and development
group consists of five employees. The Company seeks to recruit highly qualified
employees and its ability to attract and retain such employees will be a
principal factor in its success in achieving and maintaining a leading
technological position.
For the six months ended December 31, 1998, the Company expended
approximately $91,600 for research and development expenses. The Company intends
to increase its investment in product development and believes that its future
services will depend, in part, on its ability to develop, manufacture and market
new products and enhancements to existing products on a cost-effective and
timely basis.
Manufacturing and Testing
The primary manufacturer currently used by the Company is Boca Research, a
hardware assembly and engineering firm located in Boca Raton, Florida.
Accuspecs, a hardware assembler located in McKeen, Pennsylvania, also
manufactures the FoxBox for the Company. While NetWolves has no long-term
agreements with these manufacturers, it believes that alternative manufacturers
are available if NetWolves were to change manufacturers.
Production Process
The process used to produce NetWolves products begins with hardware
configuration, installing the appropriate version of FoxBox software,
configuring client-specific software components, followed by a 24-hour "burn-in"
process. Raw/prefabricated materials, components, and subassemblies required for
production include mother boards, CPU's, cases, Ethernet cards, network
communication cards, hard drives, memory, CPU fans and power supplies. The
Company believes that these materials are available from several companies and
that alternative sources of supply are currently available.
Testing
A majority of testing is performed as part of the manufacturing process. In
addition, NetWolves performs quality testing via the Internet on a periodic
basis to verify that the assembled products meet all production quality
criteria. Also, randomly chosen FoxBox units are shipped from the production
assembly facility back to NetWolves for additional testing.
In addition to testing the product on a regular basis, NetWolves researches
the status of existing components used in the FoxBox to determine if they are
being phased out or prices have changed. If it concludes that a certain
component must be substituted, trial testing is performed on a new component to
determine if it meets product component criteria. If it meets this criteria,
which includes cost effectiveness, longer life expectancy and product
efficiency, a plan to develop and use the component is implemented.
<PAGE>
Customer Service and Technical Support
The Company maintains an experienced staff of customer service personnel to
provide technical support to its customers. Each member of the customer service
staff is certified through an ongoing in-house training and testing program to
provide support for each individual product. The Company's customer service
staff provides product support via telephone and e-mail 24 hours per day, seven
days per week. The Company generally provides software and documentation
updates, including maintenance releases, operating system upgrades and major
functional upgrades, as part of its customer support services.
Sales and Marketing
The Company's strategy of marketing and sales plan for it to enter into
agreements with providers of products in a wide variety of markets, including
financial, medical, legal, travel, hospitality, entertainment, hotel and the
auto industries in order to leverage their existing client base for sales of the
Company's products. With this objective, the Company has entered into agreements
with Anicom, Inc. and The Sullivan Group and is seeking additional strategic
alliances on a worldwide basis. The Company intends to hire sales and marketing
consultants in five (5) regional areas, New York, Tampa, Chicago, Washington D.
C. and Los Angeles. These persons will perform several important functions
including managing the master distribution agreements between the Company and
its partners and also customizing solutions for the various market business
segments.
The Company has implemented marketing initiatives to support the sales and
distribution of its products and services, and to communicate corporate
direction. The Company's sales and marketing employees are responsible for
collateral development, lead generation and awareness of the Company and its
products. Marketing programs include public relations, seminars, industry
conferences and trade shows, advertising and direct mail. The Company's
marketing employees also contribute to both the product direction and strategic
planning processes by providing market research and conducting surveys and focus
groups.
Licensing and Intellectual Property
The Company considers certain features of its products, including its
methodology and technology to be proprietary. The Company relies on a
combination of trade secret, copyright and trademark laws, contractual
provisions and certain technology and security measures to protect its
proprietary intellectual property. The Company does not currently have any
patents or pending patent applications. Notwithstanding the efforts the Company
<PAGE>
takes to protect its proprietary rights, existing trade secret, copyright, and
trademark laws afford only limited protection. In addition, effective protection
of copyrights, trade secrets, trademarks and other proprietary rights may be
unavailable or limited in certain foreign countries. The Company believes that,
because of the rapid rate of technological change in the computer industry,
factors such as the knowledge, ability and experience of the Company's
employees, product and service offering development, and quality of customer
support services are more important than any available trade secret or copyright
protection.
The Company does not intend to sell or transfer title of its products to
its clients though this structure may change as the Company expands its
operations. The products are intended to be licensed generally pursuant to
licensing agreements for which extended payment terms may be offered. In the
case of extended payment term agreements, the customer is contractually bound to
equal monthly fixed payments. The first year of maintenance is bundled with
standard licensing agreements. In the case of extended payment term agreements,
maintenance may be bundled for the length of the payment term. Thereafter, in
both instances, the customer may purchase maintenance annually.
Competition
The Company faces competition from the manufacturers of several different
types of products used as multi-service packaged solutions for Internet
gateways. Its major competitors are Whistle, Team Internet and Free Gate. The
Company expects competition to intensify as more companies enter the market and
compete for market share. In addition, companies currently in the server market
may continue to change product offerings in order to capture further market
share. Many of these companies have substantially greater financial and
marketing resources, research and development staffs, manufacturing and
distribution facilities. There can be no assurance that the Company's current
and potential competitors will not develop products that may or may not be
perceived to be more effective or responsive to technological change than that
of the Company, or that current or future products will not be rendered obsolete
by such developments. Furthermore, increased competition could result in price
reductions, reduced margins or loss of market share, any of which could have a
material adverse effect on the Company's business operating results and
financial condition.
The Company believes that an important competitive factor in its market is
the cost effective integration of many services in a single unit. In this
regard, the Company believes that it compares favorably to its competitors.
However, equally important are other factors, including but not limited to,
product reliability, availability, upgradability, price, overall cost of
ownership and technical service and support. The Company's ability to compete
will depend upon, among other factors, its ability to anticipate industry
trends, invest in product research and development, and effectively manage the
introduction of new or upgraded products into targeted markets.
Employees
As of March 15, 1998, the Company employed 23 full-time employees.
Approximately, five of these employees are involved in research and development,
seven in sales and marketing, and 11 in finance and general administration. In
addition, the Company has retained five independent contractors on a consulting
basis who support engineering and marketing functions. To date, the Company
<PAGE>
believes it has been successful in attracting and retaining skilled and
motivated individuals. Competition for qualified management and technical
employees is intense in the computer industry. The Company's success will depend
in large part upon its continued ability to attract and retain qualified
employees. The Company has never experienced a work stoppage and its employees
are not covered by a collective bargaining agreement. The Company believes that
it has good relations with its employees.
<PAGE>
ITEM 2. FINANCIAL INFORMATION
Selected Financial Data
The following selected financial data has been derived from the financial
statements included elsewhere in this report and should be read in conjunction
with such financial statements.
<TABLE>
<CAPTION>
Period from Six Months ended
February 13, 1998 ended
(inception) to December 31, 1998
June 30, 1998 (unaudited)
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<S> <C> <C>
Statement of Operation Data:
Net sales $ 29,621 $ 80,714
Cost of goods sold 5,681 31,478
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Gross profit from sales 23,940 49,236
Operating expenses 149,510 3,459,236
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Loss before other income (expense)
and benefit from income taxes (125,570) (3,410,000)
Interest income (expense), net 2,666 27,218
Other income (expense), net 3,490 2,118
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Loss before benefit from income taxes (119,414) (3,380,664)
Benefit from income taxes 20,000 -
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Net loss $ (99,414) $(3,380,664)
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Basic and diluted net loss per share $ (0.04) $ (0.78)
========== ==========
Weighted average common shares
outstanding 2,810,102 4,315,772
========== ==========
Financial position:
Cash and cash equivalents $1,118,416 $ 808,279
Marketable securities, available
for sale 1,063,828 463,500
Total assets 2,959,451 1,976,444
Total shareholders' equity 2,928,003 1,788,974
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking Statements
This Form 10 includes, without limitation, certain statements containing
the words "believes", "anticipates", "estimates", and words of a similar nature,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward looking and provide meaningful, cautionary statements identifying
important factors that could cause actual results to differ from the projected
results. All statements other than statements of historical fact made in this
Registration Statement Form 10 are forward-looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward- looking statements. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations.
Overview
The Company is a corporation with a limited operating history, formed in
February 1998. The Company has commenced field trial and limited sales of its
primary product, "The FoxBox". Additionally, efforts were made to obtain
operating capital and convert the Company to a public entity. This was
successfully accomplished through a reverse merger with Watchdog Patrols, Inc.,
a publicly traded (OTCBB) corporation. Operating expenses have increased
significantly since the Company's inception. This reflects the cost associated
with the formation of the Company as well as increased efforts to promote market
awareness for the FoxBox (Multi-services Internet communications gateway),
solicit new customers, recruit personnel, build operating infrastructure and
continued product development. The FoxBox is a multi-functional product that
connects business networks [Local Area Networks (LANs) and Wide Area Networks
(WANs)] to the Internet. It supports secure access to the Internet for 3 to 400
users through a single connection, provides advanced electronic mail functions
for unlimited users and delivers firewall security. The Company's initial target
markets are the end users in small and mid-size businesses and large
organizations with satellite offices. In January 1999 the Company was able to
secure two Agreements which have the potential to generate significant revenues
over the term of the agreement. The first of which would be The Sullivan Group
("Sullivan") agreement whereby Sullivan appointed the Company as its exclusive
provider of the Company's multi-service Internet delivery system (known as
"FoxBox") to be used in conjunction with Sullivan's proprietary interactive
distance learning training programs. The period of the agreement is for a term
of five years. The second agreement is with Anicom, Inc. ("Anicom"). The Company
entered into a five- year exclusive master distribution agreement with Anicom,
Inc. to distribute the FoxBox through North America.
The Company has a limited operating history in which to base an evaluation
of the business and prospects. The Company's prospects must be considered in
light of the risks, frequently encountered by companies in their early stages of
development, particularly for companies in the rapidly evolving Technology
Industry. Certain risks for the Company include, but are not limited to unproven
business model, capital requirements and growth management. To counter this
risk, the Company must, among other things, increase its customer base, develop
a distribution network, successfully execute its business and marketing plan,
and increase the operating infrastructure. There can be no assurance that the
<PAGE>
Company will be successful in addressing such risk, and the failure to do so
could have a material adverse effect on the Company's financial condition and
results of operations. Since inception, the Company has incurred significant
losses and as of December 31, 1998 had a deficit accumulated during the
development stage of approximately $3.5 million. The Company believes that its
success depends in large part on its ability to create market awareness and
acceptance for the FoxBox, raise additional operating capital to grow
operations, build technology and non-technology infrastructures, expand the
sales force and distribution network, and continue new product R&D through the
development and operational stages.
Results of Operations
From February 13, 1998 (date of inception) to December 31, 1998
The Company continues to operate as a development stage enterprise as of
December 31, 1998, and accordingly, the Company has engaged in limited revenue
generating operations. The net sales from operations for the period from
inception through December 31, 1998 were $110,335. Additionally, $43,884 of
dividend and interest income was generated during this period. The Company
operates on a fiscal year end of June 30.
The Company's gross margin from the period of inception to December 31,
1998 was 66%. The Company believes that gross margins greater than 66% are
achievable at increased production levels. These results will depend, in part,
on the effects of economies-of-scale, the use of third-party assemblers and the
ability to competitively purchase rapidly evolving commodity hardware, which is
a significant component of "cost of goods sold." The use of non-Proprietary
hardware is one of many inherent design features of the FoxBox which facilitates
an efficient and cost effective production cycle. Additionally, this allows the
Company to focus its core R&D efforts on developing cutting edge Software. There
can be no assurance that the Company will be successful in increasing its
margins due to one or more factors. These factors include, but are not limited
to increases/decreases in direct labor and material costs and general economic
conditions in the future.
Operating expenses for this period were $3,608,746, which consisted
primarily of $1,685,260 of general and administrative costs relating to the
establishment of the infrastructure of the business. $91,616 of costs were
incurred relating to research and development, $1,831,862 relating to selling,
marketing and consulting. Included in the above mentioned operating expenses are
approximately $2,044,000 of compensation for services in the form of the
Company's common stock and options.
Liquidity and Capital Resources
On June 17, 1998 the Company executed a reverse merger with Watchdog
Patrols, Inc. a publicly traded company engaged in the activity of providing
armed and unarmed security guard services for the New York/Metropolitan Area.
This merger made available to the Company, approximately $2.3 million of cash,
cash equivalents and marketable securities to be used as operating capital.
Additionally, on November 22, 1998 the Company sold substantially all the assets
of the security guard business, consisting primarily of uniforms, vehicles,
computer systems and furniture to a third party. This generated an additional
$600,000 of cash flow to the Company.
As of December 31, 1998 the Company has $1,271,779 of cash, cash equivalent
and marketable securities available to fund operations. In March/April 1999, the
Company delivered an initial stocking order of approximately $1.6 million
pursuant to its master distribution agreement with Anicom. Additionally, the
Company estimates completion of a private placement memorandum (PPM) to raise up
to $6 million in the fourth quarter of fiscal 1999. Management believes that the
Company has and will have adequate capital resources to meet its working capital
need for at least the next twelve months based upon its current plans. However,
there can be no assurance that the Company will have sufficient capital to
finance its planned growth, or that its Private Placement offering will be
successful.
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Year 2000 Implication
The Company has been assessing the impact of the Year 2000 issue on its
current and future products, vendors and customers, internal information
technologies and non-information technologies systems and expects to complete
the process in the fourth quarter of fiscal 1999. Currently, all products and
information/ non-information technologies systems are Y2K compliant, due in part
to the limited operating history of the Company and the emphasis on compliance
during the planning and development stages of the Company. To date the Company
has not incurred material cost, and furthermore believes that any future actions
taken will not have a material effect on its operating results of financial
condition. The Company continues to assess whether third parties in its supply
and distribution chain are adequately addressing their Year 2000 compliance
issues. The Company has initiated formal communication with its significant
suppliers and service providers to determine the extent to which its systems may
be vulnerable. Failure of third-party equipment, software or content to operate
properly with regard to Year 2000 issues could require the Company to incur
unanticipated expenses to remedy problems, which could have a material adverse
effect on its business, operating results and financial condition.
<PAGE>
ITEM 3. PROPERTIES
The Company maintains approximately 250 square feet of office space in
Melville, New York at a monthly rental of approximately $1,600, which currently
accommodates the Company's headquarters for administrative and financial
functions. The lease expired in January and is currently on a month-to-month
basis. The Company has a three year lease expiring in August 2001 for
approximately 4,100 square feet of space in Tampa, Florida, which currently
accommodates the Company's research, development and a portion of its production
facilities. The annual rent is approximately $28,500. The Company is presently
negotiating for new facilities in New York and in the Tampa, Florida area. The
Company believes that its present and proposed facilities are adequate to meet
its current business requirements and that suitable facilities for expansion
will be available, if necessary, to accommodate further physical expansion of
corporate operations and for additional sales and support offices.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
common stock as of March 1, 1999 of (i) each person known by the Company to
beneficially own 5% or more of the Company's outstanding Common Stock, (ii) each
of the Company's executive officers, directors and director nominees, and (iii)
all of the Company's executive officers and directors as a group. Except as
otherwise indicated, all shares of Common Stock are beneficially owned, and
investment and voting power is held, by the persons named as owners. Percentage
ownership includes warrants currently exercisable or exercisable within 60 days
to purchase 500,000 shares of common stock.
<TABLE>
<CAPTION>
Name and Address of Amount of Shares
Beneficial Owner Beneficially Owned Percentage Ownership
- --------------------- ------------------ ---------------------
<S> <C> <C>
Greenleaf Capital Partners, LLC 1,141,360 (5) 21%
Walter M. Groteke 528,064 (1)(2) 10%
Daniel G. Stephens 528,064 (1)(2) 10%
Kevin F. Sherlock 528,064 (1)(2) 10%
Keith Darling 528,064 (2)(3) 10%
Mark Jacques 475,258 (2)(3) 9%
Walter R. Groteke 150,000 (1) 3%
Internet Technologies, Inc. 260,000 (4)(5) 5%
Ed Lavin 50,000 1%
Louis Liben 50,000 1%
Kirlin Securities, Inc. 500,000 (6) 9%
Executive officers and
directors as a group 1,834,192 33%
<FN>
* less than one percent (1%) unless otherwise indicated.
(1) Does not include unvested warrants to purchase 200,000 shares at an
option price of $1.63 per share. See "Management - Employment Agreements."
(2) Messrs. Walter M. Groteke, Daniel G. Stephens, Kevin F. Sherlock, Keith
Darling and Mark Jacques have agreed that the shares owned by them may not
be sold until June 17, 2000 without the prior written consent of Kirlin
Securities. Kirlin Securities may release such restriction, although
there are no understandings or arrangements in this regard.
(3) Messrs. Darling and Jacques are former officers, directors and employees of
the Company. Does not include unvested, performance based warrants to
purchase 50,000 shares each at an option price of $5.00 per share.
(4) Internet Technologies, Inc., a consultant to the Company, has the right
to receive up to 120,000 additional shares based upon future performance
criteria.
(5) Greenleaf Capital Partners, LLC has demand registration rights on its
shares and Internet Technologies, Inc. has demand registration rights
for 200,000 shares of common stock.
(6) Represents warrants currently exercisable by Kirlin Securities and its
affiliates to purchase 500,000 shares of common stock at $1.63 per share.
Kirlin Securities, Inc. has demand registration rights on the shares of
common stock issuable upon exercise of the warrants.
</FN>
</TABLE>
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The directors and executive officers of the Company and their ages are as
follows:
Name Age Position
- ---- --- --------
Walter M Groteke 29 Chairman of the Board, President and
Chief Executive Officer
Daniel G. Stephens 28 Vice Chairman of the Board and
Chief Information Officer
Kevin F. Sherlock 35 Chief Operating Officer and Director
Walter R. Groteke 52 Vice President - Sales and Marketing
and Director
Ed Lavin 55 Director
Louis Liben 40 Director
- ------
Walter M. Groteke, a co-founder of the Company, has been Chairman of the
Board, Chief Executive Officer and a director of the Company since June 1998.
Mr. Groteke is responsible for planning, developing and establishing policies
and business objectives for the Company. From June 1995 until 1997, Mr. Groteke
was regional business development manager for Techmatics, Inc. an information
systems Department of Defense contractor. From May 1993 to June 1995, Mr.
Groteke was senior account manager for NYNEX's strategic account management
program.
Daniel G. Stephens, a co-founder of the Company, has been Vice Chairman of
the Board and Chief Information Officer since June 1998. Mr. Stephens directs
research and development, information systems and technical support services for
the Company. From May 1994 until 1997, Mr. Stephens was a senior systems
engineer for Techmatics, Inc. In this capacity, he advised the Department of
Justice on development of a nationwide series network infrastructure to support
a law-enforcement database.
Kevin F. Sherlock, has been Chief Operating Officer of the Company since
January 1999 and a director of the Company since June 1998. From 1985 to June
1998, Mr. Sherlock was an Account Director responsible for sales and marketing
at Standard Register.
Walter R. Groteke has been a director of the Company since February 1999
and Vice President - Sales and Marketing since August 1998. From 1995 through
July 1998, Mr. Groteke was a regional and district sales manager for GTE Florida
and GTE Communications Corporation. Mr. Groteke founded Hawk Telecom in 1975 and
was President until its sale in 1994. Mr. Groteke is the father of Walter M.
Groteke.
<PAGE>
Ed Lavin has been a director of the Company since February 1999. Mr. Lavin
has been Chairman and Chief Executive Officer of Staples Communications, a
subsidiary of Staples Corporation since March, 1999. Mr. Lavin began his career
at ADT from 1967 to 1972. In 1970 he was promoted into ADT's National Accounts
Division. Mr. Lavin then joined the L. M. Ericcson Company of Sweden from 1973
to 1979 where he served as Vice President of Sales in the United States. Mr.
Lavin immigrated to Canada in 1980 to form Canadian Telecommunications Group and
was Chairman and CEO of Canadian Telecommunications Group (CTG) from 1980 to
1986. Mr. Lavin moved to TIE Communications where he served as president from
1987 to 1990. TIE Communications acquired Centel Communications, which was later
merged with WilTel Communications where he served as CEO from 1990 to 1993. In
November 1993, Mr. Lavin founded Quest America, a telecommunications consulting
company based in Boston, Massachusetts. On April 10, 1996, Mr. Lavin led a group
that acquired Executone Information Systems' Network Division. The purchaser was
a group financed by Bain Capital, Inc. of Boston, Massachusetts. The company
name was later changed to Claricom, Inc. In March 1999, Claricom successfully
merged its business with Staples Corporation.
Louis Liben has been a director of the Company since February 1999. From
1997 to date, Mr. Libin has been a director, Chief Technology Officer and Senior
Vice President of e.TV Commerce, Inc., a Jacksonville, Florida network
distribution technology company. Mr. Libin is also a director and the Chief
Technology Officer of Compu-DAWN, Inc., a leading public safety software company
in the United States. Louis Libin is the founder of Broadcast Communications,
Inc. (Broad Comm), a broadcast project management group. Mr. Libin is a
world-renowned expert in wireless communications systems. At the International
Telecommunications Union in Geneva, Switzerland, Mr. Libin represents the United
States on satellite and transmission issues and is currently Chairman of the
expert group on interactive data services. Mr. Libin has over 15 years
experience in engineering, communications, and management. From 1983 to 1986,
Mr. Libin was employed by the Radio Corporation of American ("RCA") as a project
manager. In 1986, RCA was acquired by the General Electric Corporation ("G.E.").
From 1987 to 1997, Mr. Libin served as the Director of Technology for NBC/G.E.,
specializing in a broadcast transmission systems and is also an officer as
Corporate Secretary or Assistant Corporate Secretary for all G.E. wholly-owned
subsidiaries that deal in broadcast, with responsibility for technical
developments and all Federal Communications Commission ("FCC") issues and
licenses. From 1981 to 1982, Mr. Libin was employed by the Loral Corporation as
Electronic Design Engineer and designed Radio Frequency ("RF") systems for the
military. From 1979 to 1980 he worked for Burroughs Computer Systems, Inc. (now
UNISYS) as a Field Engineer and from 1980 to 1981 for the Chryon corporation as
Design Engineer.
Employment Agreements
Walter M. Groteke, Daniel G. Stephens and Kevin F. Sherlock entered into
employment agreements in June 1998 in connection with the acquisition of
Watchdog Patrols, Inc. ("Watchdog Patrols"). Pursuant to these agreements,
Messrs. Groteke, Stephens and Sherlock are employed as Chief Executive Officer,
<PAGE>
Chief Information Officer and Chief Operating Officer, respectively, for an
initial term of three years. The agreement provides for automatic renewal for an
additional three years unless terminated by the Company for cause or terminated
by the executive. The base salary for each person is $100,000 increasing to
$150,000 annually in the event NetWolves generates revenues between $5,000,000
and $10,000,000 within one year of the employment term and further increasing to
$250,000 if NetWolves generates revenues of at least $10,000,000 within one year
of the initial employment term. The employment agreements each provide for an
annual incentive equivalent to 2% of the gross profit of NetWolves.
The employment agreements with Messrs. Groteke, Stephens and Sherlock
further provide for certain payments following death or disability for certain
fringe benefits such as reimbursement for reasonable expenses and participation
in medical plans, and for accelerated payments in the event of change of control
of the Company.
Walter M. Groteke, Daniel G. Stephens, Kevin F. Sherlock and Walter R.
Groteke also have entered into warrant agreements with the Company whereby each
is entitled to receive warrants to purchase 200,000 shares of the Company's
common stock at $1.63 per share under certain terms and conditions. The warrants
are fully vested five years from their respective dates of employment subject to
acceleration under certain events. These events include the sale or disposition
of substantially all of the capital stock or assets of the Company and the
generation of certain revenues by the Company. Specifically, the vesting of
50,000 warrants is accelerated if the Company generates revenues of at least
$5,000,000 within one year from the date of the Watchdog Patrols acquisition,
100,000 warrants will become exercisable if the Company generates at least
$10,000,000 in revenues with at least $2,000,000 in pretax profit within one
year of the Watchdog Patrols acquisition; and 50,000 warrants will become
exercisable if at least $10,000,000 of revenue is generated by the Company with
at least $1,000,000 in pretax profit within the second year following the
Watchdog Patrols acquisition. Further, if the vesting of the warrants is not
otherwise accelerated, they will nevertheless become exercisable if the Company
generates $20,000,000 in revenues with at least $4,000,000 in pretax income
during the second year following the acquisition of Watchdog Patrols.
Stock Option Plan
In June 1998, the Company adopted a 1998 Long Term Incentive Plan (the
"1998 Incentive Plan") in order to motivate qualified employees of the Company,
to assist the Company in attracting employees and to align the interests of such
persons with those of the Company's shareholders.
The 1998 Incentive Plan provides for a grant of "incentive stock options"
within the meaning of the Section 422 of the Internal Revenue Code of 1986, as
amended, "non-qualified stock options," restricted stock, performance grants and
other types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates.
The 1998 Incentive Plan, which will be administered by the Board of
Directors, authorizes the issuance of a maximum of 282,500 shares of common
stock, which may be either newly issued shares, treasury shares, reacquired
<PAGE>
shares, shares purchased in the open market or any combination thereof. If any
award under the 1998 Incentive Plan terminates, expires unexercised, or is
cancelled, the shares of common stock that would otherwise have been issuable
pursuant thereto will be available for issuance pursuant to the grant of new
awards. To date, the Company has granted options to purchase 243,500 shares of
common stock under the 1998 Incentive Plan to its officers and key employees.
ITEM 6. EXECUTIVE COMPENSATION
For the year ended June 30, 1998, no officer or director of NetWolves
Corporation received compensation in excess of $5,000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 17, 1998, NetWolves, LLC merged into a subsidiary of Watchdog
Patrols, Inc., which thereafter changed its name to NetWolves Corporation. The
merger provided for exchange of securities of NetWolves, LLC for the securities
of the Company. As part of such exchange, principals of NetWolves, LLC received
2,640,322 shares of NetWolves Corporation. Messrs. Walter M. Groteke, Daniel G.
Stephens, Jr. , Kevin F. Sherlock and Keith A. Darling each received 528,064
shares and Mr. Marc Jacques received 475,258 shares
ITEM 8. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of their property is the subject.
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NetWolves' common stock has traded on the OTC Bulletin Board under the
symbol "WOLV" since December 1998. Prior to the December name and symbol change,
the Company's stock traded under the symbol "WDGT", Watchdog Patrols, Inc. The
following table sets forth the high and low closing prices for the common stock
for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
1999
<S> <C> <C>
Second Quarter (through April 5, 1999). . . . . $11.50 $10.625
First Quarter . . . . . . . . . . . . . . . . . 16.00 4.50
1998
Fourth Quarter. . . . . . . . . . . . . . . . . $4.875 $3.25
Third Quarter . . . . . . . . . . . . . . . . . 7.75 4.50
Second Quarter (since June 17, 1998). . . . . . 5.00 1.625
</TABLE>
As of April 5, 1999, there were approximately 225 holders of record of the
common stock. On April 5, 1999, the closing sales price of NetWolves common
stock was $11.50 per share.
NetWolves has not paid any cash dividends on its Common Stock and does not
presently intend to do so. Future dividend policy will be determined by its
Board of Directors on the basis of NetWolves' earnings, capital requirements,
financial condition and other factors deemed relevant.
The transfer agent and registrar of NetWolves' Common Stock is American
Stock Transfer and Trust Co., 40 Wall Street, New York, New York 10005.
<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
1. In June 1998, in connection with the merger of Watchdog Patrols, Inc.
with the Company 2,640,322 shares of the Company's common stock were issued to
the principals of NetWolves, LLC in exchange for their ownership interest in
that company. This was a transaction by the Company not involving any public
offering which was exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
2. In January 1999, an aggregate of 260,000 shares of the Company's common
stock were issued to a person in exchange for services rendered. This was a
transaction by the Company not involving any public offering which was exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
3. In January 1999, an aggregate of 200,000 shares of the Company's common
stock were issued to two persons in exchange for services rendered. These were
transactions by the Company not involving any public offering which were exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
4. In January 1999, an aggregate of 250,000 shares of the Company's common
stock were issued to three directors of the Company in exchange for services
rendered. This was a transaction by the Company not involving any public
offering which was exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company's authorized capital stock consists of 10,000,000 shares of
common stock, $.0033 par value per share.
Holders of the common stock do not have subscription, redemption,
conversion or preemptive rights. The shares of common stock when issued and paid
for, are fully paid and non-assessable. Each share of common stock is entitled
to participate pro rata in distribution upon liquidation and to one vote on all
matters submitted to a vote of shareholders. The holders of common stock may
receive cash dividends as declared by the Board of Directors out of funds
legally available therefor. Holders of the common stock are entitled to elect
all directors. At each annual meeting of the shareholders all of the directors
will be elected. The holders of the common stock do not have cumulative voting
rights, which means that the holders of more than half of the shares voting for
the election of a class of directors can elect all of the directors of such
class and in such event the holders of the remaining shares will not be able to
elect any of such directors.
<PAGE>
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and By-laws contain provisions
which reduce the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. The Company currently maintains
a liability insurance policy for the benefit of its directors in the sum of
$3,000,000.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Company and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interests of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions). The provisions do not
require a showing of good faith. Moreover, they do not provide indemnification
for liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance.
These provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers and
directors to the maximum extent allowable under New York law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any shareholders derivative action. However,
the provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken.
<PAGE>
The Company also has entered into indemnification agreements with its
officers and directors. The indemnification agreements provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related disbursements) actually and reasonably incurred in
connection with either the investigation, defense or appeal of a proceeding, (as
defined) including amounts paid in settlement by or on behalf of an indemnitee
thereunder.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached statements.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) See Index to Financial Statements at beginning of attached financial
statements.
(b) Exhibits
3.1 Certificate of Incorporation, as amended.
3.2 By-Laws.
4.1 Specimen common stock certificate.
4.2 Form of warrant to investment banking firm.
4.3 Form of warrant to employees.
10.1 Merger and Reorganization Agreement dated June 15, 1998 among
Watchdog Patrols, Inc., Watchdog Acquisition Corp. and NetWolves,
LLC.
10.2 Agreement between The Sullivan Group and NetWolves Corporation dated
January 5, 1999.
10.3 Distribution Agreement between NetWolves Corporation and Anicom,
Inc. dated as of January 18, 1999.
10.4 Form of Employment Agreement with executive officers.
10.5 Stock Option Plan.
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
NETWOLVES CORPORATION
By: /s/ Kevin F. Sherlock
---------------------------
Kevin F. Sherlock
Chief Operating Officer
Dated: April 19, 1999
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
CONTENTS
INDEPENDENT AUDITOR'S REPORT ............................................. F-1
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1998 (unaudited) ........................ F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period from February 13, 1998 (inception) to June 30, 1998 and
for the three and six months ended December 31, 1998 (unaudited) ....... F-3
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the period from February 13, 1998 (inception) to June 30, 1998 and
for the six months ended December 31, 1998 (unaudited) .................. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from February 13, 1998 (inception) to June 30, 1998 and
for the six months ended December 31, 1998 (unaudited) .................. F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................ F-6 - F-17
<PAGE>
Board of Directors and Shareholders
NetWolves Corporation
Melville, New York
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of NetWolves
Corporation and subsidiaries (the "Company") as of June 30, 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the period from February 13, 1998 (inception) to June 30, 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 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 consolidated financial position of NetWolves
Corporation and subsidiaries as of June 30, 1998, and the consolidated results
of their operations and their consolidated cash flows for the period from
February 13, 1998 (inception) to June 30, 1998 in conformity with generally
accepted accounting principles.
/s/ Hays & Company
Hays & Company
February 25, 1999, except for Note 10c which
is dated March 23, 1999
New York, New York
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
June 30, 1998
1998 (unaudited)
----------- -------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,118,416 $ 808,279
Marketable securities, available for sale, at market value 1,063,828 463,500
Accounts receivable, net of allowance for doubtful
accounts of $5,000 6,803 77,898
Net assets held for sale (Note 4) 720,000 275,000
Inventories 22,410 194,553
Prepaid expenses and other current assets 18,318 99,471
----------- -----------
Total current assets 2,949,775 1,918,701
Property and equipment, net 4,949 48,805
Other assets 4,727 8,938
----------- -----------
$ 2,959,451 $ 1,976,444
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 31,448 $ 187,470
----------- -----------
Total current liabilities 31,448 187,470
----------- -----------
Commitments and contingencies (Notes 4, 7, 9 and 10)
Shareholders' equity
Common stock, $.0033 par value; 10,000,000 shares authorized;
issued and outstanding: 4,313,870 - June 30, 1998
and 4,663,870 - December 31, 1998 14,236 15,391
Additional paid-in capital 3,012,159 5,055,316
Deficit accumulated during the development stage (99,414) (3,480,078)
Accumulated other comprehensive income 1,022 198,345
----------- -----------
Total shareholders' equity 2,928,003 1,788,974
----------- -----------
$ 2,959,451 $ 1,976,444
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Period from Three months Six months February 13,
February 13, ended ended 1998 (inception)
1998 December 31, December 31, to December 31,
(inception) to 1998 1998 1998
June 30, 1998 (unaudited) (unaudited) (unaudited)
------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Sales $ 29,621 $ 35,961 $ 80,714 $ 110,335
Cost of goods sold 5,681 15,179 31,478 37,159
----------- ----------- ----------- -----------
Gross profit from sales 23,940 20,782 49,236 73,176
----------- ----------- ----------- -----------
Operating expenses
General and administrative 105,047 872,647 1,580,221 1,685,268
Research and development -- 78,512 91,616 91,616
Sales and marketing 44,463 882,337 1,787,399 1,831,862
----------- ----------- ----------- -----------
149,510 1,833,496 3,459,236 3,608,746
----------- ----------- ----------- -----------
Loss before other income (expense)
and benefit from income taxes (125,570) (1,812,714) (3,410,000) (3,535,570)
Other income (expense)
Interest income 3,011 14,536 27,218 30,229
Loss on sale of marketable securities -- (8,047) (8,047) (8,047)
Dividend income 3,490 7,131 10,165 13,655
Interest expense (345) -- -- (345)
----------- ----------- ----------- -----------
Loss before benefit from income taxes (119,414) (1,799,094) (3,380,664) (3,500,078)
Benefit from income taxes 20,000 -- -- 20,000
----------- ----------- ----------- -----------
Net loss $ (99,414) $(1,799,094) $(3,380,664) $(3,480,078)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.04) $ (0.42) $ (0.78) $ (0.95)
=========== =========== =========== ===========
Weighted average common
shares outstanding 2,810,102 4,317,674 4,315,772 3,670,485
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Deficit
accumulated Accumulated Compre-
Additional during the other Total hensive
Common stock paid-in development comprehensive shareholders' income
Shares Amount capital stage income equity (loss)
------ ------ ---------- ----------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capital contributions to NetWolves, LLC 100 $ 64,245 $ - $ - $ - $ 64,245
Reverse acquisition, June 17, 1998 (Note 2)
Exchange of NetWolves, LLC membership
interests (100) (64,245) - - - (64,245)
Issuance of common stock to owners of
NetWolves, LLC 2,640,322 8,713 55,532 - - 64,245
Outstanding common stock of Watchdog
Patrols, Inc. 1,673,548 5,523 2,956,627 - - 2,962,150
Marketable securities valuation adjustment - - - - 1,022 1,022 $ 1,022
Net loss, period from February 13, 1998
(inception) to June 30, 1998 - - - (99,414) - (99,414) (99,414)
---------- --------- ---------- ----------- ------- ----------- ----------
Total comprehensive loss $ (98,392)
==========
Balance, June 30, 1998 4,313,870 14,236 3,012,159 (99,414) 1,022 2,928,003
Marketable securities valuation
adjustment (unaudited) - - - - 197,323 197,323 $ 197,323
Common stock and warrants issued for
services (unaudited) 350,000 1,155 2,043,157 - - 2,044,312 -
Net loss, six months ended
December 31, 1998 (unaudited) - - - (3,380,664) - (3,380,664) (3,380,664)
---------- --------- ---------- ----------- ------- ----------- ----------
Total comprehensive loss (unaudited) $(3,183,341)
===========
Balance, December 31, 1998 (unaudited) 4,663,870 $ 15,391 $ 5,055,316 $(3,480,078) $198,345 $ 1,788,974
========== ========= =========== =========== ======== ===========
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Comany)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Period from Six months February 13
February 13, ended 1998 (inception)
1998 December 31, to December 31,
(inception) to 1998 1998
June 30, 1998 (unaudited) (unaudited)
------------- ------------ ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (99,414) $(3,380,664) $ (3,480,078)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 401 3,541 3,942
Realized loss on sale of marketable securities -- 8,047 8,047
Provision for doubtful accounts 5,000 -- 5,000
Common stock and warrants issued for services -- 2,044,312 2,044,312
Deferred income tax benefit (20,000) -- (20,000)
Changes in operating assets and liabilities
Accounts receivable (11,803) (71,095) (82,898)
Inventories (22,410) (172,143) (194,553)
Prepaid expenses and other current assets (18,318) (81,153) (99,471)
Accounts payable and accrued expenses 31,448 156,022 187,470
----------- ----------- ------------
Net cash used in operating activities (135,096) (1,493,133) (1,628,229)
----------- ----------- ------------
Cash flows from investing activities
Proceeds from the sale of marketable securities -- 789,604 789,604
Proceeds from assets held for sale, net -- 445,000 445,000
Purchases of property and equipment (5,350) (47,397) (52,747)
Payments of security deposits (4,727) (4,211) (8,938)
----------- ----------- ------------
Net cash provided by investing activities 10,077 1,182,996 1,172,919
----------- ----------- ------------
Cash flows from financing activities
Proceeds from initial capital contribution 64,245 -- 64,245
Cash acquired in reverse acquisition 1,460,366 -- 1,460,366
Transaction costs paid in connection with reverse acquisition (261,022) -- (261,022)
----------- ----------- ------------
Net cash provided by financing activities 1,263,589 -- 1,263,589
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 1,118,416 (310,137) 808,279
Cash and cash equivalents, beginning of period -- 1,118,416 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 1,118,416 $ 808,279 $ 808,279
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Reverse acquisition (Note 2)
Marketable securities acquired $ 1,062,806 $ -- $ 1,062,806
Net assets held for sale 720,000 -- 720,000
Deferred income tax liability (20,000) -- (20,000)
Cash acquired, net of $261,022 of transaction costs paid 1,199,344 -- 1,199,344
----------- ----------- ------------
Outstanding common stock of Watchdog Patrols, Inc. $ 2,962,150 $ -- $ 2,962,150
=========== =========== ============
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
1 The Company
NetWolves, LLC was an Ohio limited liability company formed on February 13,
1998, which was merged into Watchdog Patrols, Inc. ("Watchdog") on June 17,
1998. Watchdog, the legal surviving entity of the merger was incorporated
under the laws of the State of New York on January 5, 1970. As a result of
the merger and subsequent sale of Watchdog's business (Note 4), Watchdog
changed its name to NetWolves Corporation (the "Company").
The Company is a development stage company that has designed and developed
a multi- functional product that is a secure, integrated, modular Internet
gateway. The primary product, the FoxBox, supports secure access to the
Internet for multiple users through a single connection and, among other
things, provides electronic mail, firewall security and web site hosting
and also contains a network file server. Since inception, the Company has
been developing its business plan and building its infrastructure in order
to effectively market its products. The Company is expecting to ship its
first significant order, in excess of $1,500,000, in March/April 1999.
2 Reverse acquisition
On June 17, 1998, Watchdog acquired all of the outstanding common stock of
NetWolves, LLC (the "Merger"). For accounting purposes, the acquisition has
been treated as an acquisition of Watchdog by NetWolves, LLC and as a
recapitalization of NetWolves, LLC. The historical financial statements
prior to June 17, 1998 are those of NetWolves, LLC. The acquisition of
Watchdog has been recorded based on the fair value of Watchdog's net
tangible assets, which consist primarily of cash, marketable securities and
certain assets held for sale (Note 4), with an aggregate value of
$2,962,150 (net of transaction costs of $261,022). Since this transaction
is in substance, a recapitalization of NetWolves, LLC and not a business
combination, pro forma information is not presented.
