SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-25831
NetWolves Corporation
(Exact name of registrant as specified in its charter)
New York 11-3430302
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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 registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0033 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. (The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing).
As of September 30, 1999 approximately $127,095,190.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants). Common Stock, par value $.0033 per share; outstanding as of
September 30, 1999 - 6,176,016.
Documents incorporated by reference: Part III - Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Act of 1934.
<PAGE>
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 comprised of multiple computers sharing both
small and large geographic areas 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 to protect the computers of a
private network from access by other users. 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 and petroleum 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
entered into agreements with Anicom, Inc. and Comdisco, Inc., and has acquired
The Sullivan Group ("TSG").
Inc.
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, approximately $1,700,000, 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 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.
<PAGE>
In July 1999, the Company entered into a merger agreement pursuant to which
it acquired the outstanding capital stock of The Sullivan Group in exchange for
180,000 restricted shares of the Company's common stock. The five principal
officers and employees of The Sullivan Group were retained under long-term
employment contracts. To finance the anticipated sales to be generated from the
application of the FoxBox technology to The Sullivan Group's client base, in
July 1999, the Company entered into an agreement with Comdisco, Inc. under which
Comdisco has provided the Company access to up to a $320 million credit
facility. This credit facility is intended to be utilized in connection with
Comdisco installing the FoxBox in up to 40,000 locations over a four year
period. Comdisco also has agreed to provide management, installation and
technology services with respect to the sale of the FoxBox to The Sullivan
Group's clients.
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
and the former NetWolves LLC members owned 61.2% of the outstanding common stock
of NetWolves Corporation. NetWolves LLC was not affiliated with Watchdog prior
to the merger.
Products and Services
The FoxBox is a multi-services internet communications gateway that offers
a combined internet access and firewall security solution. The FoxBox includes
the following products or services which would have to be purchased separately
to achieve the same functionality: an exchange server, a web server, a firewall
which protects the computers of a private network from access by other users, a
router, internet hardware and software setup, and product training. The FoxBox
costs substantially less than purchasing its functionality in separate products,
which costs would exceed $30,000. Further, 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, at a suggested wholesale price of $3,400; FoxBox ISDN, at a price of
$4,400; FoxBox 56K, for $5,500; FoxBox T1, for $7,100; and FoxFox S2E, for
$4,100.
The FoxBox offers the following features:
-- It can securely connect any number of users in a small geographic area
(LAN) simultaneous to the Internet through a single dial-up or
dedicated connection.
-- Up to eight users at one time can connect to the Web/Internet on
non-dedicated connections.
-- Hierarchical caching, which are rules that tell a computer to look for
the data stored on a series of a computer before accessing the
internet for data, gives the FoxBox more efficient web viewing and
greater ability to transfer files from one file to another.
<PAGE>
-- Any number of users can send and receive e-mail individually, while
sharing one internet service provider account.
-- A firewall protects the LAN from Internet-borne attacks.
-- An advanced network address translation module allows the creation of
powerful address translation rules for greater firewall flexibility.
-- Files that store events for review at a later date ensure appropriate
use of internet resources.
-- Scalability allows internet usage to grow as a company expands.
-- A network file server centrally stores programs and data for
accessability to multiple users simultaneously and share data and
programs from a central location.
-- It can be used as a stand-alone firewall to protect the resources of a
private network from users outside on a public network.
-- It allows a company to publish and host a web site.
The FoxBox also offers the following optional features:
-- High speed tape backup/restore module (SCSI) allows all stored data on
the FoxBox to be backed up onto a DAT tape, which is a standardized
tape for file back up.
-- Fast SCSI hard drive provides extra storage for shared files and Web
data at faster access speeds.
-- Extra 9.1 gigabyte SCSI hard drive provides extra storage for shared
files and Web data.
-- E-Mail Archive module allows all inbound and outbound e-mail to be
saved for archival/compliance purposes.
-- Advanced access control module allows control over who can access the
web and the sites to which they have access.
-- Virtual Private Networking (VPN) module provides a process for
encrypting data for secure transmission over public networks.
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), which are conversions
of public addresses to and from private addresses, makes the network
invisible to outside Internet users by hiding the internal network's
addresses of each sender or receiver of information.
<PAGE>
All packets of data entering the FoxBox from the Internet are first checked
for validity against a series of stateful packet filters. The 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 network address translation 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 network
address translation 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), which is the standard for e-mail 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 - a process for retrieving e-mail from its stored location to
the viewer.
-- IMAP - a method of viewing electronic mail at its stored location.
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
<PAGE>
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.
Anicom
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
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. Anicom's only rights to terminate
are in the event of bankruptcy or insolvency proceedings against NetWolves or in
the event the products covered the agreement cease to be manufactured by or on
behalf of NetWolves. In the event of termination by Anicom, Anicom has the
right, but not the obligation, to direct NetWolves to repurchase from Anicom any
portion of any new undamaged and unused products sold within a one year period
and owned by and remaining in Anicom's inventory. For the fiscal year ended June
30, 1999, the Company shipped approximately $1,700,000 of product to Anicom
which accounted for approximately 95% of the Company's revenues for such fiscal
year. The Company does not believe the loss of Anicom would have a material
effect on its operations.
Additionally, 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.
The Sullivan Group
In January 1999, NetWolves entered into an agreement with The Sullivan
Group ("TSG"), a leading consulting organization serving the needs of the
automotive aftermarket, convenience store and oil industry for more than ten
years. Its senior management comprises former high-level executives from the
industry it serves. TSG provides its clients with competitive and comparative
industry intelligence generally categorized as benchmarking studies,
best-in-class performance and emerging industry trends. TSG also employs its
<PAGE>
Profit Coach System , a profit-driven management process used to provide
information to its clients. Through its division, The Duffy-Vinet Institute, it
also maintains an extensive library of training modules.
Under the January 1999 agreement with NetWolves, NetWolves was appointed
the exclusive provider of multi-services internet gateway products, which is
intended to enable TSG 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 also agreed
to customize its FoxBox to serve the needs of TSG. Initial deliveries are
scheduled to commence in the quarter ending December 31, 1999. While deliveries
will be made against specific purchase orders yet to be received, NetWolves has
agreed to deliver to TSG's customers approximately 40,000 units over a five
calendar 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.
In July 1999, the Company entered into a merger agreement pursuant to which
it acquired the outstanding capital stock of TSG in exchange for 180,000
restricted shares of its common stock. The five principal officers and employees
of TSG were retained under three-year employment contracts. The merger provides
for the Company to make working capital advances to its TSG subsidiary of up to
$4,750,000 through November 15, 1999. Through September 30, 1999, $2,600,000 in
advances have been made. Under the agreement, NetWolves has the right to provide
no additional advances, in which event its equity interest in TSG would be
reduced. See Note 4 of Notes to Consolidated Financial Statements.
To finance the anticipated sales to be generated from the application of
the FoxBox technology to TSG's client base, in July 1999, the Company entered
into an agreement with Comdisco under which Comdisco has provided the Company
access to a credit facility of up to $320 million to be utilized in connection
with Comdisco installing the FoxBox in up to 40,000 locations over a four year
period. Under the agreement, the Company intends to lease the FoxBox to its
customers for 48 months at a monthly fee estimated under the agreement at $200 .
Comdisco will then acquire all of the right, title and interest in the equipment
with the exception of intellectual property rights, software upgrades and
software application and content and take an assignment of the lease from the
Company, without recourse. At the time of assignment, Comdisco will pay the
Company 95% of the present value of the rental stream using an interest rate
commensurate with each customer's credit rating and prevailing market rates.
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,
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 September 30, 1999, the Company's research and development
group consists of nineteen 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.
<PAGE>
For the year ended June 30, 1999, the Company expended approximately
$418,000 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 manufacturer currently used by the Company is Boca Research, Inc., a
hardware assembly and engineering firm located in Boca Raton, Florida. In
September 1999, the Company entered into a strategic alliance agreement with
Boca Research. Under the terms of the agreement, Boca Research has agreed to
manufacture the FoxBox on a non-exclusive basis and has provided 250 FoxBox
units for immediate delivery. The two-year agreement also provides (a) for Boca
Research to provide certain engineering services to the Company necessary to
enable Boca Research to manufacture a thin client unit for use by TSG and (b)
the purchase of a minimum of 2,000 thin client units by the Company during the
two year agreement. The agreement further contemplates the parties negotiating
in good faith a joint marketing agreement wherein the Company would license Boca
the right to manufacture equipment comprising the FoxBox technology on an OEM,
private label basis in certain limited sales channels. To date, no marketing
agreement has been executed.
While the Company maintains a relationship with Boca Research which existed
prior to its September 1999 agreement, it believes that alternative
manufacturers are available in the event the Company seeks to change or expand
upon manufacturers of its products.
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.
<PAGE>
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.
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 the
aforesaid agreements with Anicom, Inc. and Comdisco, Inc. and is seeking
additional strategic alliances both domestically and on a worldwide basis,
including the proposed marketing agreement with Boca Research. 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 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.
<PAGE>
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
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, which was recently acquired by IBM,
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 in
<PAGE>
price and overall cost of ownership including administrative and maintenance
costs. However, equally important are other factors, including but not limited
to, product reliability, availability, upgradability, 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 September 30, 1999, the Company employed 38 full-time employees.
Approximately, 19 of these employees are involved in research and development,
13 in sales and marketing, and 6 in finance and general administration. In
addition, the Company has retained independent contractors on a consulting basis
who support engineering and marketing functions. To date, the Company 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.
Officers of the Registrant
Served as
Name Age Officer Since Position
- ---- --- ------------- --------
Walter M Groteke 29 June 1998 Chairman of the Board,
President and
Chief Executive Officer
Daniel G. Stephens 28 June 1998 Vice Chairman of the Board and
Chief Information Officer
Walter R. Groteke 52 August 1998 Vice President - Sales and
Marketing
ITEM 2. 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 and development facilities. The annual rent
is approximately $28,500. The Company also maintains leased facilities in Tampa
under a three year lease expiring in June 2002 for approximately 6,340 square
feet that is used for administrative, sales and marketing purposes. The annual
rent is approximately $163,500. The Company believes that its present 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.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is ai party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
<PAGE>
PART II
ITEM 5. MARKET FOR 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 calendar quarters indicated:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1999
Third Quarter . . . . . . . . . . . . . . $31.25 $16.50
Second Quarter. . . . . . . . . . . . . . 22.25 9.75
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 September 30, 1999, there were approximately 183 holders of record of
the common stock. On September 30, 1999, the closing sales price of NetWolves
common stock was $26.00 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. In this regard, the
Company will be submitting for shareholder approval a proposal giving the Board
of Directors discretion to approve a two-for-one or three-for-one stock split.
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 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
consolidated financial statements included elsewhere in this report and should
be read in conjunction with such financial statements.
<TABLE>
<CAPTION>
Period from
February 13, 1998
(inception) to Year ended
June 30, 1998 June 30, 1999
------------------ -------------
<S> <C> <C>
Statements of Operations Data:
Net sales $ 29,621 $ 1,789,144
Cost of sales 5,681 582,724
---------- -----------
Gross profit 23,940 1,206,420
Operating expenses 149,510 7,698,694
---------- -----------
Loss before other income (expense)
and benefit from income taxes (125,570) (6,492,274)
Interest income (expense), net 2,666 48,154
Other income 3,490 488,793
---------- -----------
Loss before benefit from income taxes (119,414) (5,955,327)
Benefit from income taxes 20,000 -
---------- -----------
Net loss $ (99,414) $(5,955,327)
========== ===========
Basic and diluted net loss per share $ (0.04) $ (1.27)
========== ===========
Weighted average common shares
outstanding 2,810,102 4,691,651
========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------
1998 1999
---- ----
<S> <C> <C>
Financial position:
Cash and cash equivalents $1,118,416 $5 ,585,981
Marketable securities, available
for sale 1,063,828 606,000
Working capital 2,918,327 5,799,246
Total assets 2,959,451 9,636,934
Long-term debt, net of
current maturities 0 266,537
Minority interest 0 274,500
Total shareholders' equity 2,928,003 8,354,802
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The Form 10-K 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 couild cause actual results to differ from the projected
results. All statements other than statements of historical fact made in this
Form 10-K 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, when it 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), non-reporting 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 TSG ("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. In
July 1999, the Company acquired TSG and in July 1999 secured a $320 million
credit facility with Comdisco, Inc. to finance the anticipated sales to be
generated from the application of the FoxBox technology to TSG's client base.
Under the agreement, the Company intends to lease the FoxBox to its customers
for 48 months at a monthly fee estimated under the agreement at $200 . Comdisco
will then acquire all of the right, title and interest in the equipment with the
exception of intellectual property rights, software upgrades and software
application and content and take an assignment of the lease from the Company,
without recourse. At the time of assignment, Comdisco will pay the Company 95%
of the present value of the rental stream using an interest rate commensurate
with each customer's credit rating and prevailing market rates. 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 throughout 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,
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, continue to develop its
distribution network, successfully execute its business and marketing plan, and
expand the operating infrastructure. There can be no assurance that the Company
will be successful in addressing such risks, 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
<PAGE>
of June 30, 1999 had an accumulated deficit of approximately $6 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.
Results of Operations
For the year ended June 30, 1999 compared to the period
from February 13, 1998 (inception) through June 30, 1998
The net sales from operations were $1,789,144 and $29,621 for the periods
June 30, 1999 and June 30, 1998, respectively. Sales in 1999 almost entirely
related to the initial stocking order of 500 FoxBox units sold to Anicom in
March/April 1999. $58,429 of dividend and interest income was generated through
June 30, 1999 as compared to $6,156 for the period ended June 30, 1998. The
increase is primarily attributable to the relatively short time for which the
securities were held in the prior period. Additionally, the Company had a gain
of $478,518 on the sale of marketable securities.
NetWolves had gross profit of 67% for the period ended June 30, 1999. As of
yet, the Company has not had a full year of production in order to have a basis
of comparison. However, the Company believes that gross profit greater than 67%
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 cost, as well as increased competition and general economic conditions
in the future.
Operating expenses were $7,698,694 and $149,510 for the periods June 30,
1999 and June 30, 1998, respectively. The operating expenses for June 30, 1999
consisted primarily of $5,278,255 of general and administrative costs relating
to the establishment of the infrastructure and the continued operations of the
business. $418,109 of costs were incurred relating to research and development,
and $2,002,330 related to selling and marketing. Included in the above mentioned
operating expenses are $4,195,063 of compensation for services in the form of
the Company's common stock and options. Operating expenses for the period June
30, 1998 were limited and provide an inadequate basis for comparability
purposes.
Liquidity and Capital Resources
On June 17, 1998 the Company executed a reverse merger with Watchdog
Patrols, Inc. a publicly traded non-reporting 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. 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. On June 29, 1999 NetWolves
concluded a private offering of 800,000 shares of common stock which generated
$5.4 million (net of $.6 million of expenses) to be used in operations.
<PAGE>
In July 1999 the Company secured a $320 million credit facility with
Comdisco, Inc. to finance the anticipated sales to be generated from the
application of the FoxBox technology to TSG's client base. Under the agreement,
the Company intends to lease the FoxBox to its customers for 48 months at a
monthly fee estimated under the agreement at $200 . Comdisco will then acquire
all of the right, title and interest in the equipment with the exception of
intellectual property rights, software upgrades and software application and
content and take an assignment of the lease from the Company, without recourse.
At the time of assignment, Comdisco will pay the Company 95% of the present
value of the rental stream using an interest rate commensurate with each
customer's credit rating and prevailing market rates.
NetWolves had cash and cash equivalents of $5.6 million and $1.1 million at
June 30, 1999 and June 30, 1998, respectively. In September 1999, the Company
completed a private placement of 100,000 shares of common stock to one
accredited investor for $1.4 million (net of $100,000 of expenses). Management
believes that the Company has adequate capital resources to meet its working
capital need for at least the next twelve months based upon its current
operating level. The Company intends to raise additional monies from the sale of
its capital stock to fund its growth over the next 24 to 36 months. However,
there can be no assurance that the Company will have sufficient capital to
finance its planned growth.
Year 2000 Issues
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decisions, some of these systems could fail to
operate or fail to produce correct results if "00" is interpreted to commonly
referred to as the "Millennium Bug" or "Year 2000 problem.
Assessment. The Year 2000 problem could affect computers, software, and
other equipment which NetWolves Corporation uses, operates, or maintains.
Accordingly, NetWolves Corporation has reviewed its internal computer programs
and systems to ensure that the programs and systems are Year 2000 complaint.
NetWolves Corporation presently believes that its computer systems are Year 2000
complaint. However, while the estimated cost of these efforts is not expected to
be material to its overall financial position, or any year's results of
operations, there can be no assurance to this effect.
Products Sold to Consumers. NetWolves Corporation believes that it has
substantially identified and resolved all potential Year 2000 problems with the
software products it develops and markets. However, it also believes that is not
possible to determine with complete certainty that all Year 2000 problems
affecting its products have been identified or corrected due to the complexity
of these products and the fact that these products interact with other third
party vendor products and operate with other systems which are not under its
control.
NetWolves Corporation recognizes the significance of the Year 2000 issue as
it relates to internal systems, including IT and non-IT systems. To that extent
NetWolves Corporation has achieved the following:
Internal Information Technology Infrastructure. NetWolves Corporation
believes that it has identified, modified upgraded, or replaced substantially
all of the major computers, software applications, and related equipment used in
connection with its internal operations in order to minimize the possibility of
a material disruption to its business. While most of the upgrades were planned
as part of a general enhancement to its infrastructure, the timing of the
upgrades also result in Year 2000 compliance.
<PAGE>
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 problem. NetWolves
Corporation has assessed and remediated the effect of the Year 2000 problem on
its office and facilities equipment under its control, and the total costs
associated with completing the required modifications, upgrades, or replacements
of these internal systems were not material.
Suppliers. NetWolves Corporation has initiated communications, including
surveys, with business critical third party suppliers of the major computers,
software, and other equipment which it uses, operates, or maintains to identify
and, to the extent possible, to resolve issues involving the Year 2000 problem.
NetWolves Corporation has received vendor certification that all of its business
critical information technology systems, including internal communications
systems, accounting and finance systems, customer service systems, and sales and
marketing tracking systems, are Year 2000 compliant. Accordingly, NetWolves
Corporation does not anticipate any significant Year 2000 problems with these
systems; however, it cannot ensure that these suppliers will resolve any or all
of their Year 2000 problems with these systems before the occurrence of a
material disruption to its business or that of its customers. NetWolves
Corporation believes that its primary exposure is presently with respect to
public utilities and telecommunications suppliers. Any failure of these third
parties to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse affect on NetWolves Corporation business,
financial condition, and results of operation.
Additionally, NetWolves Corporation has initiated communications, including
surveys, with all other vendors or businesses that supply any service to
NetWolves Corporation. While it has limited or no control over responses to its
inquiries and the actions of these third party suppliers, NetWolves Corporation
does not view this category of services to be business critical and in the event
of a Year 2000 problem with a particular vendor, believes that those goods or
services could easily be obtained from other sources.
Banking Relationships. NetWolves Corporation has confined its banking
relationships to top tier financial institutions who have represented that their
respective systems are Year 2000 complaint. Any failure of these banks to
resolve Year 2000 problems with their systems in a timely manner would result in
financial inconvenience and, depending upon the duration of the failure, could
have a material adverse affect on NetWolves Corporation financial condition and
results of operation.
Most Likely Consequences of Year 2000 Problems. NetWolves Corporation
believes that it has identified all Year 2000 problems that could materially
adversely affect its business operations. However, it does not believe that it
is possible to determine with complete certainty that all Year 2000 problems
which effect it have been identified or corrected.
<PAGE>
The number of devices that could be affected and the interactions among
these devices are simply too numerous. In addition, one cannot accurately
predict how many Year 2000 problem- related failures will occur or the severity,
duration, or financial consequences of these perhaps inevitable failures. In
addition, NetWolves Corporation is unable to determine with any degree of
certainty the changes in buying habits of its current and potential customers
due to their concerns over Year 2000 issues. As a result, NetWolves Corporation
expects that it could likely experience a significant number of operational
inconveniences and inefficiencies that may divert management's time and
attention and its financial and human resources from its ordinary business
activities. In addition, NetWolves Corporation may experience a lesser number of
serious system failures that may require significant efforts by it or its
customers to prevent or alleviate material business disruptions.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and its subsidiaries and the report
thereon of Hays and Co. are included herein:
-- Report of Independent Public Accountants
-- Consolidated Balance Sheets at June 30, 1999 and 1998
-- Consolidated Statements of Operations, Cash Flows and Shareholders'
Equity for the year ended June 30, 1999 and the period from February
13, 1998 (inception) to June 30, 1998
-- Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
Walter R. Groteke 52 Vice President - Sales and Marketing
and Director
Ed Lavin 55 Director
Louis Liben 40 Director
Principal Occupations of Officers and Directors
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.
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.
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
<PAGE>
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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
regard to the Chairman/Chief Executive Officer and each of the other executive
officers of the Company who received more than $100,000 for services rendered
during the first year of the Company's operations as NetWolves, which was the
fiscal year ended June 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Fiscal Other Annual
Principal Position Year Salary (1) Bonus Compensation (2)
<S> <C> <C> <C> <C>
Walter M. Groteke 1999 $101,250 - -
Chairman and Chief 1998 - - -
Executive Officer
Daniel G. Stephens 1999 101,250 - -
Vice Chairman and 1998 - - -
Chief Information
Officer
Kevin Sherlock 1999 100,000 - -
Chief Operating Officer 1998 - - -
_______________
(1) Represents compensation received under employment agreements. Mr.
Sherlock ceased being an officer or director of the Company effective
August 1, 1999.
(2) Other Annual Compensation excludes certain perquisites and other non-cash
benefits provided by the Company since such amounts do not exceed the
lesser of $50,000 or 10% of the total annual base salary disclosed in the
table for the respective officer.
</TABLE>
<PAGE>
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 were employed as Chief Executive Officer,
Chief Information Officer and Chief Operating Officer, respectively, for a term
of three years. While Mr. Sherlock ceased being an officer and director of the
Company effective August 1, 1999, he continues to be employed under the terms of
his employment agreement, as amended. The current base salary for each person is
$130,000.
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 they
are entitled to receive warrants to purchase 200,000, 200,000 and 150,000
shares, respectively, of the Company's common stock at $1.63 per share under
certain terms and conditions. The warrants are fully vested two 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.
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
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. As of August 31, 1999, the Company had granted options to purchase
243,500 shares of common stock under the 1998 Incentive Plan to its officers and
key employees.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of voting
stock of the Company, as of September 30, 1999, of (i) each person known by the
Company to beneficially own 5% or more of the shares of outstanding common
stock, based solely on filings with the Securities and Exchange Commission, (ii)
each of the Company's executive officers and directors and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares are beneficially owned, and investment and voting power is
held by, the persons named as owners.
Amount and Nature
Name and Address of of Shares Percentage
Benefical Owner Beneficially Owned Ownership
- --------------------- ------------------- ----------
Greenleaf Capital Partners, LLC 861,360 13.9%
Walter M. Groteke 528,064 (1)(2) 8.6%
Daniel G. Stephens 528,064 (1)(2) 8.6%
Kevin F. Sherlock 528,064 (2)(3) 8.6%
Walter R. Groteke 150,000 (1) 2.4%
Internet Technologies, Inc. 320,000 5.2%
Ed Lavin 50,000 *
Louis Liben 66,000 1.1%
Kirlin Securities, Inc. 500,000 (4) 8.1%
Executive officers and
directors as a group 1,322,128 21.4%
* 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.
(2) Messrs. Walter M. Groteke, Daniel G. Stephens and Kevin F. Sherlock have
agreed that the shares owned by them may not be sold until June 17, 2000
without the prior written consent of Kirlin Securities.
(3) Does not include unvested warrants to purchase 150,000 shares at an option
price of $1.63 per share. Does not include unvested, performance based
warrants to purchase 50,000 shares each at an option price of $5.00 per
share.
(4) 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.
ITEM 13. 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. The total capital contribution to NetWolves LLC by its members
was $64,245. As part of such exchange, principals of NetWolves, LLC received
2,640,322 shares of NetWolves Corporation for a per share cost of approximately
$.02. 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. Messrs. Groteke, Stephens, Sherlock, Darling and Jacques also
each received 200,000 warrants in connection with the merger, exercisable at a
price of $1.63 per share. Howard Habberstadt and Joseph Ariola acted as finders
for the merger transaction for which they received 75,000 warrants and 12,500
warrants, respectively, exercisable at a price of $2.00 per share. The exercise
price was based upon the public trading price of Watchdog Patrols Inc's common
stock at the time of the acquisition.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements at beginning of attached financial
statements.
(b) Reports on Form 8-K
Report on Form 8-K dated July 7, 1999, as amended.
(c) 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 Employment Agreement between NetWolves Corporation and Daniel G.
Stephens, Jr. dated June 17, 1998.*
10.5 Employment Agreement between NetWolves Corporation and Walter M.
Groteke dated June 17, 1998.*
10.6 Employment Agreement between NetWolves Corporation and Kevin F.
Sherlock dated June 17, 1998.*
10.7 Warrant Agreement between NetWolves Corporation and Walter M.
Groteke dated June 17, 1998.*
10.8 Warrant Agreement between NetWolves Corporation and Daniel G.
Stephens, Jr. dated June 17, 1998.*
10.9 Warrant Agreement between NetWolves Corporation and Kevin F.
Sherlock dated June 17, 1998.*
10.10 Stock Option Plan.*
10.11 Form of Indemnification Agreement*
10.12 Settlement Agreement and Mutual Release with Keith Darling.*
10.13 Settlement Agreement and Mutual Release with Mark Jacques.*
10.14 Agreement and Plan of Merger dated as of July 7, 1999 among
NetWolves Corporation, TSG Global Education Web, Inc. and Sales and
Management Consulting, Inc., d/b/a The Sullivan Group and Duffy-
Vinet Institute. **
10.15 Master Program Agreement dated July 26, 1999 between NetWolves
Corporation and Comdisco, Inc.
10.16 First Amendment to Employment Agreement of Kevin F. Sherlock dated
September 2, 1999.
10.17 Strategic Alliance Agreement dated as of September 10, 1999 between
Boca Research, Inc. and NetWolves Technologies, Inc.
27 Financial Data Schedule*
- ------
* Previously filed as exhibits to Report on Form 10, as amended.
** Previously filed as an exhibit to Report on Form 8-K dated July 7, 1999,
as amended.
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 19th day of
November 1999.
