SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
NetWolves Corporation
(Exact Name of Registrant as Specified in its Charter
New York 11-3439392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 Broadhollow Road, Melville, New York 11747
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 516-393-5016
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0033 per share
(Title of Class)
<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 industries.
The Company's strategy is to establish the FoxBox as the standard for
enterprise-wide network connectivity worldwide. To achieve its objectives
worldwide, NetWolves seeks to form relationships with leading companies in their
respective areas to deliver application-specific internet solutions to
organizations worldwide. In furtherance of this objective, the Company has
recently entered into agreements with Anicom, Inc. and The Sullivan Group and is
negotiating additional relationships.
In January 1999, NetWolves entered into a distribution agreement with
Anicom, Inc. appointing Anicom, Inc. as the exclusive master distributor of its
products in North America subject to certain minimum purchase requirements.
Anicom is one of the largest distributors in the United States of multimedia
wiring systems with customers including Cisco Systems and Fast Com and intends
to sell the Company's products to its 75 offices located in the United States.
In addition, Anicom will maintain inventory of the FoxBox from all 75 locations
and intends to distribute the FoxBox nationwide. The Company delivered its first
significant order, in excess of $1,500,000, in March/April 1999.
In January 1999, the Company entered into an agreement with The Sullivan
Group, a leading consulting organization serving the needs of the automobile
aftermarket, convenience stores and oil industry. It maintains an extensive
library of training modules available to its client base which includes Amoco
Oil, British Petroleum, Chevron, Chrysler, Exxon, General Motors, Mobil Oil
Shell, Tosco and Unocal. Pursuant to its agreement, The Sullivan Group has
appointed NetWolves as its exclusive provider in the United States of a delivery
system whereby The Sullivan Group intends to sell its proprietary training
programs to approximately 40,000 retail locations throughout the United States.
NetWolves is customizing an Internet solution specifically to deliver distance
learning to these locations utilizing its FoxBox technology; and it anticipates
sales of this customized product to commence this summer.
<PAGE>
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.
-- 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.
<PAGE>
-- 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.
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.
<PAGE>
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
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.
<PAGE>
Agreements With Anicom and The Sullivan Group
In January 1999, NetWolves entered into an agreement with Anicom. The
agreement appoints Anicom as NetWolves' exclusive master distributor of its
products throughout North America for a five year period. There are minimum
purchase requirements under the agreement to maintain exclusivity though there
are no specific purchase commitments beyond its initial order which was
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.
In connection with the agreement and for cash consideration paid to the
Company of $300,000, the Company issued Anicom 300,000 warrants to purchase
common stock of the Company at an exercise price of $5 per share. The warrants
issued to Anicom shall vest in equal installments over three years, commencing
on the first anniversary of the agreement and shall expire in January 2004.
Anicom also obtained piggyback registration rights with respect to the issuable
shares of common stock.
In January 1999, NetWolves entered into an agreement with The Sullivan
Group, a leading consulting organization serving the needs of the automotive
aftermarket, convenience store and oil industry and, through its subsidiary, The
Duffy-Vinet Institute, maintains an extensive library of training modules
available to its client customer base. Under the agreement, NetWolves has been
appointed as the exclusive provider of multi-services internet gateway products,
which is intended to enable The Sullivan Group and its subsidiary to sell its
proprietary training programs to approximately 40,000 retail locations
throughout the United States. This combined technology is intended to facilitate
simultaneous interactive distance learning at all sites. The agreement is for a
period of five years with an automatic five year renewal unless previously
terminated. NetWolves has agreed to customize its FoxBox to serve the needs of
The Sullivan Group.
Initial deliveries are scheduled to commence in the quarter ending December
31, 1999. While deliveries will be made against specific purchase orders yet to
be received, NetWolves has agreed to deliver approximately 40,000 units over a
<PAGE>
five-year period ranging from 350 units in 1999 and 4,150 units in 2000 to
14,000 in 2003. It is intended that the units will be leased over a 48 month
term at a monthly rate of $200 per unit. One year of maintenance is included
with each leasing agreement and extended maintenance contracts may be purchased
for a fee.
Research and Development
The internet and the computer hardware and software industry are
characterized by rapid technological change, which requires ongoing development
and maintenance of products. It is customary for modifications to be made to
products as experience with its use grows or changes in manufacturer's hardware
and software so require.
NetWolves' research and development organization is comprised of a core
team of engineers who specialize in different areas of product development.
NetWolves engineering team has experience in a variety of industries, including
information security, designing networking protocols, building interfaces,
designing databases, and computer telephony. Their expertise is used in the
design of the FoxBox and seeking improved methods for the FoxBox to meet
customer needs. As of March 31, 1999, the Company's research and development
group consists of five employees. The Company seeks to recruit highly qualified
employees and its ability to attract and retain such employees will be a
principal factor in its success in achieving and maintaining a leading
technological position.
For the six months ended December 31, 1998, the Company expended
approximately $91,600 for research and development expenses. The Company intends
to increase its investment in product development and believes that its future
services will depend, in part, on its ability to develop, manufacture and market
new products and enhancements to existing products on a cost-effective and
timely basis.
Manufacturing and Testing
The primary manufacturer currently used by the Company is Boca Research, a
hardware assembly and engineering firm located in Boca Raton, Florida.
Accuspecs, a hardware assembler located in McKeen, Pennsylvania, also
manufactures the FoxBox for the Company. While NetWolves has no long-term
agreements with these manufacturers, it believes that alternative manufacturers
are available if NetWolves were to change manufacturers.
Production Process
The process used to produce NetWolves products begins with hardware
configuration, installing the appropriate version of FoxBox software,
configuring client-specific software components, followed by a 24-hour "burn-in"
process. Raw/prefabricated materials, components, and subassemblies required for
production include mother boards, CPU's, cases, Ethernet cards, network
communication cards, hard drives, memory, CPU fans and power supplies. The
<PAGE>
Company believes that these materials are available from several companies and
that alternative sources of supply are currently available.
Testing
A majority of testing is performed as part of the manufacturing process. In
addition, NetWolves performs quality testing via the Internet on a periodic
basis to verify that the assembled products meet all production quality
criteria. Also, randomly chosen FoxBox units are shipped from the production
assembly facility back to NetWolves for additional testing.
In addition to testing the product on a regular basis, NetWolves researches
the status of existing components used in the FoxBox to determine if they are
being phased out or prices have changed. If it concludes that a certain
component must be substituted, trial testing is performed on a new component to
determine if it meets product component criteria. If it meets this criteria,
which includes cost effectiveness, longer life expectancy and product
efficiency, a plan to develop and use the component is implemented.
Customer Service and Technical Support
The Company maintains an experienced staff of customer service personnel to
provide technical support to its customers. Each member of the customer service
staff is certified through an ongoing in-house training and testing program to
provide support for each individual product. The Company's customer service
staff provides product support via telephone and e-mail 24 hours per day, seven
days per week. The Company generally provides software and documentation
updates, including maintenance releases, operating system upgrades and major
functional upgrades, as part of its customer support services.
Sales and Marketing
The Company's strategy of marketing and sales plan for it to enter into
agreements with providers of products in a wide variety of markets, including
financial, medical, legal, travel, hospitality, entertainment, hotel and the
auto industries in order to leverage their existing client base for sales of the
Company's products. With this objective, the Company has entered into agreements
with Anicom, Inc. and The Sullivan Group and is seeking additional strategic
alliances on a worldwide basis. The Company intends to hire sales and marketing
consultants in five (5) regional areas, New York, Tampa, Chicago, Washington D.
C. and Los Angeles. These persons will perform several important functions
including managing the master distribution agreements between the Company and
its partners and also customizing solutions for the various market business
segments.
The Company has implemented marketing initiatives to support the sales and
distribution of its products and services, and to communicate corporate
direction. The Company's sales and marketing employees are responsible for
<PAGE>
collateral development, lead generation and awareness of the Company and its
products. Marketing programs include public relations, seminars, industry
conferences and trade shows, advertising and direct mail. The Company's
marketing employees also contribute to both the product direction and strategic
planning processes by providing market research and conducting surveys and focus
groups.
Licensing and Intellectual Property
The Company considers certain features of its products, including its
methodology and technology to be proprietary. The Company relies on a
combination of trade secret, copyright and trademark laws, contractual
provisions and certain technology and security measures to protect its
proprietary intellectual property. The Company does not currently have any
patents or pending patent applications. Notwithstanding the efforts the Company
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 as 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 March 15, 1998, the Company employed 23 full-time employees.
Approximately, five of these employees are involved in research and development,
seven in sales and marketing, and 11 in finance and general administration. In
addition, the Company has retained five independent contractors on a consulting
basis who support engineering and marketing functions. To date, the Company
believes it has been successful in attracting and retaining skilled and
motivated individuals. Competition for qualified management and technical
employees is intense in the computer industry. The Company's success will depend
in large part upon its continued ability to attract and retain qualified
employees. The Company has never experienced a work stoppage and its employees
are not covered by a collective bargaining agreement. The Company believes that
it has good relations with its employees.
<PAGE>
ITEM 2. FINANCIAL INFORMATION
Selected Financial Data
The following selected financial data has been derived from the financial
statements included elsewhere in this report and should be read in conjunction
with such financial statements.
<TABLE>
<CAPTION>
Period from Six Months ended
February 13, 1998 ended
(inception) to December 31, 1998
June 30, 1998 (unaudited)
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<S> <C> <C>
Statement of Operation Data:
Net sales $ 29,621 $ 80,714
Cost of goods sold 5,681 31,478
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Gross profit from sales 23,940 49,236
Operating expenses 149,510 3,459,236
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Loss before other income (expense)
and benefit from income taxes (125,570) (3,410,000)
Interest income (expense), net 2,666 27,218
Other income (expense), net 3,490 2,118
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Loss before benefit from income taxes (119,414) (3,380,664)
Benefit from income taxes 20,000 -
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Net loss $ (99,414) $(3,380,664)
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Basic and diluted net loss per
share $ (0.04) $ (0.78)
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Weighted average common shares
outstanding 2,810,102 4,315,772
=========== ===========
Financial position:
Cash and cash equivalents $ 1,118,416 $ 808,279
Marketable securities, available
for sale 1,063,828 463,500
Total assets 2,959,451 1,976,444
Total shareholders' equity 2,928,003 1,788,974
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company is a corporation with a limited operating history, formed in
February 1998. The Company has commenced field trial and limited sales of its
primary product, "The FoxBox". Additionally, efforts were made to obtain
operating capital and convert the Company to a public entity. This was
successfully accomplished through a reverse merger with Watchdog Patrols, Inc.,
a publicly traded (OTCBB), 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 The Sullivan Group ("Sullivan") agreement whereby Sullivan appointed
the Company as its exclusive provider of the Company's multi-service Internet
delivery system (known as "FoxBox") to be used in conjunction with Sullivan's
proprietary interactive distance learning training programs. The period of the
agreement is for a term of five years. The second agreement is with Anicom, Inc.
("Anicom"). The Company entered into a five-year exclusive master distribution
agreement with Anicom, Inc. to distribute the FoxBox through North America.
The Company has a limited operating history in which to base an evaluation
of the business and prospects. The Company's prospects must be considered in
light of the risks, frequently encountered by companies in their early stages of
development, particularly for companies in the rapidly evolving Technology
Industry. Certain risks for the Company include, but are not limited to unproven
business model, capital requirements and growth management. To counter this
risk, the Company must, among other things, increase its customer base, develop
a distribution network, successfully execute its business and marketing plan,
and increase the operating infrastructure. There can be no assurance that the
Company will be successful in addressing such risk, and the failure to do so
could have a material adverse effect on the Company's financial condition and
results of operations. Since inception, the Company has incurred significant
losses and as of December 31, 1998 had a deficit accumulated during the
development stage of approximately $3.5 million. The Company believes that its
success depends in large part on its ability to create market awareness and
acceptance for the FoxBox, raise additional operating capital to grow
operations, build technology and non-technology infrastructures, expand the
sales force and distribution network, and continue new product R&D through the
development and operational stages.
<PAGE>
Results of Operations
From February 13, 1998 (date of inception) to December 31, 1998
The Company continues to operate as a development stage enterprise as of
December 31, 1998, and accordingly, the Company has engaged in limited revenue
generating operations. The net sales from operations for NetWolves for the
period from inception through December 31, 1998 were $110,335. Additionally,
$43,884 of dividend and interest income was generated during this period. The
Company operates on a fiscal year end of June 30.