As part of the Merger, the NetWolves, LLC membership interests were
converted into 2,640,322 shares of Watchdog common stock and warrants to
purchase an aggregate of 600,000 shares of Watchdog common stock at an
exercise price of $1.63 per share. Immediately prior to the Merger, there
were 1,673,548 shares of Watchdog common stock issued and outstanding. In
addition, certain pre-Merger shareholders of Watchdog received warrants to
purchase 500,000 shares of Watchdog common stock at an exercise price of
$1.63 per share. Additionally, two individuals, who provided consulting
services with respect to the Merger, received warrants to purchase an
aggregate of 87,500 shares of Watchdog common stock at an exercise price of
$2.00 per share. These warrants are described further in Note 7.
3 Significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Interim financial information
The unaudited consolidated balance sheet as of December 31, 1998, the
unaudited consolidated statements of operations for the three and six
months ended December 31, 1998 and the unaudited consolidated statement of
cash flows for the six months ended December 31, 1998, have been prepared
by the Company and in the opinion of management include all adjustments
consisting only of normal recurring accruals, which management considers
necessary for the fair presentation of the financial statements for such
periods. The Company's results of operations for the six months ended
December 31, 1998, are not necessarily indicative of results that may be
expected for any other future interim periods or for the year ending June
30, 1999.
Fiscal year-end
The Company operates on a fiscal-year end of June 30.
Risks and other factors
As a company that has developed a software product for use as a
multi-functional Internet communications device, and whose planned
principal operations has not yet commenced, NetWolves Corporation faces
certain risks. These include, among other items, the ability to implement
its business plan, dependence on proprietary technology, rapid
technological change, challenges in recruiting personal and a highly
competitive market place.
Revenue recognition
The Company records revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"), issued by the American
Institute of Certified Public Accountants (as modified by Statement of
Position 98-9). SOP 97-2 provides additional guidance with respect to
multiple element arrangements; returns, exchanges, and platform transfer
rights; resellers; services; funded software development arrangements; and
contract accounting. Accordingly, revenue from the sale of perpetual and
term software licenses are recognized, net of provisions for returns, at
the time of delivery and acceptance of software products by the customer,
when the fee is fixed and determinable and collectibility is probable.
Maintenance revenue that is bundled with an initial license fee is deferred
and recognized ratably over the maintenance period. Amounts deferred for
maintenance are based on the fair value of equivalent maintenance services
sold separately.
Marketable securities
Marketable securities, which are all classified as "available for sale",
are valued at fair market value. Unrealized gains or losses are recorded
net of income taxes as "accumulated other comprehensive income" in
shareholders' equity, whereas realized gains and losses are recognized in
the Company's statements of operations using the first-in, first-out
method.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Inventories
Inventories consist of raw materials and finished goods. Inventories are
valued at the lower of cost or net realizable value using the first-in,
first-out method.
Property and equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating accounts at the time the expense is incurred.
Expenditures determined to represent additions and betterments are
capitalized.
Software development costs
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased
software technologies are recorded at cost. Software costs associated with
technology development and purchased software technologies are amortized
using the greater of the ratio of current revenue to total projected
revenue for a product or the straight-line method over its estimated useful
life. Amortization of software costs begins when products become available
for general customer release. Costs incurred prior to establishment of
technological feasibility are expensed as incurred and reflected as
research and development costs in the accompanying consolidated statements
of operations.
Start-up and organization costs
The Company accounts for start-up costs in accordance with Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP
98-5"), issued by the American Institute of Certified Public Accountants.
SOP 98-5 requires the cost of start-up activities, including organization
costs, to be expensed as incurred.
Impairment of long-lived assets
The Company reviews its long-lived assets, including software development
costs and property and equipment, for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount of
the assets. The Company has determined that as of June 30, 1998, there has
been no impairment in the carrying value of long-lived assets.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Income taxes
The Company accounts for income taxes using the liability method which
requires the determination of deferred tax assets and liabilities based on
the differences between the financial and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
differences are expected to reverse. The net deferred tax asset is adjusted
by a valuation allowance, if, based on the weight of available evidence, it
is more likely than not that some portion or all of the net deferred tax
asset will not be realized. The Company and its subsidiaries are expected
to file a consolidated Federal income tax return.
Basic and diluted net loss per share
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards No.128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires dual presentation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share includes the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock.
The effect of the recapitalization on the NetWolves, LLC members has been
given retroactive application in the earnings per share calculation. The
common stock issued and outstanding with respect to the pre-Merger Watchdog
shareholders has been included since the effective date of the Merger.
Outstanding stock options and warrants have not been considered in the
computation of diluted per share amounts, since the effect of their
inclusion would be antidilutive. Accordingly, basic and diluted earnings
per share amounts are identical.
Cash and cash equivalents
Generally, the Company considers investments with original maturities of
three months or less to be cash equivalents.
Concentrations and fair value of financial instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
marketable securities. At June 30, 1998, the Company's cash investments are
held at various financial institutions, which limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk
with respect to marketable securities consist of a varied portfolio, which
limits the amount of credit exposure to any one particular investment.
Unless otherwise disclosed, the fair value of financial instruments
approximates their recorded values.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Use of estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
4 Net assets held for sale
In November 1998, the Company sold substantially all of the business assets
related to Watchdog's uniformed security guard services operations to W
Acquisition Corp. (the "Purchaser") for $600,000. The Purchaser acquired
all inventory, furniture and equipment, customer lists, trade rights,
contracts, goodwill and rights to the name "Watchdog Patrols, Inc." (the
"Assets"). The Company retained responsibility for all remaining accounts
receivable, other current assets, accounts payable and accrued expenses.
The net assets held for sale are classified as a current asset and are
reflected at net realizable value based on the selling price of the Assets,
the net estimated liquidation value of the assets and liabilities retained,
and the net negative cash flows from the operations of the security guard
business during the period from June 17, 1998 (the date of acquisition) to
the date of disposal in November 1998. Net assets held for sale consist of
the following:
<TABLE>
<CAPTION>
December 31,
1998
June 30, 1998 (unaudited)
------------- -------------
<S> <C> <C>
Sale of Assets $ 600,000 $ -
Retained assets and liabilities
Accounts receivable 500,000 250,000
Other current assets 140,000 140,000
Accounts payable and accrued expenses (460,000) (115,000)
Cash out-flows from operations during holding period (60,000) -
----------- -----------
Net assets held for sale $ 720,000 $ 275,000
=========== ===========
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
5 Marketable securities, available for sale
The following is a summary of marketable securities, available for sale:
<TABLE>
<CAPTION>
Gross
Amortized unrealized Fair
cost gain (loss) value
---------- ----------- ----------
<S> <C> <C> <C>
June 30, 1998
Mutual funds/equity securities $ 569,131 $ (536) $ 568,595
Bonds 493,675 1,558 495,233
---------- -------- ----------
$1,062,806 $ 1,022 $1,063,828
========== ======== ==========
December 31, 1998 (unaudited)
Mutual funds/equity securities $ 70,000 $230,000 $ 300,000
Bonds 195,155 (31,655) 163,500
---------- -------- ----------
$265,155 $198,345 $ 463,500
========== ======== ==========
</TABLE>
Changes in the unrealized gain (loss) on marketable securities, available
for sale are reported as separate components of shareholders' equity.
The maturities of the Company's debt securities at June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost value
--------- -----------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 202,660 203,733
Due after six years through ten years 291,015 291,500
---------- -----------
$ 493,675 $ 495,233
========== ===========
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
6 Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
Useful life 1998
in years June 30, 1998 (unaudited)
----------- ------------- ------------
<S> <C> <C> <C>
Machinery and equipment 5 $ 3,350 $ 36,601
Furniture and fixtures 5 2,000 16,146
---------- -----------
5,350 52,747
Less accumulated depreciation (401) (3,942)
---------- -----------
Property and equipment, net $ 4,949 $ 48,805
========== ===========
</TABLE>
7 Shareholders' equity
Common stock issuances
During the six months ended December 31, 1998, the Company issued 350,000
shares of its common stock as follows:
. 150,000 shares were issued to the Company's Vice President of Sales
and Marketing (who is also a Director of the Company) for services
rendered during the six months ended December 31, 1998, which resulted
in a charge to operations of approximately $576,000.
. 200,000 shares were issued to Internet Technologies, Inc., a
consultant to the Company ("Internet Technologies"), for services
rendered during the six months ended December 31, 1998, which resulted
in a charge to operations of approximately $769,000. Internet
Technologies has demand registration rights on these 200,000 shares.
During January 1999, the Company issued 360,000 shares of its common stock
as follows:
. 60,000 shares were issued to Internet Technologies for services to be
rendered during the three months ending March 31, 1999. Additionally,
Internet Technologies has the right to receive up to 120,000
additional shares based upon specified performance criteria.
. 100,000 shares were issued to a financial consultant for services to
be rendered during the three months ending March 31, 1999.
. 100,000 shares were issued in conjunction with the appointment of two
new Directors of the Company effective February 1, 1999 (50,000 shares
each).
. 100,000 shares were issued to the Company's legal counsel for services
to be rendered during the three months ending March 31, 1999.
Another shareholder, Greenleaf Capital Partners, LLC (a pre-Merger
shareholder of Watchdog), has demand registration rights on its 1,141,360
shares of common stock.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
7 Shareholders' equity (continued)
Stock option plan
In June 1998, the Company adopted the 1998 Long Term Incentive Plan (the
"1998 Incentive Plan") in order to motivate qualified employees of the
Company, to assist the Company in attracting employees and to align the
interests of such persons with those of the Company's shareholders. The
1998 Incentive Plan, which authorizes the issuance of a maximum of 282,500
shares of common stock, provides for a grant of incentive stock options,
non-qualified stock options, restricted stock, performance grants and other
types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates. The 1998 Incentive Plan is
administered by the Board of Directors, which has sole discretion and
authority, consistent with the provisions of the 1998 Incentive Plan, to
determine which eligible participants will receive options, the time when
options will be granted and the terms of options granted.
In January 1999, the Company granted options to purchase 243,500 shares of
common stock under the 1998 Incentive Plan to its officers and key
employees as follows: (i) 143,500 options are exercisable at $5.00 per
share and vest in equal installments over three years commencing January
2000, and (ii) 100,000 options are exercisable at $5.00 per share and vest
in 5 years subject to acceleration pursuant to specified performance
criteria. All options expire in ten years from the grant date.
Warrants
On June 17, 1998, in conjunction with the Merger, the Company granted
warrants to purchase 1,187,500 shares of its common stock as follows:
. 600,000 ten-year warrants issued to the former members of NetWolves
LLC at an exercise price of $1.63 per share. Originally, 200,000
warrants were granted to each of five individuals; upon termination of
two of these individuals in January 1999, 400,000 warrants were
cancelled resulting in 600,000 outstanding warrants. The warrants vest
in 5 years subject to acceleration pursuant to specified performance
criteria (also see Note 9).
. 500,000 five-year warrants issued to certain pre-Merger shareholders
of Watchdog at an exercise price of $1.63 per share. These warrants
became exercisable when granted. The pre-merger shareholders have
demand registration rights on the shares of common stock issuable upon
exercise of these warrants.
. 87,500 five-year warrants issued to two individuals who provided
consulting services with respect to the Merger at an exercise price of
$2.00 per share. These warrants became exercisable when granted.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
7 Shareholders' equity (continued)
Warrants (continued)
During the six months ended December 31, 1998, the Company granted warrants
to purchase 200,000 shares of its common stock as follows:
. 200,000 ten-year warrants issued to the Company's Vice President of
Sales and Marketing (who is also a Director of the Company) at an
exercise price of $1.63 per share. The warrants vest in 5 years
subject to acceleration pursuant to specified performance criteria.
These warrants were issued for services rendered during the six months
ended December 31, 1998 and resulted in a charge to operations of
approximately $699,000.
During January 1999, the Company granted warrants to purchase 400,000
shares of its common stock as follows:
. 100,000 two-year warrants were issued to two terminated employees
(50,000 warrants each) at an exercise price of $5.00 per share (also
see Note 9). The warrants vest only upon achieving specified sales
criteria during calendar 1999.
. 300,000 warrants were issued to Anicom, Inc. for cash consideration of
$300,000 (see Note 10b).
8 Benefit from income taxes
The benefit from income taxes for the period from February 13, 1998
(inception) to June 30, 1998 consists of the following:
<TABLE>
<S> <C>
Current - Federal and states $ -
Deferred - Federal 15,000
Deferred - states 5,000
------------
Benefit from income taxes $ 20,000
============
</TABLE>
The following table summarizes the significant differences between the
Federal statutory tax rate and the Company's effective tax rate for
financial reporting purposes:
<TABLE>
<S> <C>
Federal statutory tax rate (34.0)%
State and local taxes net of Federal tax effect (5.0)
Effect of graduated tax rates 9.0
Permanent differences 1.9
Valuation allowance on deferred tax asset 11.4
------
Effective tax rate (16.7)%
======
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
8 Benefit from income taxes (continued)
The tax effects of temporary differences and carry forwards that give rise
to deferred tax assets or liabilities at June 30, 1998 are summarized as
follows:
<TABLE>
<S> <C>
Provision for doubtful accounts $ 1,500
Net operating loss carry forward 32,000
Net assets held for sale (20,000)
Valuation allowance on net deferred tax asset (13,500)
------------
Deferred tax asset, net $ -
============
</TABLE>
The Company has provided for full valuation allowances on the net deferred
tax assets due to the uncertainty of future income tax estimates.
9 Commitments and contingencies
Leases
The Company has entered into several leases for office space. At June 30,
1998, the approximate future minimum annual lease payments are summarized
as follows:
<TABLE>
<S> <C>
Fiscal year ending June 30,
1999 $ 66,000
2000 48,000
2001 48,000
2002 23,000
2003 18,000
Thereafter 2,000
------------
$ 205,000
============
</TABLE>
Employment agreements
In conjunction with the consummation of the Merger, the Company entered
into employment agreements with 5 executives who were the principal
pre-Merger owners of NetWolves, LLC. Two of these executives were
subsequently terminated as discussed below. Each of the agreements are
substantially identical and provide for the following significant terms:
. employment term of three years commencing June 1999, with
automatic renewals for additional three-year terms unless
terminated by the Company for cause or terminated by the
executive,
. salary of $100,000, increasing up to $250,000, dependent on
specified revenue targets,
. bonus of 2% of the Company's gross profit, and
. 200,000 warrants (see Note 7).
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
9 Commitments and contingencies (continued)
Employment agreements (continued)
In January 1999, two of the five executives were terminated pursuant to a
Settlement Agreement and Mutual Release. In exchange for terminating the
employment agreements and cancellation of the 200,000 warrants previously
issued, the Company will pay each terminated executive $50,000 in cash and
enter into a Manufacturer's Representation Agreement ("MRA"). The MRA
appoints the terminated executive as an independent non-exclusive sales
person to promote the sale of the Company's products. The MRA is for a
one-year term commencing January 1999 and provides for a 5% commission on
all net sales attributed to such representative. Additionally, each of the
terminated executives received 50,000 performance based warrants (see Note
7).
Legal matters
Certain claims, suits and complaints arising in the normal course with
respect to the Company's uniformed security guard services operations have
been filed or are pending against the Company. Generally, these matters are
all covered by a general liability insurance policy. In the opinion of
management, all such matters are without merit or are of such kind, or
involve such matters, as would not have a significant effect on the
financial position or results of operations of the Company, if disposed of
unfavorably.
10 Subsequent events
a. The Sullivan Group
In January 1999, the Company entered into an agreement with The Sullivan
Group ("Sullivan") whereby Sullivan appointed the Company as its exclusive
provider of the Company's multi-service Internet delivery system (known as
"FoxBox") to be used in conjunction with Sullivan's proprietary interactive
distance learning training programs. The period of the agreement is for a
term of five years and shall be automatically renewed for an additional
five-year term unless six months notice of termination is provided by
either party.
Although there are no minimum order requirements, it is expected that
delivery will commence in June 1999, and in most instances, the FoxBox
units will be subject to 48-month rental contracts at a rate of $200 per
unit, per month. The lease obligations will be paid for by the end user
retail site (or its corporate parent, the "Site"). One year of maintenance
is to be included with each leasing agreement. Beginning in the second
year, each Site may agree to pay the Company an additional fee in order to
extend the maintenance period.
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
10 Subsequent events (continued)
b. Anicom, Inc.
In January 1999, the Company entered into a five-year exclusive master
distribution agreement with Anicom, Inc. ("Anicom") to distribute the
FoxBox throughout North America. Additionally, Anicom is entitled to
receive a commission on any sales or leases of the FoxBox unit made
directly by the Company that Anicom was not involved with and a commission
on certain technical support revenue earned by the Company. The agreement
may be terminated by the Company with payment of a specified termination
fee or it may be terminated should Anicom fail to meet minimum order
requirements.
In connection with the agreement and for cash consideration paid to the
Company of $300,000, the Company issued Anicom 300,000 warrants to purchase
common stock of the Company at an exercise price of $5 per share. The
warrants issued to Anicom shall vest in equal installments over three
years, commencing on the first anniversary of the agreement and shall
expire in January 2004. Anicom also obtained piggyback registration rights
with respect to the issuable shares of common stock.
c. Private placement memorandum
On April 20, 1999, the Company completed preparation of a Private Placement
Memorandum. The Company is offering to sell up to 800,000 shares of
restricted common stock at $7.50 per share (a total of $6,000,000) on a
"best efforts, no minimum, maximum basis." Any proceeds to the Company are
expected to be used for working capital purposes and will be subject to
sales commissions and other expenses including legal, accounting and filing
fees. There can be no assurances that the Company's offering will be
successful.
RECEIPT OF DEPARTMENT OF STATE
STATE OF NEW YORK_______DEPARTMENT OF STATE
DIVISION OF CORPORATIONS AND STATE RECORDS
ALBANY
FILING RECEIPT
TYPE OF CERTIFICATE
Incorporation (Business) 0
CORPORATION NAME DATE FILED
WATCHDOG PATROLS, INC. 1/5/70
DURATION & CO. CODE FILE NO.
P 30 804780-4
NO. AND KIND OF SHARES
200 npv
LOCATION OF PRIN. OFFICE COMMENT
OYSTER BAY NASSAU CO
ADDRESS FOR SERVICE OF PROCESS
BERGER 22 WHITLOCK ST PLAINVIEW NY 11803
REGISTERED AGENT, IF ANY
FILER AND ADDRESS
PAUL BERGER
22 WHITLOCK ST
PLAINVIEW NY 11803
6 DOLLAR FEE TO COUNTY
FEES AND/OR TAX PAID AS FOLLOWS:
[ ] CHK. [X ] M.O. [ ] CASH $ 60
$ 50 FILING
$ 10 TAX
$ CERTIFIED COPY
$ CERTIFICATE TOTAL $ 60
REFUND OF $ TO FOLLOW
JOHN P. LOMENZO
SECRETARY OF STATE
/S/
CO-518 (rev. 3/66)
<PAGE>
Certificate of Incorporation of
804780 WATCHDOG PATROLS, INC.
under Section 402 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
(1) The name of the proposed corporation is WATCHDOG PATROLS, INC.
(2) purpose or purposes for which this corporation is formed, are as follows,
to wit:
to train watchdogs in all phases: guard, protection, attack and obedience;
to rent, lease and sell trained watchdogs for residential, commercial and
industrial security purposes; to act as consultant in watchdog training and
related security aspects; and to conduct and carry on any other similar
business which may be capable of being profitably carried on in connection
with this company's business, or to carry on any similar business that is
adapted directly or indirectly to add to the value of the company's
property and the profits of the authorized business.
The corporation in furtherance of its corporate purposes above set forth,
shall have all of the powers enumerated in Section 302 of the Business
Corporation Law, subject to any limitations provided in the Business Corporation
Law or any other statute of the State of New York. (3) The office of the
corporation is to be located in the Town of Oyster Bay County of Nassau State of
New York.
(3) The office of the coproration is to be located in the Town of Oyster Bay
County of Nassau State of New York.
(4) The aggregate number of shares which the corporation shall have the
authority to issue 200 of which all shall be without par value.
(5) The Secretary of State is designated as agent of the corporation upon whom
process against it may be served. The post office address to which the
Secretary of State shall mail a copy of any process against the corporation
served upon him is c/o Berger, 22 Whitlock Street, Plainview, New York
11803.
The undersigned incorporator, or each of them if there are more than one,
is of the age of twenty-one years or over.
IN WITNESS WHEREOF, this certificate has been subscribed this 23rd day of
December 1969 by the undersigned who affirm(s) that the statements made herein
are true under the penalties of perjury.
Phyllis Berger /s/Phyllis Berger
Type Name of Incorporator -------------------------
22 Whitlock Street, Plainview, New York
Helen Jaffee /s/Helen Jaffee
Type Name of Incorporator -------------------------
105-55 Flatlands 4th Street, Brooklyn, New York
<PAGE>
Certificate of Incorporation
of
WATCHDOG PATROLS, INC.
under Section 402 of the Business Corporation Law
Filed By:
Paul Berger
Office and Post Office Address
22 Whitlock Street
Plainview, New York 11803
WE 8-1490
STATE OF NEW YORK
DEPARTMENT OF STATE
FILED JAN 5 1970
804780-4 TAX $ 10
FILING FEE $50
/S/
Secretary of State
By: /s/
p 30 Nassau
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
WATCHDOG PATROLS, INC.
Under Section 805 of the Business Corporation Law
1) The name of the corporation (hereinafter called Corporation) is WATCHDOG
PATROLS, INC., and was incorporated on January 5, 1970 under the laws of the
State of New York.
2) The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article Two thereof and by substituting in lieu of said Article the
following New Article:
Second: To train watchdogs in all phases: guard, protection, attack and
obediance; to rent, lease and sell trained watchdogs for residential, commercial
and industrial security purposes; to act as consultant in watchdog training and
related security aspects; and to conduct and carry on any other similar business
which may be capable of being profitably carried on in connection with this
Company's business, or to carry on any similar business that is adapted directly
or indirectly to add to the value of the company's property and the profits of
the althorizcd business.
To design, manufacture, buy and sell, and generally deal in automatic
electric alarms for use in banks, stores, buildings, offices, houses, churches,
and other places for protection against burglary and any other intrusion and to
install, repair, inspect, and overhaul burglar alarms and other alarms of all
kinds, makes, and description. To design, manufacture, buy, and sell watchmen's
clocks and watches of all kinds.
To furnish the services of watchmen, guards, escorts for women, messengers,
ushers, bill collectors, investigators, and collectors of information.
To devise, put into operation, and conduct ways, systems, and methods for
the prevention and detection of crime and the apprehension and arrest of
criminals, for the recovery of lost or stolen property, for the finding of
missing persons, documents, or goods, for investigating and reporting upon the
antecedents, habits, character, doings, reliability, credit, or financial
condition of persons, firms, associations, or corporations. Generally to do all
things commonly done by private and by credit and mercantile reporting agencies.
To purchase, manufacture, produce, assemble, receive, lease or in any
manner, acquire, hold, own, use, operate, install, maintain, service repair,
process, alter, improve, import, export, sell, lease, assign, transfer. and
generally to trade and deal in and with, raw materials, natural or manufactured
<PAGE>
articles or products, Machinery, equipment, devices, systems parts, supplies,
apparatus and personal property of every kind, nature or description, tangible
or intangible, used or capable of being used for any purpose whatsoever and to
engage and participate in any mercantile, manufacturing or trading business of
any kind or character.
To purchase, receive, lease or otherwise acquire and to manage, hold, own,
use, improve, convey, sell, mortgage, or otherwise deal in and with lands,
buildings and real property of every description, or any interest therein.
To adopt, apply for, obtain, register, purchase, lease or otherwise acquire
and to maintain, protect, hold, use, own exercise, develop, manufacture under,
operate and introduce, and to sell and grant licenses or other rights in respect
of, assign, or otherwise dispose of, turn to account, or in any manner deal with
and contract with reference to, any trade marks, trade names, patents, patent
rights, concessions, franchises, designs, copyrights and distinctive marks and
rights analogous thereto, and inventions, devices, improvements, processes,
recipes, formulae and the like, including such thereof as may be covered by,
used in connection with, or secured or received under, Letters Patent of the
United States of America or elsewhere or otherwise, and any licenses in respect
thereof and any or all rights connected therewith or appertaining thereto.
In furtherance of its corporate business and subject to the limitations
prescribed by statute, to acquire by purchase, exchange or otherwise, all or any
part of, or any interest in, the properties, assets, business and good-will of
any one or more corporations, associations partnerships, firms, syndicates or
individuals and to pay for the same in cash, property or its own or other
securities; to hold, operate, reorganize, liquidate, mortgage, pledge, sell,
exchange, or in any manner dispose of the whole or any part thereof; and in
connection therewith, to assume or guarantee performance of any liabilities,
obligations or contracts of corporations, associations, partnerships, firms,
syndicates or individuals, and to conduct in any lawful manner the whole or any
part of any similar business thus acquired.
To acquire or become interested in, whether by subscription, purchase,
underwriting, loan, participation in syndicates or otherwise, to own, hold, to
sell, assign or otherwise dispose of, or in any manner to deal in or with,
stocks, bonds, debentures, warrants, rights, scrip, notes, evidences of
indebtedness, or other .securities or obligations of any kind by whomsoever
issued, to exercise in respect thereof all powers and privileges of individual
ownership or interest therein, including the right to vote thereon for any and
all purposes; to consent, or otherwise act with respect thereto, without
limitations; and to issue in exchange therefor the corporation's stock, bonds,
debentures, warrants, rights, scrip, notes, evidences of indebtedness or other
securities or obligations of any kind.
To borrow money for its corporate purposes, and to make, accept, endorse,
execute and issue promissory notes, bills of exchange, bonds, debentures or
other obligations from time to time, for the purchase of property, or for any
purpose relating to the business of the company, and if decreed proper, to
secure the payment of any such obligations by mortgage, pledge, guarantee, deed
of trust or otherwise.
<PAGE>
To lend its uninvested funds from. time to time to such extent, on such
terms and on such security, if any, as the Board of Director of the corporation
may determine.
In furtherance of its corporate business and subject to the limitations
prescribed by statute, to be a promoter, partner, member, associate or manager
of other business enterprises or ventures , or to the extent permitted in any
other jurisdiction to be an incorporator of other corporations of any type or
kind and to organize, or in any way participate in the organization,
reorganization, merger or liquidation of any corporation, association or venture
and the rnanagement thereof.
Subject to the limitations prescribed by statute and in furtherance of its
corporate business, to pay pensions, establish and carry out pension, profit
sharing, share bonus, share purchase, share option, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions for any or all of
its directors, officers and employees.
To conduct its business in all or any of its branches, so far as permitted
by law, in the State of New York and in all other states of the United States of
America, in the territories and the District of Columbia and in any or all
dependencies or possessions of the United States of America, and in foreign
countries; and to hold possess, purchase, lease, .mortgage and convey real and
personal property and to maintain offices and agencies either within or outside
the State of New York.
To carry out all or any part of the foregoing purposes as principal,
factor, agent, broker, contractor or otherwise, either alone or in conjunction
with any persons, firms, associations, corporations, or others in any part of
the world; and in carrying on its business and for the purpose of attaining or
furthering any of its purposes, to make and perform contracts of any kind and
description, and to do anything and everything necessary, suitable, convenient
or proper for the accomplishment of any of the purposes herein enumerated.
For the accomplishment of the aforesaid purposes, and in furtherance
thereof, the corporation shall have and may exercise all of the powers conferred
by the Business Corporation Law upon corporations formed thereunder, subject to
any limitations contained in Article 2 of said law or in accordance with the
provisions of any other statute of the State of New York.
3) The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article Four thereof and by substituting in lieu of said Article
the following New Article:
Fourth: The aggregate number of shares which the corporation may have
authority to issue is 2,000,000 shares of voting common stock each of $.01 par
value. The holders of voting common stock of $.-01 par value of the corporation
shall not have pre-emptive rights.
<PAGE>
4) Article 6 is hereby added to the Certificate of Incorporation and states
the following:
Sixth: The duration of the Corporation is to be perpetual.
5) Article 7 is hereby added to the Certificate of Incorporation and states
the following:
Seventh: Except as may otherwise be specifically provided in this
Certificate of Incorporation, no provision of this certificate of incorporation
is intended by the corporation to be construed as limiting, prohibiting,
denying, or abrogating any of the general or specific powers or rights,
conferred under the business corporation law upon the corporation, upon its
shareholders, bondholders and security holders and upon its directors, officers,
and other corporate personnel including in particular, the power of the
corporation to furnish indemnification to directors and officers in the
capacities defined and prescribed by the business corporation law and the
defined and prescribed rights of said persons to indemnification as the same are
conferred by the Business Corporation Law.
6) The manner in which the aforesaid amendments to the Certificate of
Incorporation were authorized are as follows:
a) By unanimous written consent of the holders of all of the outstanding
shares entitled to vote thereon.
7) The manner in which the common stock shall be changed by reason of the
aforesaid amendment is as follows:
a) The 200 common shares without par value are changed into 2,000,000
shares par value of $.01 per share. The rate of change is one share no par value
to become 10,000 shares par value $.01 per share, there are 30 Issued and
outstanding shares.
8) The effective date of the amendments herein certified shall be the date
of filing.
Dated: April 25, 1972 /s/ Paul Berger
--------------------------
Paul Berger, President
/s/ Phyllis Berger
--------------------------
Phyllis Berger, Secretary
(Corporate Seal)
Jack Applebaum
Attest: Notary Public, State of New York
No.
/s/ Phyllis Berger Qualified in Queens County
Phyllis Berger Commission Expires March 30, 1973
City of Plainview
County of Nassau
State of New York
April 27, 1972
<PAGE>
STATE OF NEW YORK) ss.
COUNTY OF QUEENS)
PAUL BERGER and PHYLLIS BERGER, being duly sworn depose and say that they
are the President and Secretary respectively of WATCHDOG PATROLS, INC. the
corporation named, and described in the foregoing certificate. That they have
read the foregoing certificate and know the contents thereof, and that the same
is true of their own knowledge, except as to the matters therein stated to be
alleged upon information and belief, and as to those matters they believe it to
be true
/s/ Paul Berger
--------------------------
Paul Berger
/s/ Phyllis Berger
--------------------------
Phyllis Berger
Sworn to before me this 21 day of April 1972.
Jack Applebaum FILED BY:
Notary Public, State of New York Loecher Solomon & Zukerman
No. 666 Fifth Avenue
Qualified in Queens County New York, New York 10019
Commission Expires March 30, 1973
City of Plainview
County of Nassau
State of New York
<PAGE>
804780-4 986500 -6
1/5/70 Oyster Bay
Nassau Co.
200 npv
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
WATCHDOG PATROLS, INC.
STATE OF NEW YORK
DEPARTMENT OF STATE
FILED MAY 5 1972
TAX $ None
FILING FEE $35
/s/
30 Nassau
LOECHER SOLOMON & ZUKERMAN
ATTORNEYS AT LAW
666 FIFTH AVENUE
NEW YORK, N Y 10019
<PAGE>
NYS DEPARTMENT OF STATE
FILING RECEIPT CHANGE OF PROVISIONS
CORPORATION NAME
WATCHDOG PATROLS, INC.
DATE FILED DURATION & COUNTY CODE FILM NUMBER CASH NUMBER
07/25/88 NASS B666150-2 216943
NUMBER AND KIND OF SHARES LOCATION OF PRINCIPAL OFFICE
*P-H
ADDRESS FOR PROCESS REGISTERED AGENT
FEES AND/OR TAX PAID AS FOLLOWS:
AMOUNT OF CHECK $ AMOUNT OF MONEY ORDER $00080.00 AMOUNT OF CASH $
$6.00 DOLLAR FEE TO COUNTY $060.00 FILING
$ TAX
FILER NAME AND ADDRESS $10.00 CERTIFIED COPY
$ CERTIFICATE
RICHARD S. MISSAN 010.00 MISCELLNEOUS
SUITE 2601 TOTAL PAYMENT $ 0000080.00
575 LEXINGTON AVENUE
NEW YORK NY 10022 REFUND OF $
TO FOLLOW
380604-003 (8/84) GAIL S SHAFFER - SECRETARY OF STATE
<PAGE>
CERTIFICATE 0F INCORPORATION
of
WATCHDOG PATROLS, INC
Under Section 805 of the Business Corporation Law
--------
It is hereby certified that:
FIRST: The name of the corporation is Watchdog Patrols, Inc.
SECOND: The Certificate of incorporation of the corporation was filed by
the Department of State on January 5, 1970.
THIRD: The amendment of the Certificate of Incorporation of the corporation
effected by this certificate of amendment is to add an article limiting the
liability of directors of the corporaiton.
FOURTH: To accomplish the foregoing amendment, the following new Article
Eighth, relating to the limitation of the liability of the directors, is added
to the certificate of incorporation of the corporation:
"EIGHTH: The personal liability of the directors of the corporation is
eliminated to the fullest extent permitted by the provisions of paragraph
(b) of Section 402 of the Business Corporation Law of the State of New
York, as the same may be amended and supplemented."
FIFTH: The foregoing amendment of the certificate of incorporation of the
corporation was authorized by the vote at a meeting of the Board of Directors of
the corporation, followed by the vote of the holders of at least a majority of
all of the outstanding shares of the corporation entitled to vote on the said
amendment of the certificate of incorporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set forth
below and do hereby affirm, under the penalties of perjury, that the statements
contained therein have been examined by us and are true and correct.
Date: July 20, 1988
/s/_______________________
Earl T. Smith, President
/s/_______________________
Phyllis Berger, Secretary
<PAGE>
P H
2
B666150
CERTIFICATE OF AMENDENT
OF
CERTIFICATE OF INCORPORATION
OF
WATCHDOG PATROLS, INC.
(Under Section 805 of the Business Corporation Law)
STATE OF NEW YORK
DEPARTMENT OF STATE
FILED JUL 25 1988
AMT. OF CHECK $ 80
FILING FEE $ 60
TAX $
COUNTY FEE $
COPY $ 10
CERT $
REFUND $
SPEC HANDLE $10
BY:
Nassau
Jul 22 11 06 AM'88
Richard S. Missan 216943 Filed
Counselor at law July 25 6 50 AM'88
Suite 2601
575 Lexington Avenue
New York, N.Y. 10022
BILLED
<PAGE>
NYS DEPARTMENT OF STATE
FILING RECEIP'T AMENDMENT-CHANGE OF SHARES
CORPORATION NAME
WATCHDOG PATROLS, INC.
DATE FILED DURATION & COUNTY CODE FILM NUMBER CASH NUMBER
08/14/89 NASS 0043949-3 455734
NUMBER AND KIND OF SHARES LOCATION OF PRINCIPAL OFFICE
10,000,000 PV $.0033
*P-H
ADDRESS FOR PROCESS REGISTERED AGENT
FEES AND/OR TAX PAID AS FOLLOWS:
AMOUNT OF CHECK $ AMOUNT OF MONEY ORDER $00090.00 AMOUNT OF CASH $
$ 6.00 DOLLAR FEE TO COUNTY $060.00 FILING
$00010.00 TAX
FILER NAME AND ADDRESS $10.00 CERTIFIED COPY
RICHARD S. MISSAN $ CERTIFICATE
575 LEXINGTON AVENUE $010.00 MISCELLANEOUS
SUITE 2601 TOTAL PAYMENT $ 0000090.00
NEW YORK NY 10022
REFUND OF $
TO FOLLOW
DOS-281 (8/84)
GAIL S SHAFFER - SECRETARY OF STATE
<PAGE>
STATE OF NEW YORK :
: ss:
DEPARTMENT OF STATE:
056670
I hereby certify that I have compared the annexed copy with the original
document filed by the Department of State and that the same is a correct
transcript of said original.
AUG 14 1989
Witness my hand and seal of the Department of State on
/s/
Secretary of State
380507-004 (12/87)
<PAGE>
CERTIFICATE OF AMENDMENT
PH
of
CERTIFICATE OF INCORPORATION
of
WATCHDOG PATROLS, INC.
Under Section 805 of the Business Corporation Law
C043949
-----------------
It is hereby certified that:
FIRST: The name of the corporation is Watchdog Patrols, Inc.
SECOND: The Certificate of Incorporation of the corporation was filed
by the Department of State on January 5, 1970.
THIRD: The amendments of the Certificate of Incorporation of the
corporation effected by this Certificate are (1) to change the currently
authorized and issued 1,674,000 common shares, par value $.01 each, into
1,674,000 issued common shares, par value $.0033 each, on a one for one basis ,
and to change the 326,000 currently authorized but unissued common shares, par
value $.01 each, into 326,000 authorized but unissued common shares, par value
$.0033 each; and (ii) to increase the authorized number of shares the
corporation shall have authority to issue, by authorizing an additional
8,000,000 common shares, par value $.0033 each. In connection with the
foregoing, the stated capital in respect of each issued common share is reduced
from $,01 per share to $.0033 per share, so that the aggregate stated capital of
the corporation is reduced from $16,740 to $5,524.
FOURTH: To accomplish the foregoing amendments, Article Fourth of the
Certificate of incorporation, relating to the authorized shares of the
corporation, is amended to read as follows;
"FOURTH: The aggregate number of shares which the corporation is
authorized to issue is 10,000,000 shares of common stock, par value
$.0033 per share. The holders of such common stock shall not have
pre-emptive rights."
FIFTH: The foregoing amendments of the Certificate of Incorporation of
the corporation were authorized by the vote at a meeting of the Board of
Directors of the corporation, followed by the vote of the holders of at least a
majority of all of the outstanding shares of the corporation entitled to vote on
the said amendments of the Certificate of Incorporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by us and are true and correct.
Date: August 9, 1989
/s/
--------------------------
Earl T. Smith, President
/s/
--------------------------
Phyllis Berger, Secretary
<PAGE>
Certificate of Amendment
Of
Certificate of Incorporation
Of
Watchdog Patrols, Inc.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
CO43949
STATE OF NEW YORK
DEPARTMENT OF STATE
FILED AUG 14 1989
AMT. OF CHECK $90
FILING FEE $60
TAX $10
COUNTY FEE $
COPY $10
CERT $
REFUND $
SPEC HANDLE $10
BY: /s/_________________
Nassau
1/5/70
Nass
BILLED 8047804
#B666150-2
2,000,000 PV1C
Aug 11 9 15 AM'89
/s/ 455734
Richard S. Missan
Suite 2601
575 Lexington Avenue
New York, New York 10022
Aug 14 6 57 AM'89
<PAGE>
N.Y.S. DEPARTMENT OF STATE 162 WASHINGTON AVENUE
DIVISION OF CORPORATIONS AND STATE RECORDS ALBANY, NY 12231
FILING RECEIPT
CORPORATION NAME: WATCHDOG PATROLS.. INC.
DOCUMENT TYPE: CERTIFICATE OF CHANGE (DOM. BUSINESS COUNTY: NASS
PROCESS
SERVICE COMPANY : PRENTICE-HALL CORPORATION SYSTEM, INC.
FILED: 02/24/1993 DURATION:********* CASH #: 930224000256 FILM #: 930224000237
ADDRESS FOR PROCESS
THE: CORPORATION
ATT: PHYLLIS BERGER 99 POWERHOUSE ROAD
ROSLYN HEIGHTS, NY 11577
CASH ~ 930224000256
REGISTERED AGENT
FILER FEES 65.00 PAYMENTS 65.00
RICHARD MISSAN, ESQ, FILING : 30.00 CASH: 0.00
75 LEXINGTON AVENUE TAX: 0.00 CHECK: 0.00
SUITE 2601 CERT: 0.00 BILLED: 65.00
NEW YORK. NY 10022 COPIES: 10.00
HANDLING: 25.00
REFUND
<PAGE>
STATE OF NEW YORK :
: ss:
DEPARTMENT OF STATE:
014151
I hereby certify that I have compared the annexed copy with the original
document filed by the Department of State and that the same is a correct
transcript of said original,
FEB 24 l993
Witness my hand and seal of the Department of State on
/s/
Secretary of State
DOS-200 (12/87)
<PAGE>
PH F930224000237
CERTIFICATE OF CHANGE
OF
WATCHDOG PATROLS. INC.
(Under Section 805-A of the Business Corporation Law)
------------------
FIRST: The name of the corporation is WATCHDOG PATROLS, INC
SECOND: The certificate of incorporation of the corporation was filed by
the Department of State on January 5, 1970.