NetWolves Corporation
By: /s/ Walter M. Groteke
Walter M. Groteke
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on November 19, 1999 by the following persons in
the capacities indicated:
/s/ Walter M. Groteke Chairman of the Board and President
Walter M. Groteke Chief Executive Officer
/s/ Daniel G. Stephens Vice Chairman of the Board and
Daniel G. Stephens Chief Information Officer
/s/ Walter R. Groteke Vice President - Sales and Marketing
Walter R. Groteke and Director
/s/ Peter C. Castle Secretary and Treasurer
Peter C. Castle Principal Financial Officer and
Principal Accounting Officer
________________________ Director
Ed Lavin
/s/ Louis Liben Director
Louis Liben
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
CONTENTS
INDEPENDENT AUDITOR'S REPORT..................................... F-1
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998......................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30, 1999 and the period from
February 13, 1998 (inception) to June 30, 1998................ F-3
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the period from February 13, 1998 (inception)
to June 30, 1998 and the year ended June 30, 1999............. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30, 1999 and the period from
February 13, 1998 (inception) to June 30, 1998................ F-5 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................... F-7 F-26
<PAGE>
Board of Directors and Shareholders
NetWolves Corporation
Melville, New York
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of NetWolves
Corporation and subsidiaries (the "Company") as of June 30, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended June 30, 1999 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NetWolves
Corporation and subsidiaries as of June 30, 1999 and 1998, and the consolidated
results of its operations and cash flows for the year ended June 30, 1999 and
the period from February 13, 1998 (inception) to June 30, 1998 in conformity
with generally accepted accounting principles.
/s/ Hays & Company
August 12, 1999, except for Notes 14, 4 and 16, which
are dated September 2, September 21 and
September 29, 1999, respectively.
New York, New York
F-1
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,585,981 $ 1,118,416
Marketable securities, available for sale 606,000 1,063,828
Accounts receivable, net of allowance for doubtful
accounts of $40,000 and $5,000 at June 30, 1999 and
1998, respectively 76,907 6,803
Net assets held for sale (Note 5) - 720,000
Inventories 118,354 22,410
Prepaid expenses and other current assets 153,099 18,318
----------- -----------
Total current assets 6,540,341 2,949,775
Property and equipment, net 224,691 4,949
Intangible assets 2,849,121 -
Other assets 22,781 4,727
----------- -----------
$ 9,636,934 $ 2,959,451
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 453,336 $ 31,448
Deferred compensation 100,000 -
Loans and advances from TSG officer 144,348 -
Current maturities of long-term debt 43,411 -
----------- -----------
Total current liabilities 741,095 31,448
Long-term debt, net of current maturities 266,537 -
----------- -----------
Total liabilities 1,007,632 31,448
----------- -----------
Minority interest 274,500 -
Commitments and contingencies (Notes 5, 8, 9, 10, 12,
13, 14 and 16)
Shareholders' equity
Common stock, $.0033 par value; 10,000,000 shares authorized;
issued and outstanding: 6,063,870 June 30, 1999
and 4,313,870 June 30, 1998 20,011 14,236
Additional paid-in capital 14,013,687 3,012,159
Accumulated deficit (6,054,741) (99,414)
Accumulated other comprehensive income 375,845 1,022
----------- -----------
Total shareholders' equity 8,354,802 2,928,003
----------- -----------
$ 9,636,934 $ 2,959,451
=========== ===========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
</FN>
</TABLE>
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
February 13,
1998
Year ended (inception) to
June 30, 1999 June 30, 1998
------------- --------------
<S> <C> <C>
Sales $ 1,789,144 $ 29,621
Cost of sales 582,724 5,681
----------- -----------
Gross profit 1,206,420 23,940
----------- -----------
Operating expenses
General and administrative 5,278,255 105,047
Research and development 418,109 -
Sales and marketing 2,002,330 44,463
----------- -----------
7,698,694 149,510
----------- -----------
Loss before other income (expense)
and benefit from income taxes (6,492,274) (125,570)
Other income (expense)
Interest income 48,609 3,011
Gain on sale of marketable securities 478,518 -
Dividend income 10,275 3,490
Interest expense (455) (345)
----------- -----------
Loss before benefit from income taxes (5,955,327) (119,414)
Benefit from income taxes - 20,000
----------- -----------
Net loss $(5,955,327) $ (99,414)
----------- -----------
Basic and diluted net loss per share $ (1.27) $ (0.04)
----------- -----------
Weighted average common
shares outstanding 4,691,651 2,810,102
=========== ===========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
AND FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common Stock paid-in Accumulated comprehensive shareholders' Comprehensive
Shares Amount capital deficit income equity income (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 3)
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
Common stock and warrants
issued for services 770,000 2,541 4,192,522 - - 4,195,063
Proceeds from sale of warrants - - 300,000 - - 300,000
Common stock issued in private
placement, net of expenses 800,000 2,640 5,350,085 - - 5,352,725
Adjustment to fair value of
Reverse Acquisition - - (190,485) - - (190,485)
Common stock issued in
purchase business
combination (Note 4) 180,000 594 1,349,406 - - 1,350,000
Marketable securities
valuation adjustment - - - - 374,823 374,823 $ 374,823
Net loss, year ended
June 30, 1999 - - - (5,955,327) - (5,955,327) (5,955,327)
--------- -------- ---------- ----------- --------- --------- -----------
Total comprehensive loss (5,580,504)
===========
Balance, June 30, 1999 6,063,870 $ 20,011 $14,013,687 $(6,054,741) $ 375,845 $8,354,802
========= ======== =========== =========== ========= ==========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 13,
1998
Year ended (inception) to
June 30, 1999 June 30, 1998
------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C>
Cash flows from operating activities
Net loss $(5,955,327) $ (99,414)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 15,896 401
Realized gain on sale of marketable securities (478,518) -
Provision for doubtful accounts 35,000 5,000
Common stock and warrants issued for services 4,195,063 -
Deferred income tax benefit - (20,000)
Changes in operating assets and liabilities
Accounts receivable (34,883) (11,803)
Inventories (95,944) (22,410)
Prepaid expenses and other current assets (134,781) (18,318)
Accounts payable and accrued expenses 187,863 31,448
----------- ------------
Net cash used in operating activities (2,265,631) (135,096)
----------- ------------
Cash flows from investing activities
Proceeds from the sale of marketable securities 1,311,169 -
Proceeds from assets held for sale, net 549,515 -
Purchases of property and equipment (200,383) (5,350)
Advances to subsidiary, net of cash acquired of
$412,224, plus acquisition costs paid of $25,000 (561,776) -
Payments of security deposits (18,054) (4,727)
----------- ------------
Net cash provided by (used in) investing activities 1,080,471 (10,077)
----------- ------------
Cash flows from financing activities
Proceeds from initial capital contribution - 64,245
Cash acquired in Reverse Acquisition - 1,460,366
Transaction costs paid in connection
with Reverse Acquisition - (261,022)
Cash proceeds from issuance of common stock, net of
financing costs paid of $647,275 5,352,725 -
Cash proceeds from sale of warrants 300,000 -
----------- ------------
Net cash provided by financing activities 5,652,725 1,263,589
----------- ------------
Net increase in cash and cash equivalents 4,467,565 1,118,416
Cash and cash equivalents, beginning of period 1,118,416 -
----------- -------------
Cash and cash equivalents, end of period $ 5,585,981 $ 1,118,416
=========== ============
<FN>
The Accompanying notes are an integral part of
these consolidated financial statements.
</FN>
F-5
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
February 13,
1998
Year ended (inception) to
June 30, 1999 June 30, 1998
------------- --------------
(continued)
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Reverse Acquisition (Note 3)
Marketable securities acquired $ - $ 1,062,806
Net assets held for sale (190,485) 720,000
Deferred income tax liability - (20,000)
Cash acquired, net of $261,022 of transaction costs paid - 1,199,344
----------- ------------
Outstanding common stock of
Watchdog Patrols, Inc. $ (190,485) $ 2,962,150
----------- ------------
Purchase acquisition (Note 4)
Accounts receivable $ 70,221 $ -
Property and equipment 35,255 -
Intangible assets 2,849,121 -
Accrued expenses and other liabilities (400,498) -
Long-term debt (309,948) -
Acquisition costs (82,875) -
Advances to subsidiary, net of cash acquired
of $412,224 (536,776) -
Minority interest (274,500) -
----------- ------------
Common stock issued in purchase acquisition $ 1,350,000 $ -
=========== ============
<FN>
The Accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
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 5), Watchdog
changed its name to NetWolves Corporation ("NetWolves" or the "Company").
NetWolves is an Internet systems developer 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 and shipped its first significant order
in March 1999. Accordingly, it is no longer reporting as a development
stage company.
Additionally, in conjunction with the acquisition of Sales and Management
Consulting, Inc. (d/b/a The Sullivan Group, see Note 4), the Company
provides consulting, educational and training services primarily to the oil
and gas and automotive industries throughout the United States.
2 Significant accounting policies
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.
Risks and other factors
As a company that has developed a software product for use as a
multi-functional Internet communications device, NetWolves faces certain
risks. These include, among other items, the ability to continue to
implement its business plan, dependence on proprietary technology, rapid
technological change, challenges in recruiting personal and a highly
competitive market place.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. The separate ownership of
one of the Company's subsidiaries is reflected in the Company's
consolidated financial statements as minority interest (Note 4). The
minority interest includes common stock representing 1.7% of the
outstanding shares of the subsidiary plus preferred stock.
The subsidiary has issued 250,000 shares of non-voting Series A Cumulative
Convertible Preferred Stock with a $1 par value. The preferred stockholder
is entitled to preferential liquidation rights and is also entitled to
cumulative dividends to be included in minority interest expense that
accrue at the rate of 8% per annum commencing on June 30, 1999. On or after
January 1, 2000, the preferred stockholder may elect to convert the
preferred stock into NetWolves common stock (at fair market value at the
F-7
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
2 Significant accounting policies (continued)
Principles of consolidation (continued)
time of conversion). However, within 15 days of receiving the conversion
notice, NetWolves may elect to make a cash redemption of the preferred
stock at par value (including any unpaid cumulative dividends) and thereby
terminate the conversion right.
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.
The Company will recognize revenue from consulting and training fees when
the services are provided.
Marketable securities
Marketable securities, which are all classified as "available for sale",
are valued at fair 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.
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. Costs assigned to property and
equipment of the acquired business (Note 4) were based on estimated fair
value at acquisition. Depreciation is provided on furniture and fixtures
and machinery and equipment over their estimated lives, ranging from 5 to 7
years, using the straight-line method. Leasehold improvements are amortized
over the lesser of the term of the respective lease or the 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.
F-8
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
2 Significant accounting policies (continued)
Intangible assets
Intangible assets at June 30, 1999 consist of intangible assets acquired in
connection with the Company's purchase business combination effective June
30, 1999 (Note 4). These assets include a training library, industry
benchmarking data and the Profit Coach profitability analysis module with a
fair value of $400,000, $100,000 and $500,000, respectively. The remaining
portion of the intangible asset is allocated to goodwill, which will be
amortized over an estimated useful life of 10 years.
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, intangible assets 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, 1999, there has been no impairment in
the carrying value of long-lived assets.
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 file a
consolidated Federal income tax return.
F-9
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
2 Significant accounting policies (continued)
Stock options
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") establishes a fair value-based
method of accounting for stock compensation plans. The Company has chosen
to adopt the disclosure requirements of SFAS 123 and continue to record
stock compensation for its employees in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, charges are made to operations in accounting for
stock options granted to employees when the option exercise prices are
below the fair market value of the common stock at the measurement date.
Options granted to non-employees are recorded in accordance with SFAS 123.
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, 1999, the Company's cash investments are
held at primarily one financial institution. In addition, the Company's
marketable securities consist primarily of an investment in warrants to
purchase restricted common stock of an unrelated company (Note 6). Unless
otherwise disclosed, the fair value of financial instruments approximates
their recorded values.
F-10
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
3 Reverse acquisition
On June 17, 1998, Watchdog acquired all of the outstanding common stock of
NetWolves, LLC (the "Reverse Acquisition"). 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 5), 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 Reverse Acquisition, the NetWolves, LLC membership interests
were converted into 2,640,322 shares of Watchdog common stock and warrants
to purchase an aggregate of 620,000 shares of Watchdog common stock at an
exercise price of $1.63 per share. Immediately prior to the Reverse
Acquisition, there were 1,673,548 shares of Watchdog common stock issued
and outstanding. In addition, certain pre-Reverse Acquisition 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 Reverse
Acquisition, 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 10.
In connection with the Reverse Acquisition, in the fourth quarter of fiscal
1999, the Company reduced the fair value of Watchdog's net tangible assets
(the assets held for sale) and, accordingly, recorded an adjustment to
additional paid-in capital of $190,485.
4 Purchase acquisition
On July 7, 1999, NetWolves and Sales and Management Consulting, Inc. (d/b/a
The Sullivan Group) ("SMCI") executed a merger agreement (the "Merger")
pursuant to which NetWolves acquired the outstanding capital stock of SMCI.
Under the terms of the Merger, TSG Global Education Web, Inc. ("TSG") (a
subsidiary of NetWolves), with 4,150,000 shares of common stock
outstanding, purchased all of the outstanding shares of SMCI's common stock
in exchange for 180,000 shares of NetWolves' restricted common stock. The
shareholders are restricted from selling, transferring or pledging such
shares for an eighteen-month period. Upon consummation of the Merger SMCI
merged into TSG and TSG was the surviving entity.
Concurrent with the Merger, the shareholders of SMCI purchased 70,000
shares of TSG common stock at $.35 per share for aggregate cash proceeds of
$24,500. This represents 1.7% of the outstanding common stock of TSG.
Additionally, TSG issued 250,000 shares of TSG Series A Cumulative (8%)
Convertible Preferred Stock to one of the SMCI shareholders, which was
issued in partial settlement of outstanding liabilities owed to the
shareholder. This TSG common and preferred stock has been reflected as
minority interest in the accompanying consolidated financial statements.
F-11
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
4 Purchase acquisition (continued)
The purchase price approximated $1,350,000 (exclusive of acquisition costs
of $82,875), which consisted of 180,000 shares of NetWolves restricted
common stock valued at $7.50 per share (fair value of the common stock was
based upon the gross sales price received by NetWolves in a private
placement that was completed on June 29, 1999, Note 10). The acquisition
has been accounted for with an effective date of June 30, 1999 using the
purchase method of accounting. Accordingly, assets and liabilities were
recorded at their fair values as of June 30, 1999, and operations of SMCI
will be included in the Company's consolidated statements of operations
commencing July 1, 1999.
An allocation of the fair value of the assets acquired and liabilities
assumed is as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price
NetWolves common stock issued $ 1,350,000
Acquisition costs 82,875
-----------
$ 1,432,875
===========
Allocation of purchase price
Fair value of tangible assets and liabilities
Current assets $ 70,221
Non-current assets 35,255
Current liabilities (443,909)
Non-current liabilities (266,537)
Advances to TSG, net of cash acquired
of $412,224 (536,776)
-----------
(1,141,746)
-----------
Minority interest
Common stock (24,500)
Preferred stock (250,000)
-----------
(274,500)
-----------
Intangible assets acquired 2,849,121
-----------
$ 1,432,875
===========
</TABLE>
At the time of the Merger and in accordance with TSG's newly formed stock
option plan, the SMCI shareholders (who are all employees of TSG) received
605,000 five-year options to purchase TSG common stock at an exercise price
of $.35 per share. Management has determined that the exercise price
approximates the estimated fair value of the TSG common stock and
accordingly, the options have an intrinsic value of zero. Additionally, the
SMCI shareholders are entitled to an additional 175,000 options to purchase
TSG common stock (with an exercise price at fair value at the time of
grant), subject to TSG meeting specific earnings targets over the three
years ending June 30, 2000, 2001 and 2002. These options will be accounted
for as compensation expense in accordance with APB25 in such future
periods. All of the shareholders of SMCI entered into 5-year employment
agreements with TSG (Note 14).
F-12
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
4 Purchase acquisition (continued)
The Merger also provides for NetWolves to make up to $4,750,000 of
non-interest bearing open account working capital advances to TSG pursuant
to an agreed upon schedule through November 15, 1999. Through June 30,
1999, $949,000 has been advanced and an additional $1,651,000 has been
advanced from July 1, 1999 through September 21, 1999. Should NetWolves
decide not to make further working capital advances, the number of TSG
shares owned by NetWolves will be reduced in accordance with the agreement.
Based upon the $2,600,000 advanced through September 21, 1999 (should
NetWolves decide not to make any further advances), NetWolves could be
required to return 987,500 TSG shares to the treasury of TSG. This would
reduce NetWolves' current ownership interest from 4,150,000 shares to
3,162,500 (from 98.3% to 97.8%). Subject to NetWolves first refusal rights,
TSG has the right to sell any shares, ultimately returned by NetWolves, to
third parties at fair value, which could further reduce NetWolves'
ownership interest.
In accordance with the Merger, the Board of Directors of TSG consists of
three members designated by NetWolves and two members designated by the
SMCI shareholders. A four-fifths majority of the TSG Board is required for
specified significant actions including: sale or merger of the business,
changes to the TSG capital structure, declaration of dividends and
repayment of the working capital advances made by NetWolves. A simple
majority of the TSG Board is required for all general operating matters.
Included in the consolidated entity's cash and cash equivalents balance at
June 30, 1999 is $412,224 of cash held by TSG to be used for working
capital purposes.
Prior to the Merger negotiations, in January 1999, the Company entered into
an agreement with SMCI whereby SMCI appointed the Company as its sole
provider of a multi-service Internet delivery system (known as "FoxBox") to
be used in conjunction with SMCI's proprietary interactive distance
learning training programs.
The following unaudited pro forma financial information has been prepared
assuming that the acquisition of SMCI had taken place at the beginning of
the respective periods presented. The pro forma information is not
necessarily indicative of the combined results that would have occurred had
the acquisition taken place at the beginning of the period, nor is it
necessarily indicative of the results that may occur in the future.
<TABLE>
<CAPTION>
Period from
February 13,
Year ended 1998 to June 30,
June 30, 1999 1998
------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue $ 2,904,000 $ 644,000
Net loss $(6,940,000) $ (328,000)
Basic and diluted net loss per share $ (1.48) $ (.12)
</TABLE>
F-13
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
5 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 settling most other
working capital assets/liabilities, including accounts receivable, other
current assets, accounts payable and accrued expenses (the "Retained Assets
and Liabilities"). The Retained Assets and Liabilities were all directly
related to the uniformed security guard business and were not used or
settled by the Company in the normal course of business. Accordingly, the
resultant net proceeds have been included in the net assets held for sale.
In connection with the settlement of the Retained Assets and Liabilities,
the Company reduced the estimated fair value of such items by $190,485 in
the fourth quarter of 1999.
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 Retained Assets and Liabilities,
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>
June 30,
-------------------------
1999 1998
----------- -------------
<S> <C> <C>
Sale of Assets $ - $ 600,000
Retained Assets and Liabilities
Accounts receivable - 500,000
Other current assets - 140,000
Accounts payable and accrued expenses - (460,000)
Cash out-flows from operations during holding period - (60,000)
----------- -------------
Net assets held for sale $ - $ 720,000
=========== =============
</TABLE>
F-14
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
6 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, 1999
Equity securities $ 35,000 $ 415,000 $ 450,000
Bonds 195,155 (39,155) 156,000
----------- ------------ ------------
$ 230,155 $ 375,845 $ 606,000
=========== ============ ============
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
=========== ============ ============
</TABLE>
At June 30, 1999, the Company's equity securities consist solely of an
investment in warrants to purchase restricted common stock of an unrelated
publicly traded company. As of August 12, 1999, the estimated fair value of
the warrants decreased by approximately 33% from the June 30, 1999
estimated fair value.
Proceeds from sales of marketable securities and realized gains on such
sales aggregated $1,311,169 and $478,518, respectively, for the year ended
June 30, 1999.
The maturities of the Company's debt securities at June 30, 1999 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 97,375 66,500
Due after six years through ten years 97,780 89,500
--------- ---------
$ 195,155 $ 156,000
========= =========
</TABLE>
F-15
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
7 Property and equipment, net
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
-------------------
1999 1998
--------- -------
<S> <C> <C>
Machinery and equipment $ 121,462 $ 3,350
Furniture and fixtures 92,685 2,000
Leasehold improvements 26,841 -
--------- -------
240,988 5,350
Less accumulated depreciation and amortization (16,297) (401)
--------- -------
Property and equipment, net $ 224,691 $ 4,949
========= =======
</TABLE>
8 Accounts payable and accrued expenses
Accounts payable and accrued expenses
consist of the following:
<TABLE>
<CAPTION>
June 30,
-------------------
1999 1998
--------- -------
<S> <C> <C>
Trade accounts payable $ 286,868 $ 11,448
Compensated absences 50,354 -
Other accrued expenses 68,909 20,000
Commissions payable 36,204 -
Payroll taxes payable 11,001 -
--------- --------
$ 453,336 $ 31,448
========= ========
</TABLE>
9 Long-term debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------
1999 1998
--------- -------
<S> <C> <C>
Notes payable to DVI $ 309,948 $ -
Less current maturities of long-term debt (43,411) -
-------- -------
Long-term debt, net of current maturities $ 266,537 $ -
========= =======
</TABLE>
F-16
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
9 Long-term debt (continued)
The notes payable (the "DVI Notes") to the Duffy-Vinet Institute, Inc.
("DVI") were assumed by the Company in connection with the Merger (Note 4).
The DVI Notes are secured by all of the assets SMCI had acquired from DVI
in 1992. These assets consist of furniture, fixtures and equipment (with a
net book value of $12,000) and a portion of the intangible assets acquired
from SMCI including a library of master tapes and completed training
programs.
At the time of the Merger, the fair value of the liability (totaling
$309,948) was determined by calculating the present value of the future
payments to be made using an implied interest rate of 11%. At June 30,
1999, the DVI Notes required 66 monthly payments of $6,280, including
interest.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
2000 $ 43,411
2001 48,434
2002 54,039
2003 60,293
2004 67,270
Thereafter 36,501
---------
$ 309,948
=========
</TABLE>
10 Shareholders' equity
Common stock issuances
For the year ended June 30, 1999, the Company issued 1,750,000 shares of
its common stock as follows:
. 150,000 unregistered 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. Management determined the fair value of the common stock
based on its quoted market price on the day of issuance less a
discount of 25% due to the restricted nature of the stock.
. 260,000 unregistered shares were issued to Internet Technologies,
Inc., a consultant to the Company ("Internet Technologies"), for
services rendered during the nine months ended March 31, 1999, which
resulted in a charge to operations of approximately $999,000.
Management determined the fair value of the common stock based on its
quoted market price on the day of issuance less a discount of 25% due
to the restricted nature of the stock. Internet Technologies has
demand registration rights on 200,000 of these shares.
F-17
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
10 Shareholders' equity (continued)
Common stock issuances (continued)
. 100,000 unregistered shares were issued to a financial consultant and
100,000 unregistered shares were issued to the Company's legal counsel
for services rendered during the three months ending March 31, 1999,
which resulted in an aggregate charge to operations of approximately
$768,000. Management determined the fair value of the common stock
based on its quoted market price on the day of issuance less a
discount of 25% due to the restricted nature of the stock.
. 100,000 unregistered shares were issued in conjunction with the
appointment of two new Directors of the Company effective February 1,
1999 (50,000 shares each), which resulted in a charge to operations of
approximately $384,000. Management determined the fair value of the
common stock based on its quoted market price on the day of issuance
less a discount of 25% due to the restricted nature of the stock.
. On June 29, 1999, the Company completed a private placement. The
Company sold 800,000 shares of unregistered common stock at $7.50 per
share (a total of $6,000,000) exclusive of commission and other fees
totalling $647,275. The placement agent received 80,000 warrants,
exercisable at $9.375 each; the warrants vest one year after the
closing of the private placement and expire four years after vesting.
Additionally, 60,000 shares were issued to Internet Technologies for
services rendered in connection with the private placement. Internet
Technologies also has the right to receive up to 60,000 additional
shares based upon the completion of a second private placement, if
any.
. 180,000 unregistered shares were issued in connection with the Merger
(Note 4) on June 30, 1999 valued at $7.50 per share, totaling
$1,350,000.
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.
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.
F-18
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
10 Shareholders' equity (continued)
Stock option plan (continued)
During the third and fourth quarters of the year ended June 30, 1999, the
Company granted options to purchase 219,000 shares of common stock under
the 1998 Incentive Plan to key employees at exercise prices ranging from
$5.00 to $16.25 per share that vest in equal installments over three to
five years commencing on the first anniversary of the date of grant. The
exercise prices represent the closing quoted price of the common stock on
the day immediately prior to the grants. All options expire in ten years
from the grant date.
Warrants
On June 17, 1998, in conjunction with the Reverse Acquisition, the Company
granted warrants to purchase 1,207,500 shares of its common stock as
follows:
. 620,000 ten-year warrants issued to the former members of NetWolves
LLC at an exercise price of $1.63 per share. Originally, an aggregate
of 1,000,000 warrants were granted to six individuals; upon
termination of two of these individuals in January 1999, 380,000
warrants were cancelled resulting in 620,000 outstanding warrants. The
warrants were originally issued as performance-based warrants, vesting
only upon achieving specified financial targets. In January 1999, the
vesting terms of 600,000 of the warrants were amended so that the
warrants would automatically vest in June 2000. Accordingly, the
modification changed the warrant to a fixed-warrant and a new
measurement date was established. The intrinsic value of the modified
warrants approximated $1,908,000, which will be charged to operations
over the 18-month vesting period (also see Note 14).
. 500,000 five-year warrants issued to certain pre-Reverse Acquisition
shareholders of Watchdog at an exercise price of $1.63 per share.
These warrants became exercisable when granted. The pre-Reverse
Acquisition 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 Reverse Acquisition at an
exercise price of $2.00 per share. These warrants became exercisable
when granted.
For the year ended June 30, 1999, the Company granted warrants to purchase
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 if specified financial targets are achieved.
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, based upon the intrinsic value of the warrants
on the date of grant.
F-19
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
10 Shareholders' equity (continued)
Warrants (continued)
. 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 14). The warrants vest only upon the independent contractors'
submission of valid, legally binding purchase orders totaling
$10,000,000 for the period from January 1, 1999 to December 31, 1999.
The potential charge to operations upon achieving specified
performance criteria is approximately $115,000. The value of the
warrants has been calculated using the Black-Scholes option-pricing
model with the following assumptions: no dividend yield, expected
volatility of 65%, risk-free interest rate of 4.62%, and an expected
term of two years.
. 25,000 five year warrants were granted to a consultant in March 1999
for services rendered, which resulted in a charge to operations of
$131,000, based on the fair value of the warrant at the time of grant.
. 300,000 warrants were issued to Anicom, Inc. for cash consideration of
$300,000 (see Note 13).
. 80,000 warrants were issued to the placement agent in connection with
a private placement of common stock (see "common stock issuances"
above).