The Company's gross margin from the period of inception to December 31,
1998 was 66%. The Company believes that gross margins greater than 66% are
achievable at increased production levels. These results will depend, in part,
on the effects of economies-of-scale, the use of third-party assemblers and the
ability to competitively purchase rapidly evolving commodity hardware, which is
a significant component of "cost of goods sold." The use of non-Proprietary
hardware is one of many inherent design features of the FoxBox which facilitates
an efficient and cost effective production cycle. Additionally, this allows the
Company to focus its core R&D efforts on developing cutting edge Software. There
can be no assurance that the Company will be successful in increasing its
margins due to one or more factors. These factors include, but are not limited
to increases/decreases in direct labor and material costs and general economic
conditions in the future.
Operating expenses for this period were $3,608,746, which consisted
primarily of $1,685,260 of general and administrative costs relating to the
establishment of the infrastructure of the business. $91,616 of costs were
incurred relating to research and development, $1,831,862 relating to selling,
marketing and consulting. Included in the above mentioned operating expenses are
approximately $2,044,000 of compensation for services in the form of the
Company's common stock and options.
<PAGE>
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. Additionally, on November 22, 1998 the Company sold
substantially all the assets of the security guard business, consisting
primarily of uniforms, vehicles, computer systems and furniture to a third
party. This generated an additional $600,000 of cash flow to the Company.
As of December 31, 1998 the Company has $1,271,779 of cash, cash equivalent
and marketable securities available to fund operations. In March/April 1999, the
Company delivered an initial stocking order of approximately $1.5 million
pursuant to its master distribution agreement with Anicom. Additionally, the
Company completed a private placement memorandum (PPM) of $6 million in the
fourth quarter of fiscal 1999. 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 plans. 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:
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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.
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.
<PAGE>
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.
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 3. PROPERTIES
The Company maintains approximately 250 square feet of office space in
Melville, New York at a monthly rental of approximately $1,600, which currently
accommodates the Company's headquarters for administrative and financial
functions. The lease expired in January and is currently on a month-to-month
basis. The Company has a three year lease expiring in August 2001 for
approximately 4,100 square feet of space in Tampa, Florida, which currently
accommodates the Company's research and development facilities. The annual rent
is approximately $28,500. The Company is presently negotiating for new
facilities in New York and in the Tampa, Florida area. The Company believes that
its present and proposed facilities are adequate to meet its current business
requirements and that suitable facilities for expansion will be available, if
necessary, to accommodate further physical expansion of corporate operations and
for additional sales and support offices.
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
common stock as of March 1, 1999 of (i) each person known by the Company to
beneficially own 5% or more of the Company's outstanding Common Stock, (ii) each
of the Company's executive officers, directors and director nominees, and (iii)
all of the Company's executive officers and directors as a group. Except as
otherwise indicated, all shares of Common Stock are beneficially owned, and
investment and voting power is held, by the persons named as owners. Percentage
ownership for each owner includes warrants currently exercisable or exercisable
by such owner within 60 days.
<TABLE>
<CAPTION>
Name and Address of Amount of Shares
Beneficial Owner Beneficially Owned Percentage Ownership
- --------------------- ------------------ --------------------
<S> <C> <C>
Greenleaf Capital Partners, LLC (7) 1,141,360 (5) 27%
Walter M. Groteke 528,064 (1)(2) 11%
Daniel G. Stephens 528,064 (1)(2) 11%
Kevin F. Sherlock 528,064 (1)(2) 11%
Keith Darling 528,064 (2)(3) 11%
Mark Jacques 475,258 (2)(3) 10%
Walter R. Groteke 150,000 (1) 3%
Internet Technologies, Inc.(7) 260,000 (4)(5) 5%
Ed Lavin 50,000 1%
Louis Liben 50,000 1%
Kirlin Securities, Inc.(7) 500,000 (6) 9%
Executive officers and
directors as a group 1,834,192 38%
<FN>
________
* less than one percent (1%) unless otherwise indicated.
(1) Does not include unvested warrants to purchase 200,000 shares at an option
price of $1.63 per share. See "Management - Employment Agreements."
(2) Messrs. Walter M. Groteke, Daniel G. Stephens, Kevin F. Sherlock, Keith
Darling and Mark Jacques have agreed that the shares owned by them may not
be sold until June 17, 2000 without the prior written consent of Kirlin
Securities. Kirlin Securities may release such restriction, although there
are no understandings or arrangements in this regard.
(3) Messrs. Darling and Jacques are former officers, directors and employees of
the Company. Does not include unvested, performance based warrants to
purchase 50,000 shares each at an option price of $5.00 per share.
(4) Internet Technologies, Inc., a consultant to the Company, has the right to
receive up to 120,000 additional shares based upon future performance
criteria
(5) Greenleaf Capital Partners, LLC has demand registration rights on its
shares and Internet Technologies, Inc. has demand registration rights for
200,000 shares of common stock.
(6) Represents warrants currently exercisable by Kirlin Securities and its
affiliates to purchase 500,000 shares of common stock at $1.63 per share.
Kirlin Securities, Inc. has demand registration rights on the shares of
common stock issuable upon exercise of the warrants.
(7) The natural person or persons who exercise sole or shared voting and
dispositive powers over the shares held of record by these entities are as
follows: Greenleaf Capital Partners, LLC - Mr. Phillip LoRusso and Mr.
Edmund McCormick; Internet Technologies, Inc. - Mr. Louis McElwee; Kirlin
Securities, Inc. - Mr. Anthony Kirincic.
</FN>
</TABLE>
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The directors and executive officers of the Company as of March 1, 1999 and
their ages are as follows:
Name Age Position
- ---- --- --------
Walter M Groteke 29 Chairman of the Board, President and
Chief Executive Officer
Daniel G. Stephens 28 Vice Chairman of the Board and
Chief Information Officer
Kevin F. Sherlock 35 Chief Operating Officer and Director
Walter R. Groteke 52 Vice President - Sales and Marketing
and Director
Ed Lavin 55 Director
Louis Liben 40 Director
- ------
Walter M. Groteke, a co-founder of the Company, has been Chairman of the
Board, Chief Executive Officer and a director of the Company since June 1998.
Mr. Groteke is responsible for planning, developing and establishing policies
and business objectives for the Company. From June 1995 until 1997, Mr. Groteke
was regional business development manager for Techmatics, Inc. an information
systems Department of Defense contractor. From May 1993 to June 1995, Mr.
Groteke was senior account manager for NYNEX's strategic account management
program.
Daniel G. Stephens, a co-founder of the Company, has been Vice Chairman of
the Board and Chief Information Officer since June 1998. Mr. Stephens directs
research and development, information systems and technical support services for
the Company. From May 1994 until 1997, Mr. Stephens was a senior systems
engineer for Techmatics, Inc. In this capacity, he advised the Department of
Justice on development of a nationwide series network infrastructure to support
a law-enforcement database.
Kevin F. Sherlock, has been Chief Operating Officer of the Company since
January1999 and a director of the Company since June 1998. From 1985 to June
1998, Mr. Sherlock was an Account Director responsible for sales and marketing
at Standard Register.
<PAGE>
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
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.
<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 are employed as Chief Executive Officer,
Chief Information Officer and Chief Operating Officer, respectively, for an
initial term of three years. The agreement provides for automatic renewal for an
additional three years unless terminated by the Company for cause or terminated
by the executive. The base salary for each person is $100,000 increasing to
$150,000 annually in the event NetWolves generates revenues between $5,000,000
and $10,000,000 within one year of the employment term and further increasing to
$250,000 if NetWolves generates revenues of at least $10,000,000 within one year
of the initial employment term. The employment agreements each provide for an
annual incentive equivalent to 2% of the gross profit of NetWolves.
The employment agreements with Messrs. Groteke, Stephens and Sherlock
further provide for certain payments following death or disability for certain
fringe benefits such as reimbursement for reasonable expenses and participation
in medical plans, and for accelerated payments in the event of change of control
of the Company.
Walter M. Groteke, Daniel G. Stephens and Kevin F. Sherlock also have
entered into warrant agreements with the Company whereby each is entitled to
receive warrants to purchase 200,000 shares of the Company's common stock at
$1.63 per share vesting on July 1, 2000. Warrants to purchase 200,000 shares of
the Company's common stock at $1.63 per share also were issued to Walter R.
Groteke. These warrants are fully vested on June 17, 2003 subject to
acceleration under certain events. These events include the sale or disposition
of substantially all of the capital stock or assets of the Company and the
generation of certain revenues by the Company. Specifically, the vesting of
50,000 warrants is accelerated if the Company generates revenues of at least
$5,000,000 within one year from the date of the Watchdog Patrols acquisition,
100,000 warrants will become exercisable if the Company generates at least
$10,000,000 in revenues with at least $2,000,000 in pretax profit within one
year of the Watchdog Patrols acquisition; and 50,000 warrants will become
exercisable if at least $10,000,000 of revenue is generated by the Company with
at least $1,000,000 in pretax profit within the second year following the
Watchdog Patrols acquisition. Further, if the vesting of the warrants is not
otherwise accelerated, they will nevertheless become exercisable if the Company
generates $20,000,000 in revenues with at least $4,000,000 in pretax income
during the second year following the acquisition of Watchdog Patrols.
Stock Option Plan
In June 1998, the Company adopted a 1998 Long Term Incentive Plan (the
"1998 Incentive Plan") in order to motivate qualified employees of the Company,
to assist the Company in attracting employees and to align the interests of such
persons with those of the Company's shareholders.
<PAGE>
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. To date, the Company has granted options to purchase 243,500 shares of
common stock under the 1998 Incentive Plan to its officers and key employees.
ITEM 6. EXECUTIVE COMPENSATION
For the year ended June 30, 1998, no officer or director of NetWolves
Corporation received compensation from the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 17, 1998, NetWolves, LLC merged into a subsidiary of Watchdog
Patrols, Inc., which thereafter changed its name to NetWolves Corporation. The
merger provided for exchange of securities of NetWolves, LLC for the securities
of the Company. 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. 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. The exercise price
was based upon the public trading price of Watchdog Patrols Inc's common stock
at the time of the acquisition.
Greenleaf Capital Partners LLC was a shareholder of Watchdog Patrols, Inc.
prior to the merger, having acquired 1,141,360 shares at an aggregate purchase
price of $2,200,000. Greenleaf Capital received demand registration rights in
connection with the merger. Pursuant to these rights, Greenleaf Capital or any
member or members of Greenleaf Capital owning at least 20% of the outstanding
shares of common stock owned by Greenleaf Capital, has the right to request in
writing that NetWolves register such shares under a registration statement to be
filed with the Securities and Exchange Commission. The Company is thereafter
required to file such registration statement within sixty (60) days after
receipt of the request. The Company is further obligated to maintain the
effectiveness of the registration statement until the securities covered
thereunder have been sold.
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of their property is the subject.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NetWolves' common stock has traded on the OTC Bulletin Board under the
symbol "WOLV" since December 1998. Prior to the December name and symbol change,
the Company's stock traded under the symbol "WDGT", Watchdog Patrols, Inc. The
following table sets forth the high and low closing prices for the common stock
for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1999
Second Quarter (through April 5, 1999).... $11.50 $10.625
First Quarter............................. 16.00 4.50
1998
Fourth Quarter............................ $4.875 $3.25
Third Quarter............................. 7.75 4.50
Second Quarter (since June 17, 1998)...... 5.00 1.625
</TABLE>
As of April 5, 1999, there were approximately 225 holders of record of the
common stock. On April 5, 1999, the closing sales price of NetWolves common
stock was $11.50 per share.
NetWolves has not paid any cash dividends on its Common Stock and does not
presently intend to do so. Future dividend policy will be determined by its
Board of Directors on the basis of NetWolves' earnings, capital requirements,
financial condition and other factors deemed relevant.
The transfer agent and registrar of NetWolves' Common Stock is American
Stock Transfer and Trust Co., 40 Wall Street, New York, New York 10005.
<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
1. In June 1998, in connection with the merger of Watchdog Patrols, Inc.
with the Company 2,640,322 shares of the Company's common stock were issued to
the principals of NetWolves, LLC in exchange for their ownership interest in
that company. This was a transaction by the Company not involving any public
offering which was exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
2. In January 1999, an aggregate of 260,000 shares of the Company's common
stock were issued to a person in exchange for services rendered. This was a
transaction by the Company not involving any public offering which was exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
3. In January 1999, an aggregate of 200,000 shares of the Company's common
stock were issued to two persons in exchange for services rendered. These were
transactions by the Company not involving any public offering which were exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
4. In January 1999, an aggregate of 250,000 shares of the Company's common
stock were issued to three directors of the Company in exchange for services
rendered. This was a transaction by the Company not involving any public
offering which was exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company's authorized capital stock consists of 10,000,000 shares of
common stock, $.0033 par value per share.