THIRD: The certificate of incorporation of the corporation is hereby)
changed, pursuant to the authorization of the Board of Directors of the
corporation, so as to change the post office address to which the Secretary of
State shall mail a copy of an) process against the corporation served upon him
and, to accomplish said change, the statement in the certificate of
incorporation relating to said post office address is hereby stricken and the
following statement is substituted in lieu thereof:
"The post office address within the State of New York to which the
Secretary of State shall mail a copy of any process against the
corporation served upon him is 99 Powerhouse Road, Att: Phyllis
Berger, Roslyn Heights, New York 11577."
IN WITNESS WHEREOF, we have subscribed this document on the date
hereinafter set forth and do hereby affirm, under the penalties of perjury, that
the statements contained therein have been examined by us and are true and
correct.
Dated: February 19,1993
Name of (S) Phyllis Berger
Signer: Phyilis Berger, Chairman of the Board
Name of (S) Edward Cooperman
Signer: Edward Cooperman, Assistant Secretary
<PAGE>
F930224000237
Feb 24 1 04PM'93
CERTIFICATE OF CHANGE
PH
OF
WATCHDOG PATROLS. INC.
----------------------
(Under Section 805-A of the Business Corporation Law)
----------------------
Feb 24 10 50 PM '93
BILLED
STATE OF NEW YORK
DEPARTMENT OF STATE
FILED FEB 24 1993
TAX$ -
BY: /s/ ___________
Nass
Richard Missan, Esq.
575 Lexington Avenue
Suite 2601
New York, New York 10022
93022400256
<PAGE>
N.Y.S. DEPARTMENT OF STATE
DIVISION OF CORPORATIONS AND STATE RECORDS ALBANY, NY 12231-0001
FILING RECEIPT
ENTITY NAME: NETWOLVES CORPORATION
DOCUMENT TYPE: CERTIFICATE OF AMENDMENT (DOM. BUSINESS COUNTY: NASS
NAME
SERVICE COMPANY: ** NO SERVICE COMPANY ** SERVICE CODE: 00
FILED: 11/27/1998 DURATION:***** CASH#:981127000223 FILM #:981127000218
ADDRESS FOR PROCESS
REGISTERED AGENT
FILER FEES: 60.00 PAYMENTS 85.00
JERRY B. SELLMAN, ATTY. FILING: 60.00 CASH 0.00
WATCHDOG PATROLS, INC. CERT: 0.00 CHECK 85.00
85 EAST GAY STREET COPIES: 0.00
COLUMBUS, OH 43215 HANDLING: 0.00
REFUND: 25.00
<PAGE>
CERTIFICATE OF AMENDMENT
of
CERTIFICATE OF INCORPORATION
of
WATCHDOG PATROLS, INC,
Under Section 805 of the Business Corporation Law
-------------------------
It is hereby certified that:
FIRST: The name of the corporation is Watchdog Patrols, Inc,
SECOND: The Certificate of Incorporation of the corporation was filed by
the Department of State on January 5, 1970.
THIRD: The amendment of the Certificate of Incorporation of the corporation
effected by this Certificate is to change the name of the corporation to
NetWolves Corporation.
FOURTH: To accomplish the foregoing amendment. Article One of the
Certificate of Incorporation, relating to the name of the corporation, is
amended to read as follows:
"FIRST: The name of the proposed corporation is NetWolves Corporation."
FIFTH: The foregoing amendments of the Certificate of Incorporation of the
corporation were authorized by the vote at a meeting of the Board of Directors
of the corporation, followed by the vote of the holders of at least a majority
of all of the outstanding shares of the corporation entitled to vote on the said
amendments of the Certificate of Incorporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set forth
below and do hereby affirm, under the penalties of perjury, that the statements
contained therein have been examined by us and are true and correct.
November 23, 1998
/s/____________________________
Walter M. Groteke, CEO/President
/s/_____________________________
Kevin F. Sherlock, Secretary
BY-LAWS
of
WATCHDOG PATROLS, INC.
-----------------------------------------------------
ARTICLE I - OFFICES
-------------------
The principal office of the corporation shall be in the town of Oyster Bay
County of Nassau State of New York. The corporation may also have offices at
such other places within or without the State of New York as the board may from
time to time determine or the business of the corporation may require.
ARTICLE II - SHAREHOLDERS
-------------------------
1. PLACE OF MEETINGS.
Meetings of shareholders shall be held at the principal office of the
corporation or at such place within or without the State of New York as the
board shall authorize,
2. ANNUAL MEETING.
The annual meeting of the shareholders shall be held on the 3rd day of
March at 8 PM in each year if not a legal holiday, and, if a legal holiday, then
on the next business day following at the same hour, when the shareholders shall
elect a board and transact such other business as may properly come before the
meeting.
3. SPECIAL MEETINGS.
Special meetings of the shareholders may be called by the board or by the
president and shall be called by the president or the secretary at the request
in writing of a majority of the board or at the request in writing by
shareholders owning a majority in amount of the shares issued and outstanding.
Such request shall state the purpose or purposes of the proposed meeting,
Business transacted at a special meeting shall be confined to the purposes
stated in the notice.
4. FIXING RECORD DATE.
For the purpose of determining the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or to express
consent to or dissent from any proposal without a meeting, or for the purpose of
determining shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action, the board shall
<PAGE>
fix, in advance, a date as the record date for any such determination of
shareholders. Such date shall not be more than fifty nor less than ten days
before the date of such meeting, nor more than fifty days prior to any other
action. If no record date is fixed it shall be determined in accordance with the
provisions of law.
5. NOTICE OF MEETINGS OF SHAREHOLDERS.
Written notice of each meeting of shareholders shall state the purpose or
purposes for which the meeting is called, the place, date and hour of the
meeting and unless it is the annual meeting, shall indicate that it is being
issued by or at the direction of the person or persons calling the meeting.
Notice shall be given either personally or by mail to each shareholder entitled
to vote at such meeting, not less than ten nor more than fifty days before the
date of the meeting. If action is proposed to be taken that might entitle
shareholders to payment for their shares, the notice shall include a statement
of that purpose and to that effect. If mailed, the notice is given when
deposited in the United States mail, with postage thereon prepaid, directed to
the shareholder at his address as it appears on the record of shareholders, or,
if he shall have filed with the secretary a written request that notices to him
be mailed to some other address, then directed to him at such other address.
6. WAIVERS.
Notice of meeting need not be given to any shareholder who signs a waiver
of notice, in person or by proxy, whether before or after the meeting. The
attendance of any shareholder at a meeting, in person or by proxy, without
protesting prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him.
7. QUORUM OF SHAREHOLDERS.
Unless the certificate of incorporation provides otherwise, the holders of
a majority of the shares entitled to vote thereat shall constitute a quorum at a
meeting of shareholders for the transaction of any business, provided that when
a specified item of business is required to be voted on by a class or classes,
the holders of a majority of the shares of such class or classes shall
constitute a quorum for the transaction of such specified item of business.
When a quorum is once present to organize a meeting, it is not broken by
the subsequent withdrawal of any shareholders.
The shareholders present may adjourn the meeting despite the absence of a
quorum.
<PAGE>
8. PROXIES.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent without a meeting may authorize another person or
persons to act for him by proxy.
Every proxy must be signed by the shareholder or his attorney-in-fact. No
proxy shall be valid after expiration of eleven months from the date thereof
unless otherwise provided in the proxy. Every proxy shall be revocable at the
pleasure of the shareholder executing it, except as otherwise provided by law.
9. QUALIFICATION OF VOTERS,
Every shareholder of record shall be entitled at every meeting of
shareholders to one vote for every share standing in his name on the record of
shareholders, unless otherwise provided in the certificate of incorporation.
10. VOTE OF SHAREHOLDERS.
Except as otherwise required by statute or by the certificate of
incorporation;
(a) directors shall be elected by a plurality of the votes cast at a
meeting of shareholders by the holders of shares entitled to vote in the
election;
(b) all other corporate action shall be authorized by a majority of the
votes cast.
11. WRITTEN CONSENT OF SHAREHOLDERS.
Any action that may be taken by vote may be taken without a meeting on
written consent, setting forth the action so taken, signed by the holders of all
the outstanding shares entitled to vote thereon or signed by such lesser, number
of holders as may be provided for in the certificate of incorporation.
ARTICLE III - DIRECTORS
-----------------------
1. BOARD OF DIRECTORS.
Subject to any provision in the certificate of incorporation the business
of the corporation shall be managed by its board of directors, each of whom
shall be at least 21 years of age and shall be shareholders.
2. NUMBER OF DIRECTORS.
The number of directors shall be three. When all of the shares are owned by
less than three shareholders, the number of directors may be less than three but
not less than the number of shareholders.
<PAGE>
3. ELECTION AND TERM OF DIRECTORS.
At each annual meeting of shareholders, the shareholders shall elect
directors to hold office until the next annual meeting. Each director shall hold
office until the expiration of the term for which he is elected and until his
successor has been elected and qualified, or until his prior resignation or
removal.
4. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the board for any reason except the removal
of directors without cause may be filled by a vote of a majority of the
directors then in office, although less than a quorum exists, unless otherwise
provided in the certificate of incorporation. Vacancies occurring by reason of
the removal of directors without cause shall be filled by vote of the
shareholders unless otherwise provided in the certificate of incorporation. A
director elected to fill a vacancy caused by resignation, death or removal shall
be elected to hold office for the unexpired term of his predecessor.
5. REMOVAL OF DIRECTORS.
Any or all of the directors maybe removed for cause by vote of the
shareholders or by action of the board. Directors may be removed without cause
only by vote of the shareholders.
6. RESIGNATION.
A director may resign at any time by giving written notice to the board,
the president or the secretary of the corporation. Unless otherwise specified in
the notice, the resignation shall take effect upon receipt thereof by the board
or such officer, and the acceptance of the resignation shall not be necessary to
make it effective.
7. QUORUM OF DIRECTORS,
Unless otherwise provided in the certificate of incorporation, a majority
of the entire board shall constitute a quorum for the transaction of business or
of any specified item of business.
8. ACTION OF THE BOARD.
Unless otherwise required by law, the vote of a majority of the directors
present at the time of the vote, if a quorum is present at such time, shall be
the act of the board. Each director present shall have one vote regardless of
the number of shares, if any, which he may hold.
<PAGE>
9. PLACE AND TIME OF BOARD MEETINGS.
The board may hold its meetings at the office of the corporation or at such
other places, either within or without the State of New York, as it may from
time to time determine.
10. REGULAR ANNUAL MEETING.
A regular annual meeting of the board shall be held immediately following
the annual meeting of shareholders at the place of such annual meeting of
shareholders.
11. NOTICE OF MEETINGS OF THE BOARD, ADJOURNMENT.
(a) Regular meetings of the board may be held without notice at such time
and place as it shall from time to time determine. Special meetings of the board
shall be held upon notice to the directors and may be called by the president
upon three days notice to each director either personally or by mail or by wire;
special meetings shall be called by the president or by the secretary in a like
manner on written request of two directors. Notice of a meeting need not be
given to any director who submits a waiver of notice whether before or after the
meeting or who attends the meeting without protesting prior thereto or at its
commencement, the lack of notice to him.
(b) A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. Notice of the
adjournment shall be given all directors who were absent at the time of the
adjournment and, unless such time and place are announced at the meeting, to the
other directors.
12. CHAIRMAN.
At all meetings of the board the president, or in his absence, a chair man
chosen by the board shall preside.
13. EXECUTIVE AND OTHER COMMITTEES.
The board, by resolution adopted by a majority of the entire board, may
designate from among its members an executive committee and other committees,
each consisting of three or more directors.
Each such committee shall serve at the pleasure of the board.
14. COMPENSATION.
No compensation shall be paid to directors, as such, for their services,
but by resolution of the board a fixed sum and expenses for actual attendance,
at each regular or special meeting of the board may be authorized. Nothing
herein contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefore
<PAGE>
ARTICLE IV - OFFICERS
---------------------
1. OFFICES, ELECTION, TERM.
(a) Unless otherwise provided for in the certificate of incorporation, the
board may elect or appoint a president, one or more vice-presidents, a secretary
and a treasurer, and such other officers as it may determine, who shall have
such duties, powers and functions as hereinafter provided.
(b) All officers shall be elected or appointed to hold office until the
meeting of the board following the annual meeting of shareholders.
(c) Each officer shall hold office for the term for which he is elected or
appointed and until his successor has been elected or appointed and qualified.
2. REMOVAL, RESIGNATION, SALARY, ETC.
(a) Any officer elected or appointed by the board may be removed by the
board with or without cause.
(b) In the event of the death, resignation or removal of an officer, the
board in its discretion may elect or appoint a successor to fill the unexpired
term.
(c) Any two or more offices may be held by the same person, except the
offices of president and secretary.
(d) The salaries of all officers shall be fixed by the board.
(e) The directors may require any officer to give security for the faithful
performance of his duties.
3. PRESIDENT.
The president shall be the chief executive officer of the corporation; he
shall preside at all meetings of the shareholders and of the board; he shall
have the management of the business of the corporation and shall see that all
orders and resolutions of the board are carried into effect.
4. VICE-PRESIDENTS.
During the absence or disability of the president, the vice~president, or
if there are more than one, the executive vice-president, shall have all the
powers and functions of the president. Each vice-president shall perform such
other duties as the board shall prescribe.
<PAGE>
5. SECRETARY.
The secretary shall:
(a) attend all meetings of the board and of the shareholders;
(b) record all votes and minutes of all proceedings in a book to be kept
for that purpose;
(c) give or cause to be given notice of all meetings of shareholders and of
special meetings of the board;
(d) keep in safe custody the seal of the corporation and affix it to any
instrument when authorized by the board;
(e) when required, prepare or cause to be prepared and available at each
meeting of shareholders a certified list in alphabetical order of the names of
shareholders entitled to vote thereat, indicating the number of shares of each
respective class held by each;
(f) keep all the documents and records of the corporation as required by
law or otherwise in a proper and safe manner.
(g) perform such other duties as may be prescribed by the board.
6. ASSISTANTS-SECRETARIES.
During the absence or disability of the secretary, the assistant-secretary,
or if there are more than one, the one so designated by the secretary or by the
board, shall have all the powers and functions of the secretary.
7. TREASURER.
The treasurer shall:
(a) have the custody of the corporate funds and securities;
(b) keep full and accurate accounts of receipts and disbursements in the
corporate books;
(c) deposit all money and other valuables in the name and to the credit of
the corporation in such depositories as may be designated by the board;
(d) disburse the funds of the corporation as may be ordered or authorized
by the board and preserve proper vouchers for such disbursements;
(e) render to the president and board at the regular meetings of the board,
or whenever they require it, an account of all his transactions as treasurer and
of the financial condition of the corporation;
<PAGE>
(f) render a full financial report at the annual meeting of the
shareholders if so requested;
(g) be furnished by all corporate officers and agents at his request, with
such reports and statements as he may require as to all financial transactions
of the corporation;
(h) perform such other duties as are given to him by these by-laws or as
from time to time are assigned to him by the board or the president.
8. ASSISTANT-TREASURER.
During the absence or disability of the treasurer, the assistant-treasurer,
or if there are more than one, the one so designated by the secretary or by the
board, shall have all the powers and functions of the treasurer.
9. SURETIES AND BONDS.
In case the board shall so require, any officer or agent of the corporation
shall execute to the corporation a bond in such sum and with such surety or
sureties as the board may direct, conditioned upon the faithful performance of
his duties to the corporation and including responsibility for negligence and
for the accounting for all property, funds or securities of the corporation
which may come into his hands.
ARTICLE V - CERTIFICATES FOR SHARES
-----------------------------------
1. CERTIFICATES.
The shares of the corporation shall be represented by certificates. They
shall be numbered and entered in the books of the corporation as they are
issued. They shall exhibit the holder's name and the number of shares and shall
be signed by the president or a vice-president and the treasurer or the
secretary and shall bear the corporate seal.
2. LOST OR DESTROYED CERTIFICATES.
The board may direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by the corporation,
alleged to have been lost or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate to be lost or destroyed. When
authorizing such issue of a new certificate or certificates, the board may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
give the corporation a bond in such sum and with such surety or sureties as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost or
destroyed.
<PAGE>
3. TRANSFERS OF SHARES.
(a) Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered on
the transfer book of the corporation which shall be kept at its principal
office. No transfer shall be made within ten days next preceding the annual
meeting of shareholders.
(b) The corporation shall be entitled to treat the holder of record of any
share as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by the laws of New York.
4. CLOSING TRANSFER BOOKS.
The board shall have the power to close the share transfer books of the
corporation for a period of not more than ten days during the thirty day period
immediately preceding (1) any shareholders' meeting, or (2) any date upon which
shareholders shall be called upon to or have a right to take action without a
meeting, or (3) any date fixed for the payment of a dividend or any other form
of distribution, and only those shareholders of record at the time the transfer
books are closed, shall be recognized as such for the purpose of (1) receiving
notice of or voting at such meeting, or (2) allowing them to take appropriate
action, or (3) entitling them to receive any dividend or other form of
distribution.
ARTICLE VI - DIVIDENDS
----------------------
Subject to the provisions of the certificate of incorporation and to
applicable law, dividends on the outstanding shares of the corporation may be
declared in such amounts and at such time or times as the board may determine.
Before payment of any dividend, there may be set aside out of the net profits of
the corporation available for -dividends such sum or sums as the board from time
to time in its absolute discretion deems proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the board shall think
conducive to the interests of the corporation, and the board may modify or
abolish any such reserve.
<PAGE>
ARTICLE VII - CORPORATE SEAL
----------------------------
The seal of the corporation shall be circular in form and bear the name of
the corporation, the year of its organization and the words "Corporate Seal, New
York. " The seal may be used by causing it to be impressed directly on the
instrument or writing to be sealed, or upon adhesive substance affixed thereto.
The seal on the certificates for shares or on any corporate obligation for the
payment of money may be a facsimile, engraved or printed.
ARTICLE VIII - EXECUTION OF INSTRUMENTS
---------------------------------------
All corporate instruments and documents shall be signed or countersigned,
executed, verified or acknowledged by such officer or officers or other person
or persons as the board may from time to time designate.
ARTICLE IX - FISCAL YEAR
------------------------
The fiscal year shall begin the first day of January in each year.
ARTICLE X - REFERENCES TO CERTIFICATE OF INCORPORATION
------------------------------------------------------
Reference to the certificate of incorporation in these by-laws shall
include all amendments thereto or changes thereof unless specifically excepted.
ARTICLE XI -BY-LAW CHANGES
--------------------------
AMENDMENT, REPEAL, ADOPTION, ELECTION OF DIRECTORS.
(a) Except as otherwise provided in the certificate of incorporation the
by-laws may be amended, repealed or adopted by vote of the holders of the shares
at the time entitled to vote in the election of any directors. By-laws may also
be amended, repealed or adopted by the board but any by-law adopted by the board
may be amended by the shareholders entitled to vote thereon as hereinabove
provided.
(b) If any by-law regulating an impending election of directors is adopted,
amended or repealed by the board, there shall be set forth in the notice of the
next meeting of shareholders for the election of directors the by-law so
adopted, amended or repealed, together with a concise statement of the changes
made.
<PAGE>
ARTICLE XII - FIRST AMENDMENT TO BY-LAWS
----------------------------------------
CERTIFICATES
- ------------
The shares of common stock of the corporation shall be represented by
certificates. They shall be numbered and entered in the books of the corporation
as they are issued. They shall exhibit the holders name and the number of shares
and shall be signed by the President or Vice President aid Secretary or
Treasurer and shall bear the corporate seal. In lieu of signatures by the above
officers on the said stock certificates, facsimile signatures of the signatory
officers may be used and facsimile corporate seals maybe used when the
certificates are issued and counter signed by the Company's transfer agent duly
authorized.
SECOND AMENDMENT TO BY-LAWS
---------------------------
TRANSFER OF SHARES
- ------------------
This amendment amends Article V Section 3. (a) of the By-Laws and is to be
in lieu thereof. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession assignment or authority to transfer, it shall be the duty
of the corporation or the transfer agent, as the case may be, to issue a new
certificate to the person entitled thereto and to cancel the old certificate.
Each such transfer shall be entered on the transfer books of the transfer agent
which shall be kept at the offices of the transfer agent.
Exhibit 4.1
NETWOLVES CORPORATION
(INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK)
NW
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 64120V 10 2
THIS CERTIFIES that:
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.0033 PAR VALUE, OF
NETWOLVES CORPORATION
transferable on the books of the Corporation in person or by attorney upon
surrender of this certificate duly endorsed or assigned. This certificate and
the shares represented hereby are subject to the laws of the State of New York,
and to the Certificate of Incorporation and By-Laws of the Corporation, as now
or hereafter amended. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers. Dated:
SECRETARY
chairman and chief executive officer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED OFFICER
<PAGE>
The Corporation will furnish without charge to any shareholder who so requests a
full statement of, and the authority of the Board of Directors to fix, the
designation, relative rights, preferences and limitations of the shares of each
class of stock, or series thereof, authorized to be issued.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -
TEN ENT -
JT TEN -
as tenants in common
as tenants by the entireties
as joint tenants with right
of survivorship and not as tenants
in common
UNIF GIFT MIN ACT Custodian
(Cust) (Minor)
under Uniform Gifts to Minors
Act
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises. Dated
NOTICE:
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER ANY STATE SECURITIES LAW. THE COMPANY WILL NOT TRANSFER THIS WARRANT, OR
ANY SHARES OF COMMON SHARES ISSUABLE UPON EXERCISE, UNLESS (i) THERE IS AN
EFFECTIVE REGISTRATION COVERING THIS WARRANT OR SHARES UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, (ii) IT FIRST RECEIVES AN OPINION FROM AN
ATTORNEY, REASONABLY ACCEPTABLE TO THE COMPANY, STATING THAT THE PROPOSED
TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE ACT AND UNDER ALL APPLICABLE
STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144
PROMULGATED UNDER THE ACT.
For the Purchase of
250,001 shares of
Common Stock
No.K010
WARRANT FOR THE PURCHASE OF
SHARES OF COMMON STOCK
OF
WATCHDOG PATROLS, INC.
(A New York corporation)
FOR VALUE RECEIVED, Watchdog Patrols, Inc. ("Company"), hereby certifies
that Kirlin Holding Corp., with offices at 6901 Jericho Turnpike, Syosset, New
York 11791 or its registered assigns ("Registered Holder"), is entitled, subject
to the terms set forth below, to purchase from the Company, at any time or from
time to time including the five-year period commencing on June 17,1998 and
expiring on June 16, 2003, 250,001 shares of Common Stock, $.0033 par value, of
the Company ("Common Stock"), at a purchase price equal $1.63. The number of
shares of Common Stock purchasable upon exercise of this Warrant, and the
purchase price per share, each as adjusted from time to time pursuant to the
provisions of this Warrant, are hereinafter referred to as the "Warrant Shares"
and the "Exercise Price," respectively. This Warrant is one of a series of
similar accounts of like tenor that, in the aggregate, represent the right to
purchase 500,000 shares of Common Stock.
<PAGE>
1. Exercise
1.1 Procedure for Cash Exercise. This Warrant may be exercised by the
Registered Holder, in whole or in part, by the surrender of this Warrant (with
the Notice of Exercise Form attached hereto as Exhibit I duly executed by such
Registered Holder) at the principal office of the Company, or at such other
office or agency as the Company may designate, accompanied by payment in full,
in lawful money of the United States, of an amount equal to the then applicable
Exercise Price multiplied by the number of Warrant Shares then being purchased
upon such exercise.
1.2 Procedure for Cashless Exercise. In lieu of the payment of the Exercise
Price in the manner set forth in Section 1.1, the Registered Holder shall have
the right (but not the obligation) to convert this Warrant, in whole or part,
into Common Stock ("Conversion Right") as follows: Upon exercise of the
Conversion Right, the Company shall deliver to the Registered Holder (without
payment by the Registered Holder of any of the Exercise Price) that number of
shares of Common Stock equal to the quotient obtained by dividing (x) the
"Value" (as defined below) of the portion of the Warrant being converted on the
second trading day immediately preceding the date the Warrant is delivered to
the Company pursuant to Section 1.3 if the Conversion Right is exercised
("Valuation Date") by (y) the "Market Price" (as defined below) on the Valuation
Date.
The "Value" of the portion of the Warrant being converted shall equal the
remainder derived from subtracting (a) the Exercise Price multiplied by the
number of shares of Common Stock underlying the portion of the Warrant being
converted from (b) the Market Price of the Common Stock multiplied by the number
of shares of Common Stock underlying the portion of the Warrant being converted.
As used herein, the term "Market Price" at any date shall be deemed to be the
last reported sale price of the Common Stock on such date, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the immediately preceding three trading days, in either case, as
reported by the national securities exchange on which the Common Stock is listed
or admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or if any such exchange on which the
Common Stock is listed or admitted to trading is not its principal trading
market, the last sale price as reported by the Nasdaq Stock Market if the Common
Stock is quoted on the Nasdaq National Market or Nasdaq SmallCap Market. If the
Common Stock is not listed on a national securities exchange or quoted on the
Nasdaq National Market or Nasdaq SmallCap Market, but is traded in the residual
over-the-counter market, the Market Price shall mean the last sale price for the
Common Stock, as reported by the NASD OTC Bulletin Board if quoted on the NASD
OTC Bulletin Board and, if not, the average of the bid and asked prices as
published by the National Quotation Bureau, Incorporated, or similar publisher
of such quotations. If the Market Price cannot be determined pursuant to the
above, the Market Price shall be such price as the Board of Directors of the
Company shall determine in good faith.
1.3 Exercise of Conversion Right. The Conversion Right may be exercised by
the Holder on any business day by delivering to the Company the Warrant with a
duly executed Notice of Exercise Form attached hereto as Exhibit I with the
<PAGE>
conversion section completed by specifying the total number of shares of Common
Stock the Registered Holder will purchase pursuant to such conversion.
1.4 Date of Exercise. Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which
this Warrant shall have been surrendered to the Company. At such time, the
person or persons in whose name or names any certificates for Warrant Shares
shall be issuable upon such exercise shall be deemed to have become the holder
or holders of record of the Warrant Shares represented by such certificates.
1.5 Issuance of Certificate. As soon as practicable after the exercise of
the purchase right represented by this Warrant, the Company at its expense will
use its best efforts to cause to be issued in the name of, and delivered to, the
Registered Holder, or, subject to the terms and conditions hereof, to such other
individual or entity as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of full shares of
Warrant Shares to which such Registered Holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such Registered Holder
would otherwise be entitled, cash in an amount determined pursuant to Section 4
hereof, and
(ii) in case such exercise is in part only, a new warrant or warrants
(dated the date hereof) of like tenor, stating on the face or faces thereof the
number of shares currently stated on the face of this Warrant minus the number
of such shares purchased by the Registered Holder upon such exercise as provided
in subsections 1.1 and 1.2 above.
2. Adjustments.
2.1 Split, Subdivision or Combination of Shares. If the outstanding shares
of the Company's Common Stock at any time while this Warrant remains outstanding
and unexpired shall be subdivided or split into a greater number of shares, or a
dividend in Common Stock shall be paid in respect of Common Stock, the Exercise
Price in effect immediately prior to such subdivision or at the record date of
such dividend shall, simultaneously with the effectiveness of such subdivision
or split or immediately after the record date of such dividend (as the case may
be), shall be proportionately decreased. If the outstanding shares of Common
Stock shall be combined or reverse-split into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination or reverse split
shall, simultaneously with the effectiveness of such combination or reverse
split, be proportionately increased. When any adjustment is required to be made
in the Exercise Price, the number of shares of Warrant Shares purchasable upon
the exercise of this Warrant shall be changed to the number determined by
dividing (i) an amount equal to the number of shares issuable upon the exercise
of this Warrant immediately prior to such adjustment, multiplied by the Exercise
Price in effect immediately prior to such adjustment, by (ii) the Exercise Price
in effect immediately after such adjustment.
<PAGE>
2.2 Reclassification Reorganization, Consolidation or Merger. In the case
of any reclassification of the Common Stock (other than a change in par value or
a subdivision or combination as provided for in subsection 2.1 above), or any
reorganization, consolidation or merger of the Company with or into another
corporation (other than a merger or reorganization with respect to which the
Company is the continuing corporation and which does not result in any
reclassification of the Common Stock), or a transfer of all or substantially all
of the assets of the Company, or the payment of a liquidating distribution then,
as part of any such reorganization, reclassification, consolidation, merger,
sale or liquidating distribution, lawful provision shall be made so that the
Registered Holder of this Warrant shall have the right thereafter to receive
upon the exercise hereof, the kind and amount of shares of stock or other
securities or property which such Registered Holder would have been entitled to
receive if, immediately prior to any such reorganization, reclassification,
consolidation, merger, sale or liquidating distribution, as the case may be,
such Registered Holder had held the number of shares of Common Stock which were
then purchasable upon the exercise of this Warrant. In any such case,
appropriate adjustment (as reasonably determined by the Board of Directors of
the Company) shall be made in the application of the provisions set forth herein
with respect to the rights and interests thereafter of the Registered Holder of
this Warrant such that the provisions set forth in this Section 2 (including
provisions with respect to the Exercise Price) shall thereafter be applicable,
as nearly as is reasonably practicable, in relation to any shares of stock or
other securities or property thereafter deliverable upon the exercise of this
Warrant.
2.3 Price Adjustment. No adjustment in the per share Exercise Price shall
be required unless such adjustment would require an increase or decrease in the
Exercise Price of at least $0.01; provided, however, that any adjustments which
by reason of this paragraph are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 2 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be.
2.4 Price Reduction. Notwithstanding any other provision set forth in this
Warrant, at any time and from time to time during the period that this Warrant
is exercisable, the Company in it sole discretion may reduce the Exercise Price
or extend the period during which this Warrant is exercisable.
2.5 No Impairment. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company but will at all times in good
faith assist in the carrying out of all the provisions of this Section 2 and in
the taking of all such actions as may be necessary or appropriate in order to
protect against impairment of the rights of the Registered Holder of this
Warrant to adjustments in the Exercise Price.
2.6 Notice of Adjustment. Upon any adjustment of the Exercise Price or
extension of the Warrant exercise period, the Company shall forthwith give
written notice thereto to the Registered Holder of this Warrant describing the
<PAGE>
event requiring the adjustment, stating the adjusted Exercise Price and the
adjusted number of shares purchasable upon the exercise hereof resulting from
such event, and setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
3. Fractional Shares. The Company shall not be required to issue fractions of
shares of Common Stock upon exercise. If any fractions of a share would, but for
this Section 3, be issuable upon any exercise, in lieu of such fractional share
the Company shall round up or down to the nearest whole number.
4. Limitation on Sales. Each holder of this Warrant acknowledges that this
Warrant and the Warrant Shares, as of the date of original issuance of this
Warrant, have not been registered under the Securities Act of 1933, as amended
("Act"), and agrees not to sell, pledge, distribute, offer for sale, transfer or
otherwise dispose of this Warrant or any Warrant Shares issued upon its exercise
in the absence of (i) an effective registration statement under the Act as to
this Warrant or such Warrant Shares or (ii) an opinion of counsel, reasonably
acceptable to the Company (the Company hereby agreeing that the opinion from
Graubard Mollen and Miller shall be acceptable), that such registration and
qualification are not required. Unless, the Warrant Shares issued upon exercise
thereof have been registered under the Act, the certificates representing the
Warrant Shares shall be imprinted with a legend in substantially the following
form:
"THE ISSUANCE OF THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID
ACT OR APPLICABLE STATE SECURITIES LAWS, SUPPORTED BY AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED."
5. Certain Dividends. If the Company pays a dividend or makes a distribution on
the Common Stock ("Dividend"), other than a stock dividend payable in shares of
Common Stock, then the Company will pay or distribute to the Registered Holder
of this Warrant, upon the exercise hereof, in addition to the Warrant Shares
purchased upon such exercise, the Dividend which would have been paid to such
Registered Holder if it had been the owner of record of such Warrant Shares
immediately prior to the date on which a record is taken for such Dividend or,
if no record is taken, the date as of which the records holders of Common Stock
entitled to such Dividend are determined.
6. Registration Rights.
6.1 Obligation to Register. Upon the written demand of the holders of at
least 51% or more of the Warrants and/or the underlying shares of Common Stock
("Majority Holders"), the Company shall file a registration statement
("Registration Statement") under the Securities Act with the Commission,
registering for resale this Warrant and the Common Stock issuable upon exercise
<PAGE>
of this Warrant ("Registerable Securities"). The Company shall use its best
efforts to file the Registration Statement within 60 days after the demand by
the Majority Holders and to have it declared effective as soon thereafter as is
practicable.
6.2 Terms. The Company shall bear all fees and expenses it incurs in
connection with the preparation, filing, modifying and amending the Registration
Statement, providing reasonable numbers of the prospectus contained therein to
the Holders and effecting the issuance and transfer of the Registrable
Securities, but the Holders shall pay any and all underwriting commissions and
the expenses of any legal counsel selected by the Holders to represent them in
connection with the sale of the Registrable Securities. The Company agrees to
qualify or register the Registrable Securities in such states as are reasonably
requested by the Holder(s); provided, however, that in no event shall the
Company be required to register the Registrable Securities in a state in which
such registration would cause (i) the Company to be obligated to register or
license to do business in such state, or (ii) the principal stockholders of the
Company to be obligated to escrow their shares of capital stock of the Company.
The Company shall cause any Registration Statement filed pursuant to this
Section 5 to remain effective and current until the Registrable Securities may
be sold without any limitation under the Securities Act by the Holders thereof.
6.3 General Terms.
(i) Indemnification. The Company shall indemnify the Holder(s) of the
Registrable Securities to be sold pursuant to any registration statement
hereunder and each person, if any, who controls such Holders within the meaning
of Section 15 of the Securities Act and/or Section 20(a) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim,
damage, expense or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever incurred by the indemnified party in any action or
proceeding between the indemnitor and indemnified party or between the
indemnified party and any third party or otherwise) to which any of them may
become subject under the Securities Act, the Exchange Act or any other statute
or at common law or otherwise under the laws of foreign countries, arising from
such registration statement or based upon any untrue statement or alleged untrue
statement of a material fact contained in (i) any preliminary prospectus, the
registration statement or prospectus (as from time to time each may be amended
and supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included the Registrable
Securities; or (iii) any application or other document or written communication
(collectively called "application") executed by the Company or based upon
written information furnished by the Company in any jurisdiction in order to
qualify the Registrable Securities under the securities laws thereof or filed
with the Commission, any state securities commission or agency, Nasdaq or any
securities exchange; or the omission or alleged omission therefrom of a material
<PAGE>
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, unless
such statement or omission is made in reliance upon, and in conformity with,
written information furnished to the Company with respect to the Holders
expressly for use in a preliminary prospectus, registration statement or
prospectus, or amendment or supplement thereof, or in any application, as the
case may be. The Company agrees promptly to notify the Holder of the
commencement of any litigation or proceedings against the Company or any of its
officers, directors or controlling persons in connection with the issue and sale
or resale of the Registrable Securities or in connection with the registration
statement or prospectus.
(ii) Exercise of Warrants. Nothing contained in this Warrant shall be
construed as requiring the Holder(s) to exercise their Warrants prior to or
after the initial filing of any registration statement or the effectiveness
thereof.
7. Notices of Record Date. In case: (i) the Company shall take a record of the
holders of its Common Stock (or other stock or securities at the time
deliverable upon the exercise of this Warrant) for the purpose of entitling or
enabling them to receive any dividend or other distribution, or to receive any
right to subscribe for or purchase any shares of any class or any other
securities, or to receive any other right, or (ii) of any capital reorganization
of the Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving entity), or
any transfer of all or substantially all of the assets of the Company, or (iii)
of the voluntary or involuntary dissolution, liquidation or winding-up of the
Company, then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up is to take place, and the time, if any is to be fixed,
as of which the holders of record of Common Stock (or such other stock or
securities at the time deliverable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other stock or
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up. Such notice shall be mailed at least ten (10) days
prior to the record date or effective date for the event specified in such
notice, provided that the failure to mail such notice shall not affect the
legality or validity of any such action.
8. Reservation of Stock. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
such shares of Common Stock and other stock, securities and property, as from
time to time shall be issuable upon the exercise of this Warrant. So long as
this Warrant remains outstanding, the Company shall maintain the listing of the
shares of Common Stock to be issued upon exercise on each national securities
exchange on which Common Stock is listed or on the Nasdaq Stock Market if the
Common Stock is then quoted on the Nasdaq Stock Market.
9. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction) upon delivery of an indemnity
agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
<PAGE>
10. Transfers, etc.
10.1 Warrant Register. The Company will maintain a register containing the
names and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its, his or her address as shown on the warrant register by
written notice to the Company requesting such change.
10.2 Registered Holder. Until any transfer of this Warrant is made in the
warrant register, the Company may treat the Registered Holder of this Warrant as
the absolute owner hereof for all purposes; provided, however, that if and when
this Warrant is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
11. No Rights as Stockholder. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as
a stockholder of the Company.
12. Successors. The rights and obligations of the parties to this Warrant will
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, successors, assigns, pledgees, transferees and purchasers.
Without limiting the foregoing, the registration rights set forth in this
Warrant shall inure to the benefit of the Registered Holder and all the
Registered Holder's successors, heirs, pledgees, assignees, transferees and
purchasers of this Warrant and the Warrant Shares.
13. Change or Waiver. Any term of this Warrant may be changed or waived only by
an instrument in writing signed by the party against which enforcement of the
change or waiver is sought.
14. Headings. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning of any provision of this
Warrant.
15. Governing Law. This Warrant shall be governed by and construed in accordance
with the laws of the State of New York as such laws are applied to contracts
made and to be fully performed entirely within that state between residents of
that state.
16. Jurisdiction and Venue. The Company (i) agrees that any legal suit, action
or proceeding arising out of or relating to this Warrant shall be instituted
exclusively in New York State Supreme Court, County of New York or in the United
States District Court for the Southern District of New York, (ii) waives any
objection to the venue of any such suit, action or proceeding and the right to
assert that such forum is not a convenient forum for such suit, action or
proceeding, and (iii) irrevocably consents to the jurisdiction of the New York
State Supreme Court, County of New York, and the United States District Court
for the Southern District of New York in any such suit, action or proceeding,
and the Company further agrees to accept and acknowledge service or any and all
process which may be served in any such suit, action or proceeding in New York
State Supreme Court, County of New York or in the United States District Court
for the Southern District of New York and agrees that service of process upon it
mailed by certified mail to its address shall be deemed in every respect
effective service of process upon it in any suit, action or proceeding.
<PAGE>
17. Mailing of Notices, etc. All notices and other communications under this
Warrant (except payment) shall be in writing and shall be sufficiently given if
sent to the Registered Holder or the Company, as the case may be, by hand
delivery, private overnight courier, with acknowledgment of receipt, or by
registered or certified mail, return receipt requested, as follows:
Registered Holder: To Registered Holder's address
on page 1 of this Warrant
Attention: [Name of Holder]
The Company: To the Company's Principal
Executive Offices Attention:
President
In either case, Graubard Mollen & Miller
with a copy to: 600 Third Avenue
33rd Floor
New York, New York 10016-2097
Attn: Peter M. Ziemba
(212) 818-8800
or to such other address as any of them, by notice to the others may designate
from time to time. Time shall be counted to, or from, as the case may be, the
delivery in person or by overnight courier or five (5) business days after
mailing.
WATCHDOG PATROLS, INC.
By:
Name: Philip LoRusso
Title: Chairman
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
Date: ______________
TO: Watchdog Patrols, Inc.
35 Walt Whitman Drive
Suite 125
Huntington Station, New York 11743
1. The undersigned hereby elects to purchase _______ shares of the Common
Stock of Watchdog Patrols, Inc., pursuant to terms of the attached Warrant, and
tenders herewith payment of $________ (at the rate of $___ per share of Common
Stock) in payment of the Exercise Price pursuant thereto, together with all
applicable transfer taxes, if any.
or
The undersigned hereby elects to purchase ____ shares of Common Stock of
Watchdog Patrols, Inc. by surrender of the unexercised portion of the attached
Warrant (with a "Value" of $ based on a "Market Price" of $_______).