Summary of options and warrants
The Company has adopted the disclosure provisions of SFAS 123 and applies
APB 25 in accounting for stock options granted to employees and,
accordingly, recognizes non-cash compensation charges related to the
intrinsic value of employee stock options. If the Company had elected to
recognize compensation expense based upon the fair value at the date of
grant consistent with the methodology prescribed by SFAS 123, the effect on
the Company's net loss and net loss per share would be as follows:
<TABLE>
<CAPTION>
Period from
February 13,
Year ended 1998 (inception)
June 30, to June 30,
1999 1998
------------- ----------------
<S> <C> <C>
Net loss
As reported $ (5,955,327) $ (99,414)
Pro forma $ (5,549,779) $ (99,414)
Basic and diluted net loss per share
As reported $ (1.27) $ (.04)
Pro forma $ (1.18) $ (.04)
</TABLE>
F-20
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
10 Shareholders' equity (continued)
Summary of options and warrants (continued)
The fair value of common stock options and warrants granted to employees
during the year ended June 30, 1999 has been calculated using the
Black-Scholes option-pricing model with the following assumptions: no
dividend yield, expected volatility of 65%, risk-free interest rates
ranging from 4.6% to 5.9%, and expected lives ranging from 5 to 10 years.
The following is a summary of all of the Company's stock options and
warrants that were describe in detail above (excluding the TSG stock
options):
<TABLE>
<CAPTION>
Weighted
average
exercise
# of Options price
------------ ----------
<S> <C> <C>
Outstanding at February 13, 1998 (inception)
Granted 1,587,500 $ 1.65
Exercised - $ -
Forfeited - $ -
---------
Outstanding at June 30, 1998 1,587,500 $ 1.65
Granted 924,000 $ 5.08
Exercised - $ -
Forfeited (396,000) $ 1.77
---------
Outstanding at June 30, 1999 2,115,500 $ 3.13
---------
</TABLE>
The following table summarizes information about all of the Company's
options and warrants outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Options outstanding
Number Weighted average Options
Options outstanding at remaining contractual exercisable
Exercise Price June 30, 1999 life (years) at June 30, 1999
-------------- ------------- --------------------- ----------------
<S> <C> <C> <C>
$ 1.630 1,320,000 7.1 500,000
$ 2.000 87,500 4.0 87,500
$ 5.000 574,500 5.1 25,000
$ 9.375 80,000 4.0 -
$ 10.250 - $16.250 53,500 9.8 -
--------- --------
2,115,500 612,500
========= ========
</TABLE>
F-21
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
11 Benefit from income taxes
The benefit from income taxes consists of the following:
<TABLE>
<CAPTION>
Period from
February 13,
1998
Year ended (inception) to
June 30, 1999 June 30, 1998
------------- ---------------
<S> <C> <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>
<CAPTION>
Period from
February 13,
1998
Year ended (inception) to
June 30, 1999 June 30, 1998
------------- --------------
<S> <C> <C>
Federal statutory tax rate (34.0)% (34.0)%
State and local taxes net of Federal tax effect (6.0) (5.0)
Stock and option compensation 17.8 -
Non-deductible reserves .2 -
Effect of graduated tax rates - 9.0
Permanent differences .3 1.9
Valuation allowance on deferred tax asset 21.7 11.4
------------ ---------------
Effective tax rate 0% (16.7)%
============ ===============
</TABLE>
The tax effects of temporary differences and carry forwards that give rise
to deferred tax assets or liabilities are summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Non-deductible reserves $ 16,000 $ 1,500
Accrual to cash conversion TSG 73,000 -
Net operating loss carry forward 1,100,000 32,000
Net assets held for sale - (20,000)
Valuation allowance on net deferred tax asset (1,189,000) (13,500)
----------- -----------
Deferred tax asset, net $ - $ -
=========== ===========
</TABLE>
F-22
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
11 Benefit from income taxes (continued)
The Company has provided for full valuation allowances on the net deferred
tax assets due to the uncertainty of future income tax estimates.
At June 30, 1999, the Company has net tax operating loss carryforwards of
approximately $2,750,000 available to offset future income tax liabilities,
if any. The carryforward losses expire in the years 2011 through 2019 and
have not been recognized in the accompanying consolidated financial
statements as a result of a valuation of the total potential tax asset.
Approximately $700,000 of these carryforwards were generated by SMCI prior
to the Merger and, accordingly, are subject to restriction pursuant to
Section 382 of the Internal Revenue Code.
12 Related party transactions
In connection with the Merger, the Company has assumed obligations and
entered into commitments with one of the Company's shareholders, who is
also a director and treasurer of TSG, as follows:
. Deferred compensation payable aggregating $100,000 at June 30, 1999,
represents unpaid salary to the TSG officer for services rendered
prior to the Merger. The deferred compensation is payable in six
monthly installments of $16,667 commencing in October 1999.
. TSG leases its office facilities from the TSG officer for annual lease
payments of approximately $75,000 through December 2004.
. The loans and advances from the TSG officer of $144,348 is payable in
four equal monthly installments of $37,203 (including interest at 8%)
commencing on July 1, 1999.
In addition, in July 1999, another shareholder, who is also the President
and Chief Executive Officer of TSG, borrowed $50,000 at an interest rate of
6% per annum. Interest on the loan is payable quarterly and the entire
principal balance is payable upon the third anniversary date of issuance.
13 Major customer - 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 accordance with the terms of the agreement, the Company
shipped approximately $1,700,000 of product to Anicom which accounted for
approximately 95% of the Company's revenue for the year ended June 30,
1999.
F-23
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
13 Major customer - Anicom, Inc. (continued)
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.
14 Commitments and contingencies
Leases
The Company has entered into several leases for office space, office
equipment and vehicles. In addition, as a result of the Merger, TSG assumed
several leases which are included below. At June 30, 1999, the approximate
future minimum annual lease payments (including the lease for office space
with the TSG officer, Note 12) are summarized as follows:
<TABLE>
<CAPTION>
Fiscal year ending June 30,
<S> <C>
2000 $ 323,000
2001 314,000
2002 275,000
2003 102,000
2004 39,000
---------------
$ 1,053,000
===============
</TABLE>
Total rent expense for the year ended June 30, 1999 and for the period from
February 13, 1998 (inception) to June 30, 1998 was $139,417 and $351,
respectively.
Employment agreements
In conjunction with the consummation of the Reverse Acquisition, the
Company entered into employment agreements with 5 executives who were the
principal pre-Reverse Acquisition owners of NetWolves, LLC. Two of these
executives were subsequently terminated and one executive restructured his
employment contract 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 for four of the executives and 180,000 warrants for
the fifth executive (see Note 10).
F-24
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
14 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 380,000 warrants (in total)
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
10).
On September 2, 1999, one of the five executives restructured his
employment agreement whereby the executive tendered his resignation as a
Director and as Chief Operating Officer of the Company effective August 1,
1999 with his employment agreement terminating on June 15, 2001. In
addition, 50,000 of the executive's 200,000 warrants were cancelled.
In connection with the Merger (Note 4), TSG entered into employment
agreements with 5 executives who were the principals of SMCI. Each of the
agreements are substantially identical and provide for the following
significant terms:
. employment terms of three years with automatic renewals for additional
one-year terms unless terminated by either party through written
notice,
. annual salaries of $150,000 for two individuals and $100,000 for three
individuals adjusted annually for cost of living increases,
. two of the executives shall each receive 5% of pre-tax profits of TSG
(up to a maximum of 100% of each employee's base salary) and three of
the executives shall each receive 1.67% of pre-tax profits of TSG (up
to a maximum of 50% of each employee's base salary),
. An aggregate of 605,000 incentive TSG stock options issued to the
employees (Note 4),
. An aggregate of 175,000 contingently issuable incentive TSG stock
options to the employees (Note 4),
. If within eighteen months of the Merger, TSG has not initiated an
initial public offering or acquired a publicly held shell, two
executives shall receive 10% of pre-tax profits of TSG up to $10
million and 5% of pre-tax profits in excess of $10 million, not to
exceed, in the aggregate, $1.5 million in compensation in any year.
Pension Plan
As of a result of the Merger, TSG has assumed the obligations of a defined
contribution plan that provides retirement benefits to qualified TSG
employees. Company contributions to the plan are discretionary. In
addition, employees have the option of deferring and contributing a portion
of their annual compensation to the plan in accordance with the provisions
of the plan.
F-25
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999 AND THE PERIOD FROM
FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
14 Commitments and contingencies (continued)
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.
15 Quarterly results of operations
As a result of an adjustment to the accounting for certain stock option
compensation, the Company recorded an adjustment in the fourth quarter of
fiscal 1999, pertaining to the third quarter, which resulted in an increase
to the net loss of $449,000 or $.10 per share.
16 Subsequent events
Comdisco, Inc. agreement
On July 26, 1999 the Company entered into an agreement with Comdisco, Inc.
("Comdisco") whereby Comdisco will provide management, installation and
technology services to the Company's proprietary Internet distribution
system. In addition, the agreement provides for the creation of a credit
facility to be utilized in connection with the sale and installation of the
FoxBox in up to 40,000 locations over a four-year period. However, there
can be no assurances that the Company will actually require the use of the
credit facility.
In connection with the agreement, Comdisco was granted a five-year warrant
to purchase 125,000 shares of the Company's unregistered common stock, at
an exercise price of $10 per share. The warrants are immediately
exercisable. The value of the warrants of approximately $1,676,000 will be
amortized over the initial term of the agreement (four years) and has been
calculated using the Black-Scholes option-pricing model with the following
assumptions: no dividend yield, expected volatility of 65%, risk-free
interest rate of 5.84%, and an expected term of five years.
Issuance of warrants
For services rendered, on July 31, 1999, a financial consultant of the
Company was granted a five-year warrant to purchase 100,000 shares of
common stock, at an exercise price of $12 per share. The warrants are
immediately exercisable and the shares issuable pursuant to the warrants
have piggyback registration rights.
Private placement
On September 29, 1999, the Company sold 100,000 shares of unregistered
common stock to an accredited investor at $15 per share (a total of
$1,500,000) exclusive of commissions totalling $105,000.
F-26
Master Program Agreement
This Master Program Agreement ("Agreement") dated July 26, 1999 is entered into
between NetWolves Corporation, a New York corporation, located at 200
Broadhollow Road, Melville, New York 11747, ("NetWolves"), and Comdisco, Inc., a
Delaware Corporation, located at 6111 N. River Road, Rosemont, IL 60018
("Comdisco").
NetWolves is the manufacturer of certain equipment known as the FoxBox and
Comdisco is in the business of financing equipment and providing services in
connection with the equipment.
This Agreement contemplates an on-going business relationship in which Comdisco
will (i) acquire from NetWolves, all of the right, title and interest in the
equipment with the exception of intellectual property rights, software upgrades
and software application and content; (ii) take an assignment in associated
leases between NetWolves and certain customers of NetWolves; and (iii) provide
services with respect to the equipment as NetWolves' subcontractor and take an
assignment of the services fees in connection therewith.
NOW THEREFORE, in consideration of the foregoing and the covenants and
conditions set forth herein, the parties have entered into this Agreement and
mutually agree as follows.
Definitions
"Commencement Certificate" means an acceptance certificate substantially in the
form of Exhibit A confirming acceptance of the leased Equipment.
"Equipment" means the FoxBox equipment which will be sold to Comdisco under this
Agreement and leased to Target Customers by NetWolves or sold directly by
NetWolves to Target Customers. The Equipment is specified in Exhibit B.
"Lease" or "Lease Documents" means the Product Agreement and related Equipment
Schedule in the form of Exhibit C which NetWolves will use to lease the
Equipment and provide Services to Target Customers.
"Lessee" means a Target Customer under a Lease.
"Losses" means all losses, claims, liabilities, demands and expenses whatsoever
including, without limitation, reasonable attorney's fees.
"Related Software" means NetWolves' software described in Exhibit D which is an
integral part of the Equipment.
"Services" means the roll-out, maintenance, deinstallation and other services as
detailed in the Statement of Work under Services and Lease Documents provided by
Comdisco to Target Customers as NetWolves' subcontractor.
"Services Documents" means the Services Agreement and Services Schedule in the
form of Exhibit E which NetWolves will use to provide Services to Target
Customers who purchase the Equipment directly from NetWolves.
"Software Application and Content"
"Target Customer" shall be limited to companies that will lease or purchase the
Equipment as detailed in Exhibit F.
"Transaction Package for Leased Equipment" means the following completed and
properly executed documents between NetWolves and the Target Customer: (i)
Product Agreement; (ii) Equipment Schedule.
"Transaction Package for Purchased Equipment" means the following completed and
properly executed documents between NetWolves and the Target Customer: (i)
Services Agreement; (ii) Services Schedule; and (iii) Master Sale Agreement.
<PAGE>
1.0 Transaction Origination, Administration and Assignment
1.1 Comdisco and NetWolves will, simultaneously with the execution of this
Agreement, execute the Master Agreement and Services Schedule in the form
of Exhibit G to provide the Services on behalf of NetWolves to Target
Customers pursuant to the terms of this Agreement.
1.2 Upon approving the credit of a Target Customer (as detailed in Section 3.0)
Comdisco will prepare and forward original Lease or Services Documents to
NetWolves, as applicable, to present to the Target Customer for execution.
Any changes to the Lease or Services Documents will require Comdisco's
approval.
1.3 Upon Comdisco's receipt and approval of the Transaction Package for Leased
Equipment, NetWolves, upon receipt of payment from Comdisco for the
Equipment, will be deemed to have assigned to Comdisco all of NetWolves'
right, title and interest in the Equipment, with the exception of
intellectual property rights, software upgrades and Software Application
and Content, the Product Agreement, and the Equipment Schedule, including
the right to receive any rental payments included therein. Thereafter,
NetWolves will have no further right to any rentals associated with the
Lease Documents during the Initial Term of any Equipment Schedule.
Notwithstanding the foregoing assignment, NetWolves shall not be relieved
of any of its obligations as a manufacturer, including warranty
obligations.
1.4 Upon Comdisco's receipt and approval of a Transaction Package for Purchased
Equipment, NetWolves, upon receipt of payment from Comdisco for the
Equipment, will be deemed to have assigned to Comdisco all amounts due, if
any, under a Master Sale Agreement, and all right, title and interest to
the Services Agreement and Services Schedule (except for any obligations to
be performed by NetWolves pursuant to the Master Agreement) and all amounts
due or to become due thereunder. Thereafter, NetWolves will have no further
right to any revenues associated with the foregoing documents.
1.5 Upon taking an assignment as described in 1.3 and 1.4 above or upon receipt
of the executed Master Sale Agreement, Comdisco will undertake all
invoicing on NetWolves' letterhead to the Target Customer in accordance
with the terms of the Lease or Services Documents or the Master Sale
Agreement, as applicable. If NetWolves becomes aware of any default by a
Target Customer under the Lease or Services Documents, it shall promptly
notify Comdisco.
1.6 Lessee shall be responsible for and shall file and pay all property taxes
incurred in connection with the lease of the Equipment. The Product
Agreement shall provide that Lessee shall indemnify and hold Lessor
harmless from and against all taxes, other than those taxes based upon the
net income of Lessor.
1.7 NetWolves will at all times remain the owner of the Related Software and
agrees to transfer all Related Software to the Target Customers, pursuant
to the terms of NetWolves' standard documentation evidencing such transfer.
1.8 Comdisco acknowledges that it is purchasing the Equipment for resale/lease
and will provide NetWolves with valid exemption certificates.
2.0 Financial Arrangement
<PAGE>
2.1 Comdisco has entered into this financial arrangement on the basis of
NetWolves intending to implement 40,000 Target Customer locations within
forty-eight (48) months from the date of this Master Program Agreement.
2.2 The calculation of the Equipment purchase price is contingent upon whether
the Target Customer purchases or leases the Equipment ("purchase price").
2.2.1Target Customer Elects to Purchase the Equipment. If a Target Customer
elects to purchase the Equipment from NetWolves instead of entering
into a Lease, and elects not to take the Services, then upon
Comdisco's receipt and approval of a Transaction Package for Purchased
Equipment containing the Master Sale Agreement only, and receipt of
the sale price from the Target Customer, Comdisco will remit to
NetWolves an amount equal to the purchase price of the Equipment less
$1,400. If a Target Customer elects to purchase the Equipment and
elects to take the Services, then upon Comdisco's receipt and approval
of a Transaction Package for Purchased Equipment and receipt of the
sale price from the Target Customer, Comdisco will remit to NetWolves
the full purchase price. All Services provided will be based on a term
of forty-eight (48) months.
2.2.2Target Customer Elects to Lease the Equipment. If a Target Customer
elects to lease the Equipment, then upon Comdisco's receipt and
approval of a Transaction Package for Leased Equipment, the purchase
price for each unit of Equipment will equal the present value of the
rental stream at an interest rate commensurate with the Target
Customer's credit rating and prevailing market rates. Comdisco will
purchase the Equipment from NetWolves, without recourse but subject to
Section 4.1(h), at 95% of the purchase price. Comdisco agrees to remit
payment to NetWolves for the Equipment within ten (10) days of
Comdisco's receipt and approval of the applicable Transaction Package
for Leased Equipment and Commencement Certificate. At the time of
payment, NetWolves will provide Comdisco with a bill of sale.
2.3 Comdisco will charge a Service fee of $600.00 to install each item of
Equipment. Comdisco will charge a minimum Service fee of $300.00 to
deinstall each item of Equipment. In the event NetWolves charges a Target
Customer a Service Fee greater than $300.00 to deinstall an item of
Equipment, NetWolves and Comdisco will share the excess amount on the basis
of 73% to NetWolves and 27% to Comdisco. All amounts in connection with the
installation or deinstallation of the Equipment will be invoiced upon
completion of such installation or deinstallation.
2.4 For the first twelve (12) months of an Equipment Schedule or a Services
Schedule, as applicable, the Target customer will not be obligated to pay
Service fees other than for installation and deinstallation, because the
Equipment is considered to be under manufacturer warranty. Beginning in
month thirteen (13) of the Equipment or Services Schedule, Customer will be
obligated to pay a Service fee of $28.00 per month per item of Equipment.
2.5 The rent under an Equipment Schedule is estimated to be $200.00 per month
per item of Equipment installed, exclusive of taxes.
2.6 The Lease Documents will require Lessee to pay Lessor the last month's rent
at the time that the first rent payment is due.
2.7 Comdisco's obligation to purchase the Equipment and to pay NetWolves the
purchase price is contingent upon the following:
<PAGE>
a. Lessee's credit has been approved and there is no adverse change in
Lessee's credit as defined under the Equipment Schedule.
b. The Lessee is not in default under any Equipment Schedule.
c. Comdisco has received a completed and approved Transaction Package for
Leased Equipment, and an executed Commencement Certificate.
d. Comdisco has received a completed and approved the applicable
Transaction Package for Purchased Equipment and the sale price from
the Target Customer.
e. NetWolves is not in default under this Agreement, the Master Agreement
or the Services Schedule.
f. Neither NetWolves nor a Target Customer is in default under any Lease
or Services Documents.
2.8 NetWolves agrees that Comdisco may, on a periodic basis, review and audit,
at reasonable times and on reasonable notice, NetWolves' sale of Equipment
to Target Customers.
3.0 Credit Review
3.1 Prior to entering into Lease or Services Documentation with a Target
Customer, NetWolves will request credit approval from Comdisco with respect
to the Target Customer. Credit approval and the rent under the Lease
Documents will be calculated based on the Credit Table set forth below and
all credit approval will be valid for a period of forty-five (45) days from
the date of approval.
3.2 Credit Table
Moodys Rating Basis Points Above Like Term Treasuries
------------- ---------------------------------------
AAA Aa3 175 basis points
A1 A3 200
Baa1 Baa3 225
Below Baa3 Individual Credit Review Needed
Comdisco reserves the right to re-adjust the basis points listed above
based upon a change in market conditions as determined by Comdisco within
six (6) months from the date of this Agreement and every six (6) months
thereafter. If market conditions change so that Comdisco readjusts the
basis points as provided for herein, and NetWolves deems such readjustment
to be above competitive market rates, NetWolves will obtain three (3)
quoted rates from a third party using a similar point structure (the
"Quoted Rates"). If Comdisco matches the average of the Quoted Rates,
NetWolves will be deemed to accept Comdisco's readjustment. If Comdisco
elects not to match the Quoted Rates, NetWolves may obtain hardware
financing from one of the three parties supplying the Quoted Rates.
4.0 Representations and Warranties
4.1 NetWolves hereby represents and warrants (as of the date of execution of
this Agreement as to (a) and (b) below) that:
<PAGE>
a. It is a corporation duly organized and validly existing in good standing
under the laws of the jurisdiction of its incorporation with full corporate
power to enter into this Agreement and to carry out transactions
contemplated herein.
b. The execution and delivery of this Agreement, and all other documents
contemplated herein (including but not limited to the Warrant Agreement),
as well as performance of the contemplated transactions hereunder have been
duly authorized by all necessary corporate action and this Agreement, and
all other documents contemplated herein, constitute a legal, valid and
binding obligation enforceable in accordance with its terms.
c. Except as detailed in this Agreement, there will be no other agreements
between NetWolves and the Target Customer relating to the Equipment and
Services in contradiction of the terms of this Agreement. Nothing contained
in this Agreement shall preclude NetWolves from selling or leasing other
services to the Target Customer.
d. All credit information known to NetWolves concerning a Target Customer will
have been disclosed or made available to Comdisco.
e. The Target Customer is not be in default under any other agreement with
NetWolves which is not the subject of this Agreement.
f. As of the payment of the purchase price to NetWolves, it is the owner of
the Equipment and that title to the Equipment will be free and clear of all
liens, claims, interests and encumbrances of any kind, including, but not
limited to, infringement for claims of third party proprietary rights.
g. If Comdisco purchases the Equipment from NetWolves, pursuant to the Target
Customer's election to lease the Equipment, title to the Equipment will
vest in Comdisco upon payment of the purchase price.
h. The Equipment will be in working order at the time of installation at the
Target Customer location, will perform in all material respects in
accordance with NetWolves specifications published at the time the
Equipment is installed, and will be subject to NetWolves then current
manufacturer warranties.
4.2 Comdisco hereby represents and warrants that, as of the date of execution
of this Agreement that:
a. It is a corporation duly organized and validly existing in good
standing under the laws of the jurisdiction of its incorporation with
full corporate power to enter into this Agreement and to carry out the
transactions contemplated herein.
b. The execution and delivery of this Agreement, and all other documents
contemplated herein, as well as the performance of the contemplated
transactions hereunder have been duly authorized by all necessary
corporate action and this Agreement, and all other documents
contemplated herein, constitute a legal, valid and binding obligation
enforceable in accordance with its terms.
5.0 Indemnification
5.1 NetWolves agrees to indemnify and hold harmless Comdisco and its
affiliates, subsidiaries, employees and agents, successors and assigns
from any and all:
<PAGE>
a. Losses arising from any third party claims based upon a breach of
NetWolves' representations, warranties or obligations under this
Agreement.
b. Losses resulting directly or indirectly from claims including,
without limitation, third party claims arising in strict
liability or negligence or claims of infringement or
misappropriation of any proprietary interest or right of any
third party, including without limitation any trademark, patent,
copyright or trade secret in connection with the Equipment and/or
Related Software:
c. Losses arising from third party claims based upon any inaccurate
or incomplete information willfully or intentionally provided by
NetWolves.
5.2 In the event that a third party claims that the Equipment or any Related
Software infringes a trade secret, patent, copyright or any proprietary
right of a third party, NetWolves agrees to defend Comdisco, at NetWolves'
expense, and NetWolves will pay all costs, damages and reasonable
attorney's fees awarded to a third party arising from such infringement.
Comdisco agrees to promptly notify NetWolves of any such claim and will
allow NetWolves to control the defense and any related settlement
negotiations, provided such settlement does not affect Comdisco's right as
owner of the Equipment nor diminish or increase Comdisco's or Target
Customer's rights or obligations under the Lease or Services Documentation.
Comdisco may participate in the defense of any such claim at its own cost
and expense.
6.0 Limitation of Liability
IN CONNECTION WITH THIS AGREEMENT, NEITHER COMDISCO NOR NETWOLVES WILL BE
LIABLE TO THE OTHER FOR INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF
ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
<PAGE>
7.0 Equipment Maintenance
7.1 The responsibilities of Comdisco and NetWolves in connection with
maintenance will be as detailed in the Statement of Work, attached to the
Services Schedule under the Master Agreement.
8.0 Remarketing
8.1 Comdisco will, at the request of NetWolves, either directly or indirectly
through its subcontractor, perform the following services following a Lease
termination:
a. Upon expiration of the Initial Term of any Equipment Schedule, any
in-place extension rental and in-place purchase price negotiated
between Comdisco and Lessee will be apportioned between Comdisco and
NetWolves as follows: NetWolves 73% and Comdisco 27%.
b. For any Equipment that is returned to Comdisco by a Lessee at lease
termination, and that is remarketed to a subsequent user, Comdisco
will take the first $400.00 per item of Equipment for storage and
refurbishing costs incurred by Comdisco. Any remarketing proceeds in
excess of $400.00 shall be apportioned 73% to NetWolves and 27% to
Comdisco.
9.0 Term and Termination
9.1 This Agreement shall be effective as of the date first set forth above and
shall continue for an initial period of four (4) years (the "initial
term"), and thereafter shall be automatically renewed for additional
one-year periods (the "extended term"), unless terminated in writing by
either party given thirty (30) days prior to the expiration of the initial
term. During the extended term, either party may terminate this Agreement
at any time upon thirty (30) days prior written notice.
9.2 Either party may, by written notice, terminate this Agreement for cause if
the other party fails to cure a material default under the Agreement. Any
material default must be specifically identified in the notice of
termination. After written notice, the notified party will have thirty (30)
days to remedy any default. Failure to remedy the material default within
the time period provided for herein will give cause for immediate
termination.
9.3 Notwithstanding any termination of this Agreement, the terms and conditions
of this Agreement will survive for purposes of any Equipment Schedule or
Services Schedule in effect with a Target Customer.
9.4 Provided Comdisco is not in material default under this Agreement and
subject to paragraphs 4.1(c) and 3.2, during the initial or any extended
term of this Agreement or upon the lease or purchase of 20,000 units of
Equipment as contemplated under this Agreement, whichever comes first,
NetWolves agrees not to enter into any agreement in connection with any
Target Customer with any other technology services provider for the purpose
of providing hardware financing and the Services specified under the
Statement of Work in Exhibit E.
10.0 Publicity
<PAGE>
Except as hereinafter provided in this Section, NetWolves and Comdisco will
consult with each other before issuing any press release or otherwise
making any public statements with respect to this Agreement or the other
transactions contemplated hereby, including using any tradename, or service
mark which identifies the other party, and shall not issue any press
release or make any such public statement prior to receiving the consent of
the other party, which consent will not be unreasonably withheld or
delayed. Nothing contained herein shall prohibit any party from making a
press release or other statement required by law or by obligations pursuant
to any agreement with any automated interdealer quotation system if the
party making the disclosure has first consulted with the other party
hereto.