Holders of the common stock do not have subscription, redemption,
conversion or preemptive rights. The shares of common stock when issued and paid
for, are fully paid and non-assessable. Each share of common stock is entitled
to participate pro rata in distribution upon liquidation and to one vote on all
matters submitted to a vote of shareholders. The holders of common stock may
receive cash dividends as declared by the Board of Directors out of funds
legally available therefor. Holders of the common stock are entitled to elect
all directors. At each annual meeting of the shareholders all of the directors
will be elected. The holders of the common stock do not have cumulative voting
rights, which means that the holders of more than half of the shares voting for
the election of a class of directors can elect all of the directors of such
class and in such event the holders of the remaining shares will not be able to
elect any of such directors.
<PAGE>
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and By-laws contain provisions
which reduce the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. The Company currently maintains
a liability insurance policy for the benefit of its directors in the sum of
$3,000,000.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Company and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interests of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions). The provisions do not
require a showing of good faith. Moreover, they do not provide indemnification
for liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance.
These provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers and
directors to the maximum extent allowable under New York law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any shareholders derivative action. However,
the provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken.
The Company also has entered into indemnification agreements with its
officers and directors. The indemnification agreements provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related disbursements) actually and reasonably incurred in
connection with either the investigation, defense or appeal of a proceeding, (as
defined) including amounts paid in settlement by or on behalf of an indemnitee
thereunder.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached statements.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) See Index to Financial Statements at beginning of attached financial
statements.
(b) Exhibits
3.1 Certificate of Incorporation, as amended. *
3.2 By-Laws. *
4.1 Specimen common stock certificate.*
4.2 Form of warrant to investment banking firm. *
4.3 Form of warrant to employees. *
10.1 Merger and Reorganization Agreement dated June 15, 1998 among
Watchdog Patrols, Inc., Watchdog Acquisition Corp. and NetWolves,
LLC. *
10.2 Agreement between The Sullivan Group and NetWolves Corporation dated
January 5, 1999. *
10.3 Distribution Agreement between NetWolves Corporation and Anicom, Inc.
dated as of January 18, 1999. *
10.4 Employment Agreement between Netwolves Corporation and Daniel G.
Stephens, Jr. dated June 17, 1998.
10.5 Employment Agreement between Watchdog Patrols, Inc. and Walter M.
Groteke dated June 17, 1998.
10.6 Employment Agreement between Watchdog Patrols, Inc. and Kevin F.
Sherlock dated June 17, 1998.
10.7 Warrant Agreement between Watchdog Patrols, Inc.and Walter M. Groteke
dated June 17, 1998.
10.8 Warrant Agreement between Watchdog Patrols, Inc.and Daniel G.
Stephens, Jr. dated June 17, 1998.
10.9 Warrant Agreement between Watchdog Patrols, Inc.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.
27 Financial Data Schedule*
- ------
* Previously filed
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
NETWOLVES CORPORATION
By: /s/ Walter M. Groteke
Walter M. Groteke
Chairman of the Board and
President
Dated: September 29, 1999
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
CONTENTS
INDEPENDENT AUDITOR'S REPORT ............................................. F-1
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1998 (unaudited) ........................ F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period from February 13, 1998 (inception) to June 30, 1998 and
for the three and six months ended December 31, 1998 (unaudited) ....... F-3
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the period from February 13, 1998 (inception) to June 30, 1998 and
for the six months ended December 31, 1998 (unaudited) .................. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from February 13, 1998 (inception) to June 30, 1998 and
for the six months ended December 31, 1998 (unaudited) .................. F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................ F-6 - F-17
<PAGE>
Board of Directors and Shareholders
NetWolves Corporation
Melville, New York
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of NetWolves
Corporation and subsidiaries (the "Company") as of June 30, 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the period from February 13, 1998 (inception) to June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NetWolves
Corporation and subsidiaries as of June 30, 1998, and the consolidated results
of their operations and their consolidated cash flows for the period from
February 13, 1998 (inception) to June 30, 1998 in conformity with generally
accepted accounting principles.
/s/ Hays & Company
Hays & Company
February 25, 1999, except for Note 10c which
is dated March 23, 1999
New York, New York
F-1
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
June 30, 1998
1998 (unaudited)
----------- -------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,118,416 $ 808,279
Marketable securities, available for sale, at market value 1,063,828 463,500
Accounts receivable, net of allowance for doubtful
accounts of $5,000 6,803 77,898
Net assets held for sale (Note 4) 720,000 275,000
Inventories 22,410 194,553
Prepaid expenses and other current assets 18,318 99,471
----------- -----------
Total current assets 2,949,775 1,918,701
Property and equipment, net 4,949 48,805
Other assets 4,727 8,938
----------- -----------
$ 2,959,451 $ 1,976,444
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 31,448 $ 187,470
----------- -----------
Total current liabilities 31,448 187,470
----------- -----------
Commitments and contingencies (Notes 4, 7, 9 and 10)
Shareholders' equity
Common stock, $.0033 par value; 10,000,000 shares authorized;
issued and outstanding: 4,313,870 - June 30, 1998
and 4,663,870 - December 31, 1998 14,236 15,391
Additional paid-in capital 3,012,159 5,055,316
Deficit accumulated during the development stage (99,414) (3,480,078)
Accumulated other comprehensive income 1,022 198,345
----------- -----------
Total shareholders' equity 2,928,003 1,788,974
----------- -----------
$ 2,959,451 $ 1,976,444
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
F-2
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Period from Three months Six months February 13,
February 13, ended ended 1998 (inception)
1998 December 31, December 31, to December 31,
(inception) to 1998 1998 1998
June 30, 1998 (unaudited) (unaudited) (unaudited)
------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Sales $ 29,621 $ 35,961 $ 80,714 $ 110,335
Cost of goods sold 5,681 15,179 31,478 37,159
----------- ----------- ----------- -----------
Gross profit from sales 23,940 20,782 49,236 73,176
----------- ----------- ----------- -----------
Operating expenses
General and administrative 105,047 872,647 1,580,221 1,685,268
Research and development -- 78,512 91,616 91,616
Sales and marketing 44,463 882,337 1,787,399 1,831,862
----------- ----------- ----------- -----------
149,510 1,833,496 3,459,236 3,608,746
----------- ----------- ----------- -----------
Loss before other income (expense)
and benefit from income taxes (125,570) (1,812,714) (3,410,000) (3,535,570)
Other income (expense)
Interest income 3,011 14,536 27,218 30,229
Loss on sale of marketable securities -- (8,047) (8,047) (8,047)
Dividend income 3,490 7,131 10,165 13,655
Interest expense (345) -- -- (345)
----------- ----------- ----------- -----------
Loss before benefit from income taxes (119,414) (1,799,094) (3,380,664) (3,500,078)
Benefit from income taxes 20,000 -- -- 20,000
----------- ----------- ----------- -----------
Net loss $ (99,414) $(1,799,094) $(3,380,664) $(3,480,078)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.04) $ (0.42) $ (0.78) $ (0.95)
=========== =========== =========== ===========
Weighted average common
shares outstanding 2,810,102 4,317,674 4,315,772 3,670,485
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Deficit
accumulated Accumulated Compre-
Additional during the other Total hensive
Common stock paid-in development comprehensive shareholders' income
Shares Amount capital stage income equity (loss)
------ ------ ---------- ----------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capital contributions to NetWolves, LLC 100 $ 64,245 $ - $ - $ - $ 64,245
Reverse acquisition, June 17, 1998 (Note 2)
Exchange of NetWolves, LLC membership
interests (100) (64,245) - - - (64,245)
Issuance of common stock to owners of
NetWolves, LLC 2,640,322 8,713 55,532 - - 64,245
Outstanding common stock of Watchdog
Patrols, Inc. 1,673,548 5,523 2,956,627 - - 2,962,150
Marketable securities valuation adjustment - - - - 1,022 1,022 $ 1,022
Net loss, period from February 13, 1998
(inception) to June 30, 1998 - - - (99,414) - (99,414) (99,414)
---------- --------- ---------- ----------- ------- ----------- ----------
Total comprehensive loss $ (98,392)
==========
Balance, June 30, 1998 4,313,870 14,236 3,012,159 (99,414) 1,022 2,928,003
Marketable securities valuation
adjustment (unaudited) - - - - 197,323 197,323 $ 197,323
Common stock and warrants issued for
services (unaudited) 350,000 1,155 2,043,157 - - 2,044,312 -
Net loss, six months ended
December 31, 1998 (unaudited) - - - (3,380,664) - (3,380,664) (3,380,664)
---------- --------- ---------- ----------- ------- ----------- ----------
Total comprehensive loss (unaudited) $(3,183,341)
===========
Balance, December 31, 1998 (unaudited) 4,663,870 $ 15,391 $ 5,055,316 $(3,480,078) $198,345 $ 1,788,974
========== ========= =========== =========== ======== ===========
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
</TABLE>
F-4
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Comany)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Period from Six months February 13
February 13, ended 1998 (inception)
1998 December 31, to December 31,
(inception) to 1998 1998
June 30, 1998 (unaudited) (unaudited)
------------- ------------ ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (99,414) $(3,380,664) $ (3,480,078)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 401 3,541 3,942
Realized loss on sale of marketable securities -- 8,047 8,047
Provision for doubtful accounts 5,000 -- 5,000
Common stock and warrants issued for services -- 2,044,312 2,044,312
Deferred income tax benefit (20,000) -- (20,000)
Changes in operating assets and liabilities
Accounts receivable (11,803) (71,095) (82,898)
Inventories (22,410) (172,143) (194,553)
Prepaid expenses and other current assets (18,318) (81,153) (99,471)
Accounts payable and accrued expenses 31,448 156,022 187,470
----------- ----------- ------------
Net cash used in operating activities (135,096) (1,493,133) (1,628,229)
----------- ----------- ------------
Cash flows from investing activities
Proceeds from the sale of marketable securities -- 789,604 789,604
Proceeds from assets held for sale, net -- 445,000 445,000
Purchases of property and equipment (5,350) (47,397) (52,747)
Payments of security deposits (4,727) (4,211) (8,938)
----------- ----------- ------------
Net cash provided by investing activities 10,077 1,182,996 1,172,919
----------- ----------- ------------
Cash flows from financing activities
Proceeds from initial capital contribution 64,245 -- 64,245
Cash acquired in reverse acquisition 1,460,366 -- 1,460,366
Transaction costs paid in connection with reverse acquisition (261,022) -- (261,022)
----------- ----------- ------------
Net cash provided by financing activities 1,263,589 -- 1,263,589
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 1,118,416 (310,137) 808,279
Cash and cash equivalents, beginning of period -- 1,118,416 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 1,118,416 $ 808,279 $ 808,279
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Reverse acquisition (Note 2)
Marketable securities acquired $ 1,062,806 $ -- $ 1,062,806
Net assets held for sale 720,000 -- 720,000
Deferred income tax liability (20,000) -- (20,000)
Cash acquired, net of $261,022 of transaction costs paid 1,199,344 -- 1,199,344
----------- ----------- ------------
Outstanding common stock of Watchdog Patrols, Inc. $ 2,962,150 $ -- $ 2,962,150
=========== =========== ============
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
1 The Company
NetWolves, LLC was an Ohio limited liability company formed on February 13,
1998, which was merged into Watchdog Patrols, Inc. ("Watchdog") on June 17,
1998. Watchdog, the legal surviving entity of the merger was incorporated
under the laws of the State of New York on January 5, 1970. As a result of
the merger and subsequent sale of Watchdog's business (Note 4), Watchdog
changed its name to NetWolves Corporation (the "Company").
The Company is a development stage company that has designed and developed
a multi- functional product that is a secure, integrated, modular Internet
gateway. The primary product, the FoxBox, supports secure access to the
Internet for multiple users through a single connection and, among other
things, provides electronic mail, firewall security and web site hosting
and also contains a network file server. Since inception, the Company has
been developing its business plan and building its infrastructure in order
to effectively market its products. The Company is expecting to ship its
first significant order, in excess of $1,500,000, in March/April 1999.