2. Please issue a certificate or certificates representing said shares of
the Common Stock in the name of the undersigned or in such other name as is
specified below:
Signature of Registered Holder
Print Name:
Notice: The signature to this form must correspond with the name as written
upon the face of the within Warrant in every particular without alteration or
enlargement or any change whatsoever.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
(Print in Block Letters)
Address
Exhibit 4.3
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER ANY STATE SECURITIES LAW. THE COMPANY WILL NOT TRANSFER THIS WARRANT, OR
ANY SHARES OF COMMON SHARES ISSUABLE UPON EXERCISE, UNLESS (i) THERE IS AN
EFFECTIVE REGISTRATION COVERING THIS WARRANT OR SHARES UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, (ii) IT FIRST RECEIVES AN OPINION FROM AN
ATTORNEY, REASONABLY ACCEPTABLE TO THE COMPANY, STATING THAT THE PROPOSED
TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE ACT AND UNDER ALL APPLICABLE
STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144
PROMULGATED UNDER THE ACT.
For the Purchase of
200,000 shares of
Common Stock
No. N006
WARRANT FOR THE PURCHASE OF
SHARES OF COMMON STOCK
OF
WATCHDOG PATROLS, INC.
(A New York corporation)
FOR VALUE RECEIVED, Watchdog Patrols, Inc. ("Company"), hereby certifies
that Daniel G. Stephens, Jr. residing at 3216 W. Santiago St. No. 1, Tampa, FL
33629 ("Registered Holder"), is entitled, subject to the terms set forth below,
to purchase from the Company, $1.63 shares of Common Stock, $.0033 par value, of
the Company ("Common Stock"), at a purchase price equal $1.63. The number of
shares of Common Stock purchasable upon exercise of this Warrant, and the
purchase price per share, each as adjusted from time to time pursuant to the
provisions of this Warrant, are hereinafter referred to as the "Warrant Shares"
and the "Exercise Price," respectively.
1. Exercise.
1.1 Procedure for Cash Exercise. This Warrant may be exercised by the
Registered Holder, in whole or in part, by the surrender of this Warrant (with
the Notice of Exercise Form attached hereto as Exhibit I duly executed by such
Registered Holder) at the principal office of the Company, or at such other
office or agency as the Company may designate,
<PAGE>
1.2 accompanied by payment in full, in lawful money of the United States,
of an amount equal to the then applicable Exercise Price multiplied by the
number of Warrant Shares then being purchased upon such exercise.
1.3 Procedure for Cashless Exercise. In lieu of the payment of the Exercise
Price in the manner set forth in Section 1.1, the Registered Holder shall have
the right (but not the obligation) to convert this Warrant, in whole or part,
into Common Stock ("Conversion Right") as follows: Upon exercise of the
Conversion Right, the Company shall deliver to the Registered Holder (without
payment by the Registered Holder of any of the Exercise Price) that number of
shares of Common Stock equal to the quotient obtained by dividing (x) the
"Value" (as defined below) of the portion of the Warrant being converted on the
second trading day immediately preceding the date the Warrant is delivered to
the Company pursuant to Section 1.3 if the Conversion Right is exercised
("Valuation Date") by (y) the "Market Price" (as defined below) on the Valuation
Date.
The "Value" of the portion of the Warrant being converted shall equal the
remainder derived from subtracting (a) the Exercise Price multiplied by the
number of shares of Common Stock underlying the portion of the Warrant being
converted from (b) the Market Price of the Common Stock multiplied by the number
of shares of Common Stock underlying the portion of the Warrant being converted.
As used herein, the term "Market Price" at any date shall be deemed to be the
last reported sale price of the Common Stock on such date, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the immediately preceding three trading days, in either case, as
reported by the national securities exchange on which the Common Stock is listed
or admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or if any such exchange on which the
Common Stock is listed or admitted to trading is not its principal trading
market, the last sale price as reported by the Nasdaq Stock Market if the Common
Stock is quoted on the Nasdaq National Market or Nasdaq SmallCap Market. If the
Common Stock is not listed on a national securities exchange or quoted on the
Nasdaq National Market or Nasdaq SmallCap Market, but is traded in the residual
over-the-counter market, the Market Price shall mean the last sale price for the
Common Stock, as reported by the NASD OTC Bulletin Board if quoted on the NASD
OTC Bulletin Board and, if not, the average of the bid and asked prices as
published by the National Quotation Bureau, Incorporated, or similar publisher
of such quotations. If the Market Price cannot be determined pursuant to the
above, the Market Price shall be such price as the Board of Directors of the
Company shall determine in good faith.
1.4 Exercise of Conversion Right. The Conversion Right may be exercised by
the Holder on any business day by delivering to the Company the Warrant with a
duly executed Notice of Exercise Form attached hereto as Exhibit I with the
conversion section completed by specifying the total number of shares of Common
Stock the Registered Holder will purchase pursuant to such conversion.
1.5 Date of Exercise. Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which
this Warrant shall have been surrendered to the Company. At such time, the
<PAGE>
person or persons in whose name or names any certificates for Warrant Shares
shall be issuable upon such exercise shall be deemed to have become the holder
or holders of record of the Warrant Shares represented by such certificates.
1.6 Issuance of Certificate. As soon as practicable after the exercise of
the purchase right represented by this Warrant, the Company at its expense will
use its best efforts to cause to be issued in the name of, and delivered to, the
Registered Holder, or, subject to the terms and conditions hereof, to such other
individual or entity as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of full shares of
Warrant Shares to which such Registered Holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such Registered Holder
would otherwise be entitled, cash in an amount determined pursuant to Section 4
hereof, and
(ii) in case such exercise is in part only, a new warrant or warrants
(dated the date hereof) of like tenor, stating on the face or faces thereof the
number of shares currently stated on the face of this Warrant minus the number
of such shares purchased by the Registered Holder upon such exercise as provided
in subsections 1.1 and 1.2 above.
1.7 Exercise Schedule. Subject to Section 1.7 hereof, the Warrant may be
exercised as follows:
(i) up to 50,000 Warrant Shares may be purchased if NetWolves
Corporation, a wholly owned subsidiary of the Company ("NetWolves") generates
revenues of at least $5,000,000, without a loss before provision for income
taxes, for the twelve month period commencing July 1, 1998 ("Fiscal Year");
(ii) up to 100,000 Warrant Shares may be purchased if NetWolves
generates at least $10,000,000 in revenues, with at least $2,000,000 in income
before provisions for income taxes, within the Fiscal Year;
(iii) up to 50,000 Warrant Shares may be purchased if NetWolves
generates revenue of $10,000,000, with at least $1,000,000 in income before
provision for income taxes, during the twelve month period following the Fiscal
Year; and
(iv) if the Warrant Shares described in clause (ii) did not become
purchasable under the condition stated, then such Warrant Shares will become
purchasable if NetWolves generates $20,000,000 in revenues, with at least
$4,000,000 in income before provision for income taxes, during the twelve month
period following the Fiscal Year.
1.8 Determination of NetWolves Revenues. In order to determine whether
NetWolves has generated the threshold level of revenues ("Threshold Level")
required pursuant to Section 1.6 hereof, for the exercise of this Warrant in any
applicable period, the Company shall cause its accountants to perform (i) a SAS
No. 71 review of the NetWolves statement of operations if it reasonably believes
that the revenues for such period are in excess of 20% of the Threshold Level or
<PAGE>
(ii) an audit of the NetWolves' statement of operations if it reasonably
believes that the revenues for such period are in excess of the Threshold Level
by less than 20%. The Warrant will become exercisable pursuant to Section 1.6
hereof after the review or audit by the Company's accountants which confirms
that the Threshold Level has been met.
2. Adjustments.
2.1 Split, Subdivision or Combination of Shares. If the outstanding shares
of the Company's Common Stock at any time while this Warrant remains outstanding
and unexpired shall be subdivided or split into a greater number of shares, or a
dividend in Common Stock shall be paid in respect of Common Stock, the Exercise
Price in effect immediately prior to such subdivision or at the record date of
such dividend shall, simultaneously with the effectiveness of such subdivision
or split or immediately after the record date of such dividend (as the case may
be), shall be proportionately decreased. If the outstanding shares of Common
Stock shall be combined or reverse-split into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination or reverse split
shall, simultaneously with the effectiveness of such combination or reverse
split, be proportionately increased. When any adjustment is required to be made
in the Exercise Price, the number of shares of Warrant Shares purchasable upon
the exercise of this Warrant shall be changed to the number determined by
dividing (i) an amount equal to the number of shares issuable upon the exercise
of this Warrant immediately prior to such adjustment, multiplied by the Exercise
Price in effect immediately prior to such adjustment, by (ii) the Exercise Price
in effect immediately after such adjustment.
2.2 Reclassification Reorganization, Consolidation or Merger. In the case
of any reclassification of the Common Stock (other than a change in par value or
a subdivision or combination as provided for in subsection 2.1 above), or any
reorganization, consolidation or merger of the Company with or into another
corporation (other than a merger or reorganization with respect to which the
Company is the continuing corporation and which does not result in any
reclassification of the Common Stock), or a transfer of all or substantially all
of the assets of the Company, or the payment of a liquidating distribution then,
as part of any such reorganization, reclassification, consolidation, merger,
sale or liquidating distribution, lawful provision shall be made so that the
Registered Holder of this Warrant shall have the right thereafter to receive
upon the exercise hereof, the kind and amount of shares of stock or other
securities or property which such Registered Holder would have been entitled to
receive if, immediately prior to any such reorganization, reclassification,
consolidation, merger, sale or liquidating distribution, as the case may be,
such Registered Holder had held the number of shares of Common Stock which were
then purchasable upon the exercise of this Warrant. In any such case,
appropriate adjustment (as reasonably determined by the Board of Directors of
the Company) shall be made in the application of the provisions set forth herein
with respect to the rights and interests thereafter of the Registered Holder of
this Warrant such that the provisions set forth in this Section 2 (including
provisions with respect to the Exercise Price) shall thereafter be applicable,
as nearly as is reasonably practicable, in relation to any shares of stock or
other securities or property thereafter deliverable upon the exercise of this
Warrant.
<PAGE>
2.3 Price Adjustment. No adjustment in the per share Exercise Price shall
be required unless such adjustment would require an increase or decrease in the
Exercise Price of at least $0.01; provided, however, that any adjustments which
by reason of this paragraph are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 2 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be.
2.4 Price Reduction. Notwithstanding any other provision set forth in this
Warrant, at any time and from time to time during the period that this Warrant
is exercisable, the Company in it sole discretion may reduce the Exercise Price
or extend the period during which this Warrant is exercisable.
2.5 No Impairment. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company but will at all times in good
faith assist in the carrying out of all the provisions of this Section 2 and in
the taking of all such actions as may be necessary or appropriate in order to
protect against impairment of the rights of the Registered Holder of this
Warrant to adjustments in the Exercise Price.
2.6 Notice of Adjustment. Upon any adjustment of the Exercise Price or
extension of the Warrant exercise period, the Company shall forthwith give
written notice thereto to the Registered Holder of this Warrant describing the
event requiring the adjustment, stating the adjusted Exercise Price and the
adjusted number of shares purchasable upon the exercise hereof resulting from
such event, and setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
3. Fractional Shares. The Company shall not be required to issue fractions of
shares of Common Stock upon exercise. If any fractions of a share would, but for
this Section 3, be issuable upon any exercise, in lieu of such fractional share
the Company shall round up or down to the nearest whole number.
4. Limitation on Sales. Each holder of this Warrant acknowledges that this
Warrant and the Warrant Shares, as of the date of original issuance of this
Warrant, have not been registered under the Securities Act of 1933, as amended
("Act"), and agrees not to sell, pledge, distribute, offer for sale, transfer or
otherwise dispose of this Warrant or any Warrant Shares issued upon its exercise
in the absence of (i) an effective registration statement under the Act as to
this Warrant or such Warrant Shares or (ii) an opinion of counsel, reasonably
acceptable to the Company (the Company hereby agreeing that the opinion from
Graubard Mollen and Miller shall be acceptable), that such registration and
qualification are not required. The Warrant Shares issued upon exercise thereof
shall be imprinted with a legend in substantially the following form:
<PAGE>
"THE ISSUANCE OF THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID
ACT OR APPLICABLE STATE SECURITIES LAWS, SUPPORTED BY AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED."
5. Certain Dividends. If the Company pays a dividend or makes a distribution on
the Common Stock ("Dividend"), other than a stock dividend payable in shares of
Common Stock, then the Company will pay or distribute to the Registered Holder
of this Warrant, upon the exercise hereof, in addition to the Warrant Shares
purchased upon such exercise, the Dividend which would have been paid to such
Registered Holder if it had been the owner of record of such Warrant Shares
immediately prior to the date on which a record is taken for such Dividend or,
if no record is taken, the date as of which the records holders of Common Stock
entitled to such Dividend are determined.
6. Notices of Record Date. In case: (i) the Company shall take a record of the
holders of its Common Stock (or other stock or securities at the time
deliverable upon the exercise of this Warrant) for the purpose of entitling or
enabling them to receive any dividend or other distribution, or to receive any
right to subscribe for or purchase any shares of any class or any other
securities, or to receive any other right, or (ii) of any capital reorganization
of the Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving entity), or
any transfer of all or substantially all of the assets of the Company, or (iii)
of the voluntary or involuntary dissolution, liquidation or winding-up of the
Company, then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up is to take place, and the time, if any is to be fixed,
as of which the holders of record of Common Stock (or such other stock or
securities at the time deliverable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other stock or
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up. Such notice shall be mailed at least ten (10) days
prior to the record date or effective date for the event specified in such
notice, provided that the failure to mail such notice shall not affect the
legality or validity of any such action.
7. Reservation of Stock. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
such shares of Common Stock and other stock, securities and property, as from
time to time shall be issuable upon the exercise of this Warrant. So long as
this Warrant remains outstanding, the Company shall maintain the listing of the
shares of Common Stock to be issued upon exercise on each national securities
exchange on which Common Stock is listed or on the Nasdaq Stock Market if the
Common Stock is then quoted on the Nasdaq Stock Market.
<PAGE>
8. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction) upon delivery of an indemnity
agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
9. Transfers, etc.
9.1 Warrant Register. The Company will maintain a register containing the
names and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its, his or her address as shown on the warrant register by
written notice to the Company requesting such change.
9.2 Registered Holder. Until any transfer of this Warrant is made in the
warrant register, the Company may treat the Registered Holder of this Warrant as
the absolute owner hereof for all purposes; provided, however, that if and when
this Warrant is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
10. No Rights as Stockholder. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as
a stockholder of the Company.
11. Successors. The rights and obligations of the parties to this Warrant will
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, successors, assigns, pledgees, transferees and purchasers.
Without limiting the foregoing, the registration rights set forth in this
Warrant shall inure to the benefit of the Registered Holder and all the
Registered Holder's successors, heirs, pledgees, assignees, transferees and
purchasers of this Warrant and the Warrant Shares.
12. Change or Waiver. Any term of this Warrant may be changed or waived only by
an instrument in writing signed by the party against which enforcement of the
change or waiver is sought.
13. Headings. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning of any provision of this
Warrant.
14. Governing Law. This Warrant shall be governed by and construed in accordance
with the laws of the State of New York as such laws are applied to contracts
made and to be fully performed entirely within that state between residents of
that state.
<PAGE>
15. Jurisdiction and Venue. The Company (i) agrees that any legal suit, action
or proceeding arising out of or relating to this Warrant shall be instituted
exclusively in New York State Supreme Court, County of New York or in the United
States District Court for the Southern District of New York, (ii) waives any
objection to the venue of any such suit, action or proceeding and the right to
assert that such forum is not a convenient forum for such suit, action or
proceeding, and (iii) irrevocably consents to the jurisdiction of the New York
State Supreme Court, County of New York, and the United States District Court
for the Southern District of New York in any such suit, action or proceeding,
and the Company further agrees to accept and acknowledge service or any and all
process which may be served in any such suit, action or proceeding in New York
State Supreme Court, County of New York or in the United States District Court
for the Southern District of New York and agrees that service of process upon it
mailed by certified mail to its address shall be deemed in every respect
effective service of process upon it in any suit, action or proceeding.
16. Mailing of Notices, etc. All notices and other communications under this
Warrant (except payment) shall be in writing and shall be sufficiently given if
sent to the Registered Holder or the Company, as the case may be, by hand
delivery, private overnight courier, with acknowledgment of receipt, or by
registered or certified mail, return receipt requested, as follows:
Registered Holder: To Registered Holder's address on page 1
of this Warrant
Attention: [Name of Holder]
The Company: To the Company's Principal Executive Offices Attention:
President
or to such other address as any of them, by notice to the others may designate
from time to time. Time shall be counted to, or from, as the case may be, the
delivery in person or by overnight courier or five (5) business days after
mailing.
WATCHDOG PATROLS, INC.
By:
Name:
Title:
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
Date: ______________
TO: Watchdog Patrols, Inc.
35 Walt Whitman Drive
Suite 125
Huntington Station, New York 11743
1. The undersigned hereby elects to purchase _______ shares of the Common
Stock of Watchdog Patrols, Inc., pursuant to terms of the attached Warrant, and
tenders herewith payment of $________ (at the rate of $___ per share of Common
Stock) in payment of the Exercise Price pursuant thereto, together with all
applicable transfer taxes, if any.
or
The undersigned hereby elects to purchase ____ shares of Common Stock of
Watchdog Patrols, Inc. by surrender of the unexercised portion of the attached
Warrant (with a "Value" of $ based on a "Market Price" of $_______).
2. Please issue a certificate or certificates representing said shares of
the Common Stock in the name of the undersigned or in such other name as is
specified below.
Signature of Registered Holder
Print Name:
Notice: The signature to this form must correspond with the name as written
upon the face of the within Warrant in every particular without alteration or
enlargement or any change whatsoever.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
(Print in Block Letters)
Address
MERGER AND REORGANIZATION AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.02 The Merger. . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.03 Effective Time. . . . . . . . . . . . . . . . . . . . .1
SECTION 1.04 Effects of the Merger . . . . . . . . . . . . . . . . .2
SECTION 1.05 Certificate of Incorporation and By-Laws. . . . . . . .2
SECTION 1.06 Directors and Officers of the Surviving Corporation . .2
SECTION 1.07 The Closing . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE II
CONVERSION OF INTERESTS AND RELATED MATTERS. . . . . . . . . . . . . . .2
SECTION 2.01 Outstanding Stock of The Merger Subsidiary. . . . . . .2
SECTION 2.02 Conversion of NetWolves Interests . . . . . . . . . . .3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE MEMBERS. . . . . . . . . . . . . .3
SECTION 3.01 Organization. . . . . . . . . . . . . . . . . . . . . .3
SECTION 3.02 Authority . . . . . . . . . . . . . . . . . . . . . . .4
SECTION 3.03 No Conflict; Required Filings and Consents. . . . . . .4
SECTION 3.04 Capitalization. . . . . . . . . . . . . . . . . . . . .5
SECTION 3.05 Licenses and Permits; Compliance with Laws. . . . . . .5
SECTION 3.06 Financial Statements. . . . . . . . . . . . . . . . . .5
SECTION 3.07 Real Property . . . . . . . . . . . . . . . . . . . . .6
SECTION 3.08 Material Contracts. . . . . . . . . . . . . . . . . . .6
SECTION 3.09 Litigation. . . . . . . . . . . . . . . . . . . . . . .7
SECTION 3.10 Taxes, Tax Returns and Audits . . . . . . . . . . . . .7
SECTION 3.11 Absence of Certain Changes. . . . . . . . . . . . . . .7
SECTION 3.12 Employee Benefit Plans. . . . . . . . . . . . . . . . .8
SECTION 3.13 Labor Relations . . . . . . . . . . . . . . . . . . . .8
SECTION 3.14 Insurance Policies; Claims. . . . . . . . . . . . . . .8
SECTION 3.15 Intellectual Property . . . . . . . . . . . . . . . . .8
SECTION 3.16 Properties; Assets. . . . . . . . . . . . . . . . . . .9
SECTION 3.17 Bank Accounts . . . . . . . . . . . . . . . . . . . . .9
SECTION 3.18 Brokers . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 3.19 Records . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 3.20 No Illegal or Improper Transactions . . . . . . . . . 10
SECTION 3.21 Disclosure. . . . . . . . . . . . . . . . . . . . . . 10
SECTION 3.22 Environmental Matters . . . . . . . . . . . . . . . . 10
SECTION 3.23 Year 2000 Compliance. . . . . . . . . . . . . . . . . 12
SECTION 3.24 Investment Representations. . . . . . . . . . . . . . 12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF WATCHDOG . . . . . . . . . . . . . . 12
SECTION 4.01 Organization. . . . . . . . . . . . . . . . . . . . . 12
SECTION 4.02 Authority; Corporate Action . . . . . . . . . . . . . 13
SECTION 4.03 No Conflict; Required Filings and Consents. . . . . . 13
SECTION 4.05 Licenses and Permits; Compliance with Laws. . . . . . 14
SECTION 4.06 Financial Statements. . . . . . . . . . . . . . . . . 14
SECTION 4.07 Real Property . . . . . . . . . . . . . . . . . . . . 15
SECTION 4.08 Material Contracts. . . . . . . . . . . . . . . . . . 15
SECTION 4.09 Litigation. . . . . . . . . . . . . . . . . . . . . . 16
SECTION 4.11 Absence of Certain Changes. . . . . . . . . . . . . . 17
SECTION 4.12 Employee Benefit Plans. . . . . . . . . . . . . . . . 18
SECTION 4.13 Labor Relations . . . . . . . . . . . . . . . . . . . 18
SECTION 4.14 Insurance Policies; Claims. . . . . . . . . . . . . . 18
SECTION 4.15 Intellectual Property . . . . . . . . . . . . . . . . 18
SECTION 4.16 Properties; Assets. . . . . . . . . . . . . . . . . . 19
SECTION 4.17 Bank Accounts . . . . . . . . . . . . . . . . . . . . 19
SECTION 4.18 Brokers . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4.19 Records . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4.20 No Illegal or Improper Transactions . . . . . . . . . 20
SECTION 5.01 Additional Representations, Warranties and Covenants. 20
SECTION 5.02 Survival. . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VI
COVENANTS OF THE MEMBERS . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 6.01 Conduct of Business . . . . . . . . . . . . . . . . . 21
SECTION 6.02 Maintenance of Assets; Insurance. . . . . . . . . . . 22
SECTION 6.03 Employment and Noncompete Agreements. . . . . . . . . 22
SECTION 6.05 No Other Negotiations . . . . . . . . . . . . . . . . 22
SECTION 6.06 No Securities Transactions. . . . . . . . . . . . . . 22
SECTION 6.07 Fulfillment of Conditions . . . . . . . . . . . . . . 22
SECTION 6.08 Disclosure of Certain Matters . . . . . . . . . . . . 23
SECTION 6.09 Assignment of Contracts . . . . . . . . . . . . . . . 23
SECTION 6.10 Termination of Operating Agreement. . . . . . . . . . 23
ARTICLE VII
COVENANTS OF WATCHDOG. . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 8.01 Access to Information; Confidentiality. . . . . . . . 25
SECTION 8.02 Further Action. . . . . . . . . . . . . . . . . . . . 25
SECTION 8.03 Schedules . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 8.04 Regulatory and Other Authorizations . . . . . . . . . 26
ARTICLE IX
CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 9.01 Conditions to Each Party's Obligations26
SECTION 9.02 Conditions to Obligations of NetWolves26
SECTION 9.03 Conditions to Obligations of the Watchdog Parties27
ARTICLE X
INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 10.01 Indemnification by the Members . . . . . . . . . . . 28
SECTION 10.02 Indemnification by Watchdog . . . . . . . . . . . . . 28
SECTION 10.03 Notice, Etc . . . . . . . . . . . . . . . . . . . . . 29
SECTION 10.04 Limitations . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE XI
TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 11.01 Methods of Termination . . . . . . . . . . . . . . . 30
SECTION 11.02 Effect of Termination. . . . . . . . . . . . . . . . 31
ARTICLE XII
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 12.01 Certain Defined Terms. . . . . . . . . . . . . . . . 31
ARTICLE XIII
GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 13.01 Expenses . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 13.02 Notices. . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 13.03 Press Release; Public Announcements. . . . . . . . . 33
SECTION 13.04 Amendment. . . . . . . . . . . . . . . . . . . . . . 34
SECTION 13.05 Waiver . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 13.06 Headings . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 13.07 Severability . . . . . . . . . . . . . . . . . . . . 34
SECTION 13.08 Entire Agreement . . . . . . . . . . . . . . . . . . 34
SECTION 13.09 Benefit; Assignment. . . . . . . . . . . . . . . . . 34
SECTION 13.10 Governing Law; Consent to Jurisdiction. . . . . . . . 34
SECTION 13.11 Counterparts . . . . . . . . . . . . . . . . . . . . .35
SCHEDULES
Schedule 1.06 Directors and Officers of Surviving Corporation
Schedule 2.02 Watchdog Warrants Exercise Terms
Schedule 3.01 States in which NetWolves is Qualified
Schedule 3.08 NetWolves Material Contracts
Schedule 3.14 NetWolves Insurance
Schedule 3.15 NetWolves Intellectual Property
Schedule 4.05 Watchdog Permits
Schedule 4.07 Watchdog Real Property
Schedule 4.08 Watchdog Material Contracts
Schedule 4.14 Watchdog Insurance
Schedule 4.15 Watchdog Intellectual Property
Schedule 4.17 Watchdog Bank Accounts
EXHIBITS
Exhibit A Members
Exhibit B Certificate of Merger
Exhibit C Plan of Merger
Exhibit D NetWolves Warrant
Exhibit E Employment Agreement
Exhibit F Kirlin Warrant
Exhibit H Kirlin Right of First Refusal
Exhibit I Kirlin Private Placement Letter Agreement
Exhibit J Stock Option Plan
Exhibit K Registration Rights Agreement
Exhibit L Legal Opinion of Graubard Mollen & Miller
Exhibit M Legal Opinion of Jerry Sellman
Exhibit N Press Release
<PAGE>
MERGER AND REORGANIZATION AGREEMENT
MERGER AND REORGANIZATION AGREEMENT, dated June 15, 1998, among WATCHDOG
PATROLS, INC., a New York corporation, with offices at 33 Walt Whitman Drive,
Suite 125, Huntington Station, New York 11743 ("Watchdog"), WATCHDOG ACQUISITION
CORP., a New York corporation and wholly-owned subsidiary of Watchdog ("Merger
Subsidiary, together with Watchdog, the "Watchdog Parties"), NETWOLVES, LLC, an
Ohio limited liability company, with offices at 85 E. Gay Street, Columbus, Ohio
43215 ("NetWolves") and each of the respective members of NetWolves listed on
Exhibit A attached hereto (collectively being referred to hereinafter as the
"Members", and together with NetWolves, the "NetWolves Parties").
WHEREAS, subject to the terms and conditions of this Merger and
Reorganization Agreement ("Agreement"), the Parties desire to consummate a
merger, as contemplated herein, pursuant to which NetWolves shall be merged with
and into the Merger Subsidiary; and
WHEREAS, for Federal income tax purposes, the Parties intend, by approving
resolutions authorizing this Agreement, that such merger qualify as a
reorganization under the provisions of Section 368 of the United States Internal
Revenue Code of 1986, as amended and the rules and regulations promulgated
thereunder ("Code").
IT IS AGREED:
ARTICLE I
THE MERGER
SECTION 1.01 Definitions. Certain capitalized terms used in this Agreement
shall have the meanings specified in Article XII.
SECTION 1.02 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the relevant provisions of the Business
Corporation Law of the State of New York ("NYBCL") and the Limited Liability
Company Act of the State of Ohio ("OLLCA"), the Merger Subsidiary and NetWolves
shall consummate a merger ("Merger") of NetWolves with and into the Merger
Subsidiary at the Effective Time (as defined herein) in accordance with the
provisions of this Agreement. Following the Merger, the Merger Subsidiary shall
continue as the surviving corporation ("Surviving Corporation") and shall
continue its existence under the laws of the State of New York and the separate
corporate existence of NetWolves shall cease.
<PAGE>
SECTION 1.03 Effective Time. As soon as practicable on or after the Closing
Date, after the satisfaction or waiver of all conditions to the Merger,
NetWolves and the Merger Subsidiary shall file with the Secretary of State's
Office of the State of New York in accordance with the NYBCL an executed copy of
(i) the Certificate of Merger in the form of Exhibit B1 hereto ("Certificate of
Merger") reflecting the Merger and providing for an amendment to the Certificate
of Incorporation of Merger Subsidiary, as the Surviving Corporation, to effect a
change in name from "Watchdog Acquisition Corp." to "NetWolves Corporation" and
(ii) the Plan of Merger in the form of Exhibit C hereto (together with the
Certificate of Merger, the "Merger Documents"). NetWolves shall file a
Certificate of Consolidation with the Secretary of State's Office of the State
of Ohio in accordance with the OLLCA substantially in the form of Exhibit B2.
The Merger shall become effective at such time as the Merger Documents are so
filed with the Secretary of State's Office of the State of New York, or such
other time as the Merger Subsidiary and NetWolves shall agree should be
specified in the Certificate of Merger ("Effective Time").
SECTION 1.04 Effects of the Merger. The Merger shall have the effects set
forth in Section 906 of the NYBCL.
SECTION 1.05 Certificate of Incorporation and By-Laws. The Certificate of
Incorporation, as amended to effect the name change contemplated in Section
1.03, and the By-Laws of the Merger Subsidiary shall be the Certificate of
Incorporation and By-Laws of the Surviving Corporation at the Effective Time.
SECTION 1.06 Directors and Officers of the Surviving Corporation. At the
Effective Time, the Board of Directors and officers of the Surviving Corporation
shall consist of the persons listed in Schedule 1.06, each to serve until his or
her successor is elected and qualified.
SECTION 1.07 The Closing. Subject to the terms and conditions of this
Agreement, the consummation of the Merger and the other transactions
contemplated by this Agreement shall take place at a closing ("Closing") to be
held at 10:00 a.m., local time, on the third Business Day after the date on
which the last of the conditions to Closing set forth in Article IX hereof is
fulfilled or waived by the appropriate Party, as the case may be, at the offices
of Graubard Mollen & Miller, 600 Third Avenue, New York, New York 10016, or at
such other time, date or place as the Parties may agree upon in writing. The
date on which the Closing occurs is referred to herein as the "Closing Date."
<PAGE>
ARTICLE II
CONVERSION OF INTERESTS AND RELATED MATTERS
SECTION 2.01 Outstanding Stock of The Merger Subsidiary. Upon consummation
of the Merger, each issued and outstanding share of the common stock, no par
value, of the Merger Subsidiary outstanding immediately prior to the Effective
Time shall continue as a validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation. Each certificate representing any
such shares of the Merger Subsidiary shall continue to represent the same number
of shares of common stock of the Surviving Corporation.
SECTION 2.02 Conversion of NetWolves Interests. The membership interests of
NetWolves that exist immediately prior to the Effective Time ("NetWolves
Interests") in the aggregate shall be converted into the right to receive, at
the Closing, the following consideration ("Merger Consideration"): (i) an
aggregate of 2,640,322 shares of Watchdog's common stock, $.0033 par value per
share ("Watchdog Stock") and (ii) three-year warrants in the form of Exhibit D
attached hereto to purchase an aggregate of 1,000,000 shares of Common Stock of
Watchdog at an exercise price of $1.63 ("Watchdog Warrants," and together with
the Watchdog Stock, the "Watchdog Securities"), which shall be issued in
accordance with the allocation set forth on Exhibit A. Each of the NetWolves
Interests that exist immediately prior to the Effective Time shall at the
Effective Time be automatically canceled and shall cease to exist, and each
certificate previously evidencing any NetWolves Interests ("Certificates") shall
thereafter represent the right to receive only the specified allocation of the
Merger Consideration. The holders of Certificates shall cease to have any rights
with respect to the NetWolves Interests previously represented thereby, except
as otherwise provided herein or by law. Such certificates previously evidencing
the NetWolves Interests shall be exchanged for certificates evidencing the
Watchdog Securities.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE MEMBERS
Each of the Members, jointly and severally, represents and warrants to
Watchdog and the Merger Subsidiary (together, the "Watchdog Parties") as
follows:
SECTION 3.01 Organization. NetWolves is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Ohio. Other than its ownership of all of the outstanding shares of NetWolves,
Inc., a Florida corporation ("NetWolves Florida"), NetWolves does not own,
directly or indirectly, any capital stock or other securities of any issuer or
any equity interest in any other entity, including any partnership, limited
partnership, limited liability company, business trust and any other business
entity, and is not a party to any agreement to acquire any such securities or
interest. NetWolves does not conduct any business through any entity other than
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itself. NetWolves is qualified to do business in each state where the nature of
the business it conducts or the properties it owns, leases or operates requires
it to so qualify (which states are listed in Schedule 3.01) except where the
failure to so qualify would not, singly or in the aggregate, have a material
adverse effect on the results of operations, financial condition, business,
assets or prospects of NetWolves (a "NetWolves Material Adverse Effect").
NetWolves has all requisite power as a limited liability company to own, lease
and operate its properties and to carry on its business as now being conducted
and as presently contemplated by NetWolves to be conducted in the future.
SECTION 3.02 Authority. NetWolves has all necessary power as a limited
liability company and authority to enter into this Agreement and to consummate
the Merger and other transactions contemplated hereby. All action necessary to
be taken by NetWolves as a limited liability company or the Members of NetWolves
in such capacity to authorize the execution, delivery and performance of this
Agreement and all other agreements and instruments delivered by NetWolves (and
each of the Members) in connection with the transactions contemplated hereby has
been duly and validly taken. Subject to the terms and conditions hereof, this
Agreement and all other agreements delivered in connection with the transactions
contemplated hereby constitute the valid, binding and enforceable obligation of
NetWolves and each of the Members (if they are a party thereto), enforceable
against NetWolves and each of the Members (if they are a party thereto) in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or similar laws of general application now or hereafter in effect
affecting the rights and remedies of creditors and by general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity).
SECTION 3.03 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement (and all other
agreements contemplated hereby) by each of the Members and NetWolves does not,
and the performance by each of the Members and NetWolves of their obligations
under this Agreement (and all other agreements contemplated hereby) will not,
(i) conflict with or violate the organizational documents of NetWolves, (ii)
conflict with or violate any law, statute, ordinance, rule, regulation, order,
judgment or decree applicable to NetWolves or by which any of its properties or
assets is bound or affected, or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien on any of
the properties or assets of NetWolves pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which NetWolves is a party or by which NetWolves or
any of its properties or assets is bound or affected, except, in the case of
clauses (ii) and (iii), above, for any such conflicts, violations, breaches,
<PAGE>
defaults or other alterations or occurrences that would not have, either singly
or in the aggregate, a NetWolves Material Adverse Effect. The execution,
delivery and performance of the respective Employment Agreement of each Member
described in Section 6.03 hereof will not result in any breach of or conflict
with any agreement or other instrument or arrangement or obligation to which
such Member is a party.
(b) The execution and delivery of this Agreement (and all other
agreements contemplated hereby) by each of the Members and NetWolves does not,
and the performance of this Agreement by each of the Members and NetWolves (and
all other agreements contemplated hereby) will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Entity, except for filing and recordation of appropriate merger
documents as required by the laws of the States of New York and Ohio.
SECTION 3.04 Capitalization. The Members own in the aggregate 100% of the
membership interests of NetWolves and are the record and beneficial owners of
the Interests, free and clear of all Liens. There are no other outstanding
securities of NetWolves, including, any options, warrants, convertible
securities or other contractual rights outstanding which require, or give any
person the right to require, the issuance of any membership interests in
NetWolves, whether or not such rights are presently exercisable.
SECTION 3.05 Licenses and Permits; Compliance with Laws. No permits,
licenses and approvals (collectively, the "Permits") are required by any
Federal, state and local governmental authorities to enable NetWolves to own,
lease and operate its properties and to carry on its businesses as now being
conducted. The business of NetWolves is being and has been conducted in
compliance with all applicable laws, statutes, ordinances, regulations,
judgments, orders, decrees, concessions, grants and other authorizations of any
governmental authority.
SECTION 3.06 Financial Statements.
(a) NetWolves has delivered to Watchdog a balance sheet ("NetWolves
Balance Sheet") of NetWolves at May 31, 1998 ("NetWolves Balance Sheet Date").
The NetWolves Balance Sheet fairly presents in all material respects the
financial position of NetWolves as at the date thereof.
(b) The accounts receivable of NetWolves reflected on the NetWolves
Balance Sheet have arisen from bona fide transactions and are collectible in the
ordinary course of NetWolves business. Adequate reserves for the
uncollectability of such accounts receivable have been established on the books
and records of NetWolves and are reflected on the Balance Sheet, and none of the
Members has any knowledge of any facts or circumstances (other than general
economic conditions) which is likely to result in any material increase in the
uncollectability of such receivables in excess of such reserves.
<PAGE>
(c) NetWolves has no debts, liabilities, commitments or obligations
(including, without limitation, unasserted claims whether known or unknown),
whether absolute or contingent, liquidated or unliquidated, or due or to become
due or otherwise, except for liabilities and obligations (a) reflected as
liabilities on the NetWolves Balance Sheet, or (b) that have arisen since the
NetWolves Balance Sheet Date in the ordinary course of business of NetWolves,
not in the aggregate in excess of $40,000.
(d) The financial statements of NetWolves Florida have not been
delivered to Watchdog. Parties understand that in the event NetWolves Florida is
considered to be a predecessor entity by Watchdog's accountants or the
Securities and Exchange Commission, its financial statements will have to be
audited. The Members represent that all necessary information required by the
accountants in connection with an audit is accessible and such parties will
cooperate in the preparation of the NetWolves Florida financial statements.
SECTION 3.07 Real Property. NetWolves does not lease or sublease or own any
real property in the operation of its business. The Company currently rents
office space on a month-to-month basis at 85 E. Gay Street, Suite 801, Columbus,
Ohio 43215 at a monthly rental of $175.00.
SECTION 3.08 Material Contracts.
(a) Schedule 3.08 sets forth a complete and correct list of all
agreements of the following types to which NetWolves is a party or may be bound
and all or any portion of which are currently in effect (collectively, the
"NetWolves Material Contracts"): (i) software technology development or sharing
arrangements; (ii) employment, severance, termination, consulting and retirement
agreements; (iii) loan agreements, indentures, letters of credit, mortgages,
notes and other debt instruments; (iv) agreements that require aggregate future
payments to or by NetWolves of more than Twenty-five Thousand Dollars ($25,000);
(v) outstanding purchase orders of NetWolves as of June 5, 1998; (vi) agreements
containing any "change of control" provisions; (vii) agreements, arrangements or
understandings with any employee, director or officer of NetWolves or with any
affiliate thereof; (viii) agreements prohibiting NetWolves from engaging or
competing in any line of business or limiting such competition; (ix) joint
venture, partnership and similar agreements; (x) acquisition or divestiture
agreements relating to the (A) sale or purchase of assets or interests of
NetWolves (other than sales of inventory in the ordinary course of business) or
(B) the purchase of assets or stock of any other person (other than the purchase
of inventory, supplies or equipment in the ordinary course of business); (xi)
brokerage, finder's or financial advisory agreements; (xii) guarantees of
indebtedness for borrowed money of any person; (xiii) customer contracts; (xiv)
reseller and dealer agreements; (xvi) licensing and rights arrangements for any
Intellectual Property (as defined); and (xv) agreements that, individually or
together with one or more related agreements, are material to the operations,
<PAGE>
financial condition, business, assets or prospects of NetWolves. True and
complete copies of all NetWolves Material Contracts have been delivered to the
Watchdog Parties or made available for inspection.
(b) All Material Contracts are valid and in full force and effect and
NetWolves has not (nor does it or any Member have any knowledge that any other
party thereto has) violated any provision of, or committed or failed to perform
any act which with or without notice, lapse of time or both would constitute a
default under the provisions of, any Material Contract, except for defaults
which would not have, either singly or in the aggregate, a NetWolves Material
Adverse Effect.