11.0 Warrant Coverage
In consideration of entering into this Agreement, NetWolves will
simultaneous with the execution of this Agreement issue a Warrant Agreement
granting to Comdisco the right to purchase 175,000 shares of NetWolves
Common Stock, for an Exercise Price of $10.00 per share, with a term of no
less than five (5) years. The form of Warrant Agreement shall be as
attached to this Agreement as Exhibit H, "Warrant Agreement". The number
and purchase price of shares shall be subject to adjustment as provided in
Section 8 of the Warrant Agreement. The Exercise Price may be paid at
Comdisco's election either by cash or check or by surrender of Warrants
("Net Issuance") as determined in the Warrant Agreement.
12.0 Confidentiality
Each party (including its employees and agents) will use the same standard
of care to protect any confidential information of the other disclosed
during negotiation or performance of this Agreement that it uses to protect
its own confidential information. Confidential Information will not include
information which (i) is or becomes publicly available through no wrongful
act of the receiving party; (ii) was known by the receiving party at the
time of disclosure without any obligation of confidentiality; (iii) was
acquired by the receiving party from a third party without restriction on
nondisclosure; or (iv) was developed independently by the receiving party.
13.0 Miscellaneous
13.1 Each party is an independent contractor and, except as expressly set forth
herein, will have no authority to bind or commit the other party. Nothing
herein shall be deemed or construed to create a joint venture, partnership
or agency relationship between the parties.
13.2 Except as set forth herein, neither party may assign their rights and
obligations described in this Agreement without the prior written consent
of the other party except for assignments to affiliates or subsidiaries who
agree to be bound by the terms of this Agreement. In addition, in the event
of any such assignment on the part of NetWolves, NetWolves agrees to remain
primarily liable for the performance of all obligations hereunder.
Notwithstanding the foregoing, Comdisco may subcontract the performance of
its Services to a third party or assign its rights as provided for under
the Lease.
13.3 The waiver by either party of a breach of any provision of this Agreement
will not be construed as a waiver of any subsequent breach. The invalidity,
in whole or in part, of any provision of this Agreement will not affect the
validity of the remaining provisions.
<PAGE>
13.4 This Agreement including each Exhibit represents the entire agreement
between the parties and supersedes all oral or other written agreements
understandings between the parties concerning the Equipment and Services.
This Agreement may not be modified unless in writing and signed by the
party against whom enforcement of the modification is sought.
13.5 Any notice, request or other communication under this Agreement will be
given in writing and deemed received upon the earlier of actual receipt or
three (3) days after mailing if mailed postage prepaid by regular or
airmail to the address set forth above or, one day after such notice is
sent by courier or facsimile transmission. Copies to NetWolves also are to
be provided to David H. Lieberman, Esq., Blau, Kramer, Wactlar & Lieberman,
P.C., 100 Jericho Quadrangle, Jericho, NY 11731.
13.6 Those terms and conditions which would, by their meaning or intent, survive
the expiration or termination of this Agreement will so survive.
13.7 THIS AGREEMENT IS GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO ITS CONFLICT OF LAWS PROVISIONS. If there is any dispute or
litigation as a result of this Agreement, the prevailing party will be
entitled to reasonable attorney's fees. Any action by either party must be
brought within two (2) years after the cause of action arose.
13.8 All Exhibits to this Agreement are hereby incorporated into and deemed to
be a part of this Agreement.
13.9 In connection with the Services, in the event of any conflict between this
Agreement and the Master Agreement, the Master Agreement will govern.
13.10Terms and conditions on any NetWolves' purchase order or other
acknowledgment form in addition to, different from or in conflict with the
terms of this Agreement will be of no force or effect.
13.11NetWolves will promptly deliver to Comdisco after filing such documents
with the Securities and Exchange Commission, at Comdisco's request:
a. NetWolves' Quarterly and Annual forms 10Q and 10K.
b. Such other information concerning the financial condition of NetWolves
which is available to the public as Comdisco may from time to time
request.
13.12Comdisco and NetWolves will cooperate by furnishing such records and
supporting material relating to transactions contemplated hereunder as may
be reasonably requested by each party, and in the preparation of forms,
including notices to Lessees, and the execution of such other documents as
may be necessary to fulfill the intent and effectuate the purpose of this
Agreement.
13.13This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, personal representatives,
executors, heirs and permitted assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
set forth above.
NETWOLVES CORPORATION COMDISCO, INC.
By; /s/ Walter M. Groteke By: /s/ John Christopher
Title: ___________________________ Title: ____________________________
Date: _____________________________ Date: ____________________________
PRODUCT AGREEMENT
This Product Agreement dated ______________________________ is made by and
between NetWolves Corporation ("NetWolves") with offices at 200 Broadhollow
Road, Melville, New York 11747, and ____________________________________________
____________________________________________________("Customer") with offices at
____________________________________________________.
SECTION 1. PROPERTY LEASED
NetWolves leases to Customer all of the Products described on any Schedule
entered into pursuant to the terms of this Product Agreement.
SECTION 2. TERM
On the Commencement Date Customer will be deemed to accept the Products, will be
bound to its rental obligations for the Products and the term of a Schedule will
begin and continue through the Initial Term and thereafter until terminated by
either party upon prior written notice received during the Notice Period. No
termination may be effective prior to the expiration of the Initial Term.
SECTION 3. RENT AND PAYMENT
Rent is due and payable in advance, in immediately available funds, on the first
day of each Rent Interval to the payee and at the location specified in
NetWolves' invoice. Interim Rent is due and payable when invoiced. If any
payment is not made when due, Customer will pay interest at the Overdue Rate.
SECTION 4. SELECTION AND WARRANTY AND DISCLAIMER OF
WARRANTIES
4.1 Selection. Customer acknowledges that it has selected the Products and
disclaims any reliance upon statements made by NetWolves.
4.2 Warranty and Disclaimer of Warranties. NetWolves warrants to Customer that,
so long as Customer is not in default, NetWolves will not disturb Customer's
quiet and peaceful possession, and unrestricted use of the Products. During the
term of the Schedule, NetWolves grants to Customer all applicable warranties for
the Products. NetWolves assigns to Customer during the term of the Schedule any
manufacturer's warranties for the Products. NetWolves is not responsible for any
liability, claim, loss, damage or expense of any kind (including strict
liability in tort) caused by the Products except for any loss or damage caused
by the negligent acts of NetWolves. UNDER NO CIRCUMSTANCES, WILL NETWOLVES BE
LIABLE FOR INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
SECTION 5. TITLE AND ASSIGNMENT
5.1 Title. Customer holds the Products subject and subordinate to the rights of
the Owner, NetWolves, any Assignee and any Secured Party. Customer authorizes
NetWolves, as Customer's agent, to prepare, execute and file in Customer's name
precautionary Uniform Commercial Code financing statements showing the interest
of the Owner, NetWolves, and any Assignee or Secured Party in the Products and
to insert serial numbers in Schedules as appropriate. Except as provided in
Sections 5.2 and 7.2, Customer will, at its expense, keep the Products free and
clear from any liens or encumbrances of any kind (except any caused by
NetWolves) and will indemnify and hold NetWolves, Owner, any Assignee and
Secured Party harmless from and against any loss caused by Customer's failure to
do so.
5.2 Relocation or Sublease. Upon prior written notice, Customer may relocate
Products to any location within the continental United States provided (i) the
Products will not be used by an entity exempt from federal income tax and (ii)
all additional costs (including any administrative fees, additional taxes and
insurance coverage) are reconciled and promptly paid by Customer.
Customer may sublease the Products upon the reasonable consent of NetWolves and
the Secured Party. Such consent to sublease will be granted if: (i) Customer
meets the relocation requirements set out above, (ii) the sublease is expressly
subject and subordinate to the terms of the Schedule, (iii) Customer assigns its
rights in the sublease to NetWolves and the Secured Party as additional
collateral and security, (iv) Customer's obligation to maintain and insure the
Products is not altered, (v) all financing statements required to continue the
Secured Party's prior perfected security interest are filed, and (vi) the
sublease is not to a leasing entity affiliated with the manufacturer of the
Products described on the Schedule. NetWolves acknowledges Customer's right to
sublease for a term which extends beyond the expiration of the Initial Term. If
Customer subleases the Products for a term extending beyond the expiration of
such Initial Term of the applicable Schedule, Customer shall remain obligated
upon the expiration of the Initial Term to return such Products, or, at
NetWolves' sole discretion to (i) return Like Products or (ii) negotiate a
mutually acceptable lease extension or purchase. If the parties cannot mutually
agree upon the terms of an extension or purchase, the term of the Schedule will
extend upon the original terms and conditions until terminated pursuant to
Section 2.
<PAGE>
No relocation or sublease will relieve Customer from any of its obligations
under this Product Agreement and the applicable Schedule.
5.3 Assignment by NetWolves. The terms and conditions of each Schedule have been
fixed by NetWolves in order to permit NetWolves to sell and/or assign or
transfer its interest or grant a security interest in each Schedule and/or the
Products to a Secured Party or Assignee. In that event the term NetWolves will
mean the Assignee and any Secured Party. However, any assignment, sale, or other
transfer by NetWolves will not relieve NetWolves of its obligations to Customer,
including its warranty obligations, and will not materially change Customer's
duties or materially increase the burdens or risks imposed on Customer. The
Customer hereby consents to any such assignment, sale or transfer. Customer also
agrees that:
(a) The Secured Party will be entitled to exercise all of NetWolves' rights,
but will not be obligated to perform any of the obligations of NetWolves.
The Secured Party will not disturb Customer's quiet and peaceful possession
and unrestricted use of the Products so long as Customer is not in default
and the Secured Party continues to receive all Rent payable under the
Schedule;
(b) Customer will pay all Rent and all other amounts payable to the Secured
Party, despite any defense or claim which it has against NetWolves.
Customer reserves its right to have recourse directly against NetWolves for
any defense or claim; and
(c) Subject to and without impairment of Customer's leasehold rights in the
Products, Customer holds the Products for the Secured Party to the extent
of the Secured Party's rights in the Products.
SECTION 6. NET LEASE AND TAXES
6.1 Net Lease. Each Schedule constitutes a net lease. Customer's obligation to
pay Rent and all other amounts is absolute and unconditional and is not subject
to any abatement, reduction, set-off, defense, counterclaim, interruption,
deferment or recoupment for any reason whatsoever.
6.2 Taxes and Fees. Lessee will pay when due or reimburse Lessor for all taxes,
fees or any other charges (together with any related interest or penalties not
arising from the negligence of Lessor) accrued for or arising during the term of
each Schedule against Lessor, Lessee or the Products by any governmental
authority (except only Federal, state and local taxes on the capital or the net
income of Lessor). Lessee will file all personal property tax returns for the
Products and pay all property taxes due. Lessee will reimburse Lessor for
property taxes within thirty (30) days of receipt of an invoice.
SECTION 7. CARE, USE AND MAINTENANCE, ATTACHMENTS AND
RECONFIGURATIONS AND INSPECTION BY NETWOLVES
7.1 Care, Use and Maintenance. Customer will maintain the Products in good
operating order and appearance, protect the Products from deterioration, other
than normal wear and tear, and will not use the Products for any purpose other
than that for which it was designed. If commercially available, Customer will
maintain in force a standard maintenance contract with the manufacturer of the
Products, or another party acceptable to NetWolves, and upon request will
provide NetWolves with a complete copy of that contract. If Customer has the
Products maintained by a party other than the manufacturer, Customer agrees to
pay any costs necessary for the manufacturer to bring the Products to then
current release, revision and engineering change levels, and to re-certify the
Products as eligible for manufacturer's maintenance at the expiration of the
lease term. The lease term will continue upon the same terms and conditions
until recertification has been obtained.
7.2 Attachments and Reconfigurations. Upon prior written notice to NetWolves,
Customer may reconfigure and install Attachments on the Products. In the event
of such a Reconfiguration or Attachment, Customer shall, upon return of the
Products, at its expense, restore the Products to the original configuration
specified on the Schedule in accordance with the manufacturer's specifications
and in the same operating order, repair and appearance as when installed (normal
wear and tear excluded). If any parts are removed from the Products during the
Reconfiguration or Attachment, the restoration will include, at Customer's
option, the installation of either the original removed parts or Like Parts.
Alternatively, with NetWolves' prior written consent which will not be
unreasonably withheld, Customer may return the Products with any Attachment or
upgrade. If any parts of the Products are removed during a Reconfiguration or
Attachment, NetWolves may require Customer to provide additional security,
satisfactory to the NetWolves, in order to ensure performance of Customer's
obligations set forth in this subsection. Neither Attachments nor parts
installed on Products in the course of Reconfiguration shall be accessions to
the Products.
<PAGE>
However, if the Reconfiguration or Attachment (i) adversely affects NetWolves'
tax benefits relating to the Products; (ii) is not capable of being removed
without causing material damage to the Products; or (iii) if at the time of the
Reconfiguration or Attachment the manufacturer does not offer on a commercial
basis a means for the removal of the additional items; then such Reconfiguration
or Attachment is subject to the prior written consent of NetWolves.
7.3 Inspection by NetWolves. Upon request, Customer, during reasonable business
hours and subject to Customer's security requirements, will make the Products
and its related log and maintenance records available to NetWolves for
inspection.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF CUSTOMER
Customer represents and warrants that for each Schedule entered into under this
Product Agreement:
(a) The execution, delivery and performance of the Customer have been duly
authorized by all necessary corporate action;
(b) The individual executing was duly authorized to do so;
(c) The Master Agreement, Product Agreement and each Schedule constitute legal,
valid and binding agreements of the Customer enforceable in accordance with
their terms; and
(d) The Products are personal property and when subjected to use by the
Customer will not be or become fixtures under applicable law.
SECTION 9. DELIVERY AND RETURN OF PRODUCTS
Customer assumes the full expense of transportation and in-transit insurance to
Customer's premises and for installation of the Products. Upon expiration or
termination of each Schedule, Customer will, at NetWolves' instructions and at
Customer's expense (including transportation and in-transit insurance), have the
Products deinstalled, audited by the manufacturer, packed and shipped in
accordance with the manufacturer's specifications and returned to NetWolves in
the same operating order, repair and appearance as when installed (ordinary wear
and tear excluded), to a location within the continental United States as
directed by NetWolves. All items returned to NetWolves in addition to the
Products become property of NetWolves.
SECTION 10. LABELING
Upon request, Customer will mark the Products indicating NetWolves' interest.
Customer will keep all Products free from any other marking or labeling which
might be interpreted as a claim of ownership.
SECTION 11. INDEMNITY
Customer will indemnify and hold NetWolves, any Assignee and any Secured Party
harmless from and against any and all claims, costs, expenses, damages and
liabilities, including reasonable attorney's fees, arising out of the ownership
(for strict liability in tort only), selection, possession, leasing, operation,
control, use, maintenance, delivery, return or other disposition of the
Products. However, Customer is not responsible to a party indemnified hereunder
for any claims, costs, expenses, damages and liabilities occasioned by the
negligent acts of such indemnified party. Customer agrees to carry bodily injury
and property damage liability insurance during the term of the Schedule in
amounts and against risks customarily insured against by the Customer on
Products owned by it. Any amounts received by NetWolves under that insurance
will be credited against Customer's obligations under this Section.
SECTION 12. RISK OF LOSS
12.1 Customer's Risk of Loss. If the Schedule indicates that the Customer has
responsibility for the risk of loss of the Products, then the following terms
will apply:
Effective upon delivery and until the Products are returned, Customer relieves
NetWolves of responsibility for all risks of physical damage to or loss or
destruction of the Products. Customer will carry casualty insurance for the
Products in an amount not less than the Casualty Value. All policies for such
insurance will name NetWolves and any Secured Party as additional insured and as
loss payee, and will provide for at least thirty (30) days prior written notice
to NetWolves of cancellation or expiration. The Customer will furnish
appropriate evidence of such insurance.
Customer shall promptly repair any damaged Product unless such Product has
suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss, Customer
will provide written notice of that loss to NetWolves and Customer will, at
NetWolves' option, either (a) replace the damaged Product with Like Products and
marketable title to the Like Products will automatically vest in NetWolves or
(b) pay the Casualty Value and after that payment and the payment of all other
amounts due and owing, Customer's obligation to pay further Rent for the damaged
Product will cease.
12.2 NetWolves' Risk of Loss. If the Schedule indicates that NetWolves has
responsibility for the risk of loss of the Products, then the following terms
will apply:
<PAGE>
Effective upon delivery and throughout the Initial Term of a Schedule and any
extension, NetWolves agrees to insure the Products against physical damage to or
loss or destruction due to external cause as specified by the terms of
NetWolves' then current insurance policy. NetWolves relieves Customer of
responsibility for physical damage to or loss or destruction of Products
reimbursed by that insurance. Customer will give NetWolves prompt notice of any
damage, loss or destruction to any Product and NetWolves will determine within
fifteen (15) days of its receipt of that notice whether the item has suffered a
Casualty Loss. If any Product suffers damage or a Casualty Loss which is
reimbursable under NetWolves' insurance, upon payment by Customer of NetWolves'
deductible, NetWolves will: (i) (for damaged Products) arrange and pay for the
repair of any damaged Product; or (ii) (for any Casualty Loss) at NetWolves'
option either replace the damaged Product with Like Products, or upon payment of
all other amounts due by Customer terminate the relevant Schedule as it relates
to the damaged Product.
If any Product suffers damage or a Casualty Loss which is not reimbursable under
NetWolves' insurance, then Customer will comply with the provisions of the last
paragraph of Section 12.1 regarding repair, replacement or payment of Casualty
Value.
If NetWolves fails to maintain insurance coverage as required by this subsection
12.2, Customer will assume such risk of loss and, at the request of any Assignee
or Secured Party, will promptly provide insurance coverage. This paragraph does
not relieve NetWolves of its obligations to maintain coverage of the Products.
SECTION 13. DEFAULT, REMEDIES AND MITIGATION
13.1 Default. The occurrence of any one or more of the following Events of
Default constitutes a default under a Schedule:
(a) Customer's failure to pay Rent or other amounts payable by Customer when
due if that failure continues for ten (10) days after written notice; or
(b) Customer's failure to perform any other term or condition of the Schedule
or the material inaccuracy of any representation or warranty made by the
Customer in the Schedule or in any document or certificate furnished to the
NetWolves hereunder if that failure or inaccuracy continues for fifteen
(15) days after written notice; or
(c) An assignment by Customer for the benefit of its creditors, the failure by
Customer to pay its debts when due, the insolvency of Customer, the filing
by Customer or the filing against Customer of any petition under any
bankruptcy or insolvency law or for the appointment of a trustee or other
officer with similar powers, the adjudication of Customer as insolvent, the
liquidation of Customer, or the taking of any action for the purpose of the
foregoing; or
(d) The occurrence of an Event of Default under any Schedule or other agreement
between Customer and NetWolves or its Assignee or Secured Party.
13.2 Remedies. Upon the occurrence of any of the above Events of Default,
NetWolves, at its option, may:
(a) enforce Customer's performance of the provisions of the applicable Schedule
by appropriate court action in law or in equity;
(b) recover from Customer any damages and or expenses, including Default Costs;
(c) with notice and demand, recover all sums due and accelerate and recover the
present value of the remaining payment stream of all Rent due under the
defaulted Schedule (discounted at the same rate of interest at which such
defaulted Schedule was discounted with a Secured Party plus any prepayment
fees charged to NetWolves by the Secured Party or, if there is no Secured
Party, then discounted at 6%) together with all Rent and other amounts
currently due as liquidated damages and not as a penalty;
(d) with notice and process of law and in compliance with Customer's security
requirements, NetWolves may enter Customer's premises to remove and
repossess the Products without being liable to Customer for damages due to
the repossession, except those resulting from NetWolves', its assignees',
agents' or representatives' negligence; and
(e) pursue any other remedy permitted by law or equity.
The above remedies, in NetWolves' discretion and to the extent permitted by law,
are cumulative and may be exercised successively or concurrently.
13.3 Mitigation. Upon return of the Products pursuant to the terms of Section
13.2, NetWolves will use its best efforts in accordance with its normal business
procedures (and without obligation to give any priority to such Products) to
mitigate NetWolves' damages as described below. EXCEPT AS SET FORTH IN THIS
SECTION, CUSTOMER HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE
OR OTHERWISE WHICH MAY REQUIRE NETWOLVES TO MITIGATE ITS DAMAGES OR MODIFY ANY
OF NETWOLVES'S RIGHTS OR REMEDIES STATED HEREIN. NetWolves may sell, lease or
otherwise dispose of all or any part of the Products at a public or private sale
for cash or credit with the privilege of purchasing the Products. The proceeds
from any sale, lease or other disposition of the Products are defined as either:
<PAGE>
(a) if sold or otherwise disposed of, the cash proceeds less the Fair Market
Value of the Products at the expiration of the Initial Term less the
Default Costs; or
(b) if leased, the present value (discounted at three points over the prime
rate as referenced in the Wall Street Journal at the time of the
mitigation) of the rentals for a term not to exceed the Initial Term, less
the Default Costs.
Any proceeds will be applied against liquidated damages and any other sums due
to NetWolves from Customer. However, Customer is liable to NetWolves for, and
NetWolves may recover, the amount by which the proceeds are less than the
liquidated damages and other sums due to NetWolves from Customer.
SECTION 14. ADDITIONAL PROVISIONS
14.1 Binding Nature. Each Schedule is binding upon, and inures to the benefit of
NetWolves and its assigns. CUSTOMER MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS.
14.2 Applicable Law. THIS PRODUCT AGREEMENT AND EACH SCHEDULE IS GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS.
NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE
WILL BE CONFERRED ON CUSTOMER UNLESS EXPRESSLY GRANTED HEREIN OR A SCHEDULE.
14.3 Counterparts. Any Schedule may be executed in any number of counterparts,
each of which will be deemed an original, but all such counterparts together
constitute one and the same instrument. If NetWolves grants a security interest
in all or any part of an Schedule, the Products or sums payable thereunder, only
that counterpart Schedule marked "Secured Party's Original" can transfer
NetWolves' rights and all other counterparts will be marked "Duplicate".
14.4 Nonspecific Features and Licensed Products. If the Products are supplied
from NetWolves' inventory and contains any features not specified in the
Schedule, Customer grants NetWolves the right to remove any such features. Any
removal will be performed by the manufacturer or another party acceptable to
Customer, upon the request of NetWolves, at a time convenient to Customer,
provided that Customer will not unreasonably delay the removal of such features.
Customer acknowledges that the Products may contain or include software or other
licensed products of a third party. Customer will obtain no title to the
software or licensed products which at all times remains the property of the
owner of the software or licensed products. A license from the owner may be
required and it is Customer's responsibility to obtain any required license
before the use of the software or licensed product. Customer agrees to treat the
software and licensed products as confidential information of the owner, to
observe all copyright restrictions, and not to reproduce or sell the software or
licensed products.
14.5 Additional Documents. Customer will, upon execution of this Product
Agreement and as may be requested thereafter, provide NetWolves with a
secretary's certificate of incumbency and authority and any other documents
reasonably requested by NetWolves. Upon the execution of each Schedule with an
aggregate Rent in excess of $2,000,000, Customer will provide NetWolves with an
opinion from Customer's counsel regarding the representations and warranties in
Section 8. Customer will furnish, upon request, audited financial statements for
the most recent period.
14.6 NetWolves' Right to Match. Customer's rights under Section 5.2 and 7.2 are
subject to NetWolves' right to match any sublease or upgrade proposed by a third
party. Customer will provide NetWolves with the terms of the third party offer
and NetWolves will have three (3) business days to match the offer. Customer
shall obtain such upgrade from or sublease the Products to NetWolves if
NetWolves has timely matched the third party offer.
14.7 Electronic Communications. Each of the parties may communicate with the
other by electronic means under mutually agreeable terms.
SECTION 15. DEFINITIONS
Assignee - means an entity to whom NetWolves has sold or assigned its rights as
owner and lessor of the Products.
Attachment - means any accessory, equipment or device and the installation
thereof that does not impair the original function or use of the Products and is
<PAGE>
capable of being removed without causing material damage to the Products and is
not an accession to the Products.
Casualty Loss - means the irreparable loss or destruction of Products.
Casualty Value - means the greater of the aggregate Rent remaining to be paid
for the balance of the lease term or the Fair Market Value of the Products
immediately prior to the Casualty Loss. However, if a Casualty Value Table is
attached to the relevant Schedule its terms will control.
Commencement Certificate - means the NetWolves provided certificate which must
be signed by Customer within ten (10) days of the Commencement Date as requested
by NetWolves.
Commencement Date - is defined in each Schedule.
Default Costs - means reasonable attorney's fees and remarking costs resulting
from a Customer default or NetWolves' enforcement of its remedies.
Event of Default - means the events described in Subsection 13.1.
Fair Market Value - means the aggregate amount which would be obtainable in an
arm's-length transaction between an informed and willing buyer/user and an
informed and willing seller under no compulsion to sell.
Initial Term - means the period of time beginning on the first day of the first
full Rent Interval following the Commencement Date for all Products and
continuing for the number of Rent Intervals indicated on an Schedule.
Interim Rent - means the pro-rata portion of Rent due for the period from the
Commencement Date through but not including the first day of the first full Rent
Interval included in the Initial Term.
Licensed Products - means any software or other licensed products attached to
the Products.
Like Part - means a substituted part which is lien free and of the same
manufacturer and part number as the removed part, and which when installed on
the Products will be eligible for maintenance coverage with the manufacturer of
the Products.
Like Products - means replacement Products which are lien free and of the same
model, type, configuration and manufacture as Products.
Notice Period - means the time period described in a Schedule during which
Customer may give NetWolves notice of the termination of the term of that
Schedule.
Overdue Rate - means the lesser of 18% per year or the maximum rate permitted by
the law of the state where the Products are located.
Owner - means the owner of the Products.
Products - means the property described on a Schedule and any replacement for
that property required or permitted by this Product Agreement or a Schedule but
not including any Attachment.
Reconfiguration - means any change to Products that would upgrade or downgrade
the performance capabilities of the Products in any way.
Rent - means the rent, including Interim Rent, Customer will pay for the
Products expressed in an Schedule either as a specific amount or an amount equal
to the amount which NetWolves pays for the Products multiplied by a lease rate
factor plus all other amounts due to NetWolves under this Product Agreement or a
Schedule.
Rent Interval - means a full calendar month or quarter as indicated on a
Schedule.
Schedule - means a Schedule which incorporates all of the terms and conditions
of this Product Agreement and the Master Agreement and, for purposes of Section
14.3, its associated Commencement Certificate(s).
Secured Party - means an entity to whom NetWolves has granted a security
interest in a Schedule and related Products for the purpose of securing a loan.
IN WITNESS WHEREOF, the parties have caused this Product Agreement to be
executed by their duly authorized officers as of the day and year first set
forth above.