2 Reverse acquisition
On June 17, 1998, Watchdog acquired all of the outstanding common stock of
NetWolves, LLC (the "Merger"). For accounting purposes, the acquisition has
been treated as an acquisition of Watchdog by NetWolves, LLC and as a
recapitalization of NetWolves, LLC. The historical financial statements
prior to June 17, 1998 are those of NetWolves, LLC. The acquisition of
Watchdog has been recorded based on the fair value of Watchdog's net
tangible assets, which consist primarily of cash, marketable securities and
certain assets held for sale (Note 4), with an aggregate value of
$2,962,150 (net of transaction costs of $261,022). Since this transaction
is in substance, a recapitalization of NetWolves, LLC and not a business
combination, pro forma information is not presented.
As part of the Merger, the NetWolves, LLC membership interests were
converted into 2,640,322 shares of Watchdog common stock and warrants to
purchase an aggregate of 620,000 shares of Watchdog common stock at an
exercise price of $1.63 per share. Immediately prior to the Merger, there
were 1,673,548 shares of Watchdog common stock issued and outstanding. In
addition, certain pre-Merger shareholders of Watchdog received warrants to
purchase 500,000 shares of Watchdog common stock at an exercise price of
$1.63 per share. Additionally, two individuals, who provided consulting
services with respect to the Merger, received warrants to purchase an
aggregate of 87,500 shares of Watchdog common stock at an exercise price of
$2.00 per share. These warrants are described further in Note 7.
3 Significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
F-6
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Interim financial information
The unaudited consolidated balance sheet as of December 31, 1998, the
unaudited consolidated statements of operations for the three and six
months ended December 31, 1998 and the unaudited consolidated statement of
cash flows for the six months ended December 31, 1998, have been prepared
by the Company and in the opinion of management include all adjustments
consisting only of normal recurring accruals, which management considers
necessary for the fair presentation of the financial statements for such
periods. The Company's results of operations for the six months ended
December 31, 1998, are not necessarily indicative of results that may be
expected for any other future interim periods or for the year ending June
30, 1999.
Fiscal year-end
The Company operates on a fiscal-year end of June 30.
Risks and other factors
As a company that has developed a software product for use as a
multi-functional Internet communications device, and whose planned
principal operations has not yet commenced, NetWolves Corporation faces
certain risks. These include, among other items, the ability to implement
its business plan, dependence on proprietary technology, rapid
technological change, challenges in recruiting personal and a highly
competitive market place.
Revenue recognition
The Company records revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"), issued by the American
Institute of Certified Public Accountants (as modified by Statement of
Position 98-9). SOP 97-2 provides additional guidance with respect to
multiple element arrangements; returns, exchanges, and platform transfer
rights; resellers; services; funded software development arrangements; and
contract accounting. Accordingly, revenue from the sale of perpetual and
term software licenses are recognized, net of provisions for returns, at
the time of delivery and acceptance of software products by the customer,
when the fee is fixed and determinable and collectibility is probable.
Maintenance revenue that is bundled with an initial license fee is deferred
and recognized ratably over the maintenance period. Amounts deferred for
maintenance are based on the fair value of equivalent maintenance services
sold separately.
Marketable securities
Marketable securities, which are all classified as "available for sale",
are valued at fair market value. Unrealized gains or losses are recorded
net of income taxes as "accumulated other comprehensive income" in
shareholders' equity, whereas realized gains and losses are recognized in
the Company's statements of operations using the first-in, first-out
method.
F-7
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Inventories
Inventories consist of raw materials and finished goods. Inventories are
valued at the lower of cost or net realizable value using the first-in,
first-out method.
Property and equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating accounts at the time the expense is incurred.
Expenditures determined to represent additions and betterments are
capitalized.
Software development costs
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased
software technologies are recorded at cost. Software costs associated with
technology development and purchased software technologies are amortized
using the greater of the ratio of current revenue to total projected
revenue for a product or the straight-line method over its estimated useful
life. Amortization of software costs begins when products become available
for general customer release. Costs incurred prior to establishment of
technological feasibility are expensed as incurred and reflected as
research and development costs in the accompanying consolidated statements
of operations.
Start-up and organization costs
The Company accounts for start-up costs in accordance with Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP
98-5"), issued by the American Institute of Certified Public Accountants.
SOP 98-5 requires the cost of start-up activities, including organization
costs, to be expensed as incurred.
Impairment of long-lived assets
The Company reviews its long-lived assets, including software development
costs and property and equipment, for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash
flows, without interest charges, will be less than the carrying amount of
the assets. The Company has determined that as of June 30, 1998, there has
been no impairment in the carrying value of long-lived assets.
F-8
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Income taxes
The Company accounts for income taxes using the liability method which
requires the determination of deferred tax assets and liabilities based on
the differences between the financial and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
differences are expected to reverse. The net deferred tax asset is adjusted
by a valuation allowance, if, based on the weight of available evidence, it
is more likely than not that some portion or all of the net deferred tax
asset will not be realized. The Company and its subsidiaries are expected
to file a consolidated Federal income tax return.
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, 1998, the Company's cash investments are
held at various financial institutions, which limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk
with respect to marketable securities consist of a varied portfolio, which
limits the amount of credit exposure to any one particular investment.
Unless otherwise disclosed, the fair value of financial instruments
approximates their recorded values.
F-9
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
3 Significant accounting policies (continued)
Use of estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
4 Net assets held for sale
In November 1998, the Company sold substantially all of the business assets
related to Watchdog's uniformed security guard services operations to W
Acquisition Corp. (the "Purchaser") for $600,000. The Purchaser acquired
all inventory, furniture and equipment, customer lists, trade rights,
contracts, goodwill and rights to the name "Watchdog Patrols, Inc." (the
"Assets"). The Company retained responsibility for all remaining accounts
receivable, other current assets, accounts payable and accrued expenses.
The net assets held for sale are classified as a current asset and are
reflected at net realizable value based on the selling price of the Assets,
the net estimated liquidation value of the assets and liabilities retained,
and the net negative cash flows from the operations of the security guard
business during the period from June 17, 1998 (the date of acquisition) to
the date of disposal in November 1998. Net assets held for sale consist of
the following:
<TABLE>
<CAPTION>
December 31,
1998
June 30, 1998 (unaudited)
------------- -------------
<S> <C> <C>
Sale of Assets $ 600,000 $ -
Retained assets and liabilities
Accounts receivable 500,000 250,000
Other current assets 140,000 140,000
Accounts payable and accrued expenses (460,000) (115,000)
Cash out-flows from operations during holding period (60,000) -
----------- -----------
Net assets held for sale $ 720,000 $ 275,000
=========== ===========
</TABLE>
F-10
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
5 Marketable securities, available for sale
The following is a summary of marketable securities, available for sale:
<TABLE>
<CAPTION>
Gross
Amortized unrealized Fair
cost gain (loss) value
---------- ----------- ----------
<S> <C> <C> <C>
June 30, 1998
Mutual funds/equity securities $ 569,131 $ (536) $ 568,595
Bonds 493,675 1,558 495,233
---------- -------- ----------
$1,062,806 $ 1,022 $1,063,828
========== ======== ==========
December 31, 1998 (unaudited)
Mutual funds/equity securities $ 70,000 $230,000 $ 300,000
Bonds 195,155 (31,655) 163,500
---------- -------- ----------
$265,155 $198,345 $ 463,500
========== ======== ==========
</TABLE>
Changes in the unrealized gain (loss) on marketable securities, available
for sale are reported as separate components of shareholders' equity.
The maturities of the Company's debt securities at June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost value
--------- -----------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 202,660 203,733
Due after six years through ten years 291,015 291,500
---------- -----------
$ 493,675 $ 495,233
========== ===========
</TABLE>
F-11
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
6 Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
Useful life 1998
in years June 30, 1998 (unaudited)
----------- ------------- ------------
<S> <C> <C> <C>
Machinery and equipment 5 $ 3,350 $ 36,601
Furniture and fixtures 5 2,000 16,146
---------- -----------
5,350 52,747
Less accumulated depreciation (401) (3,942)
---------- -----------
Property and equipment, net $ 4,949 $ 48,805
========== ===========
</TABLE>
7 Shareholders' equity
Common stock issuances
During the six months ended December 31, 1998, the Company issued 350,000
shares of its common stock as follows:
. 150,000 shares were issued to the Company's Vice President of Sales
and Marketing (who is also a Director of the Company) for services
rendered during the six months ended December 31, 1998, which resulted
in a charge to operations of approximately $576,000. 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 and thin trading volume at the time of
issuance.
. 200,000 shares were issued to Internet Technologies, Inc., a
consultant to the Company ("Internet Technologies"), for services
rendered during the six months ended December 31, 1998, which resulted
in a charge to operations of approximately $769,000. 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 and thin trading volume at the time of
issuance. Internet Technologies has demand registration rights on
these 200,000 shares.
During January 1999, the Company issued 360,000 shares of its common stock
as follows:
. 60,000 shares were issued to Internet Technologies for services to be
rendered during the three months ending March 31, 1999. Additionally,
Internet Technologies has the right to receive up to 120,000
additional shares based upon specified performance criteria.
. 100,000 shares were issued to a financial consultant for services to
be rendered during the three months ending March 31, 1999.
. 100,000 shares were issued in conjunction with the appointment of two
new Directors of the Company effective February 1, 1999 (50,000 shares
each).
. 100,000 shares were issued to the Company's legal counsel for services
to be rendered during the three months ending March 31, 1999.
Another shareholder, Greenleaf Capital Partners, LLC (a pre-Merger
shareholder of Watchdog), has demand registration rights on its 1,141,360
shares of common stock.
F-12
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
7 Shareholders' equity (continued)
Stock option plan
In June 1998, the Company adopted the 1998 Long Term Incentive Plan (the
"1998 Incentive Plan") in order to motivate qualified employees of the
Company, to assist the Company in attracting employees and to align the
interests of such persons with those of the Company's shareholders. The
1998 Incentive Plan, which authorizes the issuance of a maximum of 282,500
shares of common stock, provides for a grant of incentive stock options,
non-qualified stock options, restricted stock, performance grants and other
types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates. The 1998 Incentive Plan is
administered by the Board of Directors, which has sole discretion and
authority, consistent with the provisions of the 1998 Incentive Plan, to
determine which eligible participants will receive options, the time when
options will be granted and the terms of options granted.
In January 1999, the Company granted options to purchase 165,500 shares of
common stock under the 1998 Incentive Plan to key employees at an exercise
price of $5.00 per share that vest in equal installments over three years
commencing January 2000. The exercise price represents 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 Merger, 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 9).
. 500,000 five-year warrants issued to certain pre-Merger shareholders
of Watchdog at an exercise price of $1.63 per share. These warrants
became exercisable when granted. The pre-merger shareholders have
demand registration rights on the shares of common stock issuable upon
exercise of these warrants.
. 87,500 five-year warrants issued to two individuals who provided
consulting services with respect to the Merger at an exercise price of
$2.00 per share. These warrants became exercisable when granted.
F-13
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
7 Shareholders' equity (continued)
Warrants (continued)
During the six months ended December 31, 1998, the Company granted warrants
to purchase 200,000 shares of its common stock as follows:
. 200,000 ten-year warrants issued to the Company's Vice President of
Sales and Marketing (who is also a Director of the Company) at an
exercise price of $1.63 per share. The warrants vest in 5 years
subject to acceleration pursuant to specified performance criteria.
These warrants were issued for services rendered during the six months
ended December 31, 1998 and resulted in a charge to operations of
approximately $699,000, based upon the intrinsic value of the warrants
on the date of grant.
During January 1999, the Company granted warrants to purchase 400,000
shares of its common stock as follows:
. 100,000 two-year warrants were issued to two terminated employees
(50,000 warrants each) at an exercise price of $5.00 per share (also
see Note 9). The warrants vest only upon 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.
. 300,000 warrants were issued to Anicom, Inc. for cash consideration of
$300,000 (see Note 10b).
8 Benefit from income taxes
The benefit from income taxes for the period from February 13, 1998
(inception) to June 30, 1998 consists of the following:
<TABLE>
<S> <C>
Current - Federal and states $ -
Deferred - Federal 15,000
Deferred - states 5,000
------------
Benefit from income taxes $ 20,000
============
</TABLE>
The following table summarizes the significant differences between the
Federal statutory tax rate and the Company's effective tax rate for
financial reporting purposes:
<TABLE>
<S> <C>
Federal statutory tax rate (34.0)%
State and local taxes net of Federal tax effect (5.0)
Effect of graduated tax rates 9.0
Permanent differences 1.9
Valuation allowance on deferred tax asset 11.4
------
Effective tax rate (16.7)%
======
</TABLE>
F-14
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
8 Benefit from income taxes (continued)
The tax effects of temporary differences and carry forwards that give rise
to deferred tax assets or liabilities at June 30, 1998 are summarized as
follows:
<TABLE>
<S> <C>
Provision for doubtful accounts $ 1,500
Net operating loss carry forward 32,000
Net assets held for sale (20,000)
Valuation allowance on net deferred tax asset (13,500)
------------
Deferred tax asset, net $ -
============
</TABLE>
The Company has provided for full valuation allowances on the net deferred
tax assets due to the uncertainty of future income tax estimates. At June
30, 1998, the Company has net tax operating loss carryforwards of
approximately $100,000 available to offset future income tax liabilities,
if any. The carryforward losses expire in the year 2013.