SECTION 3.09 Litigation. There are no actions, suits, arbitrations,
mediations or other proceedings pending or, to the knowledge of any of the
Members, threatened against NetWolves at law or in equity before any court,
Federal, state, municipal or other governmental department or agency or other
tribunal. As of the date hereof, neither NetWolves nor its property is subject
to any order, judgment, injunction or decree which could have, either singly or
in the aggregate, a NetWolves Material Adverse Effect. To the knowledge of each
of the Members, there is no reasonable factual basis for any claims, actions,
suits, investigations or proceedings against NetWolves that, if adversely
determined against NetWolves, would have, either singly or in the aggregate, a
NetWolves Material Adverse Effect. No claim, action, proceeding or investigation
is pending or, to the best knowledge of any of the Members, threatened, which
seeks to delay or prevent the consummation of the transactions contemplated
hereby or would, if successful, have a material adverse effect on the ability of
any of the NetWolves Parties to consummate the transactions contemplated hereby.
SECTION 3.10 Taxes, Tax Returns and Audits. NetWolves commenced its
operations in February 1998 and has not yet been required to make any filings
with Federal, state, local and foreign governmental authorities in respect of
Taxes and will not be required to make any such filings prior to the Effective
Time. NetWolves has duly and timely elected to be classified as a corporation
pursuant to Treasury Regulations Sec. 301.7701-3 effective April 15, 1998 and
NetWolves has timely filed a properly signed and complete Form 8832, Entity
Classification Election, with the Internal Revenue Service Center evidencing
such classification election. In the case of Taxes accruing on or before the
Effective Time that are not due on or before the Effective Time, NetWolves has
or will have established adequate reserves on its books and records and on
NetWolves Balance Sheet for such payment. NetWolves has withheld from each
payment made to any of its present or former employees, officers, directors or
other party all amounts required by law to be withheld and has, where required,
remitted such amounts within the applicable periods to the appropriate
governmental authorities.
<PAGE>
SECTION 3.11 Absence of Certain Changes. NetWolves has not, since the
NetWolves Balance Sheet Date:
(a) issued, delivered or agreed to issue any interests, bonds or other
corporate securities (whether authorized and unissued or held in the treasury),
or granted or agreed to grant any options (including employee stock options),
warrants or other rights for the issue thereof;
(b) borrowed or agreed to borrow any funds;
(c) incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, except current
liabilities incurred in the ordinary course of business and consistent with
prior practice;
(d) transferred or granted any rights under, or entered into any
settlement regarding the breach or infringement of, any license or any of the
Intellectual Property (as defined herein) used in the businesses or operations
of NetWolves;
(e) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind whatsoever to any of its
Members or any affiliate of any of its Members, or purchased or redeemed, or
agreed to purchase or redeem, any of its capital stock, or made or agreed to
make any payment to any of its Members or any affiliate of any of its Members,
whether on account of debt, management fees or otherwise; or
(f) suffered any material adverse change, in any case or in the
aggregate, in its assets, liabilities, financial condition, results of
operations or business.
SECTION 3.12 Employee Benefit Plans. NetWolves does not have any employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), programs or arrangements maintained
for the benefit of any current or former employee, officer or director of
NetWolves.
SECTION 3.13 Labor Relations. NetWolves is not a party to any collective
bargaining agreement or other contract or agreement with any labor organization
or other representative of any of the employees of NetWolves. NetWolves is in
compliance in all material respects with all laws relating to the employment or
the workplace, including, without limitation, provisions relating to wages,
hours, collective bargaining, safety and health, work authorization, equal
<PAGE>
employment opportunity, immigration and the withholding of income taxes,
unemployment compensation, worker's compensation, employee privacy and right to
know and social security contributions. There are no pending or, to knowledge of
each of the Members, threatened proceedings or grievances with respect to labor
matters concerning NetWolves which would have, either singly or in the
aggregate, a NetWolves Material Adverse Effect.
SECTION 3.14 Insurance Policies; Claims. NetWolves does not have insurance
policies or bonds maintained by or on behalf of NetWolves. No claims have been
made against NetWolves as a result of allegedly defective products and none of
the Members or NetWolves knows of any basis for the assertion of any such claim.
SECTION 3.15 Intellectual Property.
(a) NetWolves owns or possesses all right, title and interest in and
to, or a valid and enforceable license or other right to use all of the
Intellectual Property (as defined below) that is material to the conduct of the
business of NetWolves and all of the rights, benefits and privileges associated
therewith. To the knowledge of each of the Members, NetWolves has not infringed,
misappropriated or otherwise violated any Intellectual Property of any other
person. To the knowledge of each of the Members, no person is infringing upon
any Intellectual Property right of NetWolves.
(b) "Intellectual Property" means all patents, patent applications and
patent disclosures; all inventions (whether or not patentable and whether or not
reduced to practice); all trademarks, service marks, trade dress, trade names
and corporate names and all the goodwill associated therewith; all registered
and unregistered statutory and common law copyrights; all registrations,
applications and renewals for any of the foregoing; all protocols, codes and
operating systems; and all trade secrets, confidential information, ideas,
formulae, compositions, know-how, manufacturing and production processes and
techniques, research information, drawings, specifications, design plans,
improvements, proposals, technical and computer data, documentation and
software, financial business and marketing plans, customer and supplier lists
and related proprietary information, marketing materials and all other
proprietary rights. All of NetWolves Intellectual Property is listed on Schedule
3.15 hereto.
SECTION 3.16 Properties; Assets. NetWolves (a) has good and marketable
title to all the properties and assets reflected on the Balance Sheet as being
owned by NetWolves (except properties sold or otherwise disposed of since the
date thereof in the ordinary course of business), and those properties acquired
after the date thereof and not thereafter disposed of, free and clear of all
Liens, except (i) statutory liens securing payments not yet due, and (ii) such
imperfections or irregularities of title, claims, liens, charges, security
interests or encumbrances which do not secure monetary obligations and which do
not materially affect the use or marketability of the properties or assets
subject thereto or affected thereby or otherwise materially impair business
<PAGE>
operations at such properties, and (b) is the lessee of all personal property
reflected on the Balance Sheet as being leased by it as of the NetWolves Balance
Sheet Date (except for leases that have expired by their terms since the
NetWolves Balance Sheet Date) and those properties leased after the date
thereof. Each such lease and each lease entered into after the date thereof
which are material to the businesses of NetWolves is valid without default
thereunder by the lessee or, to the knowledge of each of the Members, lessor,
and NetWolves is in possession of the personal property purported to be leased
thereunder. The assets and properties of NetWolves are in good operating
condition and repair (ordinary wear and tear excepted), and constitute all of
the assets, rights and properties which are necessary for the businesses and
operations of NetWolves.
SECTION 3.17 Bank Accounts. Schedule 3.17 sets forth the name of each bank
in which NetWolves has an account or safe deposit box, vault, lock-box or other
arrangement, the account number and description of each account at each bank and
the names of all persons authorized to draw thereon or to have access thereto;
and the names of all persons, if any, holding tax or other powers of attorney
from NetWolves.
SECTION 3.18 Brokers. Other than the warrant being issued to Kirlin
Securities, Inc. ("Kirlin") or its designees as described in Section 7.02 hereof
and the warrants to purchase 75,000 and 12,500 shares of Common Stock of
Watchdog for an exercise price of $2.00 per share, to be issued to Howard
Habberstat and Joseph Ariola, respectively, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of NetWolves or any of the Members.
SECTION 3.19 Records. The books of account and minute book of NetWolves are
complete and correct in all material respects, and there have been no material
transactions involving NetWolves of the type typically recorded in such records
that have not been recorded.
SECTION 3.20 No Illegal or Improper Transactions. Neither NetWolves nor any
officer, director, employee, agent or affiliate of NetWolves has offered, paid
or agreed to pay to any person or entity (including any governmental official)
or solicited, received or agreed to receive from any such person or entity,
directly or indirectly, any money or anything of value for the purpose or with
the intent of (i) obtaining or maintaining business for the benefit of
NetWolves, (ii) illegally or improperly facilitating the purchase or sale of any
product or service, or (iii) avoiding the imposition of any fine or penalty, in
any manner which is in violation of any applicable ordinance, regulation or law.
SECTION 3.21 Disclosure. No representation or warranty by the Members
contained in this Agreement and no information contained in any schedule,
financial statement or other instrument furnished or to be furnished by any of
the Members or NetWolves to the Watchdog Parties pursuant to this Agreement or
<PAGE>
in connection with the transactions contemplated hereby, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements contained herein or
therein not misleading. Any furnishing of information to the Watchdog Parties by
the NetWolves Parties pursuant to, or otherwise in connection with, this
Agreement, including, without limitation, any information contained in any
document, contract, book or record of NetWolves to which the Watchdog Parties
shall have access or any information obtained by, or made available to, the
Watchdog Parties as a result of any investigation made by or on behalf of the
Watchdog Parties prior to or after the date of this Agreement, shall not affect
the Watchdog Parties' right to rely on any representation, warranty, covenant or
agreement made or deemed made by the Members in this Agreement and shall not be
deemed a waiver thereof.
SECTION 3.22 Environmental Matters.
(a) Except for matters which would not have, either singly or in the
aggregate, a NetWolves Material Adverse Effect, (i) NetWolves has complied and
is in compliance with all applicable Environmental Laws (as defined below); (ii)
NetWolves has not received any written communication that alleges that NetWolves
is not in compliance with all applicable Environmental Laws or that NetWolves
has incurred liability under Environmental Laws; (iii) all Permits and other
governmental authorizations currently held by NetWolves pursuant to the
Environmental Laws are in full force and effect, NetWolves is in compliance with
all of the terms of such Permits and authorizations, and no other Permits or
authorizations are required by NetWolves for the conduct of their respective
businesses; (iv) the management, handling, storage, transportation, treatment,
and disposal by NetWolves of any Hazardous Materials (as defined below) has been
in compliance with all applicable Environmental Laws; and (v) NetWolves has not
treated, stored, disposed of, arranged for or permitted the disposal of,
transported, handled, or released any substance, including without limitation,
any Hazardous Material, or owned or operated any property or facility (and, to
the knowledge of each of the Members and NetWolves, no such property or facility
is contaminated by any such substance), in a manner that has given or would give
rise to liabilities, including any liability for response costs, corrective
action costs, personal injury, property damage, natural resource damages, or
attorney fees, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, the Solid Waste Disposal
Act, as amended, or any other Environmental Laws.
(b) There is no Environmental Claim (as defined below) pending or, to
the knowledge of the Members, threatened against or involving NetWolves or
against any person or entity whose liability for any material Environmental
Claim NetWolves has or may have retained or assumed either contractually or by
operation of law.
<PAGE>
(c) To the knowledge of each of the Members and NetWolves, there are
no past or present actions or activities by NetWolves including the storage,
treatment, release, emission, discharge, disposal or arrangement for disposal of
any Hazardous Materials, that could reasonably form the basis of any
Environmental Claim against NetWolves or against any person or entity whose
liability for any Environmental Claim NetWolves may have retained or assumed
either contractually or by operation of law.
(d) As used herein, these terms shall have the following meanings:
(i) "Environmental Claim" means any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, directives,
claims, liens, investigations, proceedings or notices of noncompliance or
violation (written) by any person or governmental authority alleging potential
liability arising out of, based on or resulting from the presence, or release or
threatened release into the environment, of any Hazardous Materials at any
location owned or leased by NetWolves or other circumstances forming the basis
of any violation or alleged violation of any Environmental Law.
(ii) "Environmental Laws" means all applicable foreign, Federal,
state and local laws (including the common law), rules, requirements and
regulations relating to pollution, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or protection of human health as it relates to the environment
including, without limitation, laws and regulations relating to releases of
Hazardous Materials, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials or relating to management of asbestos in buildings.
(iii) "Hazardous Materials" means wastes, substances, or
materials (whether solids, liquids or gases) that are deemed hazardous, toxic,
pollutants, or contaminants, including without limitation, substances defined as
"hazardous substances," "toxic substances," "radioactive materials," or other
similar designations in, or otherwise subject to regulation under, any
Environmental Laws.
SECTION 3.23 Year 2000 Compliance. NetWolves has made every attempt
possible to ensure full year 2000 compliance in its manufactured product.
NetWolves warrants that to the best of its knowledge as of June 1, 1998, its
manufactured product will suffer no loss of functionality from December 31, 1999
capabilities to those capabilities on January 1, 2000. NetWolves will make every
attempt at speedy resolution to any unforeseen functionality problems concerning
year 2000 compliance.
SECTION 3.24 Investment Representations. All Watchdog Securities to be
acquired by the Members pursuant to this Agreement will be acquired for their
accounts and not with a view towards distribution thereof. The Members
understand that they must bear the economic risk of the investment in the
Watchdog Securities, which cannot be sold by them unless they are registered
under the Securities Act, or an exemption therefrom is available thereunder. The
<PAGE>
Members have had both the opportunity to ask questions and receive answers from
the officers and directors of Watchdog concerning the business and operations of
Watchdog and to obtain any additional information to the extent Watchdog
possesses or may possess such information or can acquire it without unreasonable
effort or expense necessary to verify the accuracy of such information. The
certificates representing the Watchdog Securities shall bear a legend to the
effect that the Watchdog Securities may not be transferred except upon
compliance with the registration requirements of the Securities Act (or an
exemption therefrom) and the provisions of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF WATCHDOG
Watchdog represents and warrants to the Members as follows:
SECTION 4.01 Organization. Each of the Watchdog Parties is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York, the only state in which it owns or leases property or
maintains offices, employees or assets material to its business or in which it
transacts business. Watchdog has all requisite corporate power to own, lease and
operate its properties and to carry on its business. The Merger Subsidiary was
formed on June 10, 1998 for the sole purpose of merging with NetWolves and has
not commenced any business activities other than in connection with the
execution of this Agreement.
SECTION 4.02 Authority; Corporate Action. Each of the Watchdog Parties has
all necessary corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby and thereby. All corporate
action necessary to be taken by the Watchdog Parties to authorize the execution,
delivery and performance of this Agreement and all other agreements delivered by
the Watchdog Parties in connection with the transactions contemplated hereby or
thereby has, or at the Closing will have been, duly and validly taken. Subject
to the terms and conditions hereof, this Agreement constitutes the valid,
binding and enforceable obligations of each of the Watchdog Parties, enforceable
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or similar laws of general application now or hereafter in effect
affecting the rights and remedies of creditors and by general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity).
<PAGE>
SECTION 4.03 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by each of the
Watchdog Parties do not, and the performance by each of the Watchdog Parties of
its respective obligations under this Agreement will not, (i) conflict with or
violate the Certificate of Incorporation, By-laws or other organizational
documents of any of the Watchdog Parties, (ii) conflict with or violate any law,
statute, ordinance, rule, regulation, order, judgment or decree applicable to
any of the Watchdog Parties or by which any of their respective properties or
assets is bound or affected, or (iii) except for the Lease dated October 1997
between Narkis Funding Company, L.L.C. and Watchdog for the premises located at
32 Broadway, New York, New York, result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any of the properties or
assets of any of the Watchdog Parties pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which any of the Watchdog Parties is a party or by
which any of the Watchdog Parties or any of their respective properties or
assets is bound or affected, except, in the case of clauses (ii) and (iii),
above, for any such conflicts, violations, breaches, defaults or other
alterations or occurrences that would not have, either singly or in the
aggregate, a material adverse effect ("a "Watchdog Material Adverse Effect") on
the results of operations, financial condition, business or assets of Watchdog.
(b) The execution and delivery of this Agreement by each of the
Watchdog Parties do not, and the performance of this Agreement by each of the
Watchdog Parties will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any Governmental Entity, except
(i) for (a) compliance with the applicable requirements, if any, of the
Securities Act, state securities laws and state takeover laws and (b) filing and
recordation of appropriate merger documents as required by the laws of the State
of New York and the State of Ohio, and (ii) where failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not have, either singly or in the aggregate, a Watchdog
Material Adverse Effect.
(c) Notwithstanding subsections (a) and (b) of this Section 4.03, it
is understood and acknowledged by the NetWolves Parties that the Company's
licenses from the Secretary of State of New York for the operation of a security
guard business may require the filing of certain notices with respect to the
change in the composition of the stockholders, directors and/or officers of the
Company and approval of such changes by the Secretary of State of the State of
New York.
SECTION 4.04 Capitalization. The authorized capital stock of Watchdog
consists of 10,000,000 shares of Common Stock, $.0033 par value per share, of
which 1,673,548 shares are issued and outstanding. There are no options,
warrants or other contractual rights outstanding which require, or give any
person the right to require, the issuance of any capital stock of Watchdog,
whether or not such rights are presently exercisable.
<PAGE>
SECTION 4.05 Licenses and Permits; Compliance with Laws. Schedule 4.05
lists all permits, licenses and approvals (collectively, the "Permits") from all
Federal, state and local governmental authorities held or required to be held by
Watchdog in connection with its business. Watchdog is in compliance in all
material respects with the Permits and the business of Watchdog is being
conducted in compliance in all material respects with all applicable laws,
statutes, ordinances, regulations, judgments, orders, decrees, concessions,
grants and other authorizations of any governmental authority. Neither Watchdog
nor any of its officers, directors and employees is in default in any material
respect under any of such Permits and no event has occurred and no condition
exists which, with the giving of notice, the passage of time, or both, would
constitute a default thereunder. Neither the execution and delivery of this
Agreement or any of the other documents contemplated hereby nor the consummation
of the transactions contemplated hereby or thereby nor compliance by each of the
Members and Watchdog with any of the provisions hereof or thereof will result in
any suspension, revocation, impairment, forfeiture or nonrenewal of any Permit
except as set forth in subsection (c) of Section 4.03.
SECTION 4.06 Financial Statements.
(a) Watchdog has delivered to the NetWolves Parties financial
statements of Watchdog for the year ended December 31, 1997 and the three months
ended March 31, 1998 (collectively, the "Watchdog Financial Statements"). The
Watchdog Financial Statements, including all related notes and schedules
thereto, fairly present in all material respects the financial position of
Watchdog as at the respective dates thereof and the results of operations and
cash flows of Watchdog for the periods indicated in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved (except as may be noted therein) and subject to normal
year-end adjustments.
(b) The accounts receivable of Watchdog reflected on the balance sheet
("Watchdog Balance Sheet) as at March 31, 1998 ("Watchdog Balance Sheet Date")
included in the Watchdog Financial Statements have arisen from bona fide
transactions and are collectible in the ordinary course of Watchdog business,
and are reflected on the books and records of Watchdog in accordance with GAAP.
Adequate reserves for the uncollectability of such accounts receivable have been
established on the books and records of Watchdog in accordance with GAAP and are
reflected on the Watchdog Balance Sheet, and Watchdog has no knowledge of any
facts or circumstances (other than general economic conditions) which is likely
to result in any material increase in the uncollectability of such receivables
in excess of such reserves.
<PAGE>
(c) Watchdog has no debts, liabilities, commitments or obligations
(including, without limitation, unasserted claims whether known or unknown),
whether absolute or contingent, liquidated or unliquidated, or due or to become
due or otherwise, except for liabilities and obligations (a) covered by
insurance, (b) reflected as liabilities on the Watchdog Balance Sheet, or (c)
that have arisen since the Watchdog Balance Sheet Date in the ordinary course of
business of Watchdog.
SECTION 4.07 Real Property. Schedule 4.07 contains a true, correct and
complete list and brief description of all real property leased or subleased by
Watchdog and utilized or accessed by Watchdog in the operation of its business,
all of which properties are hereinafter referred to as the "Leased Real
Property." Watchdog has provided to NetWolves true, correct and complete copies
of the leases of the Leased Real Property ("Leases") and any sublease to any
third party ("Subleases"). Except as set forth in Schedule 4.07, Watchdog has
not subleased any Leased Real Property to others. Watchdog is in compliance in
all material respects with all of the provisions of such Leases and Subleases
and is not in default thereunder in any material respect. Each such leasehold
interest (i) is valid, subsisting and in full force and effect; and (ii) is not
subject to any Liens (other than collateral assignments of the leases granted by
the landlords thereunder to the extent permitted by the terms of such Leases and
which do not interfere with or detract from Watchdog's use of the property
subject to such Leases). The execution and delivery of this Agreement and the
performance of the obligations hereunder and thereunder, will not constitute a
default under any Lease.
SECTION 4.08 Material Contracts.
(a) Schedule 4.08 sets forth a complete and correct list of all
agreements of the following types to which Watchdog is a party or may be bound
and all or any portion of which are currently in effect (collectively, the
"Watchdog Material Contracts"): (i) employment, severance, termination,
consulting and retirement agreements; (ii) loan agreements, indentures, letters
of credit, mortgages, notes and other debt instruments; (iii) agreements that
require aggregate future payments to or by Watchdog of more than Twenty-five
Thousand Dollars ($25,000); (iv) agreements containing any "change of control"
provisions; (v) agreements, arrangements or understandings with any employee,
director or officer of Watchdog or affiliate thereof; (vi) joint venture,
partnership and similar agreements; (vii) acquisition or divestiture agreements
relating to the (A) sale or purchase of assets or stock of Watchdog (other than
the ordinary course of business) or (B) the purchase of assets or stock of any
other person (other than in the ordinary course of business); (viii) brokerage,
finder's or financial advisory agreements; (ix) guarantees of indebtedness for
borrowed money of any person; (x) customer contracts; (xi) licensing and rights
arrangements for any Intellectual Property (as defined); and (xii) agreements
that, individually or together with one or more related agreements, are material
<PAGE>
to the assets, financial condition, business or operations of Watchdog. True and
complete copies of all Material Contracts have been delivered to the Watchdog
Parties or made available for inspection.
(b) All Watchdog Material Contracts are valid and in full force and
effect and Watchdog has not violated any provision of, or committed or failed to
perform any act which with or without notice, lapse of time or both would
constitute a default under the provisions of, any Watchdog Material Contract,
except for defaults which would not have, either singly or in the aggregate, a
Watchdog Material Adverse Effect.
SECTION 4.09 Litigation. Except for claims and costs covered by insurance
and except as set forth on Schedule 4.09 hereto, there are no actions, suits,
arbitrations, mediations or other proceedings pending or, to the knowledge of,
threatened against Watchdog at law or in equity before any court, Federal,
state, municipal or other governmental department or agency or other tribunal.
As of the date hereof, neither Watchdog nor its property is subject to any
order, judgment, injunction or decree which could have, either singly or in the
aggregate, a Watchdog Material Adverse Effect. To the knowledge of Watchdog,
there is no reasonable factual basis for any claims, actions, suits,
investigations or proceedings against Watchdog that, if adversely determined
against Watchdog, would have, either singly or in the aggregate, a Watchdog
Material Adverse Effect. No claim, action, proceeding or investigation is
pending or, to the best knowledge of Watchdog, threatened, which seeks to delay
or prevent the consummation of the transactions contemplated hereby or would, if
successful, have a material adverse effect on the ability of any of the Watchdog
Parties to consummate the transactions contemplated hereby.
SECTION 4.10 Taxes, Tax Returns and Audits. Watchdog has (or, in the case
of returns becoming due after the date hereof and on or before the Effective
Time, will have prior to the Effective Time) prepared and filed on a timely
basis with all appropriate Federal, state, local and foreign governmental
authorities all returns in respect of Taxes it is required to file on or prior
to the Effective Time or by such date will have obtained the appropriate
extensions to file, and all such returns completely and accurately (or, in the
case of returns becoming due after the date hereof and on or before the
Effective Time, will completely and accurately) set forth the amount due of any
Taxes relating to the applicable period. Watchdog has paid (or, in the case of
Taxes becoming due after the date hereof and on or before the Effective Time,
will have paid) in full all Taxes due on or before the Effective Time and, in
the case of Taxes accruing on or before the Effective Time that are not due on
or before the Effective Time, Watchdog has or will have established adequate
reserves on its books and records and financial statements (including the
Watchdog Balance Sheet) for such payment in accordance with GAAP. Watchdog has
withheld from each payment made to any of its present or former employees,
officers, directors or other party all amounts required by law to be withheld
<PAGE>
and has, where required, remitted such amounts within the applicable periods to
the appropriate governmental authorities. In addition,, (i) there are no
assessments against Watchdog with respect to Taxes that have been issued and are
outstanding; (ii) no governmental authorities have audited or, to the knowledge
of Watchdog, examined Watchdog in respect of Taxes; (iii) Watchdog has not
executed or filed any agreement extending the period of assessment or collection
of any Taxes which has not yet expired by its terms; (iv) Watchdog has not
received written notification from any governmental authority of its intention
to commence any audit or investigation; (v) Watchdog is not a party to or bound
by or nor does it have any obligation under any Tax sharing or Tax
indemnification agreement, provision or arrangement, whether formal or informal,
and no power of attorney, which is currently in effect, has been granted with
respect to any matter relating to Taxes of Watchdog; and (vi) Watchdog is not
presently required nor will it be required to include any adjustment in taxable
income under Section 481 of the Code (or any similar provision of the Tax laws
of any jurisdiction) as a result of any change in method of accounting or
otherwise.
SECTION 4.11 Absence of Certain Changes. Watchdog has not, since the
Watchdog Balance Sheet Date:
(a) issued, delivered or agreed to issue any stock, bonds or other
corporate securities (whether authorized and unissued or held in the treasury),
or granted or agreed to grant any options (including employee stock options),
warrants or other rights for the issue thereof;
(b) borrowed or agreed to borrow any funds;
(c) incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, except current
liabilities incurred in the ordinary course of business and consistent with
prior practice;
(d) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind whatsoever to any of its
stockholders or any affiliate of any of its stockholders, or purchased or
redeemed, or agreed to purchase or redeem, any of its capital stock, or made or
agreed to make any payment to any of its stockholders or any affiliate of any of
its stockholders, whether on account of debt, management fees or otherwise; or
(e) suffered any material adverse change, in any case or in the
aggregate, in its assets, liabilities, financial condition, results of
operations or business.
SECTION 4.12 Employee Benefit Plans. "Employee Plans" means all plans
required to be disclosed on Schedule 4.12. No Employee Plan fails to comply in
full with applicable provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA") and regulations issued under ERISA, in such a manner as to
constitute, in the aggregate, a material adverse event. Except as shown on
Schedule 4.12, each such plan is a "qualified" plan under section 401(a) of the
Internal Revenue Code. Complete and correct copies of all determination letters
<PAGE>
issued by the Internal Revenue Service relating to such qualified plans have
previously been delivered to the NetWolves Parties. No facts or circumstances,
including, without limitation, any "reportable events" as defined in ERISA and
the regulations promulgated under ERISA, exist in connection with such plans
which constitute, in the aggregate, a material adverse event, or which might
constitute grounds for the termination of any such plan or for the appointment
by the appropriate United States District Court of a trustee to administer any
such plan, nor does any such plan have any funding deficiency.
SECTION 4.13 Labor Relations. Other than the Collective Bargaining
Agreement between Watchdog and Allied International Union dated September 1,
1997, Watchdog is not a party to any collective bargaining agreement or other
contract or agreement with any labor organization or other representative of any
of the employees of Watchdog. Watchdog is in compliance in all material respects
with all laws relating to the employment or the workplace, including, without
limitation, provisions relating to wages, hours, collective bargaining, safety
and health, work authorization, equal employment opportunity, immigration and
the withholding of income taxes, unemployment compensation, worker's
compensation, employee privacy and right to know and social security
contributions. There are no pending or, to knowledge of Watchdog, threatened
proceedings or grievances with respect to labor matters concerning Watchdog
which would have, either singly or in the aggregate, a Watchdog Material Adverse
Effect.
SECTION 4.14 Insurance Policies; Claims. Schedule 4.14 sets forth all
insurance policies and bonds maintained by or on behalf of Watchdog. Except as
disclosed in Schedule 4.14, the insurance policies and bonds set forth in
Schedule 4.14 are provided by reputable insurers or issuers, and provide
adequate coverage for all normal risks incident to the businesses of Watchdog
and its assets. No insurance policy issued to or on behalf of Watchdog has ever
been canceled by the policy issuer.
SECTION 4.15 Intellectual Property.
(a) Watchdog owns or possesses all right, title and interest in and
to, or a valid and enforceable license or other right to use all of the
Intellectual Property (as defined below) that is material to the conduct of the
business of Watchdog and all of the rights, benefits and privileges associated
therewith. To the knowledge of Watchdog, it has not infringed, misappropriated
or otherwise violated any Intellectual Property of any other person. To the
knowledge of Watchdog, no person is infringing upon any Intellectual Property
right of Watchdog.
(b) "Intellectual Property" means all patents, patent applications and
patent disclosures; all inventions (whether or not patentable and whether or not
reduced to practice); all trademarks, service marks, trade dress, trade names
and corporate names and all the goodwill associated therewith; all registered
<PAGE>
and unregistered statutory and common law copyrights; all registrations,
applications and renewals for any of the foregoing; all protocols, codes and
operating systems; and all trade secrets, confidential information, ideas,
formulae, compositions, know-how, manufacturing and production processes and
techniques, research information, drawings, specifications, design plans,
improvements, proposals, technical and computer data, documentation and
software, financial business and marketing plans, customer and supplier lists
and related proprietary information, marketing materials and all other
proprietary rights. All of Watchdog Intellectual Property is listed on Schedule
4.15 hereto.
SECTION 4.16 Properties; Assets. Watchdog (a) has good title to all the
properties and assets reflected on the Watchdog Balance Sheet as being owned by
Watchdog (except properties sold or otherwise disposed of since the date thereof
in the ordinary course of business), and those properties acquired after the
date thereof and not thereafter disposed of, free and clear of all Liens, except
(i) statutory liens securing payments not yet due, and (ii) such imperfections
or irregularities of title, claims, liens, charges, security interests or
encumbrances which do not secure monetary obligations and which do not
materially affect the use or marketability of the properties or assets subject
thereto or affected thereby or otherwise materially impair business operations
at such properties, and (b) is the lessee of all personal property reflected on
the Balance Sheet as being leased by it as of the Watchdog Balance Sheet Date
(except for leases that have expired by their terms since the Watchdog Balance
Sheet Date) and those properties leased after the date thereof. Each such lease
and each lease entered into after the date thereof which are material to the
businesses of Watchdog is valid without default thereunder by the lessee or, to
the knowledge of Watchdog, lessor, and Watchdog is in possession of the personal
property purported to be leased thereunder. The assets and properties of
Watchdog are in good operating condition and repair (ordinary wear and tear
excepted), and constitute all of the assets, rights and properties which are
necessary for the businesses and operations of Watchdog.
SECTION 4.17 Bank Accounts. Schedule 4.17 sets forth the name of each bank
in which Watchdog and the Surviving Corporation has an account or safe deposit
box, vault, lock-box or other arrangement, the account number and description of
each account at each bank and the names of all persons authorized to draw
thereon or to have access thereto; and the names of all persons, if any, holding
tax or other powers of attorney from Watchdog and the Surviving Corporation.
SECTION 4.18 Brokers. Except for the warrant being issued to Kirlin as
described in Section 7.02 hereof, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transaction contemplated by this Agreement based upon arrangements made
by or on behalf of the Watchdog Parties.
<PAGE>
SECTION 4.19 Records. The books of account, minute books, stock certificate
books and stock transfer ledgers of Watchdog are complete and correct in all
material respects, and there have been no material transactions involving
Watchdog of the type typically recorded in such records that have not been
recorded.
SECTION 4.20 No Illegal or Improper Transactions. Neither Watchdog nor any
officer, director, employee, agent or affiliate of Watchdog has offered, paid or
agreed to pay to any person or entity (including any governmental official) or
solicited, received or agreed to receive from any such person or entity,
directly or indirectly, any money or anything of value for the purpose or with
the intent of (i) obtaining or maintaining business for the benefit of Watchdog,
(ii) illegally or improperly facilitating the purchase or sale of any product or
service, or (iii) avoiding the imposition of any fine or penalty, in any manner
which is in violation of any applicable ordinance, regulation or law.
ARTICLE V
NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PARTIES.
SECTION 5.01 Additional Representations, Warranties and Covenants. All
statements contained in any schedule, document, certificate or other instrument
delivered by or on behalf of any Party to the other pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed
representations, warranties, covenants and agreements made by the delivering
Party, as if made under this Agreement.
SECTION 5.02 Survival. Each statement, representation, warranty, covenant
and agreement made or deemed made by the NetWolves Parties to the Watchdog
Parties under this Agreement shall remain in effect continuously through the
two-year anniversary of the Effective Time and each statement, representation,
warranty, covenant and agreement made or deemed made by the Watchdog Parties to
the NetWolves Parties under this Agreement shall remain in effect continuously
through the date the security guard operations of Watchdog are sold.
ARTICLE VI
COVENANTS OF THE MEMBERS
SECTION 6.01 Conduct of Business. The Members covenant and agree that, from
the date hereof through the Closing Date, except as otherwise set forth in this
Agreement, they shall cause NetWolves to:
<PAGE>
(a) conduct its business only in the ordinary course and in a manner
consistent with the current practice of such business, preserve substantially
intact the business organization of NetWolves, keep available the services of
the current employees of NetWolves, preserve the current relationships of
NetWolves with customers and other persons with which NetWolves has significant
business relations and comply with all requirements of law, the violation of
which could have a NetWolves Material Adverse Effect;
(b) not pledge, sell, transfer, dispose of, or otherwise encumber or
grant any rights or interests to others of any kind with respect to, all or any
part of its capital stock or enter into any discussions or negotiations with any
other party to do so;
(c) not pledge, sell, lease, transfer, dispose of or otherwise
encumber any of its property or assets of other than consistent with past
practices and in the ordinary course of business or enter into any discussions
or negotiations with any other party to do so;
(d) not (i) issue any interests nor any options, obligations, rights,
warrants or other securities convertible into or exchangeable for its capital
stock, or any other class of securities, whether debt or equity, of NetWolves;
or (ii) amend or otherwise modify the terms of any such securities, options,
obligations, rights or warrants in a manner inconsistent with the provisions of
this Agreement or the effect of which shall be to make such terms more favorable
to the holders thereof;
(e) not propose or adopt any amendments to its organizational doctrine
which would affect this Agreement or the transactions contemplated hereby;
(f) not merge or consolidate with, or acquire all or substantially all
of the assets of, or otherwise acquire any business operations of, any person or
entity or enter into any agreement for any of the foregoing;
(g) (i) change any of its methods of accounting in effect on the
NetWolves Balance Sheet Date, or (ii) make or rescind any express or deemed
election relating to taxes, settle or compromise any claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to taxes, except as may be required by law or GAAP;
(h) take any action that will, or could reasonably be expected to,
result in any of its representations and warranties set forth in this Agreement
being inaccurate or in any of the conditions to the Merger not being satisfied;
or
(i) agree in writing or otherwise to do any of the foregoing.
<PAGE>
SECTION 6.02 Maintenance of Assets; Insurance. The Members shall cause
NetWolves to continue to maintain and service the assets of NetWolves consistent
with past practice.
SECTION 6.03 Employment and Noncompete Agreements. On the Closing Date,
Keith A. Darling, Kevin F. Sherlock, Daniel G. Stephens, Jr., Walter M. Groteke,
Mark Jacques, and (in each case, the "NetWolves Executive") shall each enter
into an employment and noncompete agreement ("Employment Agreement") with
NetWolves substantially in the form of Exhibit E attached hereto.
SECTION 6.04 Lock-up Agreements. On the Closing Date each Member shall
enter into a lock-up agreement ("Lock-up Agreement") with Watchdog and Kirlin
substantially in the form of Exhibit F attached hereto pursuant to which such
Member will agree not to sell the Shares owned by him for a period of two years
after the Closing without the consent of Kirlin.
SECTION 6.05 No Other Negotiations. Unless and until this Agreement shall
have been terminated pursuant to its terms, none of the NetWolves Parties or any
of their Representatives shall, directly or indirectly, solicit, institute,
initiate, pursue or enter into any inquiries, discussions, proposals or
negotiations with any person concerning any merger, sale of substantial assets,
tender offer, sale of shares of stock or similar transaction involving NetWolves
or disclose, directly or indirectly, any information not customarily disclosed
to the public concerning NetWolves, afford to any other person access to the
properties, books or records of NetWolves, or otherwise assist any person
preparing to make or who has made such an offer, or enter into any agreement
with any third party providing for a business combination transaction, equity
investment or sale of significant amount of assets of NetWolves.
SECTION 6.06 No Securities Transactions. None of the NetWolves Parties
shall engage in any transactions involving the securities of Watchdog prior to
the Closing Date, and thereafter, any of the Members that is an employee of the
Surviving Corporation, shall not engage in any such transaction except as
allowed under Watchdog's policies.
SECTION 6.07 Fulfillment of Conditions. The Members shall use their best
efforts to fulfill, or cause to be fulfilled, the conditions specified in
Article IX to the extent that the fulfillment of such conditions is within their
control. The foregoing obligation includes taking or refraining from such
actions as may be necessary to fulfill such conditions (including NetWolves to
conduct its businesses in such manner that on the Closing Date the
representations and warranties of the Members contained herein shall be accurate
as though then made, except as contemplated by the terms hereof).
<PAGE>
SECTION 6.08 Disclosure of Certain Matters. During the period from the date
hereof through the Closing Date, the NetWolves Parties shall give the Watchdog
Parties prompt written notice of any event or development that occurs that (a)
had it existed or been known on the date hereof would have been required to be
disclosed under this Agreement, (b) would cause any of the representations and
warranties of any of the NetWolves Parties contained herein to be inaccurate or
otherwise misleading, (c) gives NetWolves any reason to believe that any of the
conditions set forth in Article IX will not be satisfied, or (d) is of a nature
that is or may be materially adverse to the operations, prospects or condition
(financial or otherwise) of NetWolves.
SECTION 6.09 Assignment of Contracts. The NetWolves Parties shall, in
consultation with the Watchdog Parties and their Representatives, immediately
take all necessary action to, and shall, obtain consents under all Material
Contracts, Leases and Permits and all other instruments to which NetWolves is a
party or by which it is bound which require the consent of any other party or
person to the assignment thereof either by the terms thereof or as a matter of
law for their assumption by the Surviving Corporation in the Merger.
SECTION 6.10 Termination of Operating Agreement. Members hereby agree that
concurrently with the consummation of the Merger (i) each Member will deliver to
NetWolves an executed release reflecting that there are no further obligations
to such Member due and owing from NetWolves and (ii) the NetWolves operating
agreement dated April 15, 1998 will terminate.
SECTION 6.11 Restriction Against Issuance of Additional Shares. For a
period of two years after the Closing, the Members will not (i) vote, as
shareholders of Watchdog, to adopt a stock option plan (other than the plan
described in Section 7.04 hereof) or increase the number of shares subject to
the proposed stock option plan or (ii) take any action which would result in
additional shares of Watchdog Stock being issued to them, directly or indirectly
(other than pursuant to the exercise of the Watchdog Warrants) or result in any
option, warrant or other security exercisable or convertible into Watchdog Stock
to be issued directly or indirectly to them without first obtaining the consent
or affirmative vote of the holders of at least 80% of the outstanding shares of
Common Stock of Watchdog.
SECTION 6.12 Voting Agreement. Each of the Members hereby agrees to vote
all of the shares of Common Stock of Watchdog owned by him "for" the election of
the director designee of Kirlin pursuant to the agreement described in Section
7.03 hereof for a period of three years from the Closing Date and "for" the
election of the two directors designated by Greenleaf Capital Partners, L.L.C.
("Greenleaf") or its designee until the two-year anniversary of the Effective
Time, except that when the Company's security guard business is sold, the number
of such directors that may be designated by Greenleaf shall be reduced to one.
The initial directors designated by Greenleaf are set forth on Schedule 1.06.
<PAGE>
SECTION 6.13 Questionnaires. The information provided in the Directors' and
Officers' Questionnaire and the Questionnaire furnished to International
Business Research, Inc. by each Member is complete and true and correct in all
respects.
ARTICLE VII
COVENANTS OF WATCHDOG
SECTION 7.01 Composition of Watchdog Board and Offices At Effective Time.
Concurrently with the consummation of the Merger, the directors and officers of
Watchdog and Merger Subsidiary shall resign and Watchdog shall take all
necessary actions to ensure that at the Effective Time, the Board of Directors
of Watchdog and the Surviving Corporation is comprised of, and the offices of
Watchdog and the Surviving Corporation are occupied by, the persons set forth in
Schedule 1.06.
SECTION 7.02 Kirlin Warrant. On the Closing Date, Watchdog shall issue to
Kirlin or its designees five-year warrants to purchase 500,000 shares of Common
Stock at an exercise price of $1.63 per share ("Kirlin Warrant") substantially
in the form of Exhibit G attached hereto.