_____________________________________ NETWOLVES, CORPORATION
Customer
By: _________________________________ By: ___________________________________
Title: ______________________________ Title: ________________________________
Form 6004 2/99
<PAGE>
EQUIPMENT SCHEDULE NO. ___
DATED _______
TO THE PRODUCT AGREEMENT DATED ________
LESSEE: LESSOR: NetWolves Corporation
Address for Legal Notices: Address for All Notices:
- -------------------------
Attn: Corporate Secretary Attn:
Address for Administrative
- --------------------------
Correspondence: Address for Invoices:
- -------------- --------------------
Attn: Attn:
Phone:
Fax: Lessee Reference No:
-------------------
(24 digits maximum)
Initial Term: 48 Months
Location of Equipment:
- --------------------- Rent:
----
Estimated Equipment Rent:
------------------------
Months 1-48: $200.00 Per Unit/ Per Month
Service Rent:
------------
Installation: $600.00
Ongoing Maintenance: Months 1-12: $0
Months 13-48: $28.00 Per Unit/Per Month
Transportation Charges (Select one):
----------------------------------
Attn: ____ Amortized Over Initial Term
Phone: ____ Lessee Pays Vendor Directly
EQUIPMENT (as defined below):
- ---------
Item Machine Model/
No. Qty. Mfg. Type Feature Description
- --- ---- ---- ------- ------- -----------
<PAGE>
Risk of Loss: Pursuant to the Product Agreement, Lessor and Lessee agree that
the risk of loss is the responsibility of the Lessee.
Notice Period: The Notice Period will be not less than ninety (90) days nor more
than twelve (12) months prior to the expiration of the Initial Term, or any
extension thereof. If Lessee gives proper written notice of termination but
fails to return the Equipment on the expiration date of the Initial Term, or any
extension thereof, the Schedule will continue in full force and effect and
Lessee will be required to provide an additional sixty (60) days written notice
of termination. Such termination will be effective at the end of the month in
which the last day of the sixty (60) day notice requirement occurs. The Rent
will continue at the current rate until the effective date of the written notice
of termination and the Equipment is properly returned.
Special Terms: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Product Agreement as they pertain to
this Equipment Schedule are modified and amended as follows:
For purposes of this Equipment Schedule, all references to "Equipment" will be
deemed to mean "Product", and all references to "Lessee" will be deemed to mean
"Customer" as set forth in the Product Agreement. In addition, all references to
"Lessor" will be deemed to mean "NetWolves Corporation" as set forth in the
Product Agreement.
Multiple Delivery Special Term
- ------------------------------
1. Equipment
---------
Lessor's obligation to lease Equipment under this Equipment Schedule applies to
Equipment described in this Equipment Schedule for which Lessor receives
Commencement Certificates from Lessee during the period from ____ to _____ up to
an aggregate purchase price of $_________. Lessee acknowledges that it has
either received or approved Lessor's purchase documentation. If the cost or
configuration of the Equipment changes, Lessor may adjust the Lease Rate Factors
to reflect these additional costs or related expenses.
2. Commencement Date
-----------------
The Commencement Date for each item of Equipment will be the day on which the
Equipment is installed and qualified for a commercially available manufacturer's
standard maintenance contract or warranty coverage. Lessee agrees to confirm the
Commencement Date by providing Lessor with a Commencement Certificate in the
form attached hereto. Lessor will summarize all Commencement Certificates
received in the same calendar month into a Summary Schedule in the form attached
to this Equipment Schedule as Exhibit I, and the Initial Term will begin on the
first day of the next calendar month. Lessee agrees that for administrative
purposes, including without limitation, invoicing of Rent and taxes and
assignment of an identifying lease number, Lessor may administer the Summary
Schedule as if it constituted a separate Equipment Schedule. Alternatively, if
Lessor requests Lessee to execute a Summary Schedule, Lessee will have an
appropriate official of Lessee execute and promptly return the Summary Schedule
to Lessor. Executed Summary Schedules will incorporate the terms and conditions
of the Product Agreement and this Equipment Schedule and will constitute a
separate Equipment Schedule.
3. Adverse Change
--------------
If Lessee defaults or there is an adverse change in Lessee's credit standing,
Lessor, at its option with prior written notice to Lessee, will be relieved of
its obligations to lease Equipment for which Lessor has not received
Commencement Certificates from Lessee prior to the date of such notice.
4. Prepayment
----------
In consideration of Lessor entering into this Equipment Schedule, Lessee agrees
to remit payment of the Rent payment for Month 48 with the Rent payment for
Month 1.
<PAGE>
5. Vendor Credits
--------------
If after the Commencement Date for an item of Equipment, Lessee finds such item
of Equipment to be inoperable, Lessee will seek recourse solely against the
vendor of the Equipment for resolution of any problems concerning performance of
the Equipment. If the item of Equipment is replaced by the vendor, Lessee agrees
to provide Lessor with the serial number for the replacement equipment within 10
days of replacement. Lessor will not process any invoices associated with the
Equipment being returned to vendor or the replacement equipment.
Notwithstanding the foregoing, if after the Commencement Date for an item of
Equipment, Lessee finds that (i) the vendor has over-charged for an item of
Equipment, or (ii) the vendor has shipped an incorrect item of Equipment, upon
30 days prior written notice from Lessee, Lessor agrees to process any credits
received from the vendor and apply the credits to the Rent hereunder. The rental
adjustment will be effective on Lessor's next billing cycle following the 30 day
notice period.
6. Requirements for Return of Equipment at Lease Termination
---------------------------------------------------------
Lessee will appoint a principal contact person (the "Contact") with
responsibility for coordinating delivery and return of Equipment to one
centralized shipping location.
Lessee's Contact will provide Lessor a ten day written notice of the Equipment's
availability for pick-up, but in no event prior to Lessee's notice of
termination pursuant to the "Notice Period" provision of the Schedule.
If Lessee elects to return less than all of the Equipment, Lessee will provide
Lessor with the description of the Equipment being returned, including the line
number. Upon Lessee's request, Lessor will provide Lessee with a report which
Lessee can use to identify the Equipment description by line number.
Lessor will make arrangements for its transportation carrier to contact Lessee's
Contact to coordinate the return of the Equipment. Lessor's transportation
carrier will be responsible for packing the Equipment on site on the date of
pick-up.
Lessee will be responsible and submit payment upon receipt of an invoice for the
Fair Market Value of any Equipment or Equipment parts which are missing or
returned damaged (the "Affected Equipment"), provided Lessor or its agents did
not cause such Affected Equipment.
7. Personal Property Tax
---------------------
Notwithstanding anything to the contrary contained in the Product Agreement,
Lessor hereby appoints Lessee as its agent for the purpose of filing personal
property tax returns. Lessee will pay the appropriate taxing jurisdiction for
any personal property tax owed that is imposed against Lessee or Lessor in
connection with the Equipment, together with any penalties, fines or interest
thereon.
Lessee agrees to pay when due and indemnify and hold Lessor harmless from and
against Lessee's failure to remit payment of personal property tax owed
(together with any related interest or penalties not arising from negligence on
the part of Lessee) now or hereafter imposed or assessed against the Lessor or
the Equipment by the relevant taxing jurisdiction. Lessee will cooperate with
Lessor in obtaining all relevant documentation necessary to substantiate payment
of such personal property tax if requested by Lessor.
8. General Services Terms:
----------------------
Lessor will begin performing the Services as described in the Statement of Work
attached as Exhibit II within thirty (30) days from execution of this Equipment
Schedule. The performance of the Services will be coterminous with the Initial
Term of the associated Equipment. The Service Rent will be as set forth in
Section 9 herein. Any change to the Statement of Work must be documented in
writing. Lessor will have no obligation to commence work in connection with a
change request until the change has been approved in writing by Lessor and
Lessee. Lessee will reimburse Lessor for all reasonable expenses incurred in
connection with Lessor's performance under the Statement of Work.
<PAGE>
Lessor warrants that the Services will be performed in a professional manner.
EXCEPT AS EXPRESSLY SET FORTH IN THIS EQUIPMENT SCHEDULE OR THE PRODUCT
AGREEMENT, LESSOR MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
Proprietary Materials will mean all materials, information and other deliverable
items developed under a Statement of Work as well as proprietary tools,
methodologies, documentation and methods of analysis used in connection with the
Services. Lessee acknowledges and agrees that all such Proprietary Materials are
owned by either Lessor or its subcontractor and that Lessee receives no
ownership interest herein. Notwithstanding the foregoing, Lessor grants to
Lessee the right to use such Proprietary Materials delivered to Lessee under a
Statement of Work for Lessee's internal business use only and not for the
benefit of a third party.
Each party (including its employees and agents) will use the same standard of
care to protect any confidential information of the other, or a subcontractor of
Lessor, disclosed during negotiation or performance of the Statement of Work
that it uses to protect its own confidential information. Confidential
information will not include information which (i) is or becomes publicly
available through no wrongful act of the receiving party; (ii) was known by the
receiving party at the time of disclosure without any obligation of
confidentiality; (iii) was acquired by the receiving party from a third party
without restriction on nondisclosure; or (iv) was developed independently by the
receiving party.
Lessor's liability to Lessee from any cause whatsoever arising out of the
Services under this Equipment Schedule will not, in any event, exceed the
aggregate of the Service Rent paid by Lessee for the Services, excluding the
monthly Rent paid for the Equipment under this Equipment Schedule, giving rise
to the claim during the twelve (12) month period immediately prior to the
occurrence of the claim. UNDER NO CIRCUMSTANCES, WILL EITHER PARTY BE LIABLE FOR
INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Lessee will provide Lessor with access to each site specified in the site list
to be provided by Lessee. Lessee will be responsible for preparing each site for
the installation of the Equipment, including but not limited to, providing
specified power and cabling, environmental and wiring requirements, and
obtaining and maintaining necessary permits and certifications. In the event
that Lessee fails to fully prepare the site prior to installation of the
Equipment as described above, Lessee will be responsible for an additional
charge at the hourly rate set forth in the Statement of Work.
9. Services Rent:
-------------
Installation Services: Lessee will be responsible for an Installation charge of
$600.00 upon delivery and acceptance of the Equipment as evidenced by Lessee
completing a Commencement Certificate. Lessor will invoice Lessee for the
Installation charge at the time that Lessor invoices Lessee for the Rent payment
for Months 1 and 48 of the Initial Term.
On-Going Maintenance Services: Service Rent will be invoiced and due on the
first day of each month, in advance, beginning on the 13th month of the Initial
Term of each Summary Schedule.
10. Principal Contact
-----------------
Lessee agrees that it will designate an individual as a central contact to
coordinate confirmation of delivery and acceptance of the Equipment at the
end-user locations. The central contact will consolidate Commencement
Certificates from the end-user locations prior to forwarding such verification
to Lessor.
Product Agreement: This Equipment Schedule is issued pursuant to the Product
Agreement identified on page 1 of this Equipment Schedule. All of the terms and
conditions of the Product Agreement are incorporated in and made a part of this
Equipment Schedule as if expressly described in this Equipment Schedule, and
this Equipment Schedule constitutes a separate lease for the Equipment. The
parties reaffirm all of the terms and conditions of the Product Agreement
(including, without limitation, the representations and warranties set forth in
<PAGE>
the Product Agreement) except as modified by this Equipment Schedule. This
Equipment Schedule may not be amended or rescinded except by a writing signed by
both parties.
NetWolves Corporation
as Lessee as Lessor
By:_______________________________ By:_____________________________________
Title:____________________________ Title:__________________________________
Date:_____________________________ Date:___________________________________
<PAGE>
EXHIBIT I
SUMMARY SCHEDULE
----------------
This Summary Schedule dated _________ is executed pursuant to Equipment
Schedule No. ______ to the Product Agreement dated ____ between NetWolves
Corporation ("Lessor") and _______ ("Lessee"). All of the terms, conditions,
representations and warranties of the Product Agreement and Equipment Schedule
No. are incorporated herein and made a part hereof and this Summary Schedule
constitutes an Equipment Schedule for the Equipment described below.
1. Equipment:
---------
Equipment
Qty. Mfg. Type/Model Serial # Location
--- --- ---------- -------- --------
"SEE ATTACHED"
2. Commencement Date: (See attached)
-----------------
3. Initial Term Begins:
-------------------
4. Total Equipment Cost:
--------------------
5. Rent:
----
6. Representations of Lessee:
-------------------------
Each item of Equipment has been delivered to the location indicated above,
tested, inspected, found to be in good working order and accepted by the
Lessee on the Commencement Date.
Please sign and return one copy of this Summary Schedule to Lessor within ten
(10) days of receipt.
NetWolves Corporation
as Lessee as Lessor
By: SAMPLE By:
----------------------------- -------------------------------------
Title: Title:
-------------------------- ----------------------------------
<PAGE>
COMMENCEMENT CERTIFICATE
------------------------
This Certificate dated is executed pursuant to Equipment Schedule No. _____
to the Product Agreement dated __________ between NetWolves Corporation.
("Lessor") and _________ ("Lessee").
1. Equipment:
---------
Equipment
Qty. Mfg. Type/Model Serial # Location
--- --- ---------- -------- --------
2. Commencement Date:
-----------------
3. Representations of Lessee:
-------------------------
The Equipment has been delivered to the location indicated above, tested,
inspected, found to be in good working order and accepted by the Lessee on the
Commencement Date.
as Lessee
By:_________________________________
Title:______________________________
<PAGE>
EXHIBIT II
STATEMENT OF WORK NO. 1
TO THE EQUIPMENT SCHEDULE
DATED ____________________, 1999
BETWEEN NETWOLVES CORPORATION ("NETWOLVES")
AND _________________________ ("CUSTOMER")
1.0 Scope of Services
NetWolves will provide the following services at the sites detailed in
document to be supplied by customer to the Services Schedule for Customer's
systems.
Installation
Maintenance
Tier 1 Help Desk
Moves, Adds, Changes (Optional)
De-Installation (Optional)
Project Planning (management)
2.0 Service Components
2.1 Installation
NetWolves will install the equipment for which site surveys have been
completed.
2.1.1 Service Scope
Perform and review site survey for each site and confirm
readiness. Resolve any open issues to complete site readiness.
Develop site specific installation procedures.
Coordinate and finalize scheduling of:
* All involved NetWolves, Customer and third party personnel.
* Shipping and receipt of equipment at each site.
* Physical implementation of the equipment.
* Testing and certification of installed equipment in
accordance with the test script.
* Site sign-off by Customer's site representative.
* Circuit provisioning.
2.1.2 Service Deliverables
Site specific installation procedures.
Fully installed, tested, and functional equipment.
Comprehensive installation documentation, including:
* Descriptions, configurations and other pertinent information
for each item of installed equipment.
* Checklist of completed implementation steps and results.
* Outstanding or open issues list.
* Completed sign-off forms.
2.1.3 Assumptions
Customer personnel will be available as scheduled to assist in
the installation pursuant to the project plan.
Customer will provide NetWolves with an implementation test
script for each site.
Installation schedules will be agreed upon between NetWolves and
Customer.
<PAGE>
Installations will occur during normal business hours (8:00 AM to
5:00 PM local time, Monday through Friday excluding New Year's
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
the Friday after Thanksgiving, and Christmas Day).
NetWolves will provide implementation test script per Customer
request.
Shipping costs are not included.
2.2 Maintenance
NetWolves will provide maintenance for the equipment identified in Exhibit
B.
2.2.1 Service Scope
Determine maintenance coverage requirements.
Maintain inventory of configured "hot swap" boxes to be deployed upon
dispatch.
Upon notification from NetWolves help desk, inventory box will be
shipped overnight for installation.
Technician will arrive at site and de-install current box, install and
test new box and ship broken unit to Netwolves facility for
refurbishment
Provide documentation on all of the above to Customer and, if
appropriate, to the NetWolves Help Desk or NetWolves Network
Management Center.
2.2.2 Service Deliverables
Next day on-site replacement for broken boxes
2.3 Moves, Adds and Changes (Optional)
NetWolves will provide moves, adds, and changes on a demand basis to
facilitate modifications to the network environment.
2.3.1 Service Scope
Determine scope of work to be performed, including scheduling and
pricing.
Coordinate necessary services or materials to facilitate the change
(equipment, software, telecommunications, etc.).
Identify resources to perform the change (NetWolves, Customer, and/or
third-party personnel).
Schedule and coordinate execution of the change.
Execute the change and test, as applicable.
6x12 to next day on-site response.
2.3.2 Service Deliverables
Implementation of the change as specified by an authorized change
request.
Notification and documentation upon completion, as appropriate.
2.3.3 Assumptions
Moves, adds, and changes are modifications to the network environment
which are outside the scope of this Statement of Work and are
therefore priced on a demand basis.
Customer will provide access to Customer sites where these activities
will be performed.
Customer will provide site contacts, as appropriate, for inspection,
decision-making and site sign-off.
Moves, adds and changes will only be provided based upon authorized
change requests.
2.4 De-Installation (Optional)
NetWolves will de-install the equipment for which site surveys have been
completed.
2.4.1 Service Scope
Development of site specific de-installation procedures.
De-installation of equipment as determined by procedures.
<PAGE>
Prepare equipment for shipment.
2.4.2 Service Deliverables
Site specific de-installation procedures.
De-installation documentation, including:
* Descriptions, serial numbers, versions, and/or other pertinent
information identified in the de- installation procedures.
* Checklist of completed de-installation steps and results.
* Outstanding or open issues list.
2.4.3 Assumptions
NetWolves will perform de-installations only at those sites at which
NetWolves is performing implementation of new equipment.
Customer will provide a list of the equipment to be de-installed
2.5 Help Desk Operation
* Customer will have access to the Help Desk on a 7x24x365 basis except for
New Year's Day, Memorial Day, July 4, Labor Day, Thanksgiving Day, the
Friday after Thanksgiving, and Christmas Day. NetWolves will route all
calls outside of the scheduled access hours to Customer for resolution.
* The Help Desk will provide the first point of contact for end users. End
users may submit requests to the Help Desk via telephone, e-mail, or voice
mail.
* The first point of contact will consist of providing the initial problem
analysis and resolution. Escalations will be handled under mutually agreed
upon escalation procedures.
* NetWolves will provide a Help Desk Supervisor who will manage the daily
operation of the Help Desk. The Help Desk Supervisor will report directly
to the NetWolves Help Desk Service Manager who will be responsible for the
overall management of the Help Desk.
<PAGE>
Exhibit D
to the Master Program Agreement between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
Related Software
----------------
Fox OS
Fox A1
ESCN Navigator
ESCN Mother
ESCN Workbench
ESCN Mission Control
All training content provided through the ESCN System, created or licensed by
NetWolves Corporation/The Sullivan Group.
<PAGE>
Exhibit E
Comdisco Services
to the Master Program Agreement
between NetWolves Corporation and Comdisco, Inc.
Dated July 26, 1999
Form of Services Agreement and Services Schedule Attached.
<PAGE>
SERVICES AGREEMENT
This Services Agreement dated ______________________________ is made by and
between NetWolves Corporation ("NetWolves") with offices at 200 Broadhollow
Road, Melville, New York 11747, and ______________________
__________________________________________________ ("Customer") with offices at
____________________________________________________________________________.
SECTION 1. SCOPE
1.1 Schedules. NetWolves will provide Services under the terms and conditions of
this Services Agreement and as more particularly defined in each Schedule. Each
Schedule will constitute a separate agreement with respect to the Services
provided.
1.2 Changes. Any change to this Services Agreement must be documented in
writing. NetWolves will have no obligation to commence work in connection with a
change request until the change has been approved in writing by NetWolves and
Customer.
1.3 NetWolves may, as it deems appropriate, use subcontractors for all or any
portions of the Services.
SECTION 2. FEES
2.1 Fees. Customer will pay the fees for the Services in the amounts and in
accordance with the payment terms set forth in each Schedule.
2.2 Late Fee. Whenever any payment is not made within thirty (30) days of the
invoice date, Customer will pay interest at the lesser of one and one-half
percent (1.5%) per month or the maximum amount permitted by law.
2.3. Expenses. Customer will reimburse NetWolves for all reasonable expenses
incurred in connection with services requested by Customer which are outside the
scope of the Services outlined under a Schedule.
2.4 Taxes. Customer will pay or reimburse NetWolves for any taxes, fees or other
charges imposed by any local, state or federal authority (together with any
related interest or penalties not due to the fault of NetWolves) resulting from
this Services Agreement, or from any activities hereunder, except for taxes
based on NetWolves' net income.
SECTION 3. TERM
Each Schedule will take effect upon the signature of both parties and continue
through the term as specified therein.
The Services to be provided under each Schedule will begin on the date set forth
in the Schedule.
SECTION 4. WARRANTIES AND LIABILITY
4.1 Services. NetWolves warrants that the Services will be performed in a
professional manner.
4.2 Exclusive Warranty. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NETWOLVES MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
4.3 Liability. NetWolves' liability to Customer from any cause whatsoever
arising out of this Services Agreement will not, in any event, exceed the
aggregate of the fees paid by Customer for the Services giving rise to the claim
during the twelve (12) month period immediately prior to the occurrence of the
claim. UNDER NO CIRCUMSTANCES, WILL EITHER PARTY BE LIABLE FOR INDIRECT,
SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
<PAGE>
SECTION 5. MUTUAL INDEMNIFICATION
Each party will indemnify and hold the other party and its employees and agents,
harmless against any and all claims, liabilities, losses, damages and causes of
action relating to bodily injury, including death, arising out of the
intentional or negligent acts or omissions of the indemnifying party during the
performance of a Schedule. The indemnifying party, however, will not be
responsible for injury attributed to the intentional or negligent acts or
omissions of the indemnified party, its employees or agents.
SECTION 6. OWNERSHIP AND CONFIDENTIALITY
6.1 Ownership. Proprietary Materials will mean all materials, information and
other deliverable items developed under a Schedule as well as proprietary tools,
methodologies, documentation and methods of analysis used in connection with the
Services. Customer acknowledges and agrees that all such Proprietary Materials
are owned by either NetWolves' or its subcontractor and that Customer receives
no ownership interest herein. Notwithstanding the foregoing, NetWolves grants to
Customer the right to use such Proprietary Materials delivered to Customer under
a Schedule for Customer's internal business use only and not for the benefit of
a third party. Any proprietary software product will be licensed to Customer
under a separate license agreement.
6.2 Confidentiality. Each party (including its employees and agents) will use
the same standard of care to protect any confidential information of the other,
or a subcontractor, disclosed during negotiation or performance of this Services
Agreement that it uses to protect its own confidential information. Confidential
information will not include information which (i) is or becomes publicly
available through no wrongful act of the receiving party; (ii) was known by the
receiving party at the time of disclosure without any obligation of
confidentiality; (iii) was acquired by the receiving party from a third party
without restriction on nondisclosure; or (iv) was developed independently by the
receiving party.
SECTION 7. TERMINATION
Either party may, by written notice, terminate a Services Schedule for cause if
the other party fails to cure a material default under the Schedule. Any
material default must be specifically identified in the notice of termination.
After written notice, the notified party will have ten (10) days to remedy any
monetary default and thirty (30) days to remedy any other default. Failure to
remedy the material default within the time period provided for herein will give
cause for immediate termination. If termination is due to Customer's material
default, Customer will immediately pay to NetWolves the amounts then owing under
the relevant Schedule up to the date of termination. The foregoing payments will
be in addition to all other legal and equitable rights of NetWolves and any
remedies set forth in a Services Schedule.
SECTION 8. MISCELLANEOUS
8.1 Each party is an independent contractor and, except as expressly set forth
herein, will have no authority to bind or commit the other party. Nothing herein
shall be deemed or construed to create a joint venture, partnership or agency
relationship between the parties.
<PAGE>
8.2 Customer may not assign this Services Agreement, or any of its rights or
obligations therein.
8.3 The waiver by either party of a breach of any provision of this Services
Agreement will not be construed as a waiver of any subsequent breach. The
invalidity, in whole or in part, of any provision of this Services Agreement
will not affect the validity of the remaining provisions.
8.4 This Services Agreement including each Schedule represents the entire
agreement between the parties and supersedes all oral or other written
agreements or understandings between the parties concerning the Services. This
Agreement may not be modified unless in writing and signed by the party against
whom enforcement of the modification is sought.
8.5 Any notice, request or other communication under this Services Agreement
will be given in writing and deemed received upon the earlier of actual receipt
or three (3) days after mailing if mailed postage prepaid by regular or airmail
to the address set forth above or, one day after such notice is sent by courier
or facsimile transmission.
8.6 No third party is intended to be, or will be construed to be, a beneficiary
of any provision of this Services Agreement nor have any right to enforce any of
its provisions or to pursue any remedy for its breach.
8.7 Those terms and conditions which would, by their meaning or intent, survive
the expiration or termination of any Schedule will so survive.
8.8 THIS SERVICES AGREEMENT AND EACH SCHEDULE
IS GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK WITHOUT REGARD TO ITS CONFLICT OF LAWS
PROVISIONS. If there is any dispute or litigation as a result of this Services
Agreement, the prevailing party will be entitled to reasonable attorney's fees.
Any action by either party must be brought within two (2) years after the cause
of action arose.
8.9 During the term of each Schedule and for a period of one (1) year from the
completion of the Services thereunder, Customer agrees not to knowingly employ
or solicit for employment any NetWolves or subcontractor employee who was
involved in the furnishing of the Services under the relevant Schedule.
8.10 Terms and conditions on Customer's purchase order or other acknowledgment
form will be of no force or effect.
<PAGE>
8.11 NetWolves will not be considered in default hereunder due to any failure in
its performance of this Services Agreement should such failure arise out of
causes beyond its control. Such causes include, but are not limited to, acts of
God, acts of any federal, state or local government or authority, fires, floods,
or other disasters, strikes, degradation of telephone or other means of
communication services or utility outages.
IN WITNESS WHEREOF, the parties have caused this Services Agreement to be
executed by their duly authorized officers as of the day and year first set
forth above.
______________________________________ NetWolves Corporation
Customer
By: __________________________________ By: __________________________________
Title: _______________________________ Title: _______________________________
Form 6000, 10/98
<PAGE>
SERVICES SCHEDULE DATED [INSERT DATE]
TO THE SERVICES AGREEMENT
DATED [INSERT DATE]
BETWEEN NETWOLVES CORPORATION ("NETWOLVES")
AND [CUSTOMER NAME] ("CUSTOMER")
A. Scope of Services
NetWolves will provide the Services in the attached Statement of Work. In
the event of any conflict between this Services Schedule and a Statement of
Work, the Statement of Work will govern.
B. Fees
[Include the details of the payment schedule here or on an attached
Exhibit. As part of the payment schedule indicate when NetWolves will begin
invoicing for each fee component.]
Expenses will be billed monthly, or at NetWolves' option, as incurred.
C. Commencement of the Services
The Services will commence on [insert date that Services will begin].