9 Commitments and contingencies
Leases
The Company has entered into several leases for office space. At June 30,
1998, the approximate future minimum annual lease payments are summarized
as follows:
<TABLE>
<S> <C>
Fiscal year ending June 30,
1999 $ 66,000
2000 48,000
2001 48,000
2002 23,000
2003 18,000
Thereafter 2,000
------------
$ 205,000
============
</TABLE>
Employment agreements
In conjunction with the consummation of the Merger, the Company entered
into employment agreements with 5 executives who were the principal
pre-Merger owners of NetWolves, LLC. Two of these executives were
subsequently terminated as discussed below. Each of the agreements are
substantially identical and provide for the following significant terms:
. employment term of three years commencing June 1999, with
automatic renewals for additional three-year terms unless
terminated by the Company for cause or terminated by the
executive,
. salary of $100,000, increasing up to $250,000, dependent on
specified revenue targets,
. bonus of 2% of the Company's gross profit, and
. 200,000 warrants for four of the executives and 180,000 warrants
for the fifth executive (see Note 7).
F-15
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
9 Commitments and contingencies (continued)
Employment agreements (continued)
In January 1999, two of the five executives were terminated pursuant to a
Settlement Agreement and Mutual Release. In exchange for terminating the
employment agreements and cancellation of the 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
7).
Legal matters
Certain claims, suits and complaints arising in the normal course with
respect to the Company's uniformed security guard services operations have
been filed or are pending against the Company. Generally, these matters are
all covered by a general liability insurance policy. In the opinion of
management, all such matters are without merit or are of such kind, or
involve such matters, as would not have a significant effect on the
financial position or results of operations of the Company, if disposed of
unfavorably.
10 Subsequent events
a. The Sullivan Group
In January 1999, the Company entered into an agreement with The Sullivan
Group ("Sullivan") whereby Sullivan appointed the Company as its exclusive
provider of the Company's multi-service Internet delivery system (known as
"FoxBox") to be used in conjunction with Sullivan's proprietary interactive
distance learning training programs. The period of the agreement is for a
term of five years and shall be automatically renewed for an additional
five-year term unless six months notice of termination is provided by
either party.
Although there are no minimum order requirements, it is expected that
delivery will commence in June 1999, and in most instances, the FoxBox
units will be subject to 48-month rental contracts at a rate of $200 per
unit, per month. The lease obligations will be paid for by the end user
retail site (or its corporate parent, the "Site"). One year of maintenance
is to be included with each leasing agreement. Beginning in the second
year, each Site may agree to pay the Company an additional fee in order to
extend the maintenance period.
F-16
<PAGE>
NETWOLVES CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION)
TO JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
10 Subsequent events (continued)
b. Anicom, Inc.
In January 1999, the Company entered into a five-year exclusive master
distribution agreement with Anicom, Inc. ("Anicom") to distribute the
FoxBox throughout North America. Additionally, Anicom is entitled to
receive a commission on any sales or leases of the FoxBox unit made
directly by the Company that Anicom was not involved with and a commission
on certain technical support revenue earned by the Company. The agreement
may be terminated by the Company with payment of a specified termination
fee or it may be terminated should Anicom fail to meet minimum order
requirements.
In connection with the agreement and for cash consideration paid to the
Company of $300,000, the Company issued Anicom 300,000 warrants to purchase
common stock of the Company at an exercise price of $5 per share. The
warrants issued to Anicom shall vest in equal installments over three
years, commencing on the first anniversary of the agreement and shall
expire in January 2004. Anicom also obtained piggyback registration rights
with respect to the issuable shares of common stock.
c. Private placement memorandum
On April 20, 1999, the Company completed preparation of a Private Placement
Memorandum. The Company is offering to sell up to 800,000 shares of
restricted common stock at $7.50 per share (a total of $6,000,000) on a
"best efforts, no minimum, maximum basis." Any proceeds to the Company are
expected to be used for working capital purposes and will be subject to
sales commissions and other expenses including legal, accounting and filing
fees. There can be no assurances that the Company's offering will be
successful.
F-17
.
EMPLOYMENT AGREEMENT
OF
Daniel G. Stephens, Jr.
This EMPLOYMENT AGREEMENT ("Agreement") dated as of the 15th day of June,
1998, between Daniel G. Stephens, Jr. ("Executive") an individual residing at
3216 W. Santiago St., Tampa, Fl 33629, and NetWolves Corporation ("Company") a
New York Corporation having its principal place of business at 33 Walt Whitman
Dr., Suite 125, Huntington Station, New York 11743;
WITNESSETH:
WHEREAS, the Company desires to retain Executive as the President of
Manufacturing, Research and Development of the Company, and Executive desires to
perform such duties,
NOW, THEREFORE, it is mutually agreed by and among the parties as follows:
Section 1. Employment.
- ---------------------
Upon the terms and subject to the conditions contained herein, during the
Employment Term ( hereinafter defined), the Company hereby employs Executive as
the President of Manufacturing, Research and Development of the Company.
Executive shall be responsible for such duties as are commensurate with his
office and as may from time to time be assigned to Executive by the Board of
Directors of the Company. Executive shall report directly to the Board.
Executive hereby accepts such employment and during the Employment Term shall
devote his full business time, skill, energy and attention to the business of
the Company, and shall perform his duties in a diligent, trustworthy, loyal and
businesslike and efficient manner, all for the purpose of advancing the business
of the Company. Executive shall not be engaged in any other business activity,
whether or not the activity is pursued for gain, profit, or other pecuniary
advantage, during the term of this Agreement without Company's prior written
consent. Executive agrees to serve, if elected, as an officer and/or director of
the Company and any of its subsidiaries without additional compensation.
However, Executive shall not be required to serve as an officer or director of
any of the Company's subsidiaries if to do so would expose Executive to adverse
financial consequences.
Section 2. Compensation.
- -----------------------
2.1. Salary. During the Employment Term, the Company shall pay, and
Executive shall be entitled to receive from the Company, as a base salary for
the employment referred to in Section 1 hereof, compensation at the rate of
$100,000 per annum, payable in 26 equal installments. Executive's base salary
shall be increased after the first full year as follows:
<PAGE>
(A) to $130,000 per annum, payable in 26 equal installments;
(B) to $150,000 per annum, payable in 26 equal installments, if the
operating subsidiary NetWolves Corporation generates revenues between
$5,000,000 and $9,999,999, within one year of the initial employment
term.
(C) to $250,000 per annum, payable in 26 equal installments, if the
operating subsidiary NetWolves Corporation generated revenues of at
least $10,000,000, within one year of the initial employment term.
2.2. Bonus. Executive shall be entitled to a bonus of 2% of gross profit of
the Company. One fourth of the bonus will be paid quarterly after the completion
of the Company's quarterly financial statement, and the remaining balance will
be paid after the completion of the annual financial statement.
2.3. Stock Options; Warrants: Executive shall be entitled to receive in the
aggregate warrants to purchase 200,000 shares of the stock of the Company and
shall also share in an employee stock option plan. The warrants, which shall be
subject to a separate Warrant Agreement, shall provide as follows:
(A) 50,000 warrants will become exercisable if the operating subsidiary
generates revenues of at least $5,000,000, without a pretax loss,
within one year following the signing of this agreement;
(B) 100,000 warrants will become exercisable if the operating
subsidiary generates revenues of at least $10,000,000 in revenues,
with at least $2,000,000 in pretax profit [before interest, taxes,
depreciation, and amortization ("EBITDA")], within one year following
the signing of this Agreement; and
(C) 50,000 warrants will become exercisable if the operating
subsidiary generates revenue of $10,000,000 with at least $1,000,000
in pretax profit (EBITDA), within the second year following the
signing of this Agreement;
(D) If the warrants described in paragraph 2.3 (2) do not become
exercisable under the conditions stated, then such warrants will
become exercisable if the operating subsidiary generates $20,000,000
in revenues, with at least $4,000,000 in pretax income (EBITDA) during
the second year following the signing of this agreement.
The Company agrees to establish an employee stock option plan and reserve
at least 500,000 shares of the common stock of the Company for issuance under
the plan.
<PAGE>
2.4. Expenses. The Company shall reimburse Executive for all expenses
incurred and paid by Executive in the course of the performance of his duties
pursuant to this Agreement and consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, and subject to the Company's requirements with respect to the manner
of reporting such expenses.
2.6. Fringe Benefits. Executive shall be entitled to participate in various
fringe benefit programs now in force or hereafter established by the Company for
all employees of the Company, provided, however, that such participation shall
be subject to all of the terms and conditions pertaining to said programs as
they may now exist or as hereafter adopted, modified or amended. The fringe
benefit program of the Company may be changed or canceled at any time by the
Company in its sole discretion without prior notice to or consent of Executive.
2.7. Vacation. Executive shall be entitled to a paid vacation of two (2)
weeks commencing six (6) months from the Effective Date of this Agreement, three
(3) weeks after the first year and four (4) weeks every year thereafter.
2.8. Holidays. Executive shall be entitled to the same paid holidays as
authorized by the Company for all its other executives.
Section 3. Employment Term.
- ------------------------------
3.1. Employment Term. The Employment Term shall be three (3) years
commencing on the date of the signing of this Agreement. The Employment
Agreement will be automatically renewed for another three (3) years unless
otherwise terminated or canceled pursuant to Section 4 hereof.
Section 4. Termination
- --------------------------
4.1. Death. The Agreement shall terminate upon death of the Executive.
Should the Agreement terminate as a result of Executive's death, the Executive's
Estate shall be entitled to receive compensation equal to six months of
Executive's base salary, base salary determined at the time of death.
4.2. Termination by Company.
(a) Termination For Cause. Company may terminate Executive's
employment for cause.
(b) 'Cause' Defined. Company shall have cause to terminate Executive's
employment if Executive wilfully fails to substantially perform any duties
required by this Agreement (unless Executive's failure is due to a physical
or mental incapacity), Executive is consistently, flagrantly, and grossly
negligent in the performance of required duties, Executive engages in
<PAGE>
conduct that demonstrably and substantially damages Company, Executive is
convicted of a felonious act of moral turpitude, or Executive discloses
material confidential information in violation of this Agreement. No act or
failure to act by Executive may be considered "wilful" unless Executive
acted or failed to act without any reasonable belief that the act or
omission was in Company's best interests and without good faith.
(c) Resolution Finding Cause for Termination of Executive's
Employment. Before Executive's employment may be terminated for cause, a
majority of the entire membership of Company's Board of Directors (not
including Executive) must duly adopt a resolution finding in good faith
that Company has cause to terminate Executive's employment and specifying
the details of Executive's misconduct. Before the Board of Directors may
adopt such a resolution, Executive must be given reasonable notice and
opportunity to be heard by the Board of Directors and must be permitted to
appear before the Board of Directors with counsel. The Board of Directors
may not adopt a resolution terminating Executive's employment for cause
unless it receives a report from a firm of independent attorneys (not
including counsel for Company) concluding that the Board of Directors has
cause within the meaning of this agreement to terminate Executive's
employment. The firm of independent attorneys must be selected by a
majority of the entire membership of the Board of Directors (not including
Executive) and must be reasonably acceptable to Executive. If this
Agreement is terminated by Company for cause, each party's obligations
under this Agreement shall thereupon cease and terminate except for
obligations accrued but undischarged to and including the date of such
event
4.3. Termination by Executive. Executive may (but is not obligated to)
terminate this Agreement at any time under the following circumstances:
(a) Executive's health becomes so impaired that continued performance
of Executive's duties under this Agreement would be hazardous to
Executive's physical or mental health.
(b) Change in control. There is a change in control of Company if
someone other than the subscribers to Company's common stock at the time of
the signing of this Agreement becomes the beneficial owner of common stock
representing 20 percent or more of the voting power of Company or during
any three year period during the term of this Agreement the individuals who
constitute the Board of Directors at the beginning of the period cease to
constitute at least a majority of the Board members at the end of the
three-year period for any reason other than death or disability. No
transaction or event will be deemed to have caused a change in control if
Executive gives prior consent to the transaction or event.