SECTION 7.03 Kirlin Agreements. On the Closing Date, Watchdog will execute
a letter, substantially in the form of Exhibit H attached hereto, in connection
with (i) the grant to Kirlin of a three-year right of first refusal with respect
to any financings and (ii) certain other matters. On the Closing Date, Kirlin
will deliver to Watchdog the letter substantially in the form of Exhibit I
attached hereto with respect to a private placement of shares of Common Stock of
Watchdog.
SECTION 7.04 Stock Option Plan. On the Closing Date, Watchdog will adopt a
stock option plan substantially in the form of Exhibit J attached hereto
providing for the grant of options to purchase up to 282,500 shares of Common
Stock.
SECTION 7.05 Registration Rights Agreement. On the Closing Date, Watchdog
will execute the Registration Rights Agreement substantially in the form of
Exhibit K attached hereto.
SECTION 7.06 Disclosure of Certain Matters. During the period from the date
hereof through the Closing Date, the Watchdog Parties shall give the NetWolves
Parties prompt written notice of any event or development that occurs that (a)
had it existed or been known on the date hereof would have been required to be
disclosed under this Agreement, (b) would cause any of the representations and
warranties of any of the Watchdog Parties contained herein to be inaccurate or
otherwise misleading, (c) gives Watchdog any reason to believe that any of the
conditions set forth in Article IX will not be satisfied, or (d) is of a nature
that is or may be materially adverse to the operations, prospects or condition
(financial or otherwise) of Watchdog.
<PAGE>
ARTICLE VIII
JOINT COVENANTS OF THE PARTIES
SECTION 8.01 Access to Information; Confidentiality.
(a) Between the date of this Agreement and the Closing Date, each
Party will (i) permit the other Party and its representatives reasonable access
to all of the books, records, reports and other related materials, offices and
other facilities and properties of such Party; (ii) permit the other Party and
its representatives to make such inspections thereof as they may reasonably
request; and (iii) furnish the other Party and its representatives with such
financial and operating data and other information as the other Party may from
time to time reasonably request.
(b) Between the date of this Agreement and the Closing Date, employees
or Representatives of each Party may meet with and interview all employees of
the other Party at reasonable times during business hours as may be mutually
agreed to.
(c) Each Party shall hold and shall cause its Representatives to hold
in strict confidence, unless compelled to disclose by judicial or administrative
process or by other requirements of law, all documents and information
concerning the other party furnished to them or their Representatives in
connection with the transactions contemplated by this Agreement (except to the
extent that such information can be shown to have been (i) previously known,
(ii) in the public domain through no fault of any of such Party or (iii) later
lawfully acquired by the other Party from another source, and, except as
otherwise required by applicable law, rule or regulation, none of the Parties
shall release or disclose such information to any other person, except its
auditors, actuaries, attorneys, financial advisors, bankers and other
consultants and advisors who need to know same in connection with this
Agreement.
SECTION 8.02 Further Action. Each of the Parties shall execute such
documents and other papers and take such further actions as may be reasonably
required or desirable to carry out the provisions hereof and the transactions
contemplated hereby. Upon the terms and subject to the conditions hereof, each
of the Parties shall use its best efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement.
<PAGE>
SECTION 8.03 Schedules. The Parties shall have the obligation to supplement
or amend the Schedules being delivered concurrently with the execution of this
Agreement and annexed hereto with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Schedules. The obligations of
the Parties to amend or supplement the Schedules being delivered herewith shall
terminate on the Closing Date. Notwithstanding any such amendment or
supplementation, the representations and warranties of the Parties shall be made
with reference to the Schedules as they exist at the time of execution of this
Agreement.
SECTION 8.04 Regulatory and Other Authorizations. The Parties will promptly
make all necessary filings and use their best efforts to obtain all
authorizations, consents, orders and approvals of all Federal, state and other
regulatory bodies and officials that are required for the consummation of the
transactions contemplated by this Agreement.
ARTICLE IX
CONDITIONS TO CLOSING
SECTION 9.01 Conditions to Each Party's Obligations. The respective
obligations of each Party to consummate the Merger and the other transactions
contemplated by this Agreement shall be subject to the fulfillment at or prior
to the Closing Date of the following conditions:
(a) Directors and Officers of Watchdog and the Surviving Corporation.
The persons listed in Schedule 1.06 shall have been appointed directors or
elected officers, for Watchdog and the Surviving Corporation, as the case may
be;
(b) No Governmental Order or Regulation. There shall not be in effect
any order, decree or injunction (whether preliminary, final or appealable) of a
United States Federal or state court of competent jurisdiction, and no
regulation shall have been enacted or promulgated by any governmental authority
or agency, that prohibits consummation of the Merger.
SECTION 9.02 Conditions to Obligations of NetWolves. The obligations of the
Members and NetWolves to consummate the Merger and the other transactions
contemplated by this Agreement shall be subject to the fulfillment, at or prior
to the Closing, of each of the following conditions:
(a) Representations and Warranties; Covenants. The representations and
warranties of the Watchdog Parties contained in this Agreement shall be true and
<PAGE>
correct as of the Closing, with the same force and effect as if made as of the
Closing, and all the covenants contained in this Agreement to be complied with
by the Watchdog Parties on or before the Closing Date shall have been complied
with, and the Members shall have received a certificate of the officers of the
Watchdog Parties to such effect;
(b) Legal Opinion. The Members shall have received from Graubard
Mollen & Miller, counsel to the Watchdog Parties, a legal opinion addressed to
the Members and dated the Closing Date, in the form of Exhibit L hereto;
(c) Necessary Proceedings. All proceedings, corporate or otherwise, to
be taken by the Watchdog Parties in connection with the consummation of the
transactions contemplated by this Agreement shall have been duly and validly
taken, and copies of all documents, resolutions and certificates incident
thereto, duly certified by officers of the Watchdog Parties as of the Closing,
shall have been delivered to the Members;
(d) No Adverse Change. At the Closing, there shall have been no
material adverse change in the assets, liabilities, financial condition or
business of Watchdog from that shown or reflected in the Watchdog Financial
Statements as of March 31, 1998. Between the date of this Agreement and the
Closing Date, there shall not have occurred an event which, in the reasonable
opinion of NetWolves, materially and adversely affects or could reasonably be
expected to constitute a Watchdog Material Adverse Effect; and
(e) Other Agreements. The Watchdog Subsidiary shall execute and
deliver the Employment Agreements and Watchdog shall execute the NetWolves
Warrant.
SECTION 9.03 Conditions to Obligations of the Watchdog Parties. The
obligations of the Watchdog Parties to consummate the Merger and the other
transactions contemplated by this Agreement shall be subject to the fulfillment,
at or prior to the Closing, of each of the following conditions:
(a) Representations and Warranties; Covenants. The representations and
warranties of the Members contained in this Agreement shall be true and correct
as of the Closing, with the same force and effect as if made as of the Closing,
and all the covenants and agreements contained in this Agreement to be complied
with by any of the NetWolves Parties on or before the Closing Date shall have
been complied with, and the Watchdog Parties shall have received a certificate
of the Members to such effect;
(b) Legal Opinion. The Watchdog Parties shall have received from Jerry
Sellman, general counsel to NetWolves, legal opinion addressed to the Watchdog
Parties dated the Closing Date, in the form of Exhibit M annexed hereto;
<PAGE>
(c) Consents. The Members shall have obtained and delivered to the
Watchdog Parties consents to the Merger of all third parties as may be
necessary;
(d) No Adverse Change. At the Closing, there shall have been no
material adverse change in the assets, liabilities, financial condition or
business of NetWolves from that shown or reflected in the NetWolves Financial
Statements as of March 31, 1998. Between the date of this Agreement and the
Closing Date, there shall not have occurred an event which, in the reasonable
opinion of Watchdog, materially and adversely affects or could reasonably be
expected to constitute a NetWolves Material Adverse Effect.
(e) Necessary Proceedings. All proceedings, corporate or otherwise, to
be taken by the NetWolves Parties in connection with the consummation of the
transactions contemplated by this Agreement shall have been duly and validly
taken, and copies of all documents, resolutions and certificates incident
thereto, duly certified by the officers of NetWolves as of the Closing, shall
have been delivered to the Watchdog Parties;
(f) Other Agreements. The Members shall execute and deliver the
Employment Agreements and the Lock-up Agreements. The Kirlin Warrant and Letter
Agreements and the Registration Rights Agreement shall have been executed.
ARTICLE X
INDEMNIFICATION
SECTION 10.01 Indemnification by the Members. Subject to the limitations
set forth in Section 10.04, the Members shall severally, in proportion of their
ownership of the NetWolves Interests, indemnify and hold harmless Watchdog and
the Surviving Corporation from and against, and shall reimburse Watchdog and the
Surviving Corporation for, any Damages which may be sustained, suffered or
incurred by them, whether as a result of any Third Party Claim or otherwise, and
which arise from or in connection with or are attributable to (i) the breach of
any of the Member's covenants, representations, warranties, agreements,
obligations or undertakings contained in this Agreement or (ii) the operations
of NetWolves through the Closing Date. This indemnity shall survive the Closing
until the two-year anniversary of the Effective Time.
SECTION 10.02 Indemnification by Watchdog. Subject to the limitations set
forth in Section 10.04, Watchdog shall indemnify and hold harmless the Members
<PAGE>
from and against, and shall reimburse the Members for, any Damages which may be
sustained, suffered or incurred by the Members, whether as a result of Third
Party Claims or otherwise, and which arise or result from or in connection with
or are attributable to the breach of any of the Watchdog Parties covenants,
representations, warranties, agreements, obligations or undertakings contained
in this Agreement. This indemnity shall survive the Closing.
SECTION 10.03 Notice, Etc. A Party required to make an indemnification
payment pursuant to this Agreement ("Indemnifying Party") shall have no
liability with respect to Third Party Claims or otherwise with respect to any
covenant, representation, warranty, agreement, undertaking or obligation under
this Agreement unless the Party entitled to receive such indemnification payment
("Indemnified Party") gives notice to the Indemnifying Party specifying (i) the
covenant, representation or warranty, agreement, undertaking or obligation
contained herein which it asserts has been breached, (ii) in reasonable detail,
the nature and dollar amount of any Claim the Indemnified Party may have against
the Indemnifying Party by reason thereof under this Agreement, and (iii) whether
or not the Claim is a Third Party Claim. All Claims by any Indemnified Party
under this Article X shall be asserted and resolved as follows:
(a) Third-Party Claims. In the event that an Indemnified Party becomes
aware of a Third Party Claim for which an Indemnifying Party would be liable to
an Indemnified Party hereunder, the Indemnified Party shall with reasonable
promptness notify in writing the Indemnifying Party of such Claim, identifying
the basis for such Claim or demand, and the amount or the estimated amount
thereof to the extent then determinable (which estimate shall not be conclusive
of the final amount of such Claim and demand; the "Claim Notice"); provided,
however, that any failure to give such Claim Notice will not be deemed a waiver
of any rights of the Indemnified Party except to the extent the rights of the
Indemnifying Party are actually prejudiced by such failure. The Indemnifying
Party, upon request of the Indemnified Party, shall retain counsel (who shall be
reasonably acceptable to the Indemnified Party) to represent the Indemnified
Party and shall pay the reasonable fees and disbursements of such counsel with
regard thereto; provided, however, that any Indemnified Party is hereby
authorized, prior to the date on which it receives written notice from the
Indemnifying Party designating such counsel, to retain counsel, whose fees and
expenses shall be at the expense of the Indemnifying Party, to file any motion,
answer or other pleading and take such other action which it reasonably shall
deem necessary to protect its interests or those of the Indemnifying Party until
the date on which the Indemnified Party receives such notice from the
Indemnifying Party. After the Indemnifying Party shall retain such counsel, the
Indemnified Party shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
<PAGE>
unless (x) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (y) the named parties of any such
proceeding (including any impleaded parties) include both the Indemnifying Party
and the Indemnified Party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. The Indemnifying Party shall not, in connection with any proceedings or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one such firm for the Indemnified Party (except to the
extent the Indemnified Party retained counsel to protect its (or the
Indemnifying Party's) rights prior to the selection of counsel by the
Indemnifying Party). If requested by the Indemnifying Party, the Indemnified
Party agrees to cooperate with the Indemnifying Party and its counsel in
contesting any Third Party Claim which the Indemnifying Party defends. A Third
Party Claim may not be settled by the Indemnifying Party without the prior
written consent of the Indemnified Party (which consent will not be unreasonably
withheld) unless, as part of such settlement, the Indemnified Party shall
receive a full and unconditional release; provided, however, that the
Indemnifying Party shall not settle any claim without the prior written consent
of the Indemnified Party (which consent shall not be unreasonably withheld) if
such Claim is not exclusively for monetary Damages.
(b) Books and Records. After delivery of a Claim Notice, so long as
any right to indemnification exists pursuant to this Article X, the affected
Parties each agree to retain all books and records related to such Claim Notice.
In each instance, the Indemnified Party shall have the right to be kept fully
informed by the Indemnifying Party and its legal counsel with respect to any
legal proceedings. Any information or documents made available to any Party
hereunder and designated as confidential by the Party providing such information
or documents and which is not otherwise generally available to the public and
not already within the knowledge of the Party to whom the information is
provided (unless otherwise covered by the confidentiality provisions of any
other agreement among the Parties hereto, or any of them), and except as may be
required by applicable law, shall not be disclosed to any third party (except
for the representatives of the Party being provided with the information, in
which event the Party being provided with the information shall request its
representatives not to disclose any such information which it otherwise required
hereunder to be kept confidential).
SECTION 10.04 Limitations. No Indemnifying Party shall be required to
indemnify an Indemnified Party pursuant to this Article X unless the aggregate
of all amounts for which indemnity would otherwise be due against it exceeds
$50,000. Notwithstanding anything to the contrary contained in this Section 10,
any decision regarding the enforcement, execution or settlement of an indemnity
claim hereunder in which the Members are the Indemnifying Party, may only be
made by the member(s) of the Board of Directors of Watchdog who was designated
by Greenleaf.
<PAGE>
ARTICLE XI
TERMINATION
SECTION 11.01 Methods of Termination. The transactions contemplated herein
may be terminated and/or abandoned at any time but not later than the Closing:
(a) By mutual written consent of the Watchdog Parties and the
NetWolves Parties;
(b) By either the NetWolves Parties or the Watchdog Parties if a
material default or breach shall be made by the other Party with respect to the
due and timely performance of any of its covenants and agreements contained
herein and such default cannot be cured within a reasonable period of time, or
if any of the other Party's representations and warranties are not true and
correct in all material respects as of the Closing Date; or
(c) By the Watchdog Parties, on the one hand, or the NetWolves
Parties, on the other, if either of the Parties amends or supplements any
Schedule hereto in accordance with Section 8.02 hereof and such amendment or
supplement reflects a material adverse change in the condition or operations of
NetWolves or the Watchdog Companies, as the case may be, or their respective
businesses, taken as a whole, after the date hereof.
SECTION 11.02 Effect of Termination. In the event of termination by a
Party, or both Parties, pursuant to Section 11.01 hereof, written notice thereof
shall forthwith be given to the other Party and all payment obligations (except
as set forth in this Section 11.02) and all further obligations of the Parties
shall terminate and no Party shall have any right against the other Party hereto
and each Party shall bear its own expenses. Notwithstanding the foregoing, if
this Agreement is so terminated by one Party because one or more of the
conditions to such Party's obligations hereunder is not satisfied as a result of
the other Party's failure to comply with its obligations under this Agreement
(other than a failure by a Party, after the good faith exercise of best efforts,
to obtain any consent, approval or other permission required pursuant to this
Agreement), it is expressly agreed and understood that the terminating Party's
right to pursue all legal remedies for breach of contract or otherwise,
including, without limitation, Damages (other than consequential Damages)
relating thereto, shall survive such termination unimpaired. If the transactions
contemplated by this Agreement are terminated and/or abandoned as provided
herein:
(a) Each Party hereto will return all documents, work papers and other
material (and all copies thereof) of the other Party, relating to the
transactions contemplated hereby, whether so obtained before or after the
execution hereof, to the Party furnishing the same; and
<PAGE>
(b) All confidential information received by either Party hereto with
respect to the business of the other Party shall be treated in accordance with
Section 8.02 hereof.
ARTICLE XII
DEFINITIONS
SECTION 12.01 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"Business Day" means a day of the year on which banks are not required or
not authorized to be closed in the City of New York.
"Damages" means the dollar amount of any loss, damage, expense or
liability, including, without limitation, reasonable attorneys' fees and
disbursements incurred by an Indemnified Party in any action or proceeding
between the Indemnified Party and the Indemnifying Party or between the
Indemnified Party and a third party, which is determined (as provided in Article
X) to have been sustained, suffered or incurred by a Party and to have arisen
from or in connection with an event or state of facts which is subject to
indemnification under this Agreement; the amount of Damages shall be the amount
finally determined by a court of competent jurisdiction or appropriate
governmental administrative agency (after the exhaustion of all appeals) or the
amount agreed to upon settlement in accordance with the terms of this Agreement,
if a Third Party Claim, or by the parties, if a Direct Claim.
"Lien" means any lien, claim, charge, option, security interest,
restriction or encumbrance.
"Party" means Watchdog and/or the Merger Subsidiary, on the one hand, and
the Members and/or NetWolves, on the other hand (collectively, the "Parties").
"Representatives" of either Party means such Party's employees,
accountants, auditors, actuaries, counsel, financial advisors, bankers,
investment bankers and consultants.
"Securities Act" means the Securities Act of 1933, as amended.
"Tax" or "Taxes" means all income, gross receipts, sales, stock transfer,
excise, bulk transfer, use, employment, franchise, profits, property or other
taxes, fees, stamp taxes and duties, assessments, levies or charges of any kind
whatsoever, together with any interest and any penalties, additions to tax or
additional amounts imposed by any taxing authority with respect thereto.
<PAGE>
"Third Party Claim" means a claim, demand, suit, proceeding or action by a
person, firm, corporation or government entity other than a party hereto or any
affiliate of such party.
ARTICLE XIII
GENERAL PROVISIONS
SECTION 13.01 Expenses. Except as otherwise provided herein, all costs and
expenses, including, without limitation, fees and disbursements of
Representatives, incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such costs and
expenses, whether or not the Closing shall have occurred. The Parties
acknowledge that Watchdog and NetWolves may have outstanding obligations as of
the Closing to pay their respective attorneys, accountants, investment bankers
(i.e., GKN Securities Corp.) and IBR. The Members hereby agree to cause Watchdog
to pay such obligations promptly as approved by the Board of Directors of
Watchdog.
SECTION 13.02 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or mailed if delivered personally or by
telecopy, one day after delivery to a nationally recognized courier, or three
business days after mailed by registered mail (postage prepaid, return receipt
requested), in each case, to the Parties at the following addresses (or at such
other address for a Party as shall be specified by like notice, except that
notices of changes of address shall be effective upon receipt):
(a) If to NetWolves or the Members, as set forth in Exhibit A,
NetWolves, LLC
85 E. Gay Street
Suite 801
Columbus, Ohio 43215
Attention: Mark Jacques
Telecopier No.: (614) 469-3447
with a copy to:
85 E. Gay Street
Suite 802
Columbus, Ohio 43215
Attention: Jerry B. Sellman, Esq.
Telecopier No.: (614) 463-1987
<PAGE>
(b) If to Watchdog or the Merger Subsidiary:
Watchdog Patrols, Inc.
33 Walt Whitman Road
Suite 125
Huntington Station, New York 11743
Attention: Philip LoRusso
Telecopier No.: (516) 421-2899
with a copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: Peter M. Ziemba, Esq.
Telecopier No.: 212-818-8881
SECTION 13.03 Press Release; Public Announcements. Promptly after execution
of this Agreement, the Parties shall issue a joint press release in the form of
Exhibit O annexed hereto. The Parties shall not make any other public
announcements in respect of this Agreement or the transactions contemplated
herein without prior consultation and approval by the other party as to the form
and content thereof, which approval shall not be unreasonably withheld.
Notwithstanding the foregoing, any Party may make any disclosure which its
counsel advises is required by applicable law or regulation, in which case the
other Party shall be given such reasonable advance notice as is practicable in
the circumstances and the Parties shall use their best efforts to cause a
mutually agreeable release or announcement to be issued.
SECTION 13.04 Amendment. This Agreement may not be amended or modified
except by an instrument in writing signed by the Parties.
SECTION 13.05 Waiver. At any time prior to the Closing, either Party may
(a) extend the time for the performance of any of the obligations or other acts
of the other Party, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein. Any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by the Party to be bound thereby.
SECTION 13.06 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 13.07 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
<PAGE>
adverse to any Party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the Parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 13.08 Entire Agreement. This Agreement and the Schedules and
Exhibits hereto constitute the entire agreement and supersede all prior
agreements and undertakings, both written and oral, between the Members and
Watchdog with respect to the subject matter hereof and, except as otherwise
expressly provided herein, are not intended to confer upon any other person any
rights or remedies hereunder.
SECTION 13.09 Benefit; Assignment. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
Parties. This Agreement is not assignable by any Party without the express
written consent of the other Parties.
SECTION 13.10 Governing Law; Consent to Jurisdiction. This Agreement shall
be governed by, and construed in accordance with, the law of the State of New
York, regardless of the laws that might otherwise govern under applicable
principles of conflicts of law. Each Party hereby submits to the exclusive
jurisdiction of the courts (city, state and federal) located in the County of
New York, State of New York, for any action, proceeding or claim brought by any
other Party pursuant to this Agreement or any other agreement, instrument or
other document executed and delivered in connection with this Agreement or
pursuant hereto and waives any objection to the venue of any such suit, action
or proceeding and the right to assert that such forum is not a convenient forum.
Service of process in any such action or proceeding brought against a Party may
be made by registered mail addressed to such Party at the address set forth in
Section 13.02 or to such other address as such Party shall notify the other
Party in writing is to be used for such purpose pursuant to Section 13.02.
SECTION 13.11 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different Parties in separate counterparts, each of
which when executed shall be deemed to be an original but all of which when
taken together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
as of the date first written above.
NETWOLVES, LLC WATCHDOG PATROLS, INC.
By: By:/s/ Philip M. LaRusso
Name: Philip M. LaRusso
/s/ WIlliam A. Clark Title:Chairman
WILLIAM A. CLARK, As Member and Individually
/s/ Keith A. Darling WATCHDOG ACQUISITION CORP.
KEITH A. DARLING, As Member and Individually
/s/ Walter M. Groteke By:/s/ Philip M. LaRusso
WALTER M. GROTEKE, As Member and Individually Name: Philip M. LaRusso
Title:Chairman
/s/ Kevin F. Sherlock
KEVIN F. SHERLOCK, As Member and Individually
/s/ Daniel G. Stephens
DANIEL G. STEPHENS, JR., As Member and Individually
/s/ Mark Jacques
MARK JACQUES, As Member and Individually
Exhibit 10.2
AGREEMENT
AGREEMENT made this 5th day of January, 1999 by and between The Sullivan
Group, with its principal offices located at 320 Soundview Road, Guilford, CT
(hereinafter "Sullivan Group") and NetWolves Corporation, with its principal
offices located at 200 Broadhollow Road, Melville, New York 11747 (hereinafter
"NetWolves").
W I T N E S S E T H :
Whereas, The Sullivan Group Group is a leading consulting organization
serving the needs of the automotive aftermarket, convenience store and oil
industry and, through its wholly-owned business education subsidiary, The
Duffy-Vinet Institute, maintains an extensive library of training modules
available to its clients customer base; and
Whereas, during the past eleven (11) years, Sullivan Group has established
a primary client list as set forth in Exhibit A annexed hereto, which includes
Amoco Oil, British Petroleum, Chevron, Chrysler, Circle K Marketing, Exxon,
Ford, General Motors, Irving Oil Ltd., Mobil Oil, NAPA, J.D. Power, Shell,
Southland, Sunoco, Texaco/Star Enterprise, Tosco, and Unocal; and
Whereas, Sullivan Group has concluded a contract and obtained further
commitments from several client companies, samples of which are set forth in
Exhibit B annexed hereto, to expand training at retail sites which will rely
upon certain Internet technology developed by NetWolves; and
Whereas, NetWolves specializes in the development of multi-services
Internet gateway products; and
Whereas, the parties are desirous that NetWolves be appointed as the
exclusive provider of the delivery system which will enable Sullivan Group and
its subsidiaries to sell its proprietary training programs to approximately
40,000 retail locations throughout the United States, thereby facilitating
simultaneous interactive distance learning at all sites.
NOW, THEREFORE, in consideration of the mutual premises and the covenants
contained herein, the parties hereby agree as follows:
1. Appointment. Sullivan Group hereby appoints NetWolves as its exclusive
provider in the United States of a delivery system whereby Sullivan Group and
its subsidiaries will sell its proprietary training programs to approximately
40,000 retail locations in the United States, thereby facilitating simultaneous
interactive distance learning at the sites. NetWolves accepts such appointment
in accordance with the terms of this Agreement.
<PAGE>
2. Product. To accommodate the needs of Sullivan Group's customers,
NetWolves agrees to customize its FoxBox multi-services Internet gateway product
(the "Product") in the form of Exhibit C annexed hereto.
3. Delivery Schedule. NetWolves agrees to deliver the Product substantially
in accordance with the following schedule:
350 units June - December 1999
4,150 units January - December 2000
9,500 units January - December 2001
12,500 units January - December 2002
14,000 units January - December 2003
Sullivan Group agrees to provide continuous ninety (90) day forecasts
to assist NetWolves in its production schedule.
4. Term of Agreement. This Agreement shall continue for a period of five
(5) years and thereafter shall be automatically renewed for an additional five
(5) year term unless written notice is provided by either party on or prior to
six (6) months from the expiration date of this Agreement that the Agreement
will not be renewed.
5. Transfer Pricing. Each unit shall be paid for by the end user retail
site (or its corporate parent) at a rate of $200 per month exclusive of any tax.
All monthly payments shall be made directly to Supplier at a lockbox as
prescribed by NetWolves. In the event Sullivan Group seeks to have one monthly
invoice for the retail site to pay both content and the technology, NetWolves
and Sullivan Group will direct that all payments be sent to a receiving bank
which will deposit the appropriate amount to each of their accounts.
6. NetWolves Responsiblity. Subject to the end user being in compliance
with the terms of the rental agreement, NetWolves, at its discretion, will
repair and/or replace the product should the product fail to perform its
intended purpose and provide free software upgrades within the base product
platform during the term of the rental agreement. It will be NetWolves
responsibility to arrange installation of the product at the site upon
instructions of Sullivan Group and receipt of a properly executed agreement by
the end user.
7. Sullivan Group Responsibility. Sullivan Group will be responsible for
the payment of all marketing, sales and contents expense in order to secure the
retail site. Sullivan Group will arrange to invoice the customer and obtain any
and all approvals required from the Parent/Supplier company of the retail outlet
and shall be responsible for providing all the content which is viewed by the
end user. Sullivan Group will provide NetWolves via e-mail to the attention of
NetWoves' Director of Sales and Installation, an ongoing weekly list of sites
which require installation. Sullivan Group further agrees not to provide content
to the retail sites during the term of this Agreement other than through the
NetWolves product.
<PAGE>
8. Rental Agreement. NetWolves and Sullivan Group shall, within ten (10)
days of this Agreement, approve the final form of a rental agreement which
contains the following terms and conditions:
(a) The rental agreement shall be for a four (4) year period.
(b) Monthly rental payments are $200. During the term of the rental
agreement, NetWolves will not increase the monthly rental payment.
(c) NetWolves will, at its discretion, repair or replace and upgrade
software functionality provided the end user is in compliance with the
terms and conditions of the rental agreement.
(d) All right, title and interest in the Product vests exclusively
with NetWolves.
(e) The monthly fee payable to Sullivan Group for training content is
in addition to this fee.
(f) The end user agrees to use due care when using the product and not
to allow the product to be removed from the installed location without
the written permission of NetWolves.
(g) The agreement is non-cancellable for the term and the end
user-client end user is responsible for the monthly payments.
(h) The agreement automatically renews for a successive term unless
cancelled in writing six (6) months prior to the expiration of the rental
agreement.
(i) At the expiration of the rental agreement, NetWolves may reclaim
the product.
(j) The obligations under the rental agreement may be required to be
personal due to credit requirements in the case of an independent
franchise.
(k) At the execution of the rental agreement, payment for the first
month, last month and one month's security is required.
(l) An electrical outlet and a POTS line at the site of installation
is required.
(m) A one time set up fee for installation may be required.
(n) A service fee of 14% of the price per year ($28) per month may be
charged beginning year two. Should the service program not be subscribed
to, any and all service calls will be billed to the end user retail site.
<PAGE>
9. Termination. The exclusivity to NetWolves set forth herein shall
terminate in the event NetWolves breaches the mutual terms of this Agreement and
such breach continues after sixty (60) days written notice specifying such
breach. Upon such termination, NetWolves shall continue to be fully paid for all
products sold and services performed for the duration of all rental agreements.
10. Intellectual Property Rights. All right, title and interest in the
Product shall be the exclusive property of NetWolves and all right, title and
interest in the content shall be the exclusive property of Sullivan Group.
11. Public Announcements. Each party agrees that during the term of this
Agreement, prior to making any public announcement of any nature whatsoever
relating to this Agreement, or the relationship between the parties generally,
it first will consult with and obtain the approval of the other party with
respect to the content, timing and method(s) of such announcement.
Notwithstanding the foregoing, each party may make such public announcements or
disclosures with respect to this Agreement and the transactions contemplated
hereby as it deems in good faith to be required by applicable law.
12. Force Majeure. Any delays in or failure of performance by either party
under this Agreement shall not be considered a breach hereof if such delay or
failure is occasioned by an event beyond the reasonable control of the party
affected ("force majeure"); provided that any party whose performance is so
delayed shall give prompt notice thereof to the other party and shall use all
reasonable endeavors to comply with the terms of this Agreement as soon as
possible.
13. Binding Agreement; Assignability. This Agreement shall be binding upon
and inure to the benefit of the respective parties hereto and thereto and their
respective heirs, executors, administrators, legal representatives, successors
and assigns.
14. Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties in respect of the subject matter hereof and thereof
and supersede all prior agreements, arrangements and understandings relating to
the subject matter hereof and thereof. This Agreement may not be contradicted by
evidence of prior, contemporaneous or subsequent oral agreements of the parties.
There are no oral unwritten agreements between the parties.
15. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect any other provisions hereof or thereof, and the
remainder of the Agreement shall be construed as if such invalid or
unenforceable provision were modified to the extent necessary to make it valid
or enforceable but remain within the spirit of this Agreement, or if that is not
possible, then omitted.
<PAGE>
17. Amendment or Cancellation; Waiver. This Agreement hereto may be
amended, modified, superseded or cancelled, and any of the terms hereof or
thereof may be waived, only by a written instrument executed by each party
hereto or thereto, as the case may be, or, in the case of a waiver, by the party
or parties waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the rights
at a later time to enforce the same. No waiver by any party of any condition or
of the breach of any term contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be construed as a
further or continuing waiver of any such breach or the breach of any other terms
of this Agreement.
18. Notices. Any notice to a party hereto pursuant to this Agreement shall
be given by certified or overnight mail or by facsimile addressed as follows (or
to such other address as any party shall designate by written notice to the
other parties);
If to the NetWolves: 200 Broadhollow Road, Suite 207
Melville, New York 11747
Copy to: David H. Lieberman, Esq.
Blau, Kramer, Wactlar & Lieberman, P. C.
100 Jericho Quadrangle
Jericho, New York 1`1753
If to Sullivan Group: 320 Soundview Road
Guilford, CT 06457
Copy to: Eliot Parkhurst, Esq.
Eliot Parkhurst & Associates
50 Milk Street - 20th Floor
Boston, MA 02109
Notices given by hand shall be deemed given as of the date when they are
delivered. Notices given by Federal Express shall be deemed given as of the
business day next following the date on which they are delivered to Federal
Express in time for and marked and prepaid for next business day delivery.
<PAGE>
19. Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of New York without regard to its conflicts
of laws provisions. Any suit, action or proceeding arising out of this Agreement
shall be instituted in the state or federal courts in the State of New York.
20. Arbitration. All disputes or controversies (whether of law or fact) of
any nature whatsoever arising from or relating to this Agreement and the
transactions contemplated hereby shall be decided by the American Arbitration
Association (the "Association") in accordance with the rules and regulations of
the Association, except that either party shall have the right in accordance
with Section 18 hereof to seek equitable relief independently, including, but
not limited to, temporary restraining orders, provisional and/or permanent
injunctive relief, specific performance or any other equitable remedy as may be
appropriate to enforce or prevent the violation of, any of the terms and
conditions of this Agreement.
In the event a dispute or controversy arises, either party may submit
the dispute to the American Arbitration Association in Garden City, New York for
arbitration in accordance with and subject to the rules of the American
Arbitration Association then in effect, and specifically, the Supplementary
Procedures for Large, Complex Disputes (the "Procedures"). The parties agree
that the arbitration shall be conducted before three arbitrators. Additionally,
the parties agree that prior to the conduct of hearings, they will cooperate in
the exchange of documents, exhibits and information pursuant to detailed demands
therefor, and such other discovery as they may agree upon or the arbitrators may
deem appropriate in the circumstances after the Preliminary Hearing described in
Section 4 of the Procedures is held. The decision of a majority of the
arbitrators shall be binding upon all parties, and a judgment or decree upon the
decision rendered by the arbitrators may be entered in any court of competent
jurisdiction. Each party required to participate shall be responsible for its or
his pro rata share of the fees and costs of arbitration, including, but not
limited to, the cost of a full stenographic record of the proceedings which the
parties hereby agree in advance will be required; provided, however, that the
arbitrators shall be authorized to award legal fees and costs to the prevailing
party, based upon their consideration of the merits of the claims, the merits of
the defenses, and the results obtained from the arbitration.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on the day first above written.
The Sullivan Group
By: /s/ Martin E. Cunningham
NetWolves Corporation
By: /s/ Walter M. Groteke
Exhibit 10.3
DISTRIBUTION AGREEMENT
This Agreement is made and entered into as of January 18, 1999 by and
between NetWolves Corporation, a New York corporation ("NetWolves"), and Anicom,
Inc., a Delaware corporation ("Anicom"), both having addresses as set forth on
the signature page of this Agreement.
WITNESSETH:
WHEREAS, NetWolves is engaged in the manufacture, sale and distribution in
the United States of various software and manufactured products;
WHEREAS, Anicom is engaged in the business of distributing various types of
wire, cable and connectivity products;
WHEREAS, Anicom desires to be appointed as an Exclusive Master Distributor
of NetWolves' Products, as hereinafter defined, throughout North America; and
WHEREAS, NetWolves desires to appoint Anicom as an Exclusive Master
Distributor of the Products throughout North America.
NOW, THEREFORE, in consideration of the mutual promises and covenants of
the parties as hereinafter more fully set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
I. DEFINITIONS
1.1 "Anicom Group": Anicom, its subsidiaries and all Anicom Resellers.
1.2 "Anicom Resellers": Those entities identified on Appendix A and such
other entities as Anicom may add to Appendix A from time to time upon NetWolves'
consent, which consent shall not be unreasonably withheld or delayed, provided
that it will not be unreasonable for NetWolves to withhold its consent if the
entity is a direct competitor of NetWolves.
1.3 "Committed Amount": With respect to each Year, and the first six (6)
months of each Year, the Committed Amount for purposes of this Agreement shall
refer to a number of Units determined in accordance with the following:
<PAGE>
Committed Amount
Year First 6 Months Full Year
- ---- -------------- ---------
1 * *
2 * *
3 * *
4 * *
5 * *
provided, however, if (a) the number of Units purchased by the Anicom Group in a
given Year exceeds the Committed Amount for such Year, then the Committed Amount
in subsequent Years shall be reduced, in the aggregate beginning with the next
succeeding year, by the amount of such excess, and (b) if the Anicom Group
orders at least the Committed Amount for a given Year, but NetWolves is unable
to deliver to the Anicom Group within such year the full number of Units ordered
in such Year, then such shortfall shall be credited against the Committed Amount
for the next Year.
1.4 "Distributor": A wholesaler or an entity whose primary business is
selling products competitive with those of Anicom.
1.5 "Effective Date": February 1, 1999.
1.6 "Product": The Foxbox, as described on Appendix B, and any New
Versions, Competitive Products, updates, enhancements, modifications,
replacements or substitutions thereto.
1.7 "Territory": North America.
1.8 "Unit": A unit of Product, regardless of cost.
1.9 "Year": Each twelve month period ending on an anniversary of the
Effective Date. For example, the twelve-month period ending on the first
anniversary of the Effective Date is referred to as the first Year.
II. PURPOSE
The purpose of this Agreement is to promote and achieve the effective sale
of Products within Anicom's assigned Territory. NetWolves and Anicom recognize
the market in which the Products are sold is extremely competitive; that there
are generally competitive products in the marketplace; and that in order for
NetWolves and Anicom to achieve a satisfactory level of sales it is necessary
that Anicom compete effectively in the marketplace.
- -----------------------------------------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE>
III. APPOINTMENT
3.1 Appointment. NetWolves hereby appoints Anicom as its Exclusive Master
Distributor of Products in the Territory and Anicom hereby accepts the
appointment.
3.2 Nature of Appointment. The appointment is exclusive within the
Territory, and NetWolves shall not appoint any other distributors within the
Territory as long as this Agreement is in full force and effect. In furtherance
of this appointment, NetWolves will clearly identify Anicom as its exclusive
distributor in the Territory on NetWolves' website. Notwithstanding the
foregoing, NetWolves shall have the right to make direct sales or leases of the
Products to customers, Distributors and Anicom Resellers, and NetWolves agrees
to pay Anicom a * commission on any sales or leases made by NetWolves that
Anicom is not involved with in the Territory, and to pay Anicom a * commission
on NETS (NetWolves Enhanced Technical Support) revenues within the Territory,
provided that any such sales or leases to Distributors shall be counted as
orders from Anicom for purposes of Sections 5.3 and 8.2, but otherwise, sales or
leases of Products by NetWolves to other parties, including without limitation,
the * pursuant to an agreement entered into prior to this Agreement, will not be
counted as orders from Anicom for purposes of Section 5.3 and 8.2. Payment of
any commissions to Anicom will be made by NetWolves within forty-five (45) days
of the receipt of funds from such customers. Should NetWolves fail to pay any
commissions when due, Anicom will charge interest on the outstanding commissions
at the lower of 1-1/2% compounded monthly or the maximum rate permitted by law.
3.3 Commercially Reasonable Efforts. During the term of this Agreement,
Anicom shall promote and sell Products within the Territory. However, the Anicom
Group shall not be obligated to purchase any Products at any time hereunder, and
if the Anicom Group fails to order the Committed Amount in any given Year, for
any reason, NetWolves' sole and exclusive remedy shall be as set forth in
Section 5.3.
3.4 Sales to Resellers. NetWolves shall direct all Anicom Resellers to buy
Products from Anicom. In the event an Anicom Reseller elects not to buy from
Anicom, NetWolves will provide Anicom with a written report concerning such
events. In the event an Anicom Reseller elects not to buy from Anicom and
purchases or leases Products from NetWolves, NetWolves agrees to pay to Anicom a
commission on any such sales or leases equal to Anicom's gross profit that it
would have recognized on such sale. As used herein, the term "gross profit"
shall mean an amount equal (i) the amount that Anicom would have charged such
Anicom Reseller based upon its recent sales of similar Products and historical
sales to that Anicom Reseller, minus (ii) Anicom's discounted price from
NetWolves then in effect pursuant to Section 8.2. Payment of the foregoing
amount to Anicom will be made by NetWolves within forty five (45) days of the
receipt of funds from such Anicom Reseller. Should NetWolves fail to pay any
commissions when due, Anicom will charge interest on the outstanding commissions
at the lower of 1-1/2% compounded monthly or the maximum rate permitted by law.
- -----------------------------------------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE>
IV. NOTIFICATION REGARDING PRODUCT CHANGES
NetWolves shall notify Anicom in writing not less than ninety (90) days
prior to any changes to any of the Products, including without limitation, any
New Versions, updates, modifications, model changes and substitutions. NetWolves
shall also notify Anicom in writing not less than ninety (90) days prior to
adding or deleting a Product.