D. Term
The term of this Schedule will commence upon execution by both parties and
will continue for a period of [months/weeks] from [insert trigger date].
E. Change Control
Upon the identification of any mutually acceptable change to this Schedule,
Customer and NetWolves will complete a Change Authorization Form.
F. Responsibilities
Customer will assign a program sponsor who will have full authority with
respect to all matters pertaining to this Schedule and who will be
NetWolves' primary contact. If Customer reassigns its program sponsor or
such individual has any other conflict which would impact the delivery of
the Services, Customer will promptly replace such person with another
person no less qualified or knowledgeable as to Customer's business.
Customer will also make available to NetWolves other necessary resources on
a timely basis and will ensure that Customer's personnel involved in the
Services have sufficient knowledge of all relevant aspects of Customer's
business, including technical, financial and functional requirements
relevant to this Schedule.
Customer acknowledges and agrees that NetWolves' ability to perform in
accordance with this Schedule is contingent on Customer's accurate and
timely performance of its responsibilities. In the event that Customer
fails to perform any of its responsibilities specified herein, NetWolves
may perform such responsibilities and Customer will reimburse NetWolves for
all costs incurred. Notwithstanding the foregoing, NetWolves has no
obligation to perform any such responsibilities.
Schedule - Page 1
This document is proprietary and confidential to NetWolves, Inc. Unauthorized
distribution is prohibited.
<PAGE>
G. Reviews
When Customer review or acceptance of procedures, plans or any other items
are provided for, and NetWolves has not received written notice from
Customer of acceptance or objection within three (3) business days of
Customer's receipt of the submitted item, the item will be deemed accepted.
H. Delays
In the event that NetWolves is delayed in the performance of the Services
as a result of Customer's acts or failure to act, Customer will reimburse
NetWolves for all costs incurred, including but not limited to any cost
associated with NetWolves' resources. In the event of a delay in the
commencement of the Services, NetWolves and Customer will mutually agree
upon a new commencement date.
I. Exhibits
The Exhibits to this Services Schedule are hereby incorporated into and
deemed to be a part of this Services Schedule.
[List Exhibits here.]
J. Special Terms
Customer will provide NetWolves with access to each Site specified in
Exhibit __ to enable NetWolves to perform the Services. Customer will be
responsible for preparing each Site for the installation of the equipment,
including but not limited to, providing specified power and cabling,
environmental and wiring requirements, and obtaining and maintaining
necessary permits and certifications.
This Services Schedule is issued pursuant to the Services Agreement identified
above. All of the terms and conditions of the Services Agreement are
incorporated herein and made a part hereof. This Services Schedule constitutes a
separate agreement with respect to the Services provided.
_________________________________ NetWolves Corporation
Customer
By:______________________________ By:_____________________________
Title:___________________________ Title:__________________________
Date:____________________________ Date:___________________________
The terms and conditions of this Schedule, including pricing, are valid only if
executed by [insert date].
3/99
Schedule - Page 2
This document is proprietary and confidential to NetWolves, Inc. Unauthorized
distribution is prohibited.
<PAGE>
EXHIBIT A
STATEMENT OF WORK NO. 1
TO THE SERVICES SCHEDULE
DATED ____________________, 1999
BETWEEN NETWOLVES ("NETWOLVES")
AND _________________________ ("CUSTOMER")
1.0 Scope of Services
NetWolves will provide the following services at the sites detailed in
document to be supplied by customer to the Services Schedule for Customer's
systems. For purposes of this Statement of Work, "systems" will mean the
equipment identified in Exhibit B.
Installation
Maintenance
Tier 1 Help Desk
Moves, Adds, Changes (Optional)
De-Installation (Optional)
2.0 Service Components
2.1 Installation
NetWolves will install the equipment for which site surveys have been
completed.
2.1.1 Service Scope
Obtain and review site survey for each site and confirm
readiness. Resolve any open issues to complete site readiness.
Develop site specific installation procedures.
Coordinate and finalize scheduling of:
* All involved NetWolves, Customer and third party personnel.
* Shipping and receipt of equipment at each site.
* Physical implementation of the equipment.
* Testing and certification of installed equipment in
accordance with the test script.
* Site sign-off by Customer's site representative.
2.1.2 Service Deliverables
Site specific installation procedures.
Fully installed, tested, and functional equipment.
Comprehensive installation documentation, including:
* Descriptions, configurations and other pertinent information
for each item of installed equipment.
* Checklist of completed implementation steps and results.
* Outstanding or open issues list.
* Completed sign-off forms.
2.1.3 Assumptions
Customer personnel will be available as scheduled to assist in
the installation pursuant to the project plan.
Customer will provide NetWolves with an implementation test
script for each site.
Installation schedules will be agreed upon between NetWolves and
Customer.
Installations will occur during normal business hours (8:00 AM to
5:00 PM local time, Monday through Friday excluding New Year's
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
the Friday after Thanksgiving, and Christmas Day).
<PAGE>
2.2 Maintenance
NetWolves will provide maintenance for the equipment identified in Exhibit
B.
2.2.1 Service Scope
Determine maintenance coverage requirements.
Maintain inventory of configured "hot swap" boxes to be deployed upon
dispatch.
Upon notification from NetWolves help desk, inventory box will be
shipped overnight for installation.
Technician will arrive at site and de-install current box, install and
test new box and ship broken unit to Netwolves facility for
refurbishment
Provide documentation on all of the above to Customer and, if
appropriate, to the NetWolves Help Desk or NetWolves Network
Management Center.
2.2.2 Service Deliverables
Next day on-site replacement for broken boxes
2.3 Moves, Adds and Changes (Optional)
NetWolves will provide moves, adds, and changes on a demand basis to
facilitate modifications to the network environment.
2.3.1 Service Scope
Determine scope of work to be performed, including scheduling and
pricing.
Coordinate necessary services or materials to facilitate the change
(equipment, software, telecommunications, etc.).
Identify resources to perform the change (NetWolves, Customer, and/or
third-party personnel).
Schedule and coordinate execution of the change.
Execute the change and test, as applicable.
2.3.2Service Deliverables Implementation of the change as specified by an
authorized change request. Notification and documentation upon
completion, as appropriate.
2.3.3 Assumptions
Moves, adds, and changes are modifications to the network environment
which are outside the scope of this Statement of Work and are
therefore priced on a demand basis.
Customer will provide access to Customer sites where these activities
will be performed.
Customer will provide site contacts, as appropriate, for inspection,
decision-making and site sign- off.
Moves, adds and changes will only be provided based upon authorized
change requests.
2.4 De-Installation (Optional)
NetWolves will de-install the equipment for which site surveys have been
completed.
2.4.1 Service Scope
Development of site specific de-installation procedures.
De-installation of equipment as determined by procedures.
Prepare equipment for shipment.
2.4.2 Service Deliverables
Site specific de-installation procedures.
De-installation documentation, including:
* Descriptions, serial numbers, versions, and/or other pertinent
information identified in the de- installation procedures.
<PAGE>
* Checklist of completed de-installation steps and results.
* Outstanding or open issues list.
2.4.3 Assumptions
NetWolves will perform de-installations only at those sites at which
NetWolves is performing implementation of new equipment.
Customer will provide a list of the equipment to be de-installed
2.5 Help Desk Operation
* Customer will have access to the Help Desk on a 7x24x365 basis except for
New Year's Day, Memorial Day, July 4, Labor Day, Thanksgiving Day, the
Friday after Thanksgiving, and Christmas Day. NetWolves will route all
calls outside of the scheduled access hours to Customer for resolution.
* The Help Desk will provide the first point of contact for end users. End
users may submit requests to the Help Desk via telephone, e-mail, or voice
mail.
* The first point of contact will consist of providing the initial problem
analysis and resolution. Escalations will be handled under mutually agreed
upon escalation procedures.
* NetWolves will provide a Help Desk Supervisor who will manage the daily
operation of the Help Desk. The Help Desk Supervisor will report directly
to the NetWolves Help Desk Service Manager who will be responsible for the
overall management of the Help Desk.
<PAGE>
Exhibit F
to the Master Program Agreement
between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
Target Customer
---------------
Any company or account engaged in the distance learning application through the
Sullivan Group and NetWolves Corporation.
<PAGE>
Exhibit G
to the Master Program Agreement
between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
Form of Master Agreement and Services Schedule attached.
FIRST AMENDMENT TO EMPLOYMENT
AGREEMENT OF KEVIN F. SHERLOCK
WHEREAS Kevin F. Sherlock ("Executive"), an individual residing at 162
Boney Lane, St. James, New York 11780, entered into an employment agreement with
NetWolves Corporation, a New York corporation having its principal place of
business located at 33 Walt Whitman Drive, Suite 125, Huntington Station, New
York 11743 (the "Company"), dated as of June 17, 1998 (the "Employment
Agreement"); and
WHEREAS, the parties now desire to amend certain terms of the Employment
Agreement;
NOW, THEREFORE, the parties agree as follows:
1. Section 1 of the Employment Agreement is amended such that Executive
shall tender his resignation as a Director and as Chief Operating Officer of the
Company effective August 1, 1999. At the direction of the Board of Directors,
during the remaining term of the Employment Agreement, Executive's duties shall
be to attempt to secure acquisition, financing, investment and joint venture
candidates for NetWolves, as well as other similar duties which may be assigned
to him. Executive agrees to work from his home and shall not be provided with an
office at any of the Company's offices.
2. Section 2.2 of the Employment Agreement is deleted in its entirety.
3. Section 2.3 of the Employment Agreement is deleted in its entirety,
except that the Company hereby agrees that the warrant issued to Executive shall
be amended as set forth in Exhibit "A" hereto.
4. Section 2.4 of the Employment Agreement is amended such that Executive
shall not be entitled to incur travel, cellular phone and/or entertainment
expenses above a total amount equal to $250.00 during any one month period
without first receiving the written approval of the Company. Reimbursement of
all such expenses by the Company shall be subject to submission by Executive of
appropriate documentation evidencing such expenses and shall be paid by the
Company within thirty (30) days of the Company's receipt of documentation of
such expenses. As of the date of the First Amendment there are business expenses
of $1,800.00, which have been incurred by Executive that will be reimbursed to
Executive simultaneously with the execution of this First Amendment, subject to
Executive's submission of appropriate documentation evidencing such expenses.
5. Section 2.7 of the Employment Agreement is deleted in its entirety.
6. Section 3.1 of the Employment Agreement is deleted in its entirety,
except that the Company hereby agrees that Executive shall be paid the sum of
$130,000 per annum, payable semi-monthly, ending as of June 15, 2001. Executive
shall be entitled to no further compensation from the Company. Executive's
employment shall terminate automatically on June 15, 2001, with no rights of
renewal.
7. All other terms of the Employment Agreement shall remain in full force
and effect.
Dated: September 2, 1999
/s/ Kevin F. Sherlock
KEVIN F. SHERLOCK
NETWOLVES CORPORATION
By: /s/ Peter C. Castle
<PAGE>
Exhibit A
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. N005
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 Kevin F. Sherlock, residing at 162 Boney Lane, Nissequogue, NY 11780 or his
registered assigns ("Registered Holder"), is entitled, subject to the terms set
forth below, to purchase from the Company, 200,000 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, 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.
<PAGE>
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
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.
<PAGE>
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.
1.6 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.
1.7 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
(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.
<PAGE>
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:
"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."
<PAGE>
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.
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
<PAGE>
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: /s/ Philip M. LoRusso
---------------------------------------------------
Name: Philip M. 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
-------------------------------------------------------------------------
<PAGE>
AMENDMENT TO WARRANT ISSUED TO KEVIN SHERLOCK
AMENDMENT to a Warrant (the "Warrant") numbered N005, a copy of which is
annexed hereto, and issued by Watchdog Patrols, Inc. (whose name has been
changed to NetWolves Corporation, a New York corporation) (the "Company"),
pursuant to which the Company granted to Kevin Sherlock ("Sherlock") the right
to purchase 200,000 shares of the Company's Common Stock, par value $0.0033 (the
"Common Stock") for $1.63 per share.
The Company hereby acknowledges and agrees:
1. Unless otherwise defined herein or the context otherwise requires, terms
used herein and defined in the Warrant shall be used herein as so defined.
2. The Warrant is hereby amended as follows:
(a) The opening paragraph of the Warrant commencing with the words
"FOR VALUE RECEIVED" is amended replacing the number "200,000" with the
number "150,000" and inserting after the word "Company" in the fourth line
thereof the words "at any time or from time to time during the three year
period commencing July 1, 2000."
(b) Section 1.6 of the Warrant is deleted in its entirety and replaced
with the following:
"Section 1.6. Exercise. The Warrant, as amended to reduce the number
of shares of Common Stock available for purchase from 200,000 to 150,000,
shall automatically vest on July 1, 2000, notwithstanding any termination
of the employment of Sherlock at any time, and all or any portion thereof
may be exercised at any time after such date."
(c) Section 1.7 of the Warrant is deleted in its entirety.
3. The terms and provisions set forth in this Amendment shall modify and
supersede all inconsistent terms and provisions set forth in the Warrant and
except as expressly modified and superseded by this Amendment, the terms and
provisions of the Warrant are ratified and confirmed and shall continue in full
force and effect. The Company agrees and confirms that the Warrant as amended
hereby shall continue to be the legal, valid and binding obligations of the
Company, enforceable in accordance with its terms.
4. This Amendment shall be governed by and construed in accordance with the
law of the State of New York.
IN WITNESS WHEREOF, the Company has executed this Amendment to be duly
executed and delivered by their duly authorized officer or representative, and
to be effective as of the date below written.
Dated: September 2, 1999
NetWolves Corportion
/s/ Peter C. Castle
Name: Peter C. Castle
Title: Treasurer/Asst. Secretary
STRATEGIC ALLIANCE AGREEMENT
----------------------------
This Strategic Alliance Agreement (this "Agreement") is hereby made and
entered into this 10th day of September, 1999 (the "Effective Date"), by and
among BOCA RESEARCH, INC., a corporation incorporated in the State of Florida,
United States, having a place of business at 1377 Clint Moore Road, Boca Raton,
Florida 33487-2722 ("BOCA"), and NETWOLVES TECHNOLOGIES, INC., a corporation
incorporated in the State of New York, United States, having a place of business
at 200 Broadhollow Road, Suite 207, Melville, New York 11747 ("NETWOLVES"). BOCA
and NETWOLVES are individually referred to in this Agreement as a "Party" and,
collectively, as "Parties."
RECITALS
WHEREAS, BOCA designs, manufactures, and supports hardware products for and
to the specification of other companies, and provides related engineering and
homologation certification services, and BOCA manufactures a thin client or
network computer (a "Thin Client" computer) which is designed to serve primarily
as clients for a network client/server architecture and configured with only the
most essential equipment, typically excluding hard disk drives ("Thin Clients");
WHEREAS, NETWOLVES produces sophisticated, scalable software and hardware
technology (the "FoxBox Technology") that provides enterprise-wide connectivity,
distance learning, firewall security and productivity enhancing applications.
FoxBox Technology includes software providing server-side and client-side
facilities for Thin Client (or network) computers (the "FoxBox Thin Client
Software");
WHEREAS, NETWOLVES has produced general systems specifications for two (2)
new FoxBox chassis, for the FoxBox, and for NETWOLVES Thin Clients, to be used
with the FoxBox Technology, attached hereto as Exhibits B, C and E,
respectively, (collectively, the "Specifications");
WHEREAS, BOCA desires to manufacture FoxBox units and NETWOLVES Thin Client
units conforming to the Specifications and capable of interoperating with the
FoxBox Thin Client Software and to provide related engineering and homologation
certification services for NETWOLVES, and NETWOLVES desires BOCA to perform such
manufacturing and related services; and
WHEREAS, BOCA and NETWOLVES desire to further investigate participating in
joint Marketing, Sales, Engineering and Training activities to provide a
turn-key solution to the Internet Gateway Marketplace;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Parties hereto agree as follows:
<PAGE>
OPERATIVE TERMS
ARTICLE 1
DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
meanings specified below:
1.1 "Affiliate" shall mean any corporation, partnership, joint venture, or
other entity (i) in which either Party own or controls, or is owned or
controlled by, or in common ownership or control with either Party to the extent
of holding directly or indirectly stock or interest representing more than fifty
percent (50%) of the aggregate stock or other interest entitled to vote on
general decisions reserved to stockholders, partners, or other owners of such
entity; or (ii) if a partnership, as to which a Party (and/or any of its
Affiliates) is a general partner.
1.2 "Confidential Information" shall mean all information not known or
generally available without restrictions on use, including know-how, trade
secrets, intellectual property, operational methods, marketing plans or
strategies, product development techniques or plans, processes, designs and
design projects, inventions and research projects, and other business affairs,
including the terms and conditions of this Agreement and the negotiations
between the Parties with respect to this Agreement.
1.3 "Cost of Work" with respect to any particular work shall mean costs
necessarily incurred by BOCA in proper performance of the work. Such costs shall
be at rates not higher than any standard rates paid by BOCA to suppliers or
workers, except with prior consent of NETWOLVES. Cost of Work shall include the
following:
(a) Time. Actual labor costs for performing the work, including
allocable portions of (i) wages of construction workers directly employed
by BOCA to perform the work; and (ii) wages and salaries of BOCA's
supervisory and administrative personnel, when such workers and personnel
are engaged at factories, workshops or on the road and expediting
production or transportation of materials or equipment required for the
work;
(b) Materials. Costs of materials and equipment actually incorporated
into the completed work, including transportation of raw materials, but
exclusive of transportation of completed work; costs of materials in excess
of those actually installed, but required to provide reasonable allowance
for waste, spoilage or overrun and agreed to in advance by NETWOLVES,
provided, however, that unused excess materials, if any, shall be delivered
to NETWOLVES by BOCA at the time of final payments; costs including
transportation, installation, maintenance, dismantling and removal of
materials, supplies, temporary facilities, machinery or equipment required
in the performance of the work;
(c) Overhead. All factory direct and indirect expense other than Time
and Materials defined herein fairly allocable to the product or products,
or ten percent (10%) of the Materials Cost, whichever is less; and
<PAGE>
(d) Miscellaneous Costs. Premiums for insurance and bonds that are
directly attributable to the Project; sales, use or similar taxes imposed
by governmental authority which are directly related to the work and for
which BOCA is responsible, including direct costs of subcontracting as
permitted in this Agreement..
The term "Cost of Work," as used herein, shall not include:
(i) Salaries and other compensations of BOCA personnel, except as
specifically provided herein;
(ii) Expenses of BOCA's principal office and offices, except as
specifically provided herein;
(iii) Overhead and general expenses, except as expressly provided
herein;
(iv) BOCA's capital expenses, including interest on BOCA's
capital employed for the work;
(v) Rental costs of machinery and equipment; or
(vi) Costs due to the fault or negligence of BOCA or anyone
directly employed by them, including the cost of correction of
damaged, defective or nonconforming work, disposal and replacement of
materials and equipment incorrectly ordered or supplied.
Trade discounts, rebates, refunds and amounts received from sales of
surplus materials and equipment shall accrue to NETWOLVES and BOCA shall attempt
to secure such discounts. Any amounts which accrue to NETWOLVES in accordance
with the foregoing shall be credited to NETWOLVES as a deduction from the Cost
of Work.
1.4 "Engineering Release Package" shall mean:
* Schematic ? Bill of Materials
* Work Instructions
* Firmware/Code
* Test Software
* Test Instructions
* Customer Software
* Assembly Instructions
* Component Specifications and Approved Vendor(s)
* Prototype
<PAGE>
1.5 A "FoxBox Derivative" shall mean any FoxBox product and FoxBox
Technology, including the FoxBox Thin Client Software, or any parts or portions
thereof or work made from any part or portion therefrom, which the development,
manufacture, use or distribution thereof would infringe any intellectual
property rights of NETWOLVES.
1.6 A "FoxBox Unit" shall mean a computer conforming in all respects to the
FoxBox Specifications.
1.7 The "Industrial Release" shall be obtained when NETWOLVES and BOCA have
successfully completed all work necessary to put the NETWOLVES Thin Client Unit
or FoxBox Unit into manufacturing for release to the trade. The milestone shall
be marked by the transmission and acceptance of an engineering documentation,
bill of materials, program files, and prototype testing code conforming to the
Specifications. This release shall not be gated by the actual production but
rather the acceptance of the product for production by BOCA's manufacturing
facility.
1.8 "Know-How" shall mean all knowledge and tangible information whether
patentable or not and physical objects related to the joint product development,
including, but not limited to, formulations, materials, data, schematics,
designs, configurations, computer programs, drawings and sketches, testing and
test results, and regulatory information of a like nature whether or not capable
of precise, separate description prior to its publication, owned by BOCA and
NETWOLVES, which either party has the right to disclose or license to the other.
1.9 A "NETWOLVES Thin Client Unit" shall mean a Thin Client unit conforming
in all respects to the NETWOLVES Thin Client Unit Specifications and operable
with the NETWOLVES Thin Client Software.
1.10 A "Third Party" shall mean any party, except Affiliates of either
Party, who is not a party to this Agreement and shall specifically include
parties who integrate the Units into other products.
ARTICLE 2
ENGINEERING SERVICES
2.1 FoxBox Services.
(a) General Statement of Work. BOCA shall provide at no cost to NETWOLVES
engineering services and corresponding deliverables (the "FoxBox Services") as
set forth in Exhibit A with respect to the design and efficient manufacture of a
computer system conforming in all respects to the FoxBox Specifications set
forth in Exhibit C. The deliverables shall include an Engineering Release
package and a complete schematic design and specification to produce a FoxBox
Unit with particularity and detail sufficient to enable a manufacturer of
ordinary skill to manufacture FoxBoxes conforming with the FoxBox
Specifications. BOCA shall take all steps necessary to obtain FCC, CUL and UL
approvals for the FoxBox Unit. These services shall be provided to NETWOLVES at
no charge and shall be completed on or prior to November 1, 1999.
<PAGE>
(b) Ownership of Work Product. NETWOLVES shall own all right, title and
interest to any intellectual property rights in and to the deliverables,
schematics and specification and any other property interest related to the
FoxBox Services. All works of authorship created by BOCA with respect to the
FoxBox Services shall be works made for hire created by BOCA for NETWOLVES and
all such right, title and interest therein and thereto shall pass to NETWOLVES
upon creation by operation of law. All other intellectual property related to
the FoxBox Services shall be assigned, and hereby are assigned by BOCA to
NETWOLVES. BOCA shall undertake all actions reasonably required by NETWOLVES,
including the execution of instruments of assignment, applications for letters
patent, applications for registration of other intellectual property rights or
other instruments reasonably necessary to perfect NETWOLVES' interest in and to
such intellectual property rights. BOCA shall not retain any intellectual
property rights whatsoever with respect to the FoxBox Services, and no other
rights shall vest in or pass to BOCA by reason of its participation in
undertaking to perform the FoxBox Services.
2.2 Thin Client Services.
(a) General Statement of Work. BOCA shall provide at no cost to NETWOLVES
engineering services and corresponding deliverables (the "Thin Client Services")
necessary to enable BOCA to manufacture a NETWOLVES Thin Client Unit conforming
in all respects to the NETWOLVES Thin Client Specifications set forth in Exhibit
E. The deliverables shall comprise, at least, an Engineering Release Package and
a working NETWOLVES Thin Client Unit prototype. BOCA shall take all steps
necessary to obtain FCC, CUL and UL approvals for the NETWOLVES Thin Client
Unit. These services shall be provided to NETWOLVES at no charge and shall be
completed on or prior to September 1, 1999.
(b) BOCA Ownership of Certain Work Product. Except for computer software
other than BOCA's computer BIOS, BOCA shall retain all right, title and interest
to any intellectual property rights in and to the deliverables and any other
property interest related to the Thin Client Services; provided, however, that
nothing set forth herein shall be construed to result in the transfer to BOCA
from NETWOLVES of any interest in any previously existing intellectual property
interest of NETWOLVES whatsoever, including any interest in or to the FoxBox,
FoxBox technology, the NETWOLVES Thin Client Specifications or the NETWOLVES
Thin Client Software.
(c) NETWOLVES Ownership of Certain Work Product. NETWOLVES shall own all
right, title and interest in and to any and all software delivered with or
designed for the NETWOLVES Thin Client by NETWOLVES other than BOCA'S existing
BIOS software. Such software shall be works made for hire created by BOCA for
NETWOLVES and all such right, title and interest therein and thereto shall pass
to NETWOLVES upon creation by operation of law. All other intellectual property
related to computer software delivered with or designed for the NETWOLVES Thin
Client other than BOCA's existing BIOS software shall be assigned, and hereby
are assigned by BOCA to NETWOLVES. BOCA shall undertake all actions reasonably
required by NETWOLVES, including the execution of instruments of assignment,
<PAGE>
applications for letters patent, applications for registration of other
intellectual property rights or other instruments reasonably necessary to
perfect NETWOLVES' interest in and to such intellectual property rights.
Further, nothing in this Agreement shall be construed to preclude or limit
NETWOLVES' right or ability to engage the services of third parties to
independently produce a Thin Client conforming to NETWOLVES Thin Client
Specifications or a Thin Client unit interoperable with a FoxBox or the
NETWOLVES Thin Client Software.
2.3 Further Engineering Services. BOCA shall provide additional engineering
services (the "Further Engineering Services") necessary to meet any technically,
commercially, and reasonably feasible changes in functionality requested by
NETWOLVES. Unless otherwise agreed between the parties, such services shall be
provided at a fee of One Hundred Dollars ($100.00) per hour. All other
intellectual property related to the Further Engineering Services shall be
assigned, and hereby are assigned by BOCA to NETWOLVES. BOCA shall undertake all
actions reasonably required by NETWOLVES, including the execution of instruments
of assignment, applications for letters patent, applications for registration of
other intellectual property rights or other instruments reasonably necessary to
perfect NETWOLVES' interest in and to such intellectual property rights. BOCA
shall not retain any intellectual property rights whatsoever with respect to the
Further Engineering Services, and no other rights shall vest in or pass to BOCA
by reason of its participation in undertaking to perform the Further Engineering
Services.
2.4 Acceptance of Engineering Services. Engineering Services shall be
deemed accepted unless NETWOLVES presents BOCA a notice of nonacceptance within
forty-five (45) days upon the presentation of deliverables under the Agreement
setting forth with particularity the basis for such rejection. BOCA shall have
thirty (30) days thereafter to correct deficiencies identified by NETWOLVES in
such notice. Timely completion of the FoxBox Services and the Thin Client
Services shall be a condition precedent to NETWOLVES' obligations under this
Agreement.