(c) Executive is assigned duties that are significantly different than
those described in this Agreement, or duties assigned Executive by this
Agreement are eliminated or transferred to someone else.
(d) Executive is removed from any of the positions described in
Section 1 of this Agreement (other than by Company for cause).
(e) Executive's fringe benefits or other compensation are materially
reduced. (f) Company requires Executive to travel more frequently than
contemplated by this Agreement. (g) Company fails to have a successor
assume this Agreement. (h) Company becomes insolvent or files a bankruptcy
petition.
<PAGE>
4.4. Notice of Termination. Any termination of Executive's employment
by Company or Executive must be communicated to the other party by a written
Notice of Termination. The notice must specify the provision of this Agreement
authorizing the termination and must set forth in reasonable detail the facts
and circumstances providing the basis for termination of Executive's employment.
4.5. Date Termination Is Effective. If Executive's employment
terminates because this Agreement expires, then Executive's employment will be
considered to have terminated on that expiration date. If Executive's employment
terminates because of Executive's death, then Executive's employment will be
considered to have terminated on the date of Executive's death. If Executive's
employment is terminated by Executive, then Executive's employment will be
considered to have terminated on the date that a Notice of Termination is given.
If Executive's employment is terminated by Company for cause, then Executive's
employment will be considered to have terminated on the date specified by the
"Notice of Termination." If, within 30days after a Notice of Termination is
given, the party receiving the notice notifies the other party that there is a
dispute concerning the termination, then Executive's employment will not be
considered to have terminated until the dispute is ended by a written agreement
between the parties, a final arbitration award, or a final judgment, order, or
decree of a court of competent jurisdiction. A judgment, order, or decree of a
court of competent jurisdiction will be considered final if the time for
appealing the decision has expired and no appeal has been perfected.
4.6. Compensation Following Termination.
(a) If Executive's employment terminates because of Executive's
death, the Company shall pay a lump sum death benefit to the person or
persons designated in a written notice filed with Company by Executive
or, if no person has been designated, to Executive's estate. The
amount of the lump sum death benefit will equal the amount of
Executive's then current base salary plus the amount of incentive
compensation paid Executive most recently prior to Executive's death,
multiplied by the number of full and partial years that Executive was
employed by Company. This lump sum death benefit shall be in addition
to any other amounts that Executive's beneficiaries and estate may be
entitled to receive under any employee benefit plan maintained by
Company.
(b) If Executive's employment is terminated by Company for cause,
Company shall pay to Executive Executive's then current base salary
through the date employment is terminated, and Company shall have no
further obligations to Executive under this Agreement.
(c) If Company terminates Executive's employment other than for
cause, Company shall pay Executive Executive's then current base
salary through the date employment is terminated and any legal fees
and expenses incurred by Executive to enforce Executive's rights under
<PAGE>
this Agreement. In addition, Company shall pay Executive as liquidated
damages an amount equal to the sum of Executive's then current base
salary plus the amount of incentive compensation paid to Executive
most recently before the date Executive's employment was terminated,
multiplied by the number of full and partial years remaining in the
term of this Agreement (including extensions), and further multiplied
by 50% percent if Executive's employment terminates during the year
ending December 31, 1998, 75% percent if Executive's employment
terminates during the year ending December 31, 1999, or 100% percent
if Executive's employment terminates during the year ending December
31, 2000 or a subsequent year.
(d) If Executive's employment is terminated by Executive
in accordance with the provisions of this Agreement, Company shall pay
Executive severance pay in an amount equal to the sum of Executive's
base salary plus the amount of incentive compensation paid to Executive
most recently before the date Executive's employment was terminated,
multiplied by fifty percent (50%).
(e) Company and Executive intend that no portion of the payments
to Executive contingent on a change in control of Company be deemed a
parachute payment, as that term is defined by Section 28OG(b)(2) of
the Internal Revenue Code. Company and Executive agree that the
present value (as that term is defined by Section 28OG(d)(4) of the
Internal Revenue Code) of the termination payments contingent on a
change in control of Company shall not exceed the amount that could
cause the payments to be characterized as a parachute payment. If the
present value of the payments to be made to Executive exceed the
amount; that could cause the payments to be characterized as a
parachute payment, then the amount of those payments shall be reduced
so that their present value equals one dollar less than the amount
that would cause the payments to be characterized as a parachute
payment.
4.7. Health insurance upon termination. In the event the Company
terminates this Agreement with Executive for reasons other than those in
Sections 4.1, and 4.2(a), the Executive shall be entitled to receive continuing
benefits of health insurance coverage for a six month period.
Section 5. Disability.
- ------------------------
5.1. Replacement Because of Disability. If, because of illness or
injury, Executive becomes unable to work full time for the Company for a period
of more than 90 days, Company may, in its sole discretion at any time after that
period give Executive 30 days written notice that it will replace Executive if
Executive is unable to return to work full time before the date specified in the
written notice. Replacement of Executive shall not be considered a termination
of Executive's employment under this Agreement.
5.2. Compensation During Periods of Disability.
(a) Executive shall continue to receive Executive's base salary
and incentive compensation while Executive is unable to work full time
until Executive is replaced or until Executive terminates Executive's
employment with Company because Executive's health becomes so impaired
that continued performances of Executive's duties under this Agreement
would be hazardous to Executive's physical or mental health.
<PAGE>
(b) While Executive is unable to work full time because of
illness or injury and through the full term of this Agreement,
including extensions, Company shall maintain for Executive's benefit
all employee benefit plans in which Executive was participating at the
time Executive was replaced. If Executive is barred from participating
in any employee benefit plan because of Executive's disability,
Company shall pay Executive an amount equal to what Company would have
contributed on Executive's behalf to the employee benefit plan if
Executive's participation had not been barred.
(c) After Executive is replaced or receives notice that Executive
is terminating employment because Executive's health has become so
impaired that continued performance of Executive's duties under this
Agreement would be hazardous to Executive's physical or mental health,
Company shall pay Executive an amount equal to the sum of Executive's
base salary plus the amount of incentive compensation paid to
Executive most recently before the date Executive's employment was
terminated, multiplied by fifty percent (50%)
(d) Executive is not required to seek other employment to
mitigate any amounts payable under this Agreement. Nor will amounts
due Executive under this Agreement be reduced by any amounts received
by Executive for other employment.
5.3. Disability Insurance. Company shall purchase and use its best
efforts to maintain disability insurance in force for the benefit of Executive
throughout the term of this Agreement (including extensions). The policy shall
replace fifty percent of Executive's Base Salary, start paying benefits after
Executive has been unable to work full-time for 90 days, continue paying
benefits until Executive reaches age 65, and waive premium payments while
Executive is disabled. If Company fails to make a premium payment, Executive
shall have the right in Executive's sole discretion to advance such funds as may
be required to maintain the policy in force and shall thereafter be entitled to
recover amounts paid from Company.
Section 6. Business Properties.
- ---------------------------------
6.1. Business Properties. Other than as required to perform his duties
in accordance with this Agreement and for purpose of furthering the business of
the Company, Executive shall not use or cause to be used Company's trade secrets
or any other confidential business information by him as a result of his
employment or relationship to the Company or any affiliate of the Company.
6.2. Revealing Trade Secret, etc. Executive acknowledges the interest
of the Company in maintaining the confidentiality of information related to its
business and shall not at any time during the Employment Term or thereafter,
directly or indirectly, reveal or cause to be revealed to any person or entity
the production processes, inventions, formulae, trade secrets, customer lists or
any other confidential information obtained by him as a result of his employment
or relationship with the Company or any affiliate of the Company, except when
authorized in writing to do so by the Company, provided, however, that it is not
the intent of this Section 5.2 to include within the subject matter information
not proprietary to the Company or information which is in the public domain.
Confidential information does not include any information that is known
<PAGE>
generally by the public (other than as a result of unauthorized disclosure by
Executive) or information that is not the type of information considered
confidential by persons engaged in a business that is the same of similar to
that conducted by the company. Confidential information is material if its
disclosure would be materially damaging to the Company.
Section 7. Non-Competition.
- -----------------------------
7.1. Non-Competition. During the Employment Term and for a period of
one (1) year thereafter, Executive shall not (a) compete, engage, or
participate, directly or indirectly, in the business or business substantially
similar to the business as conducted by the Company or as may thereafter be
conducted by the Company at any time during the Employment Term, (b) solicit or
cause to be solicited any customers of the Company, or (c) recruit or cause any
other person to recruit any employee of the Company to any of said business or
businesses.
7.2. Prior Notice. Prior to engaging in any activity or accepting
employment with another company any time within one (1) year after Executive
leaves the employment of the Company, which activity or employment is in the
same or related industry in which the Company is engaged, Executive agrees to
provide at least thirty (30) days prior written notice (by certified mail) to
the Company, stating the description of the activities or position sought to be
undertaken by Executive, together with such further information as the Company
may request in connection therewith (including, but not limited to, location
where the services would be performed, the present or former customers of the
Company who may be anticipated to receive such services, etc.). Upon receipt of
such information from Executive, the Company shall, within fifteen (15) days of
the receipt of all of the requested information, notify Executive whether the
Company objects to the otherwise prohibited services of activities by Executive.
If the Company does not object or does not respond, the restrictions set forth
in Section 6 shall have no force and effect. The Company shall be free to object
or not to object in unfettered discretion, and parties agree that any actions
taken or not taken by the Company with respect to any other employees or former
employees shall have no bearing whatsoever on the Company's decision or on any
question regarding the enforceability of this restraint with respect to
Executive.
7.3. Limitations. It is also agreed that if for any reason the area or
time restrictions set forth above are too broad so as to be unenforceable by
law, then they, or either one of them, shall be reduced to such area or time as
shall be legally enforceable. If it is judicially determined that this agreement
not to compete, or any potion thereof, is illegal or offensive under any
applicable law (statute, common law or otherwise), then it is hereby agreed by
Executive and the Company that the non-competition covenant shall be in full
force and effect to the full extent permitted by law. By this agreement, the
parties intend to have this agreement not to compete to be in full force and
effect to the greatest extent permitted.
<PAGE>
Section 8. Inventions.
- ------------------------
8.1. Assignment. Without further consideration Executive shall fully
and promptly report to the Company all ideas, concept, inventions, discoveries,
formulae and designs conceived or produced by Executive at any time during the
Employment Term, whether alone or with others and whether patentable or
unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to
the business of the Company as conducted at any time during the Employment Term,
and shall assign and hereby does assign to the Company or its nominee
Executive's entire right, title and interest in and to all such Inventions.
8.2. Cooperation. Executive shall take all reasonable action requested
by the Company to protect or obtain title to any and all United States and/or
foreign patents on any such Inventions, including execution and delivery of all
applications. assignments and other documents deemed necessary or desirable by
the Company, provided Executive is reimbursed for reasonable expenses incurred
by Executive in connection with such execution and delivery.
Section 9. Miscellaneous.
- ---------------------------
9.1. Remedies. The parties acknowledge that any breach or violation by
Executive of the terms of this Agreement will result in immediate and
irreparable injury and harm to the Company, and will do damage to the Company in
amounts difficult to ascertain. Accordingly, the company shall be entitled to
remedies of injunction, as well as to all other legal or equitable remedies to
which the Company may be entitled, including, without limitation termination of
the Employment Term and this Agreement.
9.2. Certain definitions. For the purposes of this Agreement, the
following terms shall have the following meanings:
(a) "Engage in or participate in any business" referred to in Section 7
hereof shall be deemed to mean engaging in or participating in any business or
businesses, directly or indirectly, whether for his own account or for that of
any other person, firm, or corporation, and whether as a stockholder (except as
a stockholder in a publicly-held corporation with more than 500 holders of
common stock of which Executive owns less than 1 % of the outstanding securities
of any class), principal, agent, proprietor, partner, officer, director,
employee or consultant, or in any other capacity;
9.3. Notices. Any notice or other communications required or permitted
to be given to the parties hereto shall be deemed to have been given when
received, addressed as follows (or at such other address as the party addressed
may have substituted by notice pursuant to this Section 8.3.
(a) If to the Company: NetWolves Corporation
33 Walt Whitman Dr., Suite 125
Huntington Station, New York 11743;
<PAGE>
(b) If to Executive: Daniel G. Stephens, Jr.