V. COMMITTED AMOUNTS
5.1 Annual Accounting. Within sixty (60) days after the end of each Year,
NetWolves shall prepare or caused to be prepared and delivered to Anicom a
statement setting forth the actual purchases by the Anicom Group during such
Year, the Committed Amount for such Year, the commissions earned and paid for
such Year, and the bonus discounts earned for such Year (the "Annual
Statement"). If Anicom disagrees with an Annual Statement, Anicom shall notify
NetWolves in writing of such disagreement within thirty (30) days after the date
on which Anicom received the Annual Statement, which written notice shall
specify the nature of the dispute and shall provide in reasonable detail the
facts or circumstances upon which such dispute is based. Thereafter, NetWolves
and Anicom shall attempt in good faith to resolve such disagreement with respect
to the Annual Statement.
5.2 Dispute Resolution. If NetWolves and Anicom are unable to resolve any
disagreement regarding an Annual Statement within twenty (20) days after
NetWolves' receipt of notice of disagreement from Anicom, either NetWolves or
Anicom may give notice (an "Arbitration Notice") to the other party of an intent
to submit such disagreement to a certified independent public accounting firm
that is among the five largest such firms in the United States (the "Independent
Accounting Firm") and mutually agreeable to NetWolves and Anicom. If NetWolves
and Anicom cannot agree upon such election within twenty (20) days after
delivery of the Arbitration Notice, the Independent Accounting Firm shall be
selected by lot from among the five largest independent public accounting firms
in the United States. The dispute shall be immediately submitted by the parties
to the Independent Accounting Firm for resolution of such dispute within twenty
(20) days after submission to the Independent Accounting Firm. At the time of
the submission of such dispute to the Independent Accounting Firm for
resolution, NetWolves shall file with the Independent Accounting Firm a written
statement of its position with regard to any matters in dispute, at which time
Anicom shall have ten (10) days to respond in writing to NetWolves' position.
Upon receipt of written position statements by each of the parties, the
Independent Accounting Firm shall resolve the dispute in accordance with
generally accepted accounting principles, consistently applied. The decision of
the Independent Accounting Firm shall be final and binding upon all parties
hereto. Each party shall bear its own expenses, including expenses of its
accountants and attorneys in connection with the resolution of any such dispute,
and the fees and expenses of the Independent Accounting Firm shall be paid by
the parties as determined by the Independent Accounting Firm.
<PAGE>
5.3 Failure to Meet Committed Amount. Notwithstanding Sections 5.1 and 5.2,
in the event the Anicom Group shall fail to order Products from NetWolves
equaling or exceeding the corresponding Committed Amount for any Year, or the
first six months of any Year, other than as a result of NetWolves' failure to
timely fulfil orders placed by Anicom during such Year, NetWolves may, at its
option, take any or all of the following actions:
(a) convert Anicom's Exclusive Master Distributor rights hereunder to
that of a Master Distributor or Distributor in the Company's Reseller Program at
a level based on the number of Units purchased by the Anicom Group in the prior
Year;
(b) elect to terminate this Agreement, provided that notwithstanding
such termination, NetWolves shall continue to sell to Anicom such quantities of
repair parts, supplies, accessories and replacement inventory of any model of
the Products which Anicom may reasonably require to effectuate an orderly
disposal of Anicom's existing inventory of Products as well as continue to
service the Products theretofore sold by Anicom; and
(c) immediately upon written notice to Anicom, stop any and all
override commissions referred to in Section 3.2 and Section 8.2, provided that
NetWolves shall remain obligated to pay any such commissions earned prior to
such notice.
5.4 Committed Amount to be Renegotiated. In the event that this Agreement
shall be extended beyond its original five (5) year term, the parties hereto
shall jointly agree upon a new Committed Amount for each subsequent Year hereof,
and the same shall be endorsed by the parties and made a part of this Agreement,
failing which the Agreement shall not be renewed.
VI. NETWOLVES' OBLIGATIONS
6.1 Instruction Manuals. NetWolves shall provide to Anicom reasonable
quantities of instruction manuals as well as catalogues, circulars and other
printed or electronic media material which it may have on hand and which are or
may be useful to Anicom in the conduct of sales of the Products.
6.2 Advertising Materials. NetWolves shall furnish to Anicom in such
amounts as NetWolves and Anicom reasonably deem necessary, for a minimal
handling fee as NetWolves shall determine, such advertising aids which NetWolves
may have from time to time and which Anicom may use in advertising and
promotional campaigns for the Products. Anicom may adapt, translate, reproduce
and distribute such advertising aids as Anicom deems appropriate or necessary
with NetWolves' prior written consent, which consent will not be unreasonably
withheld or delayed.
6.3 Access to NetWolves' Employees. NetWolves agrees to provide reasonable
access to its Internet Sales Consultants to assist Anicom in selling Products.
<PAGE>
6.4 Warranties and Representations of NetWolves. NetWolves represents and
warrants that (a) it is a corporation duly organized and existing and in good
standing under and by virtue of the laws of the state set forth on the title
page hereof; (b) it has the corporate power and authority to enter into this
Agreement and to conduct its business as currently conducted and as contemplated
hereunder; (c) the signatory to this Agreement for NetWolves has the power and
authority to bind NetWolves; (d) NetWolves owns or has the right to use all
patents, patent rights, copyrights, trade secrets and other proprietary rights
in or to the Products; (e) to the Company's knowledge, the Products do not
infringe any patent, copyright, trade secret or other proprietary right owned by
a third person; (f) NetWolves' execution and performance of this Agreement will
not violate any other agreement or obligation by which NetWolves may be bound;
(g) NetWolves will be entitled to exercise its rights under this Agreement, free
of any attribution, accounting or consent obligation, except as otherwise
specified herein; (h) to the Company's knowledge, the occurrence in or use of
dates on or after January 1, 2000, including leap year calculations (the
"Millennial Dates") will not adversely affect the performance of the Products
with respect to date dependent data, computations, output or other functions
(including, without limitation, calculating, computing and sequencing) and the
Products will create, sort and generate output data related to or including
Millennial Dates without errors or omissions; and (i) the Products do not
contain any "time bomb," "Trojan horse," "worm," "drop dead device," "virus" (as
these terms are commonly used in the computer software industry), to disable or
erase software, hardware, or data, or to perform any other similar type of
functions.
6.5 Copies of Products. Upon the execution of this Agreement, NetWolves
will deliver two (2) copies of the current Products to Anicom to be used for the
purposes described in Section 7.7.
6.6 Training. NetWolves will provide personnel of the Anicom Group training
at no additional charge, to the extent NetWolves and Anicom reasonably believe
it will enable the Anicom Group to adequately promote and sell the Products,
including without limitation, the initial training described on Appendix C (the
"Initial Training").
6.7 Product Support. During the term of this Agreement, NetWolves will
provide support (as defined below) to the Anicom Group and Anicom's customers
and resolve reported problems in a timely and professional manner. "Support"
means (a) providing to the Anicom Group any corrections, releases and updates to
the Products; (b) consultation with the Anicom Group and Anicom's customers with
respect to technical questions and suspected errors reported by the Anicom Group
and/or Anicom's customers; and (c) resolution of errors in the Products.
NetWolves will provide Support seven (7) days per week, twenty-four (24) hours
per day, and support will be in the form of telephone, e-mail and fax
communication.
6.8 Upgrades and New Versions. During the term of the Agreement, NetWolves
will provide to Anicom, at prices to be determined in accordance with Section
8.2, the enhancements, upgrades and new versions of the Products that may be
developed by or for NetWolves for use in the Territory (each, a "New Version"),
together with sufficient explanatory materials to enable Anicom to promote and
sell the Products. Such New Versions will become additional Products and will be
<PAGE>
subject to the terms and conditions of this Agreement. NetWolves will promptly
offer to Anicom any new computer programs that it develops or acquires the right
to distribute in the Territory which competes with or that can be used as a
substitute for the Products in whole or in part or that perform similar
functions to the Products on computer hardware platforms that are different from
the computer hardware platforms on which the Products currently operate
("Competitive Product"). In the event Anicom accepts such Competitive Product,
the Competitive Product will become additional Products subject to the terms and
conditions of this Agreement.
6.9 Product Development. Anicom and NetWolves will meet not less often than
once each fiscal quarter, at such times and places as the parties mutually
agree, to discuss NetWolves' development plans and any maintenance and support
problems. NetWolves will make reasonable efforts to accommodate Anicom's
requests for Product modification, enhancement or porting to new hardware
platforms.
6.10 Future Deliverables. NetWolves will deliver New Versions and
Competitive Products to Anicom no later than the time NetWolves releases such
Products in final form to any other person or entity, together with any related
documentation, for testing and acceptance in accordance with Anicom's quality
assurance procedures. NetWolves will make reasonable efforts to correct any
errors that Anicom may report to NetWolves, at no additional charge.
6.11 Capacity. NetWolves will use its commercially reasonable efforts to
maintain relationships with manufacturers so that required production capacity
can be maintained to fulfill orders in a timely manner.
VII. RIGHTS, OBLIGATIONS AND RESPONSIBILITIES OF ANICOM
7.1 Warranties and Representations of Anicom. Anicom represents and
warrants as follows: (a) Anicom is a company organized, existing and in good
standing under and by virtue of the laws of the State of Delaware; (b) it has
the power and authority to enter into this Agreement; and (c) the signatory to
this Agreement for Anicom has the power and authority to bind Anicom.
7.2 Sales and Service Responsibility. Anicom shall promote, advertise,
merchandise and sell the Products in the Territory to meet its commitments, and
in connection therewith, shall:
(a) establish and maintain adequate facilities and personnel that
Anicom reasonably believes may be necessary to meet the obligations assumed
hereunder;
(b) formulate and execute marketing and sales plans;
<PAGE>
(c) supply sales and inventory data as may be reasonably requested by
NetWolves from time to time in such form as NetWolves may reasonably request,
and which Anicom can readily generate, to assist NetWolves in its production
planning and to provide a basis for evaluating Anicom performance;
(d) maintain at all times the number of Products and assortment of
Products, which Anicom reasonably believes are necessary and appropriate for the
market involved;
(e) maintain and employ in connection with Anicom's business and
operations such working capital as Anicom reasonably believes may be required to
enable Anicom to properly and fully carry out and perform all of Anicom's
duties, obligations and responsibilities under this Agreement;
(f) promote the sale of Products in the Territory, and specifically in
furtherance thereof:
(i) collect technical and engineering requirements from
customers and, to the extent reasonably able, assist in the adaptation
of the Products to customers' uses;
(ii) to the extent it is reasonably able, assist
customers in gathering data on the adaptability of the Products to
customers' potential use of the Products;
(iii) to the extent it is reasonably able, act as a
liaison and coordinator between Anicom's customers and NetWolves in
communicating both customer and NetWolves requirements for technical
specifications, manufacturing schedules, delivery schedules, and other
terms and conditions of sale; and
(iv) to the extent it is reasonably able, follow-up
with Anicom's customers to determine that the Products have
satisfactorily met customer requirements.
7.3 State and Local Taxes. Where required, Anicom shall pay, or cause to be
paid, all taxes (except NetWolves' income taxes), assessments and charges that
are based upon the sale, use or ownership of the Products hereunder, or upon
Anicom's right to sell or lease the same.
7.4 Trademarks. Anicom shall not use any trademark or trade name owned by
NetWolves, either alone or with any other word or words as part of Anicom's
trade or corporate name, without the express written permission of NetWolves.
Anicom shall not remove any such trademarks or trade names from the Products.
Upon request by NetWolves, and in any event upon termination of this Agreement,
Anicom agrees to completely discontinue any use of any of NetWolves' trademarks
or trade names, for any purpose whatsoever, including use in Anicom's trade or
corporate name.
<PAGE>
7.5 Anicom Not Agent. Anicom is an independent contractor in relation to
NetWolves, solely and exclusively responsible for its own acts at all times.
Anicom is not authorized to act as agent for NetWolves and has neither the right
nor authority to assume or create obligations of any kind whatsoever on behalf
of NetWolves, or to accept service of legal processes of any kind addressed to
or intended for NetWolves, or to bind NetWolves in any respect whatsoever. The
relationship between NetWolves and Anicom is that of vendor and vendee, and not
of principal and agent.
7.6 Prices. Anicom will establish, at its sole discretion, the prices or
fees that Anicom may charge for the Products. Anicom may offer discounts against
such prices and fees. NetWolves, at its sole discretion, shall establish the
manufacturers' suggested retail price for the Products which shall be made
available to potential purchasers which price shall be the basis for applying
Anicom's discount from list price pursuant to Section 8.2.
7.7 Demonstration and Trial Use Copies. The Anicom Group has the
non-exclusive, non-transferable and royalty-free right to use two copies of the
Products as set forth in Section 6.5, (a) to conduct demonstrations of the
Products at the Anicom Group's premises, (b) to permit potential Anicom Group
customers to conduct evaluations of the Products at the potential Anicom Group
customers' premises and (c) to conduct internal education of the Anicom Group's
employees in the use and operation of the Products. The Anicom Group will take
reasonable measures necessary to remove the Products from its potential Anicom
Group customers' computer hardware on or before the expiration of the trial use
period.
7.8 Repair Items. NetWolves shall sell to the Anicom Group and the Anicom
Group's customers any needed repair parts, supplies, accessories and shall
supply the Anicom Group any needed replacement inventory. In the absence of a
NETS Service Agreement, NetWolves shall charge for such parts, supplies and
accessories in accordance with its published prices from time to time.
7.9 Point-of-Sale Reports. Anicom shall provide NetWolves, within fifteen
(15) days after the end of each month, a copy of Anicom's point-of-sale report
for such month.
VIII. PURCHASE ORDERS, PRICES, AND TERMS OF PAYMENT
8.1 Purchase Orders. All purchase orders of Anicom shall, unless otherwise
agreed by NetWolves from time to time, be in writing and shall set forth the
quantity of the Products desired, the specifications thereof, the desired
delivery date, the price of each Product, and all other relevant information
necessary to effectuate shipment of the Products by NetWolves. It is
contemplated that from time to time purchase orders in forms prepared by the
Anicom Group or other purchasers, may be used in ordering the Products and that
there may be included in such forms certain stipulations, conditions or
agreements not otherwise contained herein. It is expressly understood and agreed
that the provisions of this Agreement shall be deemed a part of each purchase
order accepted by NetWolves and any provision in any purchase order which shall
<PAGE>
be inconsistent with or contrary to the provisions of this Agreement shall be
deemed amended or deleted, as the case may be. NetWolves shall deliver to the
destinations directed by the Anicom Group.
8.2 Prices and Terms of Sale.
(a) For the original five year term herein, Anicom shall be invoiced
at the rate of * of NetWolves' established list prices, such amount to be
reduced to * of NetWolves' established list prices commencing with the purchase
of the first Unit after Anicom has ordered, in the aggregate, 3,000 Units.
NetWolves will provide Anicom with thirty (30) days' written notice prior to any
increase in NetWolves' established list prices. In the event Anicom produces an
account that purchases 1,000 Units before Anicom reaches 3,000 Units of Product,
NetWolves agrees to provide Anicom with an additional * discount for that
particular order or orders.
(b) All invoices shall be paid net * days from date of invoice except
Anicom's initial purchase order which will be paid for as follows: (i) 10% of
the amount due will be paid within ten (10) days of the date of this Agreement
and (ii) the balance will be paid within fifteen (15) days after the delivery of
the initial purchase order to the destination of Anicom's choice. Should Anicom
fail to pay any invoice when due, NetWolves will charge interest on the
outstanding balance of invoices at the lower of 1-1/2% compounded monthly or the
maximum rate permitted by law. Anicom shall make payment to NetWolves for all
Products purchased by Anicom in a timely fashion, all in accordance with the
terms of payment set forth above.
(c) Products shall be shipped F.O.B. destination, such destination to
be determined by Anicom. Title and risk of loss shall remain with NetWolves
until delivery to such destination and Anicom will pay the cost of freight so
long as the Products are shipped in accordance with Anicom's instructions.
8.3 Acceptance of Orders. NetWolves shall accept all orders for the
Products submitted to NetWolves by the Anicom Group at NetWolves' Tampa, Florida
or Melville, New York locations. The Anicom Group may cancel an order or any
portion thereof, without charge or penalty, only in the event that such order is
not delivered within seventy-five (75) days of the date on which the order is
submitted to NetWolves.
8.4 Sales through Reseller Program. All orders of Anicom Resellers shall be
processed and made directly through Anicom. All Anicom Resellers appointed by
NetWolves under the Reseller Program shall be required to purchase Products
- -----------------------------------------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE>
through Anicom or from NetWolves at their choice, subject to Section 3.4 above.
All sales of Products to distributors in NetWolves' Reseller Program shall be
pursuant to the pricing schedule set forth on Appendix D, or as amended from
time to time at NetWolves' option.
8.5 Inventory Adjustments.
(a) NetWolves agrees to provide Anicom with the opportunity to adjust
its levels of NetWolves inventory of Products under the following conditions.
NetWolves shall repurchase or exchange, at NetWolves' option (an "Inventory
Adjustment"): (i) any newly introduced Products, defined as Products which are
in the first six (6) months of the Product introduction period and were not
previously stocked by Anicom (for purposes herein, the product introduction
period begins upon first receipt of the Products by Anicom), and (ii) any slow
move return items, defined as new, unused products in original cartons which (1)
have been in Anicom's inventory for at least three months and (2) have not been
reordered from NetWolves during such three month period.
(b) NetWolves agrees to exchange or credit to Anicom's account all
Products in Anicom's inventory which have been replaced by updated, modified,
enhanced, newly released and/or enhanced Products, New Versions and/or
Competitive Products ("Improved Product Adjustment").
(c) NetWolves agrees that it will allow Anicom to exchange for
Products of equal value up to fifteen percent (15%) of the prior purchases made
during each of NetWolves' fiscal quarters subject to the following:
(i) Products returned must be unused, undamaged, sealed
in their original packages and in merchantable condition;
(ii) all freight charges for said returns shall be paid
by Anicom;
(iii) sales of special configurations of Products
shall not be subject to exchange; and
(iv) Products returned to NetWolves as an Improved
Product Adjustment shall not be included in determining the fifteen
percent (15%) rotation amount.
8.6 Inspection Rights.
(a) Anicom agrees that NetWolves may conduct periodic examinations of
the NetWolves' stock at Anicom's location and Anicom agrees to cooperate with
NetWolves' designated Quality Representative in conducting such periodic
<PAGE>
examinations of Anicom's inventory rotation. NetWolves shall provide Anicom with
at least thirty (30) days' notice prior to conducting any such examinations. All
examinations will be conducted during Anicom's normal business hours.
(b) NetWolves agrees that Anicom may conduct periodic examinations of
such of NetWolves' books and records as are necessary in connection with
Anicom's review of any Annual Statement pursuant to Section 5.1, and NetWolves
agrees to cooperate with Anicom's designated representatives during such
examination of NetWolves' books and records. Anicom shall provide NetWolves with
reasonable notice prior to conducting any such examinations. All examinations
shall be conducted during NetWolves' normal business hours.
8.7 Force Majeure. Neither party hereto shall have any liability to the
other party hereto on account of any non-performance or delay resulting from any
strike, lockout, accident, fire, act of God, embargo or governmental action, or
any other like cause beyond the control of such party, whether the same or
different from the matters and things hereinabove specifically enumerated.
IX. WARRANTY, LIMITATION OF LIABILITY AND INDEMNIFICATION
9.1 Warranty. All Products sold to the Anicom Group pursuant to this
Agreement are sold subject to the standard warranty of NetWolves as may be in
effect from time to time (the "Standard Warranty"). The Anicom Group shall be
entitled to pass on the Standard Warranty and the warranty set forth in Section
6.4 hereof to any of the Anicom Group's customers. NetWolves agrees to accept
any such warranty claims directed to the Anicom Group or NetWolves by the Anicom
Group's customers. The Anicom Group is not authorized to assume on behalf of
NetWolves any other obligation or liability in connection with the sale of the
Products in addition to the Standard Warranty and the warranty set forth in
Section 6.4 except as specifically approved by NetWolves. THE ABOVE-MENTIONED
WARRANTIES SHALL BE THE SOLE AND EXCLUSIVE WARRANTIES OF NETWOLVES AND ARE IN
LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT
LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS, AND NETWOLVES
NEITHER ASSUMES NOR AUTHORIZES ANICOM TO ASSUME FOR IT ANY OTHER OBLIGATIONS OR
LIABILITY IN CONNECTION WITH THE PRODUCTS WITHOUT NETWOLVES' PRIOR WRITTEN
CONSENT.
9.2 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS
OF PROFIT) OF THE OTHER FOR ANY REASON WHATSOEVER, WHETHER ANY CLAIM FOR SUCH
RECOVERY IS BASED UPON THEORIES OF CONTRACT, NEGLIGENCE OR TORT (INCLUDING
STRICT LIABILITY), AND EVEN IF THE PARTY HAS KNOWLEDGE OF THE POSSIBILITY OF THE
POTENTIAL LOSS OR DAMAGE.
9.3 Indemnification. Anicom will promptly notify NetWolves in writing if
any claim is brought or threatened against the Anicom Group that arises from
breach of the representations and warranties set forth in Section 6.4 and 9.1
above. Provided that NetWolves diligently defends any such claim, Anicom will
not settle or compromise any such actual or threatened claim without NetWolves'
prior written consent. Subject to these conditions, NetWolves will indemnify,
defend and hold harmless the Anicom Group against all damages, losses and
expenses (including reasonable attorneys' fees) that they may suffer or incur in
connection with any such actual or threatened claim. Anicom shall have the right
to employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall not be at the expense
of NetWolves unless NetWolves fails to promptly defend or a conflict shall exist
between the positions of NetWolves and Anicom, in which case, the reasonable
fees and expenses of such separate counsel shall be borne by NetWolves.
<PAGE>
X. TERM; RENEWAL; TERMINATION
10.1 Term and Renewal. This Agreement shall take effect on the commencement
date as set forth on the title page hereof and shall continue in full force and
effect for a five year period subject to the terms of Sections 5.3(b) and 10.2.
10.2 Termination. The provision of Section 10.1 to the contrary
notwithstanding, this Agreement may be terminated pursuant to the terms of
Section 5.3 and additionally as follows:
(a) By NetWolves, immediately upon giving written notice, in the event
Anicom fails to make full payment of its initial purchase order within fifteen
(15) days after delivery of the Products in accordance with this Agreement;
(b) By NetWolves, upon thirty (30) days' prior written notice to
Anicom at any time during the first two (2) Years, provided that, as a condition
to the effectiveness of such termination, NetWolves shall pay to Anicom a
termination fee of (i) $ * if such termination occurs in Year 1, or (ii) $ * if
such termination occurs in Year 2, in each case, payable within ten (10) days of
notice thereof;
(c) By NetWolves, immediately upon giving written notice, in the event
that there are instituted proceedings by or against Anicom in bankruptcy or
under insolvency laws which are not vacated within sixty (60) days from the date
of filing, Anicom makes an assignment of all or part of its assets for the
benefit of creditors or Anicom shall admit insolvency or ceases to exist;
(d) By either party, if a material breach shall occur which is not
cured within a period of thirty (30) days (ten (10) days with respect to any
payment default) after written notice thereof from the non-breaching party;
- -----------------------------------------------------
* Confidential portions omitted and filed separately with the Commission.
<PAGE>
(e) By Anicom immediately upon giving written notice, in the event
that there are instituted proceedings by or against NetWolves in bankruptcy or
under insolvency laws which are not vacated within sixty (60) days from the date
of filing, NetWolves makes an assignment of all or part of its assets for the
benefit of creditors or NetWolves shall admit insolvency or ceases to exist; or
(f) By Anicom in the event that the Products cease to be manufactured
by or on behalf of NetWolves.
10.3 Obligations Upon Termination. In the event that this Agreement is
terminated by Anicom in accordance with the terms hereof, or NetWolves
terminates this Agreement pursuant to Section 10.2(b), Anicom shall have the
right, but not the obligation, to direct NetWolves to repurchase from Anicom all
or any portion of any new, undamaged, and unused Products which are in their
original containers theretofore sold by NetWolves to Anicom, and owned by and
remaining in Anicom's inventory (other than Products that have been in inventory
for more than one year), at the original purchase prices, exclusive of any
transportation charges originally paid by Anicom and less any non-reimbursed
transportation charges originally paid by NetWolves. In the event that this
Agreement is terminated by NetWolves in accordance with the terms hereof (other
than pursuant to Section 10.2(b)), NetWolves shall have the right, but not the
obligation, to repurchase Products from Anicom in accordance with the foregoing
at the lower of the prevailing or original purchase prices, exclusive of any
transportation charges originally paid by Anicom and less any non-reimbursed
transportation charges originally paid by NetWolves.
XI. GENERAL PROVISIONS
11.1 Assignment. This Agreement may not be assigned by either party to any
other individual or business entity without the prior written approval of the
non-assigning party, provided that either party may assign its rights and
obligations hereunder to any successor-in-interest resulting from a business
combination without the consent of the other party.
11.2 Notice. All notices permitted or required hereunder shall be in
writing, and shall be effective: (a) as of the date sent, if by confirmed
facsimile or personal delivery, (b) as of the next day following the date on
which sent, if sent by nationally recognized overnight courier or (c) as of the
third day following the date sent, if sent by United States mail, registered or
certified mail, return receipt requested, postage pre-paid. All such notices
shall be sent to the respective parties at the address or facsimile number set
forth on the signature page hereof or to such other address as may be designated
by either party from time to time by notice given in accordance herewith.
<PAGE>
11.3 Entire Agreement. This Agreement, together with all attachments hereto
and all purchase orders issued hereunder, constitutes the entire agreement
between the parties and supersedes any and all previous agreements, memoranda or
other understandings of the parties.
This Agreement may be amended only in writing.
11.4 Severability of Provisions. A judicial or administrative declaration
in any jurisdiction of the invalidity of any one or more of the provisions
hereof shall not invalidate the remaining provisions of this Agreement in any
jurisdiction, nor shall such declaration have any effect on the validity or
interpretation of this Agreement outside of that jurisdiction.
11.5 Waiver of Compliance. Any failure by any party hereto to enforce at
any time any term or condition under this Agreement shall not be construed as a
waiver of that party's right thereafter to enforce each and every term and
condition of this Agreement.
11.6 Binding Upon Successors. This Agreement shall be binding upon the
successors and legal representatives of the parties hereto.
11.7 Jurisdiction and Governing Law. This Agreement shall be deemed to have
been made in the State of New York, and shall be construed according to the laws
of that state. Anicom consents to the jurisdiction of any court of general
jurisdiction located within the Borough of Manhattan, City of New York, with
respect to any legal proceedings arising out of this Agreement, and agrees that
the mailing to its last known address by registered mail of any process shall
constitute lawful and valid service of process in any such proceeding, suit, or
controversy. Anicom shall bring any legal proceeding arising out of this
Agreement only in the federal or state courts located in the Borough of
Manhattan, City of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate originals by their duly authorized representatives the
date and year first set forth on the title page hereof.
NETWOLVES CORPORATION
Telecopy No.:
Attn:
BY:/s/____________________________
TITLE:__________________________
DATE:__________________________
ANICOM, INC.
6133 North River Road
Suite 1000
Rosemont, Illinois 60018-5171
Telecopy No.: (847) 518-8777
Attn: Scott C. Anixter
BY:/s/___________________________
TITLE:__________________________
DATE:__________________________
<PAGE>
APPENDIX A
ANICOM RESELLERS
List to be provided and updated from time to time by Anicom.
<PAGE>
APPENDIX B
DESCRIPTION OF PRODUCT
<PAGE>
APPENDIX C
INITIAL TRAINING SCHEDULE
SEE ATTACHED TRAINING SCHEDULE.
<PAGE>
APPENDIX D
PRICE LIST
SEE ATTACHED NETWOLVES PRICE LIST DATED 10/98
<PAGE>
APPENDIX E
RESELLER PROGRAM
NetWolves Reseller Program (the Program) is designed to give resellers of
its products a discount off of the established list price determined by
NetWolves in order to quickly penetrate the market. Various levels of
distributorships have been established to accomplish this. All distributorships
are given on a non-exclusive basis, except as provided in the Agreement to which
this is attached, although resellers below the Master Distributor level are
required to select a Master Distributor through whom all of their sales are
ordered and processed. All participants in the Program must enter into a written
agreement with NetWolves which specifically sets forth all of the requirements
and obligations. The following is a list of the current levels of participation
in the Program:
1. Exclusive Master Distributor
(a) Commit to the purchase of 1,500, 3,000, 10,000, 20,000,
30,000 units of product in years 1,2,3,4 and 5 respectively and have
established national distribution channels. All other resellers may
order through the Exclusive Master Distributor in order to obtain the
listed discount off list price.
(b) Platinum Level Reseller/Distributor: Sell a minimum volume of
1000 Units of product per year and receive 40% off list.
(c) Gold Level Reseller/Distributor: Sell a minimum volume of
501-999 Units of product per year and receive 35% off list.
(d) Silver Level Reseller/Distributor: Sell a minimum volume of
250-500 Units of product per year and receive 30% off list.
(e) Bronze Level Reseller/Distributor: Sell a minimum volume of
1-249 Units of product per year and receive 25% off list.
Exhibit 10.4
EMPLOYMENT AGREEMENT
OF
Daniel G. Stephens, Jr.
This EMPLOYMENT AGREEMENT ("Agreement") dated as of the 15th day of June,
1998, between Daniel G. Stephens, Jr. ("Executive") an individual residing at
3216 W. Santiago St., Tampa, Fl 33629, and NetWolves Corporation ("Company") a
New York Corporation having its principal place of business at 33 Walt Whitman
Dr., Suite 125, Huntington Station, New York 11743;
WITNESSETH:
WHEREAS, the Company desires to retain Executive as the President of
Manufacturing, Research and Development of the Company, and Executive desires to
perform such duties,
NOW, THEREFORE, it is mutually agreed by and among the parties as
follows:
Section 1. Employment.
Upon the terms and subject to the conditions contained herein, during the
Employment Term (hereinafter defined), the Company hereby employs Executive as
the President of Manufacturing, Research and Development of the Company.
Executive shall be responsible for such duties as are commensurate with his
office and as may from time to time be assigned to Executive by the Board of
Directors of the Company. Executive shall report directly to the Board.
Executive hereby accepts such employment and during the Employment Term shall
devote his full business time, skill, energy and attention to the business of
the Company, and shall perform his duties in a diligent, trustworthy, loyal and
businesslike and efficient manner, all for the purpose of advancing the business
of the Company. Executive shall not be engaged in any other business activity,
whether or not the activity is pursued for gain, profit, or other pecuniary
advantage, during the term of this Agreement without Company's prior written
consent. Executive agrees to serve, if elected, as an officer and/or director of
the Company and any of its subsidiaries without additional compensation.
However, Executive shall not be required to serve as an officer or director of
any of the Company's subsidiaries if to do so would expose Executive to adverse
financial consequences.
Section 2. Compensation.
2.1. Salary. During the Employment Term, the Company shall pay, and
Executive shall be entitled to receive from the Company, as a base salary for
the employment referred to in Section 1 hereof, compensation at the rate of
$100,000 per annum, payable in 26 equal installments. Executive's base salary
shall be increased after the first full year as follows:
<PAGE>
(A) to $130,000 per annum, payable in 26 equal installments;
(B) to $150,000 per annum, payable in 26 equal installments, if the
operating subsidiary NetWolves Corporation generates revenues
between $5,000,000 and $9,999,999, within one year of the initial
employment term.
(C) to $250,000 per annum, payable in 26 equal installments, if the
operating subsidiary NetWolves Corporation generated revenues of
at least $10,000,000, within one year of the initial employment
term. The base salary will be reviewed at least once a year by
the Company's Board of Directors and may be increased if the
performance of the Company warrants any such increase.
2.2. Bonus. Executive shall be entitled to a bonus of 2% of gross profit
of the Company. One fourth of the bonus will be paid quarterly after the
completion of the Company's quarterly financial statement, and the remaining
balance will be paid after the completion of the annual financial statement.
2.3. Stock Options; Warrants: Executive shall be entitled to receive in the
aggregate warrants to purchase 200,000 shares of the stock of the Company and
shall also share in an employee stock option plan. The warrants, which shall be
subject to a separate Warrant Agreement, shall provide as follows:
(A) 50,000 warrants will become exercisable if the operating subsidiary
generates revenues of at least $5,000,000, without a pretax loss,
within one year following the signing of this agreement;
(B) 100,000 warrants will become exercisable if the operating subsidiary
generates revenues of at least $10,000,000 in revenues, with at least
$2,000,000 in pretax profit [before interest, taxes, depreciation, and
amortization ("EBITDA")], within one year following the signing of
this Agreement; and
(C) 50,000 warrants will become exercisable if the operating subsidiary
generates revenue of $10,000,000 with at least $1,000,000 in pretax
profit (EBITDA), within the second year following the signing of this
Agreement;
(D) If the warrants described in paragraph 2.3 (2) do not become
exercisable under the conditions stated, then such warrants will
become exercisable if the operating subsidiary generates $20,000,000
in revenues, with at least $4,000,000 in pretax income (EBITDA) during
the second year following the signing of this agreement.
The Company agrees to establish an employee stock option plan and reserve
at least 282,500 shares of the common stock of the Company for issuance under
the plan.
2.4. Expenses. The Company shall reimburse Executive for all expenses
incurred and paid by Executive in the course of the performance of his duties
pursuant to this Agreement and consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, and subject to the Company's requirements with respect to the manner
of reporting such expenses.
<PAGE>
2.6. Fringe Benefits. Executive shall be entitled to participate in various
fringe benefit programs now in force or hereafter established by the Company for
all employees of the Company, provided, however, that such participation shall
be subject to all of the terms and conditions pertaining to said programs as
they may now exist or as hereafter adopted, modified or amended. The fringe
benefit program of the Company may be changed or canceled at any time by the
Company in its sole discretion without prior notice to or consent of Executive.
2.7. Vacation. Executive shall be entitled to a paid vacation of two (2)
weeks commencing six (6) months from the Effective Date of this Agreement, three
(3) weeks after the first year and four (4) weeks every year thereafter.
2.8. Holidays. Executive shall be entitled to the same paid holidays as
authorized by the Company for all its other executives.
Section 3. Employment Term.
3.1. Employment Term. The Employment Term shall be three (3) years
commencing on the date of the signing of this Agreement. The Employment
Agreement will be automatically renewed for another three (3) years unless
otherwise terminated or canceled pursuant to Section 4 hereof.
Section 4. Termination
4.1. Death. The Agreement shall terminate upon death of the Executive.
Should the Agreement terminate as a result of Executive's death, the Executive's
Estate shall be entitled to receive compensation equal to six months of
Executive's base salary, base salary determined at the time of death.
4.2. Termination by Company.
(a) Termination For Cause. Company may terminate Executive's employment for
cause.
(b) 'Cause' Defined. Company shall have cause to terminate Executive's
employment if Executive wilfully fails to substantially perform any duties
required by this Agreement (unless Executive's failure is due to a physical or
mental incapacity), Executive is consistently, flagrantly, and grossly negligent
in the performance of required duties, Executive engages in conduct that
demonstrably and substantially damages Company, Executive is convicted of a
felonious act of moral turpitude, or Executive discloses material confidential
information in violation of this Agreement. No act or failure to act by
Executive may be considered "wilful" unless Executive acted or failed to act
without any reasonable belief that the act or omission was in Company's best
interests and without good faith.
<PAGE>
(c) Resolution Finding Cause for Termination of Executive's
Employment. Before Executive's employment may be terminated for cause, a
majority of the entire membership of Company's Board of Directors (not including
Executive) must duly adopt a resolution finding in good faith that Company has
cause to terminate Executive's employment and specifying the details of
Executive's misconduct. Before the Board of Directors may adopt such a
resolution, Executive must be given reasonable notice and opportunity to be
heard by the Board of Directors and must be permitted to appear before the Board
of Directors with counsel. The Board of Directors may not adopt a resolution
terminating Executive's employment for cause unless it receives a report from a
firm of independent attorneys (not including counsel for Company) concluding
that the Board of Directors has cause within the meaning of this agreement to
terminate Executive's employment. The firm of independent attorneys must be
selected by a majority of the entire membership of the Board of Directors (not
including Executive) and must be reasonably acceptable to Executive. If this
Agreement is terminated by Company for cause, each party's obligations under
this Agreement shall thereupon cease and terminate except for obligations
accrued but undischarged to and including the date of such event
4.3. Termination by Executive. Executive may (but is not obligated to)
terminate this Agreement at any time under the following circumstances:
(a) Executive's health becomes so impaired that continued performance of
Executive's duties under this Agreement would be hazardous to
Executive's physical or mental health.
(b) Change in control. There is a change in control of Company if someone
other than the subscribers to Company's common stock at the time of
the signing of this Agreement becomes the beneficial owner of common
stock representing 20 percent or more of the voting power of Company
or during any three year period during the term of this Agreement the
individuals who constitute the Board of Directors at the beginning of
the period cease to constitute at least a majority of the Board
members at the end of the three-year period for any reason other than
death or disability. No transaction or event will be deemed to have
caused a change in control if Executive gives prior consent to the
transaction or event.
(c) Executive is assigned duties that are significantly different than
those described in this Agreement, or duties assigned Executive by
this Agreement are eliminated or transferred to someone else.
(d) Executive is removed from any of the positions described in Section 1
of this Agreement (other than by Company for cause).
(e) Executive's fringe benefits or other compensation are materially
reduced.
(f) Company requires Executive to travel more frequently than contemplated
by this Agreement.
<PAGE>
(g) Company fails to have a successor assume this Agreement.
(h) Company becomes insolvent or files a bankruptcy petition.
4.4. Notice of Termination. Any termination of Executive's employment by
Company or Executive must be communicated to the other party by a written Notice
of Termination. The notice must specify the provision of this Agreement
authorizing the termination and must set forth in reasonable detail the facts
and circumstances providing the basis for termination of Executive's employment.
4.5. Date Termination Is Effective. If Executive's employment terminates
because this Agreement expires, then Executive's employment will be considered
to have terminated on that expiration date. If Executive's employment terminates
because of Executive's death, then Executive's employment will be considered to
have terminated on the date of Executive's death. If Executive's employment is
terminated by Executive, then Executive's employment will be considered to have
terminated on the date that a Notice of Termination is given. If Executive's
employment is terminated by Company for cause, then Executive's employment will
be considered to have terminated on the date specified by the "Notice of
Termination." If, within 30 days after a Notice of Termination is given, the
party receiving the notice notifies the other party that there is a dispute
concerning the termination, then Executive's employment will not be considered
to have terminated until the dispute is ended by a written agreement between the
parties, a final arbitration award, or a final judgment, order, or decree of a
court of competent jurisdiction. A judgment, order, or decree of a court of
competent jurisdiction will be considered final if the time for appealing the
decision has expired and no appeal has been perfected.
4.6. Compensation Following Termination.
(a) If Executive's employment terminates because of Executive's death, the
Company shall pay a lump sum death benefit to the person or persons
designated in a written notice filed with Company by Executive or, if
no person has been designated, to Executive's estate. The amount of
the lump sum death benefit will equal the amount of Executive's then
current base salary plus the amount of incentive compensation paid
Executive most recently prior to Executive's death, multiplied by the
number of full and partial years that Executive was employed by
Company. This lump sum death benefit shall be in addition to any other
amounts that Executive's beneficiaries and estate may be entitled to
receive under any employee benefit plan maintained by Company.
(b) If Executive's employment is terminated by Company for cause, Company
shall pay to Executive Executive's then current base salary through
the date employment is terminated, and Company shall have no further
obligations to Executive under this Agreement.
(c) If Company terminates Executive's employment other than for cause,
Company shall pay Executive Executive's then current base salary
through the date employment is terminated and any legal fees and
expenses incurred by Executive to enforce Executive's rights under
this Agreement. In addition, Company shall pay Executive as liquidated
<PAGE>
damages an amount equal to the sum of Executive's then current base
salary plus the amount of incentive compensation paid to Executive
most recently before the date Executive's employment was terminated,
multiplied by the number of full and partial years remaining in the
term of this Agreement (including extensions), and further multiplied
by 50% percent if Executive's employment terminates during the year
ending December 31, 1998, 75% percent if Executive's employment
terminates during the year ending December 31, 1999, or 100% percent
if Executive's employment terminates during the year ending December
31, 2000 or a subsequent year.