2.5 Homologation Services. BOCA shall provide homologation for FoxBox
products and NETWOLVES Thin Client in those states noted by asterisk in Exhibit
D at its expense other than the NETWOLVES obligation to pay for the filing fees
and costs. As a Further Engineering Service, at the election of NETWOLVES, BOCA
shall provide assistance in the application for and obtaining of homologation
approvals in those other states listed in Exhibit D with respect to the
NETWOLVES Thin Client Units and FoxBox Units developed hereunder. NETWOLVES and
its vendors agree to pay all costs associated with such applications and pay the
Engineering Services to BOCA as defined under Section 2.3 above. NETWOLVES
agrees to provide all reasonable, necessary cooperation, assistance and
documentation to process such applications. BOCA shall make best efforts to
assure that all such homologation approvals may be obtained, but does not
represent or warrant that the respective governments will ultimately grant such
approvals. In the event BOCA shall sell any NETWOLVES Thin Client Units in any
jurisdiction wherein the NETWOLVES Thin Client homologation has been obtained
and NETWOLVES has paid the cost of same, BOCA shall reimburse such fees and
costs to NETWOLVES upon the sale of its first Unit. In the event NETWOLVES shall
sell any FoxBox Units in any jurisdiction wherein the FoxBox homologation has
been obtained and BOCA has paid the cost of same, NETWOLVES shall reimburse such
fees and costs to BOCA upon the sale of its first Unit.
<PAGE>
ARTICLE 3
MANUFACTURING OF FOXBOX UNITS AND NETWOLVES THIN CLIENT UNITS
3.1 Sale of Conforming FoxBox Units to NETWOLVES. BOCA shall, within the
limitations contained in this Article, sell to NETWOLVES such quantities of
FoxBox Units conforming in all respects to the Specifications as NETWOLVES may
order. BOCA shall make best efforts to timely satisfy such orders and provide
quality assurance services subject to the provisions set forth below. Subject to
the approval of NETWOLVES, which approval shall not be unreasonably withheld,
BOCA reserves the right to subcontract the manufacturing of the FoxBox Units to
third parties, in its sole discretion, provided that the FoxBox Units shall at
all times meet the required quality and technical specifications set forth in
this Agreement; further provided that such subcontractor shall be expressly and
affirmatively bound in writing to comply with the warranty, ownership and
confidentiality provisions set forth in this Agreement and shall be bound to
defend, indemnify and hold harmless NETWOLVES from claims arising from the work
of said subcontractor; and still further provided that such appointment of a
subcontractor is consistent with BOCA's obligation to make best efforts to
minimize the cost of manufacture to NETWOLVES.
3.2 Sale of Conforming NETWOLVES Thin Client Units to NETWOLVES. BOCA
shall, within the limitations contained in this Article, sell to NETWOLVES such
quantities of NETWOLVES Thin Client Units conforming to the Specifications as
NETWOLVES may order. BOCA shall make best efforts to timely satisfy such orders
and provide quality assurance services subject to the provisions set forth
below. Provided that this Agreement shall not have been terminated, NETWOLVES
agrees to purchase, within two (2) years from the delivery of the NETWOLVES Thin
Client Services deliverables, two thousand (2,000) NETWOLVES Thin Client Units
from BOCA, provided, however, that any sales of NETWOLVES Thin Client Units by
BOCA within said period to third parties pursuant to its marketing rights
provided for in Section 5.1 shall be credited against such commitment within
said period. BOCA reserves the right to subcontract the manufacturing of the
NETWOLVES Thin Client Units to third parties, in its sole discretion, provided,
however, that such contractor shall be expressly and affirmatively bound in
writing to comply with the warranty, ownership and confidentiality provisions
set forth in this Agreement and shall be bound to defend, indemnify and hold
harmless NETWOLVES from claims arising from the work of said subcontractor; and
further provided that the NETWOLVES Thin Client Units shall at all times meet
the required quality and technical specifications set forth in this Agreement.
Such right to subcontract shall not be deemed to limit BOCA'S obligation to make
its best efforts to minimize the cost of manufacturing such product.
3.3 Initial Delivery. Subject to the availability of the parts being
delivered to BOCA by September 1, 1999:
(a) BOCA shall deliver thirty (30) NETWOLVES Thin Client Units acceptable
to NETWOLVES on or prior to September 15, 1999;
<PAGE>
(b) BOCA shall deliver two hundred fifty (250) FoxBox Units acceptable to
NETWOLVES on or prior to September 15, 1999, as follows:
<TABLE>
<CAPTION>
QUANTITY NETWOLVES SKU BOCA SKU
- -------- ------------- --------
<S> <C> <C>
100 NETWOLVES FoxBox S2e NW2Ether
75 NETWOLVES FoxBox T1 NWCSUT1
50 NETWOLVES FoxBox DDR NWModem
20 NETWOLVES FoxBox 56K NWCSU56K
5 NETWOLVES FoxBox ISDN NWISDN
</TABLE>
Provided, however, that in the event parts are not available by
September 1, 1999, BOCA shall deliver the products within twenty (20) days
following receipt of all required parts and/or components.
3.4 Reservation of Rights by NETWOLVES. Nothing set forth in this Agreement
shall be construed to constitute the grant of any exclusive right to BOCA to
manufacture FoxBox units or the assignment of any right, title or interest in or
to the FoxBox or any FoxBox technology. Nothing set forth herein shall be
construed to constitute the grant of any license in or to the FoxBox or any
FoxBox technology, apart from such license as may be necessary to accomplish the
fulfillment of each such order. Nothing set forth in this Agreement shall be
construed to constitute the grant of any exclusive right to BOCA to supply
NETWOLVES Thin Units to NETWOLVES except as expressly set forth in Article 3.2
above.
3.5 Price and Shipping.
(a) FoxBox Unit Pricing. Pricing for FoxBox Units shall be in accordance
with Exhibit F attached hereto or in accordance with such other pricing as to
which the parties may agree.
(b) Thin Client Pricing. With respect to delivery of conforming goods
delivered in response to an Order, NETWOLVES shall pay to BOCA an amount equal
to the lesser of (i) for the first delivery of NETWOLVES Thin Client Units
pursuant to this Agreement, BOCA's Cost of Work associated with the production
of such units, plus twenty-five percent (25%); (ii) for subsequent deliveries,
an amount equal to the average of BOCA's Cost of Work for the first delivery and
BOCA's Cost of Work for the delivery preceding such subsequent delivery, plus
twenty-five percent (25%); (iii) the maximum unit prices as set forth in Exhibit
F; or (iv) such lesser amount upon which the parties may agree in writing. BOCA
shall make reasonable and best efforts to minimize BOCA's Cost of Work at all
times during the term of this Agreement. However, in the event the price
determined pursuant to (i) above exceeds the Exhibit F price set forth in (iii)
above, BOCA shall not have the obligation to sell such additional NETWOLVES Thin
Client Units pursuant to this Agreement unless the parties reach a mutually
acceptable price pursuant to (iv) above; provided, however, that if BOCA does
not agree to sell NETWOLVES Thin Client Units pursuant to the provisions of this
sentence, then NETWOLVES shall likewise not be obliged to purchase such
NETWOLVES Thin Client Units.
<PAGE>
All such units shall be delivered F.O.B. BOCA's plant in Florida
or such other place of shipment as the parties may agree. BOCA shall arrange and
pay for shipping of units in accordance with NETWOLVES' instructions and BOCA
shall further pay any customs, duties, costs, taxes, insurance premiums and
other expenses related to such shipping, which amounts shall be billed to
NETWOLVES without markup.
3.6 Delivery; Liquidated Damages for Late Delivery. BOCA shall deliver
conforming goods within ten (10) weeks after receipt of an order from NETWOLVES
(the "Delivery Date"), provided that BOCA shall be able to obtain all key
components for such deliveries in a timely manner through the exercise of its
commercially reasonable efforts. However, any such delays in obtaining said key
components shall extend the Delivery Date on a day-for-day basis For each full
week late of the Delivery Date, provided that NETWOLVES shall not have caused or
contributed to the delay, NETWOLVES may deduct five percent (5%) of the Cost of
Work from the price, as liquidated damages and not as a penalty. These
provisions shall be deemed a reasonable measure of the damages incurred
resulting from late delivery and the parties agree that they shall not be deemed
a penalty. In no case shall the deduction exceed fifteen percent (15%) of the
Cost of Work.
3.7 Terms of Payment/Accounting for Cost of Work. All purchase orders given
to BOCA by NETWOLVES shall be firm and noncancellable for any reason. NETWOLVES
shall pay to BOCA a deposit equal to twenty percent (20%) of the Price, payable
thirty (30) days following the placement of an order, provided, however, that
NETWOLVES need not pay such deposit to the extent that the aggregate of unpaid
deposits are less than two hundred and fifty thousand dollars ($250,000.00).
NETWOLVES shall pay the balance thirty (30) days following the receipt of an
invoice stating the Cost of Work for conforming goods delivered with respect to
such Order, but may take a two percent (2%) discount if payment is made within
ten days of receipt of such invoice. Upon request, BOCA shall provide NETWOLVES
with a statement of costs setting forth specifically the basis for computing a
Cost of Work associated with any invoice. In the event that NETWOLVES suffers a
substantial and material adverse change to its financial condition, then BOCA
may withdraw the Two Hundred Fifty Thousand Dollars ($250,000.00) trade credit
set forth in this paragraph; further provided, however, that NETWOLVES shall not
be obliged to purchase any NETWOLVES Thin Client Units under terms that do not
include such Two Hundred Fifty Thousand Dollars ($250,000.00) credit.
3.8 Acceptance of FoxBox Units. NETWOLVES may reject any portion of any
shipment of units that are not conforming in any material respects. To reject a
shipment, NETWOLVES shall give notice of intent to reject the shipment within
thirty (30) days of delivery together with a written indication of the reasons
for such possible rejection, and as promptly as reasonably possible thereafter,
give notice of final rejection and the full basis therefor. After notice of
intent to reject, the parties shall cooperate to determine whether rejection is
necessary or justified. If notice is not given, NETWOLVES shall be deemed to
have accepted delivered, provided, however, in the case of products having
latent defects upon which diligent examination could not have been discovered,
NETWOLVES must give notice of NETWOLVES' intent within thirty (30) days after
discovery of such defects. In any event, NETWOLVES shall be entitled to a refund
of the purchase price of properly rejected products at the time they are
ultimately rejected. BOCA shall use, its reasonable efforts, at NETWOLVES'
request, to provide replacement products that shall be purchased by buyer as
provided in this Agreement.
<PAGE>
3.9 Quality Assurance by BOCA. BOCA agrees to monitor and assure strict
quality standards and adhere to the quality specifications to be developed and
agreed upon by both parties. BOCA will provide per lot shipment reporting on
out-of-box quality results and will provide additional available manufacturing
quality measurements and audits on request, within five (5) working days.
NETWOLVES, at NETWOLVES' expense, may at any time upon reasonable notice to BOCA
(not to exceed three (3) days) enter BOCA's property and inspect BOCA's
facilities and records to investigate BOCA's compliance with these Quality
Assurance provisions.
3.10 Accounting Records/Audit. BOCA shall keep full and detailed accounts
and exercise such controls as may be necessary for proper financial management
under this Agreement. NETWOLVES shall be afforded reasonable access to such
accounting records not more often than once each calendar quarter upon at least
three (3) days prior notice. NETWOLVES shall bear the expense of such review
unless a discrepancy of more than five percent (5%) in BOCA's favor is
discovered with respect to the computation of Cost of Work over any 90-day
period, in which case BOCA shall pay the expense of such review and shall
immediately pay NETWOLVES the amount of any overcharges resulting from such
erroneous computation of the Cost of Work, plus interest computed at the rate of
the lesser of three hundred (300) basis points over the three (3) month LIBOR
rate (LIBOR+3) on the date payment was due to BOCA or the highest applicable
legal rate, accruing from the date payment was due until paid in full.
ARTICLE 4
INTELLECTUAL PROPERTY
4.1 Reservation of Rights/No Implied Assignment of Rights. Each Party shall
retain all intellectual property and other priority rights in its respective
pre-existing works and inventions and all proprietary rights developed
independently of this Agreement. Except as expressly provided herein, nothing in
this Agreement shall be deemed to constitute the assignment or license of any
intellectual property or other proprietary right. Generally, BOCA shall retain
those rights it owns with respect to BOCA Thin Client machines and the entire
non-software work product of the Thin Client Engineering Services, and NETWOLVES
shall retain all rights it owns to its Specifications, FoxBox and FoxBox
Technology, including without limitation all FoxBox Thin Client Software.
4.2 Freedom to Continue Respective Businesses. In particular, BOCA shall
remain free, without limitation, to make, use, sell or offer for sale any and
all BOCA Thin Client Units to third parties (but not any FoxBox packaging,
FoxBox Units or NETWOLVES Thin Client Software), regardless of whether it has
received any consent of NETWOLVES. Similarly, NETWOLVES shall remain free,
without limitation, to make, use, sell or offer for sale, or to authorize third
parties to make, use, sell or offer for sale any and all FoxBox Units, FoxBox
Technology (including the FoxBox Thin Client Software), the Specifications and
the entire work product of the FoxBox Engineering Services and Other Engineering
Services with third parties, regardless of whether it has received any consent
of NETWOLVES.
<PAGE>
ARTICLE 5
MARKETING AGREEMENT AND OTHER OPPORTUNITIES
5.1 Both Parties shall undertake to negotiate a joint marketing agreement
in good faith as generally described in the Non-Binding Memorandum of
Understanding set forth in Exhibit G, provided, however, that each party
reserves the right, in each party's sole and exclusive discretion, to agree or
not to agree to enter into a definitive agreement proposed by the other party.
5.2 If the parties do not execute a definitive joint marketing agreement on
or prior to December 31, 1999, then BOCA may terminate this Agreement effective
upon written notice given on or prior to January 10, 2000, if such definitive
agreement was not executed on or prior to the date such notice was given;
provided, however, that BOCA may not terminate this Agreement under any
circumstances if NETWOLVES had previously offered to execute a commercially
reasonable written agreement containing, at least, the terms described in the
Non-Binding Memorandum of Understanding set forth in Exhibit G.
5.3 If BOCA makes a lawful election to terminate this Agreement pursuant to
Section 5.2, then NETWOLVES may elect, within NETWOLVES sole and exclusive
discretion, either to:
(a) Continue to use deliverables from the FoxBox Services, in which case,
NETWOLVES shall pay BOCA for the time and materials in providing the FoxBox
Services and NETWOLVES Thin Client Services;
(b) Refrain from using deliverables from the FoxBox Services, in which
case, NETWOLVES need not pay for time and materials in providing the FoxBox
Services. In such a case, however, neither BOCA nor NETWOLVES may subsequently
use or disclose deliverables from the FoxBox Services.
ARTICLE 6
CONFIDENTIALITY
6.1 Covenant Not to Use or Disclose. Each Party acknowledges that the
Confidential Information constitutes and shall constitute valuable assets and
trade secrets. Accordingly, when a Party (the "Receiving Party") receives
confidential information from the other Party (the "Owning Party"), the
Receiving Party shall (i) keep secret and retain in strict confidence any
Confidential Information received from the Owning Party; (ii) not disclose to
any Third Party any Confidential Information received from the Owning Party for
any reason whatsoever; (iii) not disclose any Confidential Information received
from the Owning Party to the Receiving Party's (and/or any of its Affiliates')
employees or sublicensees, except on a need-to-know basis and only after
instructing each such employee or sublicensee not to disclose or otherwise make
available any Confidential Information to any Third Party receiving a signed
Confidentiality Statement from each such sublicensee, and provided each such
employee is bound by appropriate confidentiality obligation under its labor
contract with the employer; and (iv) not make use of any Confidential
Information received from the Owning Party for its own purposes or for the
benefit of any Third Party except as authorized by this Agreement.
<PAGE>
6.2 Additional Restrictions on Use of NETWOLVES Software. BOCA shall not
copy, in whole or in part, any NETWOLVES software or accompanying documentation;
modify, adapt or otherwise create derivative works from all or any part of any
NETWOLVES software or accompanying documentation; distribute all or any part of
the NETWOLVES software, decompile, disassemble or otherwise attempt to reverse
engineer the NETWOLVES software; or rent or lease the NETWOLVES software. All
rights in or to the FoxBox software are reserved.
6.3 Notice of Demand for Confidential Information. In the event of any
legal action or proceeding or asserted requirement under applicable law or
government regulations requesting or demanding the Receiving Party disclose this
Agreement or any Confidential Information, the Receiving Party shall immediately
notify the Owning Party in writing of such request or demand so that the Owning
Party may seek an appropriate protective order or take other protective
measures. The Receiving Party shall, upon the request of the Owning Party,
cooperate reasonably with the Owning Party in contesting such request or demand
at the expense of the Owning Party including, without limitation, consulting
with the Owning Party as to the advisability of taking legally available steps
to resist or narrow such request or demand. If in the absence of a protective
order or a waiver hereunder from the Owning Party, the Receiving Party, in the
reasonable written opinion of the Receiving Party's legal counsel, is compelled
to disclose this Agreement or any Confidential Information to any tribunal or
otherwise stand liable for contempt or suffer other penalty, the Receiving Party
may disclose this Agreement or such Confidential Information to such tribunal
without liability hereunder; provided, however, the Receiving Party (i) shall
give the Owning Party written notice of the Confidential Information to be so
disclosed as far in advance of its disclosure as is practicable; (ii) shall
furnish only that portion of this Agreement or the Confidential Information
which is legally required; and (iii) shall use best efforts to obtain an order
or other reliable assurance that confidential treatment will be accorded to such
portions of this Agreement or the Confidential Information to be disclosed as
the Owning Party designates.
6.4 Notice of Threatened Misappropriation. In the event the Receiving Party
becomes aware that any person or entity (including, but not limited to, any
Affiliate or employee of the Receiving Party) is taking, threatens to take, or
has taken any action which would violate any of the foregoing provisions of this
Agreement, the Receiving Party shall promptly and fully advise the Owning Party
(with written confirmation as soon as practicable thereafter) of all facts known
to the Receiving Party concerning such action or threatened action. The
Receiving Party shall not in any way aid, abet, or encourage any such action or
threatened action; and the Receiving Party agrees to use its best efforts to
prevent such action or threatened action, including, but not limited to,
assigning any cause of action it may have relating to the violation of the
foregoing provisions to the Owning Party; and the Receiving Party agrees to do
all reasonable things and cooperate in all reasonable ways as may be requested
by the Owning Party to protect the trade secrets and proprietary rights of the
Owning Party in and to the Confidential Information.
6.5 Confidentiality of Terms of Agreement. The terms and conditions of this
Agreement shall not be disclosed by either Party, except with the prior written
consent of the other Party, or as may be required by law or necessary to
establish its rights hereunder. Notwithstanding the foregoing, (i) each Party
shall have the right to disclose the terms and conditions of this Agreement, if
necessary, to any legal counsel of such Party as may be required to establish
its rights hereunder; and (ii) subsequent the execution of this Agreement, the
<PAGE>
Parties may jointly or individually issue press releases or otherwise publicly
disclose the Parties' relationship, (x) provided such Party has obtained the
prior written approval of the content of such disclosure for the other Party and
(y) that such disclosure does not include information which would be prohibited
from disclosure by either Party pursuant to this Agreement or that certain
Confidentiality Agreement between the Parties. The approval of such press
release or other disclosure of the Parties' relationship shall be given by a
Party within ten (3) business days following the request by the other Party, or
in the event the approval is not given, the disapproving Party shall provide
commercially reasonable objections.
6.6 Return or Destruction of Materials. Upon termination of this Agreement
for any reason, nothing herein shall be construed to release either Party from
any obligation that matured prior to the effective date of such termination.
ARTICLE 7
INDEMNIFICATION
7.1 Intellectual Property. Each party agrees to indemnify, defend and hold
harmless the other party, its Affiliates, and its/their officers, employees from
and against any and all Third Party Claims as incurred by such party to the
extent that the other party's products or services provided and/or utilized
under this Agreement are alleged and ultimately determined to infringe any
patent, copyright or intellectual property right registered or otherwise
protected under the Laws of the United States or any other nation. Each party
will not indemnify the other party to the extent the infringement is caused by
(i) the misuse or modification of the other party's products or materials; or
(ii) the use of any such materials in combination with any product not approved
by or supplied by the other party to the extent that such combination caused the
infringement. BOCA shall be deemed to have approved all hardware and software
presently sold by NETWOLVES and all hardware and software with which NETWOLVES
products are customarily used. NETWOLVES shall be deemed to have approved all
hardware and software presently sold by BOCA and all hardware and software with
which BOCA products are customarily used. If BOCA Materials or any part thereof
is, or in BOCA's opinion is likely to be, held to constitute an infringing
product, then with BOCA Materials, (i) replace it with a non-infringing
equivalent with at least the same functionality and performance; (ii) modify it
to make it non-infringing in a manner that does not impair its functionality and
performance; or (iii) if none of the foregoing options are commercially
feasible, the Parties will negotiate in good faith to establish a mutually
agreeable alternative, taking due regard to NETWOLVES market obligations. If
NETWOLVES Materials or any part thereof is, or in NETWOLVES' opinion is likely
to be, held to constitute an infringing product, then with NETWOLVES Materials,
(i) replace it with a non-infringing equivalent with at least the same
functionality and performance; (ii) modify it to make it non-infringing in a
manner that does not impair its functionality and performance; or (iii) if none
of the foregoing options are commercially feasible, the Parties will negotiate
in good faith to establish a mutually agreeable alternative, taking due regard
to BOCA market obligations. Notwithstanding the foregoing an indemnifying party
shall not be obligated to indemnify the other under this section for an
infringement arising from the combination of the indemnifying party's products
or materials with other products or materials not provided, made used or sold by
the indemnifying party in cases where both: (i) such infringement would not have
occurred but for the use of the other products or materials; and (ii) such
infringement would still have occurred if a third party vendor's comparable
products or materials were substituted for the indemnifying party's products or
materials.
<PAGE>
7.2 General. Except for claims of infringement of a patent, copyright or
intellectual property right, each party (the "Indemnifying Party") shall at all
times during the term of this Agreement and thereafter, indemnify, defend, and
hold the other party ("the "Indemnified Party"), its Affiliates, and its/their
officers and employees harmless against any and all Claims, actions, demands,
liabilities, losses, damages, costs, payments, and expenses (including
reasonable attorneys' fees and expenses) (collectively, "Claims"), arising out
of the death of or injury to any person or persons or out of any damage to real
or personal property and against any other Claim of any kind whatsoever
resulting from any occurrence caused by and attributable to the Indemnifying
Party, its subcontractors', or its agents' acts or omissions during the
performance of this Agreement. If both parties are or may be obligated to each
other as a result of different actions taken by each party or actions taken
jointly by both parties, then each party agrees to contribute to the amount of
such Claims as is appropriate to reflect the relative fault of such party in
connection with the events that resulted in such Claims. The relative fault of
each party shall be determined by reference to, among other things, each party's
relative intent, knowledge, access to information, and opportunity to correct or
prevent the circumstances resulting in such Claims.
7.3 Procedures Relating to Indemnification.
(a) Scope. The procedures set forth in this Article 7.3 shall apply with
respect to any actual or potential Claim, any written demand, the commencement
of any action, or the occurrence of any other event which involves any matter or
related series of matters against which NETWOLVES or BOCA (an "Indemnified
Party") is indemnified by a Party hereto (the "Indemnifying Party") under
Article 7.1 or Article 7.2 hereof.
(b) Notice. Upon receiving notice in writing of the commencement of any
Claim from a Third Party, the Indemnified Party shall give written notice of
such Claim, in reasonable detail, to the Indemnifying Party no later than thirty
(30) days after receiving such notice, stating the amount involved, if known,
together with copies of any written documents initiating or asserting such a
Claim. The failure to so notify, or any delay in so notifying, shall not relieve
the Indemnifying Party hereunder unless and only to the extent that the
Indemnifying Party did not otherwise learn of such Claim and such failure or
delay results in the forfeiture by the Indemnifying Party of substantial rights
and defenses, and will not in any event relieve the Indemnifying Party from any
obligations to the Indemnified Party other than the indemnification obligation
provided in Article 7.1 or Article 7.2 hereof, as the case may be.
(c) Assumption of Defense. The Indemnifying Party shall be entitled to
assume the defense of any Claim for which indemnification is sought hereunder
with counsel of its choice and at its expense (in which case the Indemnifying
Party shall not thereafter be responsible for the fees and expenses of any
separate counsel retained by the Indemnified Party except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
Indemnified Party. Notwithstanding an election by the Indemnifying Party to
assume the defense of such Claim, the Indemnified Party shall have the right to
employ separate counsel and to participate in the defense of such Claim; and the
Indemnifying Party shall bear the reasonable fees, costs, and expenses of such
<PAGE>
separate counsel if (i) the use of counsel chosen by the Indemnifying Party to
represent the Indemnified Party would present such counsel with a conflict of
interest; (ii) the Indemnifying Party shall not have employed counsel reasonably
satisfactory to the Indemnified Party to represent the Indemnified Party within
a reasonable time after notice of the institution of such Claim; or (iii) the
Indemnifying Party shall authorize the Indemnified Party to employ separate
counsel at the Indemnifying Party's expense.
(d) Settlements. The Indemnifying Party shall not be liable under the
provisions of Article 7.1 or Article 7.2 hereof, as the case may be, for any
amount paid by the Indemnified Party to settle, compromise, or otherwise resolve
(hereinafter "Settle" or "Settlement") any Claims if the Settlement is entered
into without the written consent of the Indemnifying Party, which consent may
not be withheld unless such Settlement is unreasonable in light of such Claims
against, and defenses available to, the Indemnified Party. If the Indemnifying
Party withholds its consent to a proposed Settlement, and the Claim in question
is not Settled as proposed, the Indemnifying Party will indemnify the
Indemnified Party in accordance with Article 7.1 or Article 7.2 hereof, as the
case may be. The Indemnifying Party agrees that it will not, without the prior
written consent of the Indemnified Party (which consent may not be withheld
unless such Settlement is unreasonable in light of such Claims against, and
defenses available to, the Indemnified Party), Settle any pending or threatened
Claim unless such Settlement includes an unconditional release of the
Indemnified Party from all liability arising out of or related to such Claim, or
transactions, or conduct in connection therewith.
(e) Cooperation. The Parties agree to cooperate, share information (subject
to the need to preserve any applicable privilege), and consult in good faith to
the fullest extent possible, at the Indemnifying Party's expense, in connection
with any Claim in respect of which indemnification is sought under this
Agreement.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
8.1 Warranty. BOCA represents and warrants the following:
(a) All Engineering Services performed under this Agreement shall be
performed in a good and workmanlike manner in accordance with industry
standards.
(b) All Deliverables arising from Engineering Services shall conform in all
respects to the Specifications.
(c) BOCA has and shall have all right, title and interest necessary to make
the assignments of intellectual property and other proprietary rights where
required under this Agreement, and BOCA has and shall have the all powers
necessary to transfer such rights and to execute all instruments required under
this Agreement with respect to such rights.