3216 W. Santiago St.
Tampa, Fl 33629
9.4. Heading. The captions set forth in this Agreement are for convenience
only and shall not be considered as part of this Agreement or as in any way
limiting or amplifying the terms and provision hereof.
9.5. Governing Law. The Agreement shall in all respects be interpreted,
construed and governed by and in accordance with the law of the State of
Florida.
9.6. Severability. In case this Agreement or any one or more of the
provisions hereof, shall be held to be invalid, illegal or unenforceable within
any governmental jurisdiction or subdivision thereof, the Agreement or any such
provision or provisions shall not as a consequence thereof be deemed to be
invalid, illegal or unenforceable in any other governmental jurisdiction or
subdivision thereof. In case any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any other respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein and there shall be deemed substituted such other provision as
will most nearly accomplish the intent of the parties to the extent permitted by
applicable law.
9.7. Whole Agreement. This Agreement embodies all the representations,
warrants covenants and agreements of the parties in relation to subject matter
hereof, and no representations, warranties, covenants, understandings or
agreements, or otherwise, in relation thereto exist between the parties except
as herein expressly set forth herein, or in any instrument in writing by the
party to be bound thereby which makes reference to this Agreement.
9.8. No Rights in Third Parties. Nothing herein expressed or implied is
intended to or shall be construed to confer upon or give to any person, firm or
other entity, other than the parties hereto and their respective successors and
assigns or personal representatives, any rights or remedies under or by reason
of this Agreement.
9.9. Amendment. This Agreement may not be amended orally but only by an
instrument in writing duly executed by the parties hereto.
9.10. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
<PAGE>
In WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
EXECUTIVE NetWolves Corporation
/s/ Daniel G. Stephens By: /s/Mark Jacques
- ---------------------- -----------------------
Daniel G. Stephens, Jr. President
EMPLOYMENT AGREEMENT
OF
Walter M. Groteke
This EMPLOYMENT AGREEMENT ("Agreement") dated as of the day of June, 1998,
between Walter W. Groteke ("Executive") an individual residing at 64 Hodson
Ave., Lynbrook, New York 11563, and Watchdog Patrols, Inc ("Company") a New York
Corporation having its principal place of business at 33 Walt Whitman Dr., Suite
125, Huntington Station, New York 11743;
WITNESSETH:
WHEREAS, the Company desires to retain Executive as the Chief Executive
Officer of the Company, and Executive desires to perform such duties,
NOW, THEREFORE, it is mutually agreed by and among the parties as follows:
Section 1. Employment.
Upon the terms and subject to the conditions contained herein, during the
Employment Term ( hereinafter defined), the Company hereby employs Executive as
the Chief Executive Officer of the Company. Executive shall be responsible for
such duties as are commensurate with his office and as may from time to time be
assigned to Executive by the Board of Directors of the Company. Executive shall
report directly to the Board. Executive hereby accepts such employment and
during the Employment Term shall devote his full business time, skill, energy
and attention to the business of the Company, and shall perform his duties in a
diligent, trustworthy, loyal and businesslike and efficient manner, all for the
purpose of advancing the business of the Company. Executive shall not be engaged
in any other business activity, whether or not the activity is pursued for gain,
profit, or other pecuniary advantage, during the term of this Agreement without
Company's prior written consent. Executive agrees to serve, if elected, as an
officer and/or director of the Company and any of its subsidiaries without
additional compensation. However, Executive shall not be required to serve as an
officer or director of any of the Company's subsidiaries if to do so would
expose Executive to adverse financial consequences.
Section 2. Compensation.
2.1. Salary. During the Employment Term, the Company shall pay, and
Executive shall be entitled to receive from the Company, as a base salary for
the full-time employment referred to in Section 1 hereof during the first term
of employment, compensation at the rate of $100,000 per annum, payable in 26
<PAGE>
equal installments; the base salary shall be increased to $250,000 per annum,
payable in 26 equal installments, commencing the second term of Executive's
employment; and the base salary shall be increased to $275,000 per annum,
payable in 26 equal installments, commencing the third term of Executive's
employment. The base salary will be reviewed at least once a year by the
Company's Board of directors and may be increased if the performance of the
Company warrants any such increase. If the Board deems that the performance of
the Company is not meeting projections and the resulting cash flow is
insufficient to pay the full salaries in year two and three, the Board shall
renegotiate the salaries with Executive, which salary shall not be less than
$150,000 in year two and $175,000 in year three.
2.2. Bonus. Executive shall be entitled to a bonus of 2% of gross profit of
the Company. One fourth of the bonus will be paid quarterly after the completion
of the Company's quarterly financial statement, and the remaining balance will
be paid after the completion of the annual financial statement.
2.3. Stock Options; Warrants: Executive shall be entitled to receive in the
aggregate warrants to purchase 200,000 shares of the stock of the Company and
shall also share in an employee stock option plan. The warrants shall become
exercisable as follows:
(1) 50,000 warrants will become exercisable if the operating
subsidiary generates revenues of at least $5,000,000, without a pretax
loss, withing one year following the signing of this agreement;
(2) 100,000 warrants will become exercisable if the operating
subsidiary generates revenues of at least $10,000,000 in revenues,
with at least $2,000,000 in pretax profit [before interest, taxes,
depreciation, and amortization ("EBITDA")], within one year following
the signing of this Agreement; and
(3) 50,000 warrants will become exercisable if the operating
subsidiary generates revenue of $10,000,000 with at least $1,000,000
in pretax profit (EBITDA), within the second year following the
signing of this Agreement;
(4) If the warrants described in paragraph 2.3 (2) do not become
exercisable under the conditions stated, then such warrants will
become exercisable if the operating subsidiary generates $20,000,000
in revenues, with at least $4,000,000 in pretax income (EBITDA) during
the first two years following the signing of this agreement.
The Company agrees to establish an employee stock option plan and reserve
at least 500,000 shares of the common stock of the Company for issuance under
the plan.
2.4. Expenses. The Company shall reimburse Executive for all expenses
incurred and paid by Executive in the course of the performance of his duties
pursuant to this Agreement and consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
<PAGE>
expenses, and subject to the Company's requirements with respect to the manner
of reporting such expenses.
2.6. Fringe Benefits. Executive shall be entitled to participate in various
fringe benefit programs now in force or hereafter established by the Company for
all employees of the Company, provided, however, that such participation shall
be subject to all of the terms and conditions pertaining to said programs as
they may now exist or as hereafter adopted, modified or amended. The fringe
benefit program of the Company may be changed or canceled at any time by the
Company in its sole discretion without prior notice to or consent of Executive.
2.7. Vacation. Executive shall be entitled to a paid vacation of two (2)
weeks commencing six (6) months from the Effective Date of this Agreement, three
(3) weeks after the first year and four (4) weeks every year thereafter.
2.8. Holidays. Executive shall be entitled to the same paid holidays as
authorized by the Company for all its other executives.
Section 3. Employment Term.
3.1. Employment Term. The Employment Term shall be three (3) years
commencing on the date of the signing of this Agreement. The Employment
Agreement will be automatically renewed for another three (3) years unless
otherwise terminated or canceled pursuant to Section 4 hereof.
Section 4. Termination
4.1. Death. The Agreement shall terminate upon death of the Executive.
Should the Agreement terminate as a result of Executive's death, the Executive's
Estate shall be entitled to receive compensation equal to six months of
Executive's base salary, base salary determined at the time of death.
4.2. Termination by Company.
(a) Termination For Cause. Company may terminate Executive's
employment for cause.
(b) 'Cause' Defined. Company shall have cause to terminate
Executive's employment if Executive wilfully fails to substantially perform
any duties required by this Agreement (unless Executive's failure is due to
a physical or mental incapacity), Executive is consistently, flagrantly,
and grossly negligent in the performance of required duties, Executive
engages in conduct that demonstrably and substantially damages Company,
Executive is convicted of a felonious act of moral turpitude, or Executive
discloses material confidential information in violation of this Agreement.
No act or failure to act by Executive may be considered "wilful" unless
Executive acted or failed to act without any reasonable belief that the act
or omission was in Company's best interests and without good faith.
<PAGE>
(c) Resolution Finding Cause for Termination of Executive's
Employment. Before Executive's employment may be terminated for cause, a
majority of the entire membership of Company's Board of Directors (not
including Executive) must duly adopt a resolution finding in good faith
that Company has cause to terminate Executive's employment and specifying
the details of Executive's misconduct. Before the Board of Directors may
adopt such a resolution, Executive must be given reasonable notice and
opportunity to be heard by the Board of Directors and must bet permitted to
appear before the Board of Directors with counsel. The Board of Directors
may not adopt a resolution terminating Executive's employment for cause
unless it receives a report from a firm of independent attorneys (not
including counsel for Company) concluding that the Board of Directors has
cause within the meaning of this agreement to terminate Executive's
employment. The firm of independent attorneys must be selected by a
majority of the entire membership of the Board of Directors (not including
Executive) and must be reasonably acceptable to Executive. If this
Agreement is terminated by Company for cause, each party's obligations
under this Agreement shall thereupon cease and terminate except for
obligations accrued but undischarged to and including the date of such
event
4.3. Termination by Executive. Executive may (but is not obligated to)
terminate this Agreement at any time under the following circumstances:
(a) Executive's health becomes so impaired that continued performance
of Executive's duties under this Agreement would be hazardous to
Executive's physical or mental health.
(b) Change in control. There is a change in control of Company if
someone other than an subscribers to Company's common stock at the time of
the signing of this Agreement becomes the beneficial owner of common stock
representing 20 percent or more of the voting power of Company or during
any three year period during the term of this Agreement the individuals who
constitute the Board of Directors at the beginning of the period cease to
constitute at least a majority of the Board members at the end of the
three-year period for any reason other than death or disability. No
transaction or event will be deemed to have caused a change in control if
Executive gives prior consent to the transaction or event.
(c) Executive is assigned duties that are significantly different than
those described in this Agreement, or duties assigned Executive by this
Agreement are eliminated or transferred to someone else.
(d) Executive is removed from any of the positions described in
Section 1 of this Agreement (other than by Company for cause).
(e) Executive's fringe benefits or other compensation are materially
reduced.
(f) Company requires Executive to travel more frequently than
contemplated by this Agreement.
(g) Company fails to have a successor assume this Agreement.
(h) Company becomes insolvent or files a bankruptcy petition.
<PAGE>
4.4. Notice of Termination. Any termination of Executive's employment by
Company or Executive must be communicated to the other party by a written Notice
of Termination. The notice must specify the provision of this Agreement
authorizing the termination and must set forth in reasonable detail the facts
and circumstances providing the basis for termination of Executive's employment.
4.5. Date Termination Is Effective. If Executive's employment terminates
because this Agreement expires, then Executive's employment will be considered
to have terminated on that expiration date. If Executive's employment terminates
because of Executive's death, then Executive's employment will be considered to
have terminated on the date of Executive's death. If Executive's employment is
terminated by Executive, then Executive's employment will be considered to have
terminated on the date that a Notice of Termination is given. If Executive's
employment is terminated by Company for cause, then Executive's employment will
be considered to have terminated on the date specified by the "Notice of
Termination." If, within 30days after a Notice of Termination is given, the
party receiving the notice notifies the other party that there is a dispute
concerning the termination, then Executive's employment will not be considered
to have terminated until the dispute is ended by a written agreement between the
parties, a final arbitration award, or a final judgment, order, or decree of a
court of competent jurisdiction. A judgment, order, or decree of a court of
competent jurisdiction will be considered final if the time for appealing the
decision has expired and no appeal has been perfected.
4.6. Compensation Following Termination.
(a) If Executive's employment terminates because of Executive's death,
the Company shall pay a lump sum death benefit to the person or persons
designated in a written notice filed with Company by Executive or, if no
person has been designated, to Executive's estate. The amount of the lump
sum death benefit will equal the amount of Executive's then current base
salary plus the amount of incentive compensation paid Executive most
recently prior to Executive's death, multiplied by the number of full and
partial years that Executive was employed by Company. This lump sum death
benefit shall be in addition to any other amounts that Executive's
beneficiaries and estate may be entitled to receive under any employee
benefit plan maintained by Company.
(b) If Executive's employment is terminated by Company for cause,
Company shall pay to Executive Executive's then current base salary through
the date employment is terminated, and Company shall have no further
obligations to Executive under this Agreement.