(d) If Executive's employment is terminated by Executive in accordance
with the provisions of this Agreement, Company shall pay Executive
severance pay in an amount equal to the sum of Executive's base salary
plus the amount of incentive compensation paid to Executive most
recently before the date Executive's employment was terminated,
multiplied by fifty percent (50%).
(e) Company and Executive intend that no portion of the payments to
Executive contingent on a change in control of Company be deemed a
parachute payment, as that term is defined by Section 28OG(b)(2) of
the Internal Revenue Code. Company and Executive agree that the
present value (as that term is defined by Section 28OG(d)(4) of the
Internal Revenue Code) of the termination payments contingent on a
change in control of Company shall not exceed the amount that could
cause the payments to be characterized as a parachute payment. If the
present value of the payments to be made to Executive exceed the
amount; that could cause the payments to be characterized as a
parachute payment, then the amount of those payments shall be reduced
so that their present value equals one dollar less than the amount
that would cause the payments to be characterized as a parachute
payment.
4.7. Health insurance upon termination. In the event the Company
terminates this Agreement with Executive for reasons other than those in
Sections 4.1, and 4.2(a), the Executive shall be entitled to receive continuing
benefits of health insurance coverage for a six month period.
Section 5. Disability.
5.1. Replacement Because of Disability. If, because of illness or
injury, Executive becomes unable to work full time for the Company for a period
of more than 90 days, Company may, in its sole discretion at any time after that
period give Executive 30 days written notice that it will replace Executive if
Executive is unable to return to work full time before the date specified in the
written notice. Replacement of Executive shall not be considered a termination
of Executive's employment under this Agreement.
5.2. Compensation During Periods of Disability.
(a) Executive shall continue to receive Executive's base salary and
incentive compensation while Executive is unable to work full time
until Executive is replaced or until Executive terminates Executive's
employment with Company because Executive's health becomes so impaired
that continued performances of Executive's duties under this Agreement
would be hazardous to Executive's physical or mental health.
<PAGE>
(b) While Executive is unable to work full time because of illness or
injury and through the full term of this Agreement, including
extensions, Company shall maintain for Executive's benefit all
employee benefit plans in which Executive was participating at the
time Executive was replaced. If Executive is barred from participating
in any employee benefit plan because of Executive's disability,
Company shall pay Executive an amount equal to what Company would have
contributed on Executive's behalf to the employee benefit plan if
Executive's participation had not been barred.
(c) After Executive is replaced or receives notice that Executive is
terminating employment because Executive's health has become so
impaired that continued performance of Executive's duties under this
Agreement would be hazardous to Executive's physical or mental health,
Company shall pay Executive an amount equal to the sum of Executive's
base salary plus the amount of incentive compensation paid to
Executive most recently before the date Executive's employment was
terminated, multiplied by fifty percent (50%)
(d) Executive is not required to seek other employment to mitigate any
amounts payable under this Agreement. Nor will amounts due Executive
under this Agreement be reduced by any amounts received by Executive
for other employment.
5.3. Disability Insurance. Company shall purchase and use its best efforts
to maintain disability insurance in force for the benefit of Executive
throughout the term of this Agreement (including extensions). The policy shall
replace fifty percent of Executive's Base Salary, start paying benefits after
Executive has been unable to work full-time for 90 days, continue paying
benefits until Executive reaches age 65, and waive premium payments while
Executive is disabled. If Company fails to make a premium payment, Executive
shall have the right in Executive's sole discretion to advance such funds as may
be required to maintain the policy in force and shall thereafter be entitled to
recover amounts paid from Company.
Section 6. Business Properties.
6.1. Business Properties Other than as required to perform his duties in
accordance with this Agreement and for purpose of furthering the business of the
Company, Executive shall not use or cause to be used Company's trade secrets or
any other confidential business information by him as a result of his employment
or relationship to the Company or any affiliate of the Company.
6.2. Revealing Trade Secret, etc. Executive acknowledges the interest of
the Company in maintaining the confidentiality of information related to its
business and shall not at any time during the Employment Term or thereafter,
directly or indirectly, reveal or cause to be revealed to any person or entity
the production processes, inventions, formulae, trade secrets, customer lists or
<PAGE>
any other confidential information obtained by him as a result of his employment
or relationship with the Company or any affiliate of the Company, except when
authorized in writing to do so by the Company, provided, however, that it is not
the intent of this Section 5.2 to include within the subject matter information
not proprietary to the Company or information which is in the public domain.
Confidential information does not include any information that is known
generally by the public (other than as a result of unauthorized disclosure by
Executive) or information that is not the type of information considered
confidential by persons engaged in a business that is the same of similar to
that conducted by the company. Confidential information is material if its
disclosure would be materially damaging to the Company.
Section 7. Non-Competition.
7.1. Non-Competition. During the Employment Term and for a period of one
(1) year thereafter, Executive shall not (a) compete, engage, or participate,
directly or indirectly, in the business or business substantially similar to the
business as conducted by the Company or as may thereafter be conducted by the
Company at any time during the Employment Term, (b) solicit or cause to be
solicited any customers of the Company, or (c) recruit or cause any other person
to recruit any employee of the Company to any of said business or businesses.
7.2. Prior Notice. Prior to engaging in any activity or accepting
employment with another company any time within one (1) year after Executive
leaves the employment of the Company, which activity or employment is in the
same or related industry in which the Company is engaged, Executive agrees to
provide at least thirty (30) days prior written notice (by certified mail) to
the Company, stating the description of the activities or position sought to be
undertaken by Executive, together with such further information as the Company
may request in connection therewith (including, but not limited to, location
where the services would be performed, the present or former customers of the
Company who may be anticipated to receive such services, etc.). Upon receipt of
such information from Executive, the Company shall, within fifteen (15) days of
the receipt of all of the requested information, notify Executive whether the
Company objects to the otherwise prohibited services of activities by Executive.
If the Company does not object or does not respond, the restrictions set forth
in Section 6 shall have no force and effect. The Company shall be free to object
or not to object in unfettered discretion, and parties agree that any actions
taken or not taken by the Company with respect to any other employees or former
employees shall have no bearing whatsoever on the Company's decision or on any
question regarding the enforceability of this restraint with respect to
Executive.
7.3. Limitations. It is also agreed that if for any reason the area or time
restrictions set forth above are too broad so as to be unenforceable by law,
then they, or either one of them, shall be reduced to such area or time as shall
be legally enforceable. If it is judicially determined that this agreement not
to compete, or any potion thereof, is illegal or offensive under any applicable
law (statute, common law or otherwise), then it is hereby agreed by Executive
and the Company that the non-competition covenant shall be in full force and
effect to the full extent permitted by law. By this agreement, the parties
intend to have this agreement not to compete to be in full force and effect to
the greatest extent permitted.
<PAGE>
Section 8. Inventions.
8.1. Assignment. Without further consideration Executive shall fully and
promptly report to the Company all ideas, concept, inventions, discoveries,
formulae and designs conceived or produced by Executive at any time during the
Employment Term, whether alone or with others and whether patentable or
unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to
the business of the Company as conducted at any time during the Employment Term,
and shall assign and hereby does assign to the Company or its nominee
Executive's entire right, title and interest in and to all such Inventions.
8.2. Cooperation. Executive shall take all reasonable action requested by
the Company to protect or obtain title to any and all United States and/or
foreign patents on any such Inventions, including execution and delivery of all
applications. assignments and other documents deemed necessary or desirable by
the Company, provided Executive is reimbursed for reasonable expenses incurred
by Executive in connection with such execution and delivery.
Section 9. Miscellaneous.
9.1. Remedies. The parties acknowledge that any breach or violation by
Executive of the terms of this Agreement will result in immediate and
irreparable injury and harm to the Company, and will do damage to the Company in
amounts difficult to ascertain. Accordingly, the company shall be entitled to
remedies of injunction, as well as to all other legal or equitable remedies to
which the Company may be entitled, including, without limitation termination of
the Employment Term and this Agreement.
9.2. Certain definitions. For the purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Engage in or participate in any business" referred to in Section 7
hereof shall be deemed to mean engaging in or participating in any business or
businesses, directly or indirectly, whether for his own account or for that of
any other person, firm, or corporation, and whether as a stockholder (except as
a stockholder in a publicly-held corporation with more than 500 holders of
common stock of which Executive owns less than 1 % of the outstanding securities
of any class), principal, agent, proprietor, partner, officer, director,
employee or consultant, or in any other capacity;
9.3. Notices. Any notice or other communications required or permitted to
be given to the parties hereto shall be deemed to have been given when received,
addressed as follows (or at such other address as the party addressed may have
substituted by notice pursuant to this Section 8.3.
(a) If to the Company: NetWolves Corporation
33 Walt Whitman Dr., Suite 125
Huntington Station, New York 11743;
(b) If to Executive: Daniel G. Stephens, Jr.
3216 W. Santiago St.
Tampa, Fl 33629
<PAGE>
9.4. Heading. The captions set forth in this Agreement are for convenience
only and shall not be considered as part of this Agreement or as in any way
limiting or amplifying the terms and provision hereof.
9.5. Governing Law. The Agreement shall in all respects be interpreted,
construed and governed by and in accordance with the law of the State of
Florida.
9.6. Severability. In case this Agreement or any one or more of the
provisions hereof, shall be held to be invalid, illegal or unenforceable within
any governmental jurisdiction or subdivision thereof, the Agreement or any such
provision or provisions shall not as a consequence thereof be deemed to be
invalid, illegal or unenforceable in any other governmental jurisdiction or
subdivision thereof. In case any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any other respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein and there shall be deemed substituted such other provision as
will most nearly accomplish the intent of the parties to the extent permitted by
applicable law.
9.7. Whole Agreement. This Agreement embodies all the representations,
warrants covenants and agreements of the parties in relation to subject matter
hereof, and no representations, warranties, covenants, understandings or
agreements, or otherwise, in relation thereto exist between the parties except
as herein expressly set forth herein, or in any instrument in writing by the
party to be bound thereby which makes reference to this Agreement.
9.8. No Rights in Third Parties. Nothing herein expressed or implied is
intended to or shall be construed to confer upon or give to any person, firm or
other entity, other than the parties hereto and their respective successors and
assigns or personal representatives, any rights or remedies under or by reason
of this Agreement.
9.9. Amendment. This Agreement may not be amended orally but only by an
instrument in writing duly executed by the parties hereto.
9.10. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
In WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
EXECUTIVE NetWolves Corporation
_______________________ By:_______________________
Daniel G. Stephens, Jr. President
Exhibit 10.5
Approved by Board of Directors on June 15, 1998
WATCHDOG PATROLS, INC.
1998 Performance Equity Plan
Section 1. Purpose; Definitions.
1.1 Purpose. The purpose of the Watchdog Patrols, Inc. ("Company") 1998
Performance Equity Plan ("Plan") is to enable the Company to offer to its key
employees, officers, directors and consultants whose past, present and/or
potential contributions to the Company and its Subsidiaries have been, are or
will be important to the success of the Company, an opportunity to acquire a
proprietary interest in the Company. The various types of long-term incentive
awards which may be provided under the Plan will enable the Company to respond
to changes in compensation practices, tax laws, accounting regulations and the
size and diversity of its businesses.
1.2 Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Agreement" means the agreement between the Company and the Holder
setting forth the terms and conditions of an award under the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto and the regulations promulgated
thereunder.
(d) "Committee" means the Stock Option Committee of the Board or any
other committee of the Board, which the Board may designate to administer the
Plan or any portion thereof. If no Committee is so designated, then all
references in this Plan to "Committee" shall mean the Board.
(e) "Common Stock" means the Common Stock of the Company, par value
$.0033 per share.
(f) "Company" means Watchdog Patrols, Inc., a corporation organized
under the laws of the State of New York.
(g) "Deferred Stock" means Stock to be received, under an award made
pursuant to Section 9, below, at the end of a specified deferral period.
(h) "Disability" means disability as determined under procedures
established by the Committee for purposes of the Plan.
(i) "Effective Date" means the date set forth in Section 13.1, below.
(j) "Fair Market Value", unless otherwise required by any applicable
provision of the Code or any regulations issued thereunder, means, as of any
given date: (i) if the Common Stock is listed on a national securities exchange
or quoted on the Nasdaq National Market or Nasdaq SmallCap Market, the last sale
price of the Common Stock in the principal trading market for the Common Stock
on the last trading day preceding the date of grant of an award hereunder, as
reported by the exchange or Nasdaq, as the case may be; (ii) if the Common Stock
is not listed on a national securities exchange or quoted on the Nasdaq National
Market or Nasdaq SmallCap Market, but is traded in the over-the-counter market,
the closing bid price for the Common Stock on the last trading day preceding the
date of grant of an award hereunder for which such quotations are reported by
<PAGE>
the OTC Bulletin Board or the National Quotation Bureau, Incorporated or similar
publisher of such quotations; and (iii) if the fair market value of the Common
Stock cannot be determined pursuant to clause (i) or (ii) above, such price as
the Committee shall determine, in good faith.
(k) "Holder" means a person who has received an award under the Plan.
(l) "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
(m) "Nonqualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(n) "Normal Retirement" means retirement from active employment with
the Company or any Subsidiary on or after age 65.
(o) "Other Stock-Based Award" means an award under Section 10, below,
that is valued in whole or in part by reference to, or is otherwise based upon,
Stock.
(p) "Parent" means any present or future parent corporation of the
Company, as such term is defined in Section 424(e) of the Code.
(q) "Plan" means the Watchdog Patrols, Inc. 1998 Performance Equity
Plan, as hereinafter amended from time to time.
(r) "Restricted Stock" means Stock, received under an award made
pursuant to Section 8, below, that is subject to restrictions under said Section
8.
(s) "SAR Value" means the excess of the Fair Market Value (on the
exercise date) of the number of shares for which the Stock Appreciation Right is
exercised over the exercise price that the participant would have otherwise had
to pay to exercise the related Stock Option and purchase the relevant shares.
(t) "Stock" means the Common Stock of the Company, par value $.0033
per share.
(u) "Stock Appreciation Right" means the right to receive from the
Company, on surrender of all or part of the related Stock Option, without a cash
payment to the Company, a number of shares of Common Stock equal to the SAR
Value divided by the exercise price of the Stock Option.
(v) "Stock Option" or "Option" means any option to purchase shares of
Stock which is granted pursuant to the Plan.
(w) "Stock Reload Option" means any option granted under Section 6.3,
below, as a result of the payment of the exercise price of a Stock Option and/or
the withholding tax related thereto in the form of Stock owned by the Holder or
the withholding of Stock by the Company.
(x) "Subsidiary" means any present or future subsidiary corporation of
the Company, as such term is defined in Section 424(f) of the Code.
<PAGE>
Section 2. Administration.
2.1 Committee Membership. The Plan shall be administered by the Board or a
Committee. Committee members shall serve for such term as the Board may in each
case determine, and shall be subject to removal at any time by the Board.
2.2 Powers of Committee. The Committee shall have full authority to award,
pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock Appreciation
Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v) Stock Reload Options
and/or (vi) Other Stock-Based Awards. For purposes of illustration and not of
limitation, the Committee shall have the authority (subject to the express
provisions of this Plan):
(a) to select the officers, key employees, directors and consultants
of the Company or any Subsidiary to whom Stock Options, Stock Appreciation
Rights, Restricted Stock, Deferred Stock, Reload Stock Options and/or Other
Stock-Based Awards may from time to time be awarded hereunder.
(b) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including, but not limited
to, number of shares, share price or other consideration, such as other
securities of the Company or other property, any restrictions or limitations,
and any vesting, exchange, surrender, cancellation, acceleration, termination,
exercise or forfeiture provisions, as the Committee shall determine);
(c) to determine any specified performance goals or such other factors
or criteria which need to be attained for the vesting of an award granted
hereunder;
(d) to determine the terms and conditions under which awards granted
hereunder are to operate on a tandem basis and/or in conjunction with or apart
from other equity awarded under this Plan and cash awards made by the Company or
any Subsidiary outside of this Plan;
(e) to permit a Holder to elect to defer a payment under the Plan
under such rules and procedures as the Committee may establish, including the
crediting of interest on deferred amounts denominated in cash and of dividend
equivalents on deferred amounts denominated in Stock;
(f) to determine the extent and circumstances under which Stock and
other amounts payable with respect to an award hereunder shall be deferred which
may be either automatic or at the election of the Holder; and
(g) to substitute (i) new Stock Options for previously granted Stock
Options, which previously granted Stock Options have higher option exercise
prices and/or contain other less favorable terms, and (ii) new awards of any
other type for previously granted awards of the same type, which previously
granted awards are upon less favorable terms.
2.3 Interpretation of Plan.
(a) Committee Authority. Subject to Section 12, below, the Committee
shall have the authority to adopt, alter and repeal such administrative rules,
guidelines and practices governing the Plan as it shall, from time to time, deem
advisable, to interpret the terms and provisions of the Plan and any award
issued under the Plan (and to determine the form and substance of all Agreements
relating thereto), and to otherwise supervise the administration of the Plan.
Subject to Section 12, below, all decisions made by the Committee pursuant to
the provisions of the Plan shall be made in the Committee's sole discretion and
shall be final and binding upon all persons, including the Company, its
Subsidiaries and Holders.
(b) Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term or provision of the Plan relating to Incentive Stock
Options (including but limited to Stock Reload Options or Stock Appreciation
rights granted in conjunction with an Incentive Stock Option) or any Agreement
providing for Incentive Stock Options shall be interpreted, amended or altered,
nor shall any discretion or authority granted under the Plan be so exercised, so
as to disqualify the Plan under Section 422 of the Code, or, without the consent
of the Holder(s) affected, to disqualify any Incentive Stock Option under such
Section 422.
Section 3. Stock Subject to Plan.
3.1 Number of Shares. The total number of shares of Common Stock reserved
and available for distribution under the Plan shall be 282,500 shares. Shares of
Stock under the Plan may consist, in whole or in part, of authorized and
<PAGE>
unissued shares or treasury shares. If any shares of Stock that have been
granted pursuant to a Stock Option cease to be subject to a Stock Option, or if
any shares of Stock that are subject to any Stock Appreciation Right, Restricted
Stock, Deferred Stock award, Reload Stock Option or Other Stock-Based Award
granted hereunder are forfeited or any such award otherwise terminates without a
payment being made to the Holder in the form of Stock, such shares shall again
be available for distribution in connection with future grants and awards under
the Plan. Only net shares issued upon a stock-for-stock exercise (including
stock used for withholding taxes) shall be counted against the number of shares
available under the Plan.
3.2 Adjustment Upon Changes in Capitalization, Etc. In the event of any
change in the shares of Common Stock of the Company occurring as the result of a
stock split, reverse stock split, stock dividend payable in shares of Common
Stock, recapitalization, merger, consolidation, reorganization, combination or
exchange of shares, or other extraordinary or unusual event occurring after the
grant of an Award, the Committee shall determine, in its sole discretion,
whether such change equitably requires an adjustment in the terms of any Award
or the aggregate number of shares reserved for issuance under the Plan. Any such
adjustments will be made by the Committee, whose determination will be final,
binding and conclusive.
Section 4. Eligibility.
Awards may be made or granted to key employees, officers, directors
and consultants who are deemed to have rendered or to be able to render
significant services to the Company or its Subsidiaries and who are deemed to
have contributed or to have the potential to contribute to the success of the
Company. No Incentive Stock Option shall be granted to any person who is not an
employee of the Company or a Subsidiary at the time of grant.
Section 5. Required Six-Month Holding Period.
A period of not less than six months must elapse from the date of grant of
an award under the Plan, (i) before any disposition by a Holder of a derivative
security (as defined in Rule 16a-1 promulgated under the Securities Exchange Act
of 1934, as amended ("Exchange Act")) issued under this Plan or (ii) before any
disposition by a Holder of any Stock purchased or granted pursuant to an award
under this Plan.
Section 6. Stock Options.
6.1 Grant and Exercise. Stock Options granted under the Plan may be of two
types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. Any
Stock Option granted under the Plan shall contain such terms, not inconsistent
with this Plan, or with respect to Incentive Stock Options, not inconsistent
with the Plan and the Code, as the Committee may from time to time approve. The
Committee shall have the authority to grant Incentive Stock Options,
Non-Qualified Stock Options, or both types of Stock Options and which may be
granted alone or in addition to other awards granted under the Plan. To the
extent that any Stock Option intended to qualify as an Incentive Stock Option
does not so qualify, it shall constitute a separate Nonqualified Stock Option.
An Incentive Stock Option may be granted only within the ten-year period
commencing from the Effective Date and may only be exercised within ten years of
the date of grant (or five years in the case of an Incentive Stock Option
granted to an optionee ("10% Shareholder") who, at the time of grant, owns Stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company.
6.2 Terms and Conditions. Stock Options granted under the Plan shall be
subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the time of grant
and may not be less than 100% of the Fair Market Value of the Stock as defined
above; provided, however, that the exercise price of an Incentive Stock Option
granted to a 10% Shareholder shall not be less than 110% of the Fair Market
Value of the Stock.
(b) Option Term. Subject to the limitations in Section 6.1, above, the
term of each Stock Option shall be fixed by the Committee.
<PAGE>
(c) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee and as set forth in Section 11, below. If the Committee provides, in
its discretion, that any Stock Option is exercisable only in installments, i.e.,
that it vests over time, the Committee may waive such installment exercise
provisions at any time at or after the time of grant in whole or in part, based
upon such factors as the Committee shall determine.
(d) Method of Exercise. Subject to whatever installment, exercise and
waiting period provisions are applicable in a particular case, Stock Options may
be exercised in whole or in part at any time during the term of the Option, by
giving written notice of exercise to the Company specifying the number of shares
of Stock to be purchased. Such notice shall be accompanied by payment in full of
the purchase price, which shall be in cash or, unless otherwise provided in the
Agreement, in shares of Stock (including Restricted Stock and other contingent
awards under this Plan) or, partly in cash and partly in such Stock, or such
other means which the Committee determines are consistent with the Plan's
purpose and applicable law. Cash payments shall be made by wire transfer,
certified or bank check or personal check, in each case payable to the order of
the Company; provided, however, that the Company shall not be required to
deliver certificates for shares of Stock with respect to which an Option is
exercised until the Company has confirmed the receipt of good and available
funds in payment of the purchase price thereof. Payments in the form of Stock
shall be valued at the Fair Market Value of a share of Stock on the date prior
to the date of exercise. Such payments shall be made by delivery of stock
certificates in negotiable form which are effective to transfer good and valid
title thereto to the Company, free of any liens or encumbrances. Subject to the
terms of the Agreement, the Committee may, in its sole discretion, at the
request of the Holder, deliver upon the exercise of a Nonqualified Stock Option
a combination of shares of Deferred Stock and Common Stock; provided that,
notwithstanding the provisions of Section 9 of the Plan, such Deferred Stock
shall be fully vested and not subject to forfeiture. A Holder shall have none of
the rights of a Shareholder with respect to the shares subject to the Option
until such shares shall be transferred to the Holder upon the exercise of the
Option.
(e) Transferability. Except as may be set forth in the Agreement, no
Stock Option shall be transferable by the Holder other than by will or by the
laws of descent and distribution, and all Stock Options shall be exercisable,
during the Holder's lifetime, only by the Holder.
(f) Termination by Reason of Death. If a Holder's employment by the
Company or a Subsidiary terminates by reason of death, any Stock Option held by
such Holder, unless otherwise determined by the Committee at the time of grant
and set forth in the Agreement, shall be fully vested and may thereafter be
exercised by the legal representative of the estate or by the legatee of the
Holder under the will of the Holder, for a period of one year (or such other
greater or lesser period as the Committee may specify at grant) from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(g) Termination by Reason of Disability. If a Holder's employment by
the Company or any Subsidiary terminates by reason of Disability, any Stock
Option held by such Holder, unless otherwise determined by the Committee at the
time of grant and set forth in the Agreement, shall be fully vested and may
thereafter be exercised by the Holder for a period of one year (or such other
greater or lesser period as the Committee may specify at the time of grant) from
the date of such termination of employment or until the expiration of the stated
term of such Stock Option, whichever period is the shorter.
(h) Other Termination. Subject to the provisions of Section 14.3,
below, and unless otherwise determined by the Committee at the time of grant and
set forth in the Agreement, if a Holder is an employee of the Company or a
Subsidiary at the time of grant and if such Holder's employment by the Company
or any Subsidiary terminates for any reason other than death or Disability, the
Stock Option shall thereupon automatically terminate, except that if the
Holder's employment is terminated by the Company or a Subsidiary without cause
or due to Normal Retirement, then the portion of such Stock Option which has
vested on the date of termination of employment may be exercised for the lesser
of three months after termination of employment or the balance of such Stock
Option's term.
(i) Additional Incentive Stock Option Limitation. In the case of an
Incentive Stock Option, the aggregate Fair Market Value of Stock (determined at
the time of grant of the Option) with respect to which Incentive Stock Options
become exercisable by a Holder during any calendar year (under all such plans of
the Company and its Parent and Subsidiary) shall not exceed $100,000.
<PAGE>
(j) Buyout and Settlement Provisions. The Committee may at any time,
in its sole discretion, offer to buy out a Stock Option previously granted,
based upon such terms and conditions as the Committee shall establish and
communicate to the Holder at the time that such offer is made.
(k) Stock Option Agreement. Each grant of a Stock Option shall be
confirmed by, and shall be subject to the terms of, the Agreement executed by
the Company and the Holder.
6.3 Stock Reload Option. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after the
time of grant in the case of a Nonqualified Stock Option) a Stock Reload Option
up to the amount of shares of Stock held by the Holder for at least six months
and used to pay all or part of the exercise price of an Option and, if any,
withheld by the Company as payment for withholding taxes. Such Stock Reload
Option shall have an exercise price equal to the Fair Market Value as of the
date of the Stock Reload Option grant. Unless the Committee determines
otherwise, a Stock Reload Option may be exercised commencing one year after it
is granted and shall expire on the date of expiration of the Option to which the
Reload Option is related.
Section 7. Stock Appreciation Rights.
7.1 Grant and Exercise. The Committee may grant Stock Appreciation Rights
to participants who have been, or are being granted, Options under the Plan as a
means of allowing such participants to exercise their Options without the need
to pay the exercise price in cash. In the case of a Nonqualified Stock Option, a
Stock Appreciation Right may be granted either at or after the time of the grant
of such Nonqualified Stock Option. In the case of an Incentive Stock Option, a
Stock Appreciation Right may be granted only at the time of the grant of such
Incentive Stock Option.
7.2 Terms and Conditions. Stock Appreciation Rights shall be subject to the
following terms and conditions:
(a) Exercisability. Stock Appreciation Rights shall be exercisable as
shall be determined by the Committee and set forth in the Agreement, subject to
the limitations, if any, imposed by the Code, with respect to related Incentive
Stock Options.
(b) Termination. A Stock Appreciation Right shall terminate and shall
no longer be exercisable upon the termination or exercise of the related Stock
Option.
(c) Method of Exercise. Stock Appreciation Rights shall be exercisable
upon such terms and conditions as shall be determined by the Committee and set
forth in the Agreement and by surrendering the applicable portion of the related
Stock Option. Upon such exercise and surrender, the Holder shall be entitled to
receive a number of Option Shares equal to the SAR Value divided by the exercise
price of the Option.
(d) Shares Affected Upon Plan. The granting of a Stock Appreciation
Right shall not affect the number of shares of Stock available under for awards
under the Plan. The number of shares available for awards under the Plan will,
however, be reduced by the number of shares of Stock acquirable upon exercise of
the Stock Option to which such Stock Appreciation Right relates.
Section 8. Restricted Stock.
8.1 Grant. Shares of Restricted Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom, and the time or times at which, grants of
Restricted Stock will be awarded, the number of shares to be awarded, the price
(if any) to be paid by the Holder, the time or times within which such awards
may be subject to forfeiture ("Restriction Period"), the vesting schedule and
rights to acceleration thereof, and all other terms and conditions of the
awards.
<PAGE>
8.2 Terms and Conditions. Each Restricted Stock award shall be subject to
the following terms and conditions:
(a) Certificates. Restricted Stock, when issued, will be represented
by a stock certificate or certificates registered in the name of the Holder to
whom such Restricted Stock shall have been awarded. During the Restriction
Period, certificates representing the Restricted Stock and any securities
constituting Retained Distributions (as defined below) shall bear a legend to
the effect that ownership of the Restricted Stock (and such Retained
Distributions), and the enjoyment of all rights appurtenant thereto, are subject
to the restrictions, terms and conditions provided in the Plan and the
Agreement. Such certificates shall be deposited by the Holder with the Company,
together with stock powers or other instruments of assignment, each endorsed in
blank, which will permit transfer to the Company of all or any portion of the
Restricted Stock and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the Agreement.
(b) Rights of Holder. Restricted Stock shall constitute issued and
outstanding shares of Common Stock for all corporate purposes. The Holder will
have the right to vote such Restricted Stock, to receive and retain all regular
cash dividends and other cash equivalent distributions as the Board may in its
sole discretion designate, pay or distribute on such Restricted Stock and to
exercise all other rights, powers and privileges of a holder of Common Stock
with respect to such Restricted Stock, with the exceptions that (i) the Holder
will not be entitled to delivery of the stock certificate or certificates
representing such Restricted Stock until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing the Restricted Stock during the
Restriction Period; (iii) other than regular cash dividends and other cash
equivalent distributions as the Board may in its sole discretion designate, pay
or distribute, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Stock (and such
Retained Distributions will be subject to the same restrictions, terms and
conditions as are applicable to the Restricted Stock) until such time, if ever,
as the Restricted Stock with respect to which such Retained Distributions shall
have been made, paid or declared shall have become vested and with respect to
which the Restriction Period shall have expired; (iv) a breach of any of the
restrictions, terms or conditions contained in this Plan or the Agreement or
otherwise established by the Committee with respect to any Restricted Stock or
Retained Distributions will cause a forfeiture of such Restricted Stock and any
Retained Distributions with respect thereto.
(c) Vesting; Forfeiture. Upon the expiration of the Restriction Period
with respect to each award of Restricted Stock and the satisfaction of any other
applicable restrictions, terms and conditions (i) all or part of such Restricted
Stock shall become vested in accordance with the terms of the Agreement, subject
to Section 11, below, and (ii) any Retained Distributions with respect to such
Restricted Stock shall become vested to the extent that the Restricted Stock
related thereto shall have become vested, subject to Section 11, below. Any such
Restricted Stock and Retained Distributions that do not vest shall be forfeited
to the Company and the Holder shall not thereafter have any rights with respect
to such Restricted Stock and Retained Distributions that shall have been so
forfeited.
Section 9. Deferred Stock.
9.1 Grant. Shares of Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom and the time or times at which grants of Deferred
Stock will be awarded, the number of shares of Deferred Stock to be awarded to
any person, the duration of the period ("Deferral Period") during which, and the
conditions under which, receipt of the shares will be deferred, and all the
other terms and conditions of the awards.
9.2 Terms and Conditions. Each Deferred Stock award shall be subject to the
following terms and conditions:
(a) Certificates. At the expiration of the Deferral Period (or the
Additional Deferral Period referred to in Section 9.2 (d) below, where
applicable), share certificates shall be issued and delivered to the Holder, or
his legal representative, representing the number equal to the shares covered by
the Deferred Stock award.
(b) Rights of Holder. A person entitled to receive Deferred Stock
shall not have any rights of a Shareholder by virtue of such award until the
expiration of the applicable Deferral Period and the issuance and delivery of
the certificates representing such Stock. The shares of Stock issuable upon
<PAGE>
expiration of the Deferral Period shall not be deemed outstanding by the Company
until the expiration of such Deferral Period and the issuance and delivery of
such Stock to the Holder.
(c) Vesting; Forfeiture. Upon the expiration of the Deferral Period
with respect to each award of Deferred Stock and the satisfaction of any other
applicable restrictions, terms and conditions all or part of such Deferred Stock
shall become vested in accordance with the terms of the Agreement, subject to
Section 11, below. Any such Deferred Stock that does not vest shall be forfeited
to the Company and the Holder shall not thereafter have any rights with respect
to such Deferred Stock.
(d) Additional Deferral Period. A Holder may request to, and the
Committee may at any time, defer the receipt of an award (or an installment of
an award) for an additional specified period or until a specified event
("Additional Deferral Period"). Subject to any exceptions adopted by the
Committee, such request must generally be made at least one year prior to
expiration of the Deferral Period for such Deferred Stock award (or such
installment). Section 10. Other Stock-Based Awards.
10.1 Grant and Exercise. Other Stock-Based Awards may be awarded, subject
to limitations under applicable law, that are denominated or payable in, valued
in whole or in part by reference to, or otherwise based on, or related to,
shares of Common Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, purchase rights, shares of
Common Stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures, or other rights convertible into shares
of Common Stock and awards valued by reference to the value of securities of or
the performance of specified Subsidiaries. Other Stock-Based Awards may be
awarded either alone or in addition to or in tandem with any other awards under
this Plan or any other plan of the Company.
10.2 Eligibility for Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
such other stock-based awards shall be made, the number of shares of Common
Stock to be awarded pursuant to such awards, and all other terms and conditions
of the awards.
10.3 Terms and Conditions. Each Other Stock-Based Award shall be subject to
such terms and conditions as may be determined by the Committee and to Section
11, below.
Section 11. Accelerated Vesting and Exercisability.
If at any time after the Company is required to file reports under the
Exchange Act and a "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), is or becomes the "beneficial owner" (as referred in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined voting power of the Company's
then outstanding securities in one or more transactions, and the Board does not
authorize or otherwise approve such acquisition, then, the vesting periods of
any and all Options and other Awards granted and outstanding under the Plan
shall be accelerated and all such Options and Awards will immediately and
entirely vest, and the respective holders thereof will have the immediate right
to purchase and/or receive any and all Common Stock subject to such Options and
awards on the terms set forth in this Plan and the respective agreements
respecting such Options and Awards.
Section 12. Amendment and Termination.
The Board may at any time, and from time to time, amend alter, suspend or
discontinue any of the provisions of the Plan, but no amendment, alteration,
suspension or discontinuance shall be made which would impair the rights of a
Holder under any Agreement theretofore entered into hereunder, without the
Holder's consent.
Section 13. Term of Plan.
13.1 Effective Date. The Plan shall be effective as of June 15, 1998
("Effective Date"), subject to the approval of the Plan by the Company's
shareholders within one year after the Effective Date. Any awards granted under
the Plan prior to such approval shall be effective when made (unless otherwise
specified by the Committee at the time of grant), but shall be conditioned upon,
and subject to, such approval of the Plan by the Company's shareholders and no
awards shall vest or otherwise become free of restrictions prior to such
approval.
<PAGE>
13.2 Termination Date. Unless terminated by the Board, this Plan shall
continue to remain effective until such time no further awards may be granted
and all awards granted under the Plan are no longer outstanding. Notwithstanding
the foregoing, grants of Incentive Stock Options may only be made during the ten
year period following the Effective Date.
Section 14. General Provisions.
14.1 Written Agreements. Each award granted under the Plan shall be
confirmed by, and shall be subject to the terms of the Agreement executed by the
Company and the Holder. The Committee may terminate any award made under the
Plan if the Agreement relating thereto is not executed and returned to the
Company within 10 days after the Agreement has been delivered to the Holder for
his or her execution.
14.2 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Holder by the Company, nothing contained herein shall
give any such Holder any rights that are greater than those of a general
creditor of the Company.
14.3 Employees.
(a) Engaging in Competition With the Company. In the event a Holder's
employment with the Company or a Subsidiary is terminated for any reason
whatsoever, and within eighteen months after the date thereof such Holder
accepts employment with any competitor of, or otherwise engages in competition
with, the Company, the Committee, in its sole discretion, may require such
Holder to return to the Company the economic value of any award which was
realized or obtained by such Holder at any time during the period beginning on
that date which is six months prior to the date of such Holder's termination of
employment with the Company.
(b) Termination for Cause. The Committee may, in the event a Holder's
employment with the Company or a Subsidiary is terminated for cause, annul any
award granted under this Plan to such employee and, in such event, the
Committee, in its sole discretion, may require such Holder to return to the
Company the economic value of any award which was realized or obtained by such
Holder at any time during the period beginning on that date which is six months
prior to the date of such Holder's termination of employment with the Company.
(c) No Right of Employment. Nothing contained in the Plan or in any
award hereunder shall be deemed to confer upon any Holder who is an employee of
the Company or any Subsidiary any right to continued employment with the Company
or any Subsidiary, nor shall it interfere in any way with the right of the
Company or any Subsidiary to terminate the employment of any Holder who is an
employee at any time.
14.4 Investment Representations. The Committee may require each person
acquiring shares of Stock pursuant to a Stock Option or other award under the
Plan to represent to and agree with the Company in writing that the Holder is
acquiring the shares for investment without a view to distribution thereof.
14.5 Additional Incentive Arrangements. Nothing contained in the Plan shall
prevent the Board from adopting such other or additional incentive arrangements
as it may deem desirable, including, but not limited to, the granting of Stock
Options and the awarding of stock and cash otherwise than under the Plan; and
such arrangements may be either generally applicable or applicable only in
specific cases.
14.6 Withholding Taxes. Not later than the date as of which an amount must
first be included in the gross income of the Holder for Federal income tax
purposes with respect to any option or other award under the Plan, the Holder
shall pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any Federal, state and local taxes of any kind
required by law to be withheld or paid with respect to such amount. If permitted
by the Committee, tax withholding or payment obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives rise
to the withholding requirement. The obligations of the Company under the Plan
shall be conditioned upon such payment or arrangements and the Company or the
Holder's employer (if not the Company) shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Holder from the Company or any Subsidiary.
<PAGE>
14.7 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of New York (without regard to choice of law provisions).
14.8 Other Benefit Plans. Any award granted under the Plan shall not be
deemed compensation for purposes of computing benefits under any retirement plan
of the Company or any Subsidiary and shall not affect any benefits under any
other benefit plan now or subsequently in effect under which the availability or
amount of benefits is related to the level of compensation (unless required by
specific reference in any such other plan to awards under this Plan).
14.9 Non-Transferability. Except as otherwise expressly provided in the
Plan or the Agreement, no right or benefit under the Plan may be alienated,
sold, assigned, hypothecated, pledged, exchanged, transferred, encumbranced or
charged, and any attempt to alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void.
14.10 Applicable Laws. The obligations of the Company with respect to all
Stock Options and awards under the Plan shall be subject to (i) all applicable
laws, rules and regulations and such approvals by any governmental agencies as
may be required, including, without limitation, the Securities Act of 1933, as
amended, and (ii) the rules and regulations of any securities exchange on which
the Stock may be listed.
14.11 Conflicts. If any of the terms or provisions of the Plan or an
Agreement (with respect to Incentive Stock Options) conflict with the
requirements of Section 422 of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of said
Section 422 of the Code. Additionally, if this Plan or any Agreement does not
contain any provision required to be included herein under Section 422 of the
Code, such provision shall be deemed to be incorporated herein and therein with
the same force and effect as if such provision had been set out at length herein
and therein. If any of the terms or provisions of any Agreement conflict with
any terms or provision of the Plan, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of the
Plan. Additionally, if any Agreement does not contain any provision required to
be included therein under the Plan, such provision shall be deemed to be
incorporated therein with the same force and effect as if such provision had
been set out at length therein.
14.12 Non-Registered Stock. The shares of Stock to be distributed under
this Plan have not been, as of the Effective Date, registered under the
Securities Act of 1933, as amended, or any applicable state or foreign
securities laws and the Company has no obligation to any Holder to register the
Stock or to assist the Holder in obtaining an exemption from the various
registration requirements, or to list the Stock on a national securities
exchange.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the period from February 13,
1998 (inception) to June 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,118,416
<SECURITIES> 1,063,828
<RECEIVABLES> 6,803
<ALLOWANCES> 0
<INVENTORY> 22,410
<CURRENT-ASSETS> 2,949,775
<PP&E> 4,949
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,959,451
<CURRENT-LIABILITIES> 31,448
<BONDS> 0
0
0
<COMMON> 14,236
<OTHER-SE> 2,913,767
<TOTAL-LIABILITY-AND-EQUITY> 2,959,451
<SALES> 29,621
<TOTAL-REVENUES> 29,621
<CGS> 5,681
<TOTAL-COSTS> 5,681
<OTHER-EXPENSES> 149,510
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (345)
<INCOME-PRETAX> (119,414)
<INCOME-TAX> 20,000
<INCOME-CONTINUING> (99,414)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,414)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