<PAGE>
(d) All FoxBox Units, when shipped
by BOCA, shall be interoperable with NETWOLVES Thin Client Units and the FoxBox
Thin Client Software, shall conform in all respects to the Specifications, and
shall be Homologized for the states set forth in Exhibit D.
(e) All NETWOLVES Thin Client Units, when shipped by BOCA, shall be
interoperable with the FoxBox Units and the FoxBox Thin Client Software, shall
conform in all respects to the Specifications, and shall be Homologized for the
states set forth in Exhibit D.
(f) All FoxBox Units, NETWOLVES Thin Client Units and any software embedded
therein shall correctly operate and process date data prior to, during and after
January 1, 2000.
8.2 Intellectual Property Rights of Third Parties. Both parties warrant to
the other that neither has or shall have knowledge that the FoxBox Units or the
NETWOLVES Thin Client Units shall infringe on the intellectual property rights
of any third party.
8.3 Remedies. NETWOLVES' remedy for breach of the foregoing warranties, in
addition to such other remedies that may be available at law or equity, shall be
the prompt repair or replacement of nonconforming goods, or the immediate refund
of monies paid for such goods.
8.4 Disclaimer of Certain Warranties. EXCEPT AS SPECIFICALLY SET FORTH IN
THIS AGREEMENT, BOCA AND NETWOLVES MAKE NO REPRESENTATIONS OR WARRANTIES,
EXPRESSED OR IMPLIED, AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
OTHERWISE WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT.
8.5 Limitation of Liability. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE
LIABLE FOR ANY INDIRECT, CONSEQUENTIAL, INCIDENTAL, EXEMPLARY OR PUNITIVE
DAMAGES, LOSS OF EARNINGS, PROFIT, OR GOODWILL SUFFERED BY ANY PERSON OR ENTITY,
INCLUDING THE OTHER PARTY, CAUSED DIRECTLY OR INDIRECTLY BY THE WORK PERFORMED
PURSUANT TO THIS AGREEMENT, BY ANY LICENSE OR SUBLICENSE GRANTED HEREUNDER, OR
BY EACH PARTY'S PERFORMANCE OR NON-PERFORMANCE OF THIS AGREEMENT, EVEN IF SUCH
PARTY IS NOTIFIED BY THE OTHER PARTY OR ANY THIRD PARTY OF THE POSSIBILITY OF
SUCH DAMAGES.
ARTICLE 9
UNITED STATES REGULATIONS AND EXPORT CONTROLS
9.1 Compliance. Both Parties agree to comply with all applicable laws,
rules, regulations and orders of federal, state, local and foreign governments.
Both parties are subject to United States laws and regulations controlling the
export of technical data, computer software, prototypes and other commodities
(including all Export Administration Regulations of the United States Department
<PAGE>
of Commerce), and that BOCA's obligations hereunder are contingent on NETWOLVES'
compliance with applicable United States export laws and regulations. The
transfer of certain technical data and commodities may require a license from
the certain agencies of the United States Government and/or written assurances
by NETWOLVES that NETWOLVES shall not export data or commodities to certain
foreign countries without prior approval of such agency. NETWOLVES agrees that
it shall not, directly or indirectly, export or re-export, or knowingly permit
the export or re-export of, the Licensed Technology to any country for which the
United States Export Administration Act, any regulation thereunder, or any
similar United States law or regulation, requires an export license or other
United States government approval, unless the appropriate export license or
approval has been obtained. BOCA shall provide NETWOLVES with reasonable support
and cooperation to enable NETWOLVES to obtain the required licenses or approvals
NETWOLVES agrees that it will be solely responsible for any violations of such
by NETWOLVES.
9.2 Disclaimer of Representation. BOCA neither represents that an export
license shall not be required nor that, if required, it shall be issued.
Further, if such license is issued, revocation of such export license or
modification thereof that prevents BOCA from performing all or part of its
obligations under this Agreement shall not be deemed a breach of this Agreement
to the extent such revocation or modification is not attributable to BOCA; or,
if such revocation or modification is attributable to BOCA, is remedied by BOCA
on an expedited basis and at least within sixty (60) days.
ARTICLE 10
NON-USE OF TRADEMARKS
Neither Party shall use the trade names, trademarks, or service marks of
the other party or any adaptation thereof, in any advertising, promotional or
sales literature without prior written consent obtained from the other party in
each case.
ARTICLE 11
TERMINATION
11.1 Termination for Convenience. If BOCA has not timely presented
acceptable deliverables for the FoxBox Services or deliverables for the Thin
Client Services in accordance with the provisions of this Agreement, then
NETWOLVES may terminate this Agreement for convenience, effective upon giving
Notice of Termination.
11.2 Termination for Cause. Upon any material breach or default of this
Agreement by any Party (the "Breaching Party"), the non-breaching Party shall
have the right to terminate this Agreement and the rights, privileges, and
license granted hereunder by sixty (60) days' notice to the Breaching Party.
Such termination shall become effective unless the Breaching Party shall have
cured any such breach or default by diligently pursuing remedial action prior to
the expiration of the sixty (60) day period; provided that, if the Breaching
Party shall be in breach or default of the same provision twice within any six
(6) month period, the non-breaching Party shall have the right to terminate this
Agreement immediately without providing the Breaching Party the sixty (60) days'
notice and cure period.
<PAGE>
11.3 Effect of Termination. Upon termination of this Agreement for any
reason, each Party shall, at the option of the other Party, return or destroy
all Confidential Information and Know-How in its possession owned by the other
Party.
ARTICLE 12
TERM
The term of this Agreement shall be for a period of two (2) years from the
date of this Agreement unless sooner terminated pursuant to the provisions of
this Agreement.
ARTICLE 13
PUBLIC ANNOUNCEMENTS AND PROMOTIONAL MATERIALS
NETWOLVES and BOCA shall cooperate with each other so that each party may
issue a press release concerning this Agreement within ninety (90) days
following the execution of this Agreement, provided that each party may approve
any such press release prior to its release. Such press release shall include a
quote attributable to the executive officer of each party.
ARTICLE 14
GENERAL PROVISIONS
14.1 Notices. All notices, demands or other communications given under this
Agreement shall be in writing and shall be mailed by first-class, registered, or
certified mail, return receipt requested, postage prepaid, or transmitted by
hand delivery (including delivery by courier), telegram, telex, or facsimile
transmission, addressed as follows:
(i) If to BOCA:
----------
Boca Research, Inc.
Attention: Executive Vice President & General Manager
1377 Clint Moore Road
Boca Raton, FL 33487-2722
Telephone: (561) 997-6227
Facsimile: (561) 997-6934
<PAGE>
With a copy to:
--------------
Robert W. Federspiel
Spinner, Dittman, Federspiel & Dowling
501 E. Atlantic Avenue
Delray Beach, FL 33483
Telephone: (561) 276-2900
Facsimile: (561) 276-5489
(ii) If to NETWOLVES:
---------------
NetWolves Corporation
Attn: Daniel G. Stephens, Jr., Chief Information Officer
6016 Benjamin Road, Suite 107
Tampa, FL 33634
Telephone: (813) 885-2779
Facsimile: (813) 885-2380
With a copy to:
--------------
Andrew C. Greenberg
Carlton Fields
P.O. Box 3239
Tampa, FL 33601-3239
Telephone: (813) 223-7000
Facsimile: (813) 229-4133
or to such other address which each Party may designate by notice in writing.
Each such notice, demand, or other communication which shall be mailed,
delivered, or transmitted in the manner described above shall be deemed given
for all purposes at such time as it is delivered to the addressee (with the
return receipt, the delivery receipt, the affidavit of messenger, or (with
respect to a telex) the answer back being deemed conclusive (but not exclusive)
evidence of such delivery), or at such time as delivery is refused by the
addressee upon presentation.
14.2 Governing Law. The construction and interpretation of this Agreement
and the rights of the Parties shall be governed by the laws of the State of
Florida without regard to its conflicts of laws provisions. The parties consent
to personal jurisdiction and venue in the state and federal courts located in
Florida over any dispute arising from or in connection with this Agreement not
otherwise submitted to arbitration. Each Party hereby consents to the personal
jurisdiction of the state and federal courts in Florida in any such dispute
arising from or relating to this Agreement. Each Party further agrees that
services of process may be made, in addition to any other method permitted by
law, by certified mail, return receipt requested, sent to the applicable address
set forth herein. Any award or injunctive relief granted in any dispute may be
enforced by either Party in either the courts of the State of Florida or in the
United States District Courts in Florida.
14.3 Assignment. This Agreement shall be binding upon and shall inure to
the benefit of the Parties hereto and their respective successors and assigns as
permitted hereunder. No person or entity other than the Parties hereto is or
shall be entitled to bring any action to enforce any provision of this Agreement
against any of the Parties hereto, and the covenants and agreements set forth in
this Agreement shall be solely for the benefit of, and shall be enforceable only
<PAGE>
by, the Parties hereto or their respective successors and assigns as permitted
hereunder. Except for assignment to an Affiliate, a successor in interest or to
the purchaser of all or substantially all of the assets of a party, neither this
Agreement nor any rights hereunder shall be assignable by any Party without the
prior written consent of the other Party hereto, which consent shall not be
unreasonably withheld.
14.4 Further Assurances. Each Party agrees to take or cause to be taken
such further actions, to execute, deliver and file or cause to be executed,
delivered and filed such further documents, and to obtain such consents, as may
be necessary or reasonably requested in order to fully effectuate the purposes,
terms, and conditions of this Agreement.
14.5 Entire Agreement; Amendment. This Agreement constitutes the entire
agreement between the Parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
between the Parties with respect to such matters. No amendment to this Agreement
shall be made except by an instrument in writing signed on behalf each Party.
14.6 Severability. If any court or arbiter of applicable jurisdiction
determines that any of the agreements, covenants, and undertakings set forth
herein, or any part thereof, is invalid or unenforceable, the provision shall,
to the extent possible, be restated to reflect the original intention of the
Parties, and the remainder of this Agreement shall be given full effect, without
regard to the invalid or restated portions.
14.7 Waiver. The failure of either Party to assert a right hereunder or to
insist upon compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or excuse a similar subsequent failure to
perform any such term or condition by the other Party.
14.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement.
14.9 Compliance with Laws. In performing under this Agreement, both Parties
agree to comply with all applicable laws, rules, and regulations of any
governmental entity.
14.10 Force Majeure. Neither Party shall not be liable to the other Party
for any loss or damage done to delays or failure to perform resulting from an
event of "force majeure," including without limitation, acts of God; accident;
war; fire; lockout; strike or labor dispute; riot or civil commotion; act of the
public enemy; enactment, rule, order, or act of civil or military authority;
unforeseeable judicial action; or unforeseeable inability to secure adequate
materials, labor, or facilities.
14.11 Permits and Licenses. The Parties agree that BOCA shall be
responsible for obtaining all necessary United States federal and state permits,
licenses, and other government approvals relating to the work performed under
this Agreement; and NETWOLVES shall be responsible for obtaining all necessary
permits, licenses, and other government approvals relating to the work performed
<PAGE>
in other countries with regards to their FoxBox Units. The Party responsible for
obtaining government approvals agrees to indemnify the other for any loss
incurred due to the asserted or established failure to comply with the
responsible Party's respective obligation to obtain such applicable government
approvals. Each Party agrees to reasonably assist the other, at the responsible
Party's expense, in obtaining all such necessary government approvals.
IN WITNESS WHEREOF, the Parties have hereunto set their hands and seals and
duly executed this Agreement the day and year set forth above.
BOCA RESEARCH, INC.
By: /s/Navroze S. Mehta 9/10/99
--------------------------------------
Name: Navroze S. Mehta
Title: President - BOCA Global
NETWOLVES TECHNOLOGIES
By: /s/ Daniel G. Stephens
-------------------------------------
Name: Daniel G. Stephens, Jr.
Title: Chief Information Officer
Officer of the Company
<PAGE>
TABLE OF EXHIBITS
EXHIBIT A FOXBOX ENGINEERING SERVICES
EXHIBIT B FOXBOX CASE REDESIGN REQUIREMENTS
EXHIBIT C FOXBOX SPECIFICATIONS
EXHIBIT D HOMOLOGATION STATES
EXHIBIT E NETWOLVES THIN CLIENT SPECIFICATIONS
EXHIBIT F MAXIMUM UNIT PRICES
EXHIBIT G MEMORANDUM OF UNDERSTANDING
<PAGE>
EXHIBIT A
FOXBOX ENGINEERING SERVICES
1. Chassis Designs. BOCA shall take all steps necessary to design two (2)
FoxBox chassis (a single rack mount unit and a four rack mount unit) that are
acceptable to NETWOLVES in accordance with the NETWOLVES FoxBox Chassis
Specifications, attached hereto as Exhibit B, and to prepare detailed schematics
and such other documentation as may be necessary for the manufacture and
assembly of a conforming chassis.
2. Detailed Schematics and Directions for FoxBox Manufacture. BOCA shall
take all steps necessary to prepare detailed schematics and such other
documentation (the "Documentation") as may be necessary for manufacture and
assembly of a computer conforming in all respects to the FoxBox Specification,
attached hereto as Exhibit C. The Documentation shall be sufficiently complete
and set forth with sufficient particularity to enable a person of ordinary skill
in the art to manufacture a computer conforming in all respects to the FoxBox
Specification. The Documentation shall include, without limitation, the
following:
* All documents necessary to apply for and to achieve UL Certification
(1950 3d Edition) for any computer manufactured in accordance
therewith.
* Detailed schematic drawings of all FoxBox Unit components.
* Specifications package for all FoxBox Unit components.
* Work instructions for Mass Production of the FoxBox Units.
* Enhanced drawings and sourcing for customized cables, LEDs and other
components unique to the FoxBox Units
3. Homologation Services. BOCA shall take all steps necessary to prepare
detailed schematics and such other documentation as necessary for Homologation
of the FoxBox computers manufactured in accordance therewith with the states
identified in Exhibit D, attached hereto. BOCA shall then provide all Regulatory
approval support and shall be responsible for obtaining all approvals necessary
for NETWOLVES to sell FoxBox Units in each state listed in Exhibit D. These
services shall include: detailed assessment of the requirements for each piece
of equipment by individual country; arranging for a proper local applicant for
approval where required; collection and assimilation of all materials and
documentation required for compliance; review of test data to ensure agency
compliance; on-site testing support where required; assuring that all necessary
supporting documentation has been provided and properly prepared; preparing type
approval application or compliance folders for local agencies' specific formats;
attending pre-submission and coordination meetings with the regulatory agencies
as necessary; modification of the application (if necessary) based on agency
comments, feedback and recommendations; submission of the completed application
or maintenance of a compliance folder; careful coordination with agency
officials through and until receipt of approvals; and notification of the
application approval and delivery of the approval certificate.
4. Prototypes and Sourcing. BOCA shall provide NETWOLVES with prototypes
and sourcing for production with respect to each of the above elements.
<PAGE>
EXHIBIT B
FOXBOX CASE REDESIGN REQUIREMENTS
1. Overall Design Goal.
(a) Design two separate cases.
i. 5 Rack mount units high.
A. Expandable (access to all PCI/ISA card slots on
motherboard).
B. Higher Wattage, internal power supply.
ii. 1 Rack mount unit high.
A. One combo PCI/ISA slot set horizontally for Modem, T1/56K
card, 2nd Ethernet card, etc.
B. Possibly external power supply.
C. Similar in shape and size to Cisco 2500 series case.
2. Fasteners.
(a) No self tapping screws. They are difficult to install and they can
potentially leave small slivers of metal inside of the unit.
(b) Utilize identical screw in as many locations as possible. This will
speed assembly line construction.
3. Faceplate.
(a) Possibly molded plastic if less expensive than metal.
(b) Use printed stickers vs. silkscreening for logos. This would be
advantageous for potential OEM's.
(c) Snap on faceplate/bezel.
(d) Construct the LED's as a single assembly to snap into the faceplate.
(e) Three openings.
i. Two hard drive openings into which standard 3.5" hard drives can
be inserted onto rails with power/data cable mate.
ii. One opening for an internal tape backup - specific tape system
needs to be chosen.
4. Case Frame.
(a) Two Frames.
i. 5 Rack Mount Units (RMU) high.
A. possibly framed similar to a PC with a slide-over outer
covering.
ii. 1 Rack Mount Unit high.
A. Similar to Cisco 2500 series.
(b) Solid bottom plate onto which the motherboard plate will attach.
(c) Optional Mounting Brackets for 19" rack.
(d) 5 RMU case Must have mounting system for ATX power supply.
<PAGE>
5. Power Supply.
(a) Must be phased to an ATX form factor for 5 RMU unit.
(b) Possibly external for 1 RMU unit, or custom internal.
6. Mounting Brackets.
(a) Screw into box cover -> into nuts welded on cover.
(b) Alternate method of attachment so FoxBox can be mounted flat (bottom
against the wall) onto a wall.
7. Motherboard Plate.
(a) Pre-attach mounting hardware for motherboard to ease assembly
(standoffs and key slots).
(b) Have all mounting points utilize same screw.
(c) Mounting plate motherboard attachment holes may need to change on
occasion to support motherboard revisions.
8. Ports and Switches.
(a) Move console port to front of case.
(b) Move ATX power switch to front.
(c) Remove reset switch.
9. Hard Drive System.
(a) Hard drives mounted on rails for easy insertion and removal.
(b) Connector assembly on rail kit and at the back of the drive bay so
cables do not slide in and out.
(c) Face plate pops off and drives can be removed/inserted.
10. Packaging.
(a) Potentially decrease width of packaging for use in automatic tape
machines.
11. Certifications.
(a) The case design MUST be fully compliant with all guidelines in UL 1950 3rd
edition.
<PAGE>
EXHIBIT C
FOXBOX SPECIFICATIONS
The FoxBox is an Internet communications gateway providing enterprise-wide
connectivity, distance learning, firewall security and productivity enhancing
applications. All FoxBoxes produced by BOCA shall be functionally equivalent or
superior to existing FoxBox products sold by NETWOLVES. FoxBoxes shall be
delivered complete, packaged and ready for commercial distribution in accordance
with NETWOLVES' written instructions.
Except as set forth below, FoxBox Units shall conform in all respects with
the following documents: FoxBox Quick Start Guide; FoxBox Administrator's
Manual; FoxBox Configuration Guide; FoxBox Technical Reference Guide; FoxBox
Client Configuration Guide; FoxBox Virtual Private Networking Module; FoxBox
Advanced Access Control Module; SEC E-mail Archive (Security & Exchange
Commission); and Citrix Application Note: Connecting to a WinFrame Server.
All FoxBox Units shall be interoperable with the FoxBox Thin Client
software and hardware conforming with the Thin Client Specifications. All
hardware must be supported by the FreeBSD Operating system, and capable of
executing the following software at least as well as existing NETWOLVES
hardware: Apache1.3.3; Bind 8.12; Fetchmail 4.7.8; FreeBSD 2.2.8; IMAP 4.5 Beta;
IP Filter 3.2.10; ISC DHCP 2.0b1p16; MRTG 2.5.3; Perl 5.003; PHP 3.0.6;
PostgreSQL 6.4.2; Sendmail 8.9.3; Squid 2.1Patch2; Samba 2.0; SNMPD 3.5.3; SSH;
and SUDO 1.5.6p2.
FoxBox Units shall further include the following components:
FoxBox DDR Model:
- ----------------
1. 19" Rackmountable Case (8 pieces)
2. Power Supply 230 Watt UL approved Double Throw
3. Tyan Trinity (S1590S) Mother Board
4. Cyrix M2 300 Mhz processor with fan
5. 32MB DIMM PC-100 SDRAM
6. Accton 10 Mbit PCI Ethernet card
7. Western Digital 4.3. GB Hard Drive with IDE cable
8. FoxBox Packaging
9. Power Cord
10. 15` Blue (cat 5) Straight thru Ethernet
11. Boca Research -- V.90 modem
12. Standard Phone Cord
FoxBox ISDN Model:
- -----------------
1. 19" Rackmountable Case (8 pieces)
2. Power Supply 230 Watt UL approved Double Throw
3. Tyan Trinity (S1590S) Mother Board
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4. Cyrix M2 300 Mhz processor with fan
5. 32MB DIMM PC-100 SDRAM
6. Accton 10 Mbit PCI Ethernet card
7. Western Digital 4.3. GB Hard Drive with IDE cable
8. FoxBox Packaging
9. Power Cord
10. 15` Blue (cat 5) Straight thru Ethernet
11. US Robotics Courier Imodem ISDN TA
12. RJ-45 Silver Satin Cable
FoxBox 56K Model:
- ----------------
1. 19" Rackmountable Case (8 pieces)
2. Power Supply 230 Watt UL approved Double Throw
3. Tyan Trinity (S1590S) Mother Board
4. Cyrix M2 300 Mhz processor with fan
5. 32MB DIMM PC-100 SDRAM
6. Accton 10 Mbit PCI Ethernet card
7. Western Digital 4.3. GB Hard Drive with IDE cable
8. FoxBox Packaging
9. Power Cord
10. 15` Blue (cat 5) Straight thru Ethernet
11. RS-232 (8 bit) Sync Serial Card
12. 56K CSU/DSU
13. 10` RS-232 cable (25 pin to 25 pin M/M)
FoxBox T1 Model:
- ---------------
1. 19" Rackmountable Case (8 pieces)
2. Power Supply 230 Watt UL approved Double Throw
3. Tyan Trinity (S1590S) Mother Board
4. Cyrix M2 300 Mhz processor with fan
5. 32MB DIMM PC-100 SDRAM
6. Accton 10 Mbit PCI Ethernet card
7. Western Digital 4.3. GB Hard Drive with IDE cable
8. FoxBox Packaging
9. Power Cord
10. 15` Blue (cat 5) Straight thru Ethernet
11. V.35 card (8 bit) Sync Serial Card
12. T1 CSU/DSU
13. V.35 Winchester Cable
FoxBox S2E Model:
- ----------------
1. 19" Rackmountable Case (8 pieces)
2. Power Supply 230 Watt UL approved Double Throw
3. Tyan Trinity (S1590S) Mother Board
4. Cyrix M2 300 Mhz processor with fan
5. 32MB DIMM PC-100 SDRAM
6. Accton 10 Mbit PCI Ethernet card
7. Western Digital 4.3. GB Hard Drive with IDE cable
8. FoxBox Packaging
9. Power Cord
10. 15` Blue (cat 5) Straight thru Ethernet
11. Accton 10Mbit PCI Ethernet Card
12. 15` Red (cat 5) Crossover cable
<PAGE>
EXHIBIT D
HOMOLOGATION STATES
<TABLE>
<CAPTION>
Asia/Pacific: Mid-East/Africa:
------------ ---------------
<S> <C>
Australia/New Zealand Bahrain
Hong Kong (China) Egypt
India Kuwait
Indonesia Nigeria
Japan Saudi
Korea South Africa
Malaysia
Singapore
Taiwan
Thailand
Europe: Latin America:
- ------ -------------
Belgium Argentina
Denmark Brazil
Finland Chile
France Costa Rica
*Germany Ecuador
Holland *Mexico
Italy *Panama
Norway Venezuela
Spain
Sweden North America:
*United Kingdom *Canada
</TABLE>
<PAGE>
EXHIBIT E
NETWOLVES THIN CLIENT SPECIFICATIONS
The diskless workstation (Fox pup) is a thin client designed to support
rich audio and video through our ESCN product. It shall be relatively small and
durable with limited moving parts. All hardware shall be supported by FreeBSD
3.2 operating system.
1. Motherboard
a. Netboot Capable.
b. Support for a 300mhz K6-AMD or GXM-National.
c. Support for Memory up to 128 Megs.
2. Memory
a. Type is DIMM.
b. Size should be no less than 64 Megs, however, the more the
better.
3. Drives
a. No Hard Drive or Floppy Drive.
4. Sound
a. Any True Sound Blaster chip set.
5. Video
a. Should be supported by FreeBSD and have excellent performance in
an X-window environment. See attached list for compatible video
cards.
b. The video card should have at least 4 Megs of video on the card.
6. Network Card
a. 10/100 Megabit Ethernet. See attached list for compatible network
cards.
b. Should have a TCP/IP Boot prom (uses the bootp protocol)
installed.
7. I/O
a. PS/2 Keyboard.
b. PS/2 Mouse.
c. One available PCI slot for expansion.
8. Monitor
a. 14" Minimum.
9. Peripherals
a. PS/2 Keyboard.
b. PS/2 Mouse.
c. External Speakers (may be mounted on or inside monitor).
<PAGE>
10. Case
a. Max. dimensions: Width = 13", Depth = 10", Height = 3".
b. Desired headphone jack mounted on the front of the case.
Below are a few video cards believed to be supported by FreeBSD:
S3 with one of the following S3 chipsets: 911, 924, 801/805, 928, 732
(Trio32), 764, 765, 775, 785 (Trio64*), 864, 868, 964, 968 and M65 (Aurora64V+).
Mach32 series: Graphics Ultra+, Graphics Ultra Pro, Graphics Wonder,
Graphics Ultra XLR, Graphics Ultra AXO, VLB mach32-D, PCI mach32-D, ISA mach32.
Mach64 series: Graphics Xpression, Graphics Pro Turbo, Win Boost, Win
Turbo, Graphics.
Pro Turbo 1600, Video Xpression, 3D Xpression, Video Xpression+, 3D
Xpression+, All- In-Wonder, All-In-Wonder PRO, 3D Pro Turbo, ATI-TV, XPERT@Play,
XPERT@Work, XPERT XL.
Below are a few Ethernet cards believed to be supported by FreeBSD:
SMC Elite 16 WD8013 Ethernet interface, and most other WD8003E, WD8003EBT,
WD8003W, WD8013W, WD8003S, WD8003SBT and WD8013EBT based clones.
SMC Elite Ultra and 9432TX based cards are also supported.
DEC EtherWORKS III NICs (DE203, DE204 and DE205).
DEC EtherWORKS II NICs (DE200, DE201, DE202 and DE422).
DEC DC21040/DC21041/DC21140 based NICs:
ASUS PCI-L101-TB
Accton ENI1203
Cogent EM960PCI
Compex CPXPCI/32C
D-Link DE-530
DEC DE435
Danpex EN-9400P3
JCIS Condor JC1260
Linksys EtherPCI
SMC EtherPower 10/100 (Model 9332)
SMC EtherPower (Model 8432) SMC
EtherPower (2)
<PAGE>
Intel EtherExpress
Intel EtherExpress Pro/100B 100Mbit
Novell NE1000, NE2000 and NE2100 ethernet interface
3Com 3C501 cards
3Com 3C503 Etherlink II
3Com 3c505 Etherlink/+
3Com 3C507 Etherlink 16/TP
3Com 3C590, 3C595 Etherlink III
3Com 3C90x cards
NOTE: FreeBSD does not currently support PnP (plug-n-play) features present
on some ethernet cards. If your card has PnP and is giving you problems, try
disabling the PnP features.
<PAGE>