(c) If Company terminates Executive's employment other than for cause,
Company shall pay Executive Executive's then current base salary through
the date employment is terminated and any legal fees and expenses incurred
by Executive to enforce Executive's rights under this Agreement. In
addition, Company shall pay Executive as liquidated damages an amount equal
to the sum of Executive's then current base salary plus the amount of
incentive compensation paid to Executive most recently before the date
Executive's employment was terminated, multiplied by the number of full and
<PAGE>
partial years remaining in the term of this Agreement (including
extensions), and further multiplied by 50% percent if Executive's
employment terminates during the year ending December 31, 1998, 75% percent
if Executive's employment terminates during the year ending December 31,
1999, or 100% percent if Executive's employment terminates during the year
ending December 31, 2000 or a subsequent year.
(d) If Executive's employment is terminated by Executive in accordance
with the provisions of this Agreement, Company shall pay Executive
severance pay in an amount equal to the sum of Executive's base salary plus
the amount of incentive compensation paid to Executive most recently before
the date Executive's employment was terminated, multiplied by fifty percent
(50%).
(e) Company and Executive intend that no portion of the payments to
Executive contingent on a change in control of Company be deemed a
parachute payment, as that term is defined by Section 28OG(b)(2) of the
Internal Revenue Code. Company and Executive agree that the present value
(as that term is defined by Section 28OG(d)(4) of the Internal Revenue
Code) of the termination payments contingent on a change in control of
Company shall not exceed the amount that could cause the payments to be
characterized as a parachute payment. If the present value of the payments
to be made to Executive exceed the amount; that could cause the payments to
be characterized as a parachute payment, then the amount of those payments
shall be reduced so that their present value equals one dollar less than
the amount that would cause the payments to be characterized as a parachute
payment.
4.7. Health insurance upon termination. In the event the Company terminates
this Agreement with Executive for reasons other than those in Sections 4.1, and
4.2(a), the Executive shall be entitled to receive continuing benefits of health
insurance coverage for a six month period.
Section 5. Disability.
5.1. Replacement Because of Disability. If, because of illness or injury,
Executive becomes unable to work full time for the Company for a period of more
than 90 days, Company may, in its sole discretion at any time after that period
give Executive 30 days written notice that it will replace Executive if
Executive is unable to return to work full time before the date specified in the
written notice. Replacement of Executive shall not be considered a termination
of Executive's employment under this Agreement.
5.2. Compensation During Periods of Disability.
(a) Executive shall continue to receive Executive's base salary and
incentive compensation while Executive is unable to work full time until
Executive is replaced or until Executive terminates Executive's employment
with Company because Executive's health becomes so impaired that continued
performances of Executive's duties under this Agreement would be hazardous
to Executive's physical or mental health.
(b) While Executive is unable to work full time because of illness or
injury and through the full term of this Agreement, including extensions,
Company shall maintain for Executive's benefit all employee benefit plans
in which Executive was participating at the time Executive was replaced. If
Executive is barred from participating in any employee benefit plan because
<PAGE>
of Executive's disability, Company shall pay Executive an amount equal to
what Company would have contributed on Executive's behalf to the employee
benefit plan if Executive's participation had not been barred.
(c) After Executive is replaced or receives notice that Executive is
terminating employment because Executive's health has become so impaired
that continued performance of Executive's duties under this Agreement would
be hazardous to Executive's physical or mental health, Company shall pay
Executive an amount equal to the sum of Executive's base salary plus the
amount of incentive compensation paid to Executive most recently before the
date Executive's employment was terminated, multiplied by fifty percent
(50%)
(d) Executive is not required to seek other employment to mitigate any
amounts payable under this Agreement. Nor will amounts due Executive under
this Agreement be reduced by any amounts received by Executive for other
employment.
5.3. Disability Insurance. Company shall purchase and use its best
efforts to maintain disability insurance in force for the benefit of Executive
throughout the term of this Agreement (including extensions). The policy shall
replace fifty percent of Executive's Base Salary, start paying benefits after
Executive has been unable to work full-time for 90 days, continue paying
benefits until Executive reaches age 65, and waive premium payments while
Executive is disabled. If Company fails to make a premium payment, Executive
shall have the right in Executive's sole discretion to advance such funds as may
be required to maintain the policy in force and shall thereafter be entitled to
recover amounts paid from Company.
Section 6. Business Properties.
6.1. Business Properties. Other than as required to perform his duties in
accordance with this Agreement and for purpose of furthering the business of the
Company, Executive shall not use or cause to be used Company's trade secrets or
any other confidential business information by him as a result of his employment
or relationship to the Company or any affiliate of the Company.
6.2. Revealing Trade Secret, etc. Executive acknowledges the interest of
the Company in maintaining the confidentiality of information related to its
business and shall not at any time during the Employment Term or thereafter,
directly or indirectly, reveal or cause to be revealed to any person or entity
the production processes, inventions, formulae, trade secrets, customer lists or
any other confidential information obtained by him as a result of his employment
or relationship with the Company or any affiliate of the Company, except when
authorized in writing to do so by the Company, provided, however, that it is not
the intent of this Section 5.2 to include within the subject matter information
not proprietary to the Company or information which is in the public domain.
Confidential information does not include any information that is known
generally by the public (other than as a result of unauthorized disclosure by
Executive) or information that is not the type of information considered
<PAGE>
confidential by persons engaged in a business that is the same of similar to
that conducted by the company. Confidential information is material if its
disclosure would be materially damaging to the Company.
Section 7. Non-Competition.
7.1. Non-Competition. During the Employment Term and for a period of one
(1) year thereafter, Executive shall not (a) compete, engage, or participate,
directly or indirectly, in the business or business substantially similar to the
business as conducted by the Company or as may thereafter be conducted by the
Company at any time during the Employment Term, (b) solicit or cause to be
solicited any customers of the Company, or recruit or cause any other person to
recruit any employee of the Company to any of said business or businesses.
7.2. Prior Notice. Prior to engaging in any activity or accepting
employment with another company any time within one (1) year after Executive
leaves the employment of the Company, which activity or employment is in the
same or related industry in which the Company is engaged, Executive agrees to
provide at least thirty (30) days prior written notice (by certified mail) to
the Company, stating the description of the activities or position sought to be
undertaken by Executive, together with such further information as the Company
may request in connection therewith (including, but not limited to, location
where the services would be performed, the present or former customers of the
Company who may be anticipated to receive such services, etc.). Upon receipt of
such information from Executive, the Company shall, within fifteen (15) days of
the receipt of all of the requested information, notify Executive whether the
Company objects to the otherwise prohibited services of activities by Executive.
If the Company does not object or does not respond, the restrictions set forth
in Section 6 shall have no force and effect. The Company shall be free to object
or not to object in unfettered discretion, and parties agree that any actions
taken or not taken by the Company with respect to any other employees or former
employees shall have no bearing whatsoever on the Company's decision or on any
question regarding the enforceability of this restraint with respect to
Executive.
7.3. Limitations. It is also agreed that if for any reason the area or time
restrictions set forth above are too broad so as to be unenforceable by law,
then they, or either one of them, shall be reduced to such area or time as shall
be legally enforceable. If it is judicially determined that this agreement not
to compete, or any potion thereof, is illegal of offensive under any applicable
law (statute, common law or otherwise), then it is hereby agreed by Executive
and the Company that the non-competition covenant shall be in full force and
effect to the full extent permitted by law. By this agreement, the parties
intend to have this agreement not to compete to be in full force and effect to
the greatest extent permitted.
Section 8. Inventions.
8.1. Assignment. Without further consideration Executive shall fully and
promptly report to the Company all ideas, concept, inventions, discoveries,
formulae and designs conceived or produced by Executive at any time during the
Employment Term, whether alone of with others and whether patentable or
unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to
the business of the Company as conducted at any time during the Employment Term,
and shall assign and hereby does assign to the Company or its nominee
Executive's entire right, title and interest in and to all such Inventions.
8.2. Cooperation. Executive shall take all reasonable action requested by
the Company to protect or obtain title to any and all United States and/or
foreign patents on any such Inventions, including execution and delivery of all
applications. assignments and other documents deemed necessary or desirable by
the Company, provided Executive is reimbursed for reasonable expenses incurred
by Executive in connection with such execution and delivery.
Section 9. Miscellaneous.
9.1. Remedies. The parties acknowledge that any breach or violation by
Executive of the terms of this Agreement will result in immediate and
irreparable injury and harm to the Company, and will do damage to the Company in
amounts difficult to ascertain. Accordingly, the company shall be entitled to
remedies of injunction, as well as to all other legal or equitable remedies to
which the Company may be entitled, including, without limitation termination of
the Employment Term and this Agreement.
9.2. Certain definitions. For the purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Engage in or participate in any business" referred to in Section
7 hereof shall be deemed to mean engaging in or participating in any
business or businesses, directly or indirectly, whether for his own account
or for that of any other person, firm, or corporation, and whether as a
stockholder (except as a stockholder in a publicly-held corporation with
more than 500 holders of common stock of which Executive owns less than 1 %
of the outstanding securities of any class), principal, agent, proprietor,
partner, officer, director, employee or consultant, or in any other
capacity;
9.3. Notices. Any notice or other communications required or permitted to
be given to the parties hereto shall be deemed to have been given when received,
addressed as follows (or at such other address as the party addressed may have
substituted by notice pursuant to this Section 8.3.
(a) If to the Company: Watchdog Pilots, Inc.
33 Walt Whitman Dr., Suite 125
Huntington Station, New York 11743;
(b) If to Executive: Walter M. Groteke
Hodson Ave.
Lynbrook, New York 11563
9.4. Heading. The captions set forth in this Agreement are for convenience
only and shall not be considered as part of this Agreement or as in any way
limiting or amplifying the terms and provision hereof.
<PAGE>
9.5. Governing Law. The Agreement shall in all respects be interpreted,
construed and governed by and in accordance with the law of the State of New
York.
9.6. Severability. In case this Agreement or any one or more of the
provisions hereof, shall be held to be invalid, illegal or unenforceable within
any governmental jurisdiction or subdivision thereof, the Agreement or any such
provision or provisions shall not as a consequence thereof be deemed to be
invalid, illegal or unenforceable in any other governmental jurisdiction or
subdivision thereof. In case any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any other respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein and there shall be deemed substituted such other provision as
will most nearly accomplish the intent of the parties to the extent permitted by
applicable law.
9.7. Whole Agreement. This Agreement embodies all the representations,
warrants covenants and agreements of the parties in relation to subject matter
hereof, and no representations, warranties, covenants, understandings or
agreements, or otherwise, in relation thereto exist between the parties except
as herein expressly set forth herein, or in any instrument in writing by the
party to be bound thereby which makes reference to this Agreement.
9.8. No Rights in Third Parties. Nothing herein expressed or implied is
intended to or shall be construed to confer upon or give to any person, firm or
other entity, other than the parties hereto and their respective successors and
assigns or personal representatives, any rights or remedies under or by reason
of this Agreement.
9.9. Amendment. This Agreement may not be amended orally but only by an
instrument in writing duly executed by the parties hereto.
9.10. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
In WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
EXECUTIVE
/s/ Walter M. Groteke
- --------------------------
Walter M. Groteke
Watchdog Patrols, Inc.
/s/ Mark Jacques
- --------------------------
Mark Jacques, President
Draft dated June 2, 1998
EMPLOYMENT AGREEMENT
OF
KEVIN F. SHERLOCK
This EMPLOYMENT AGREEMENT ("Agreement") dated as of the day of June, 1998,
between Kevin F. Sherlock ("Executive") an individual residing at 162 Boney Lane
St. James, New York 11780, and Watchdog Patrols, Inc ("Company") a New York
Corporation having its principal place of business at 33 Walt Whitman Dr., Suite
125, Huntington Station, New York 11743;
WITNESSETH:
WHEREAS, the Company desires to retain Executive as the Chief Operating
Officer of the Company, and Executive desires to perform such duties,
NOW, THEREFORE, it is mutually agreed by and among the parties as follows:
Section 1. Employment.
Upon the terms and subject to the conditions contained herein, during the
Employment Term ( hereinafter defined), the Company hereby employs Executive as
the Chief Operating Officer of the Company. Executive shall be responsible for
such duties as are commensurate with his office and as may from time to time be
assigned to Executive by the Board of Directors of the Company. Executive shall
report directly to the Board. Executive hereby accepts such employment and
during the Employment Term shall devote his time, skill, energy and attention to
the business of the Company, and shall perform his duties in a diligent,
trustworthy, loyal and businesslike and efficient manner, all for the purpose of
advancing the business of the Company. Executive agrees to serve, if elected, as
an officer and/or director of the Company and any of its subsidiaries without
additional compensation. However, Executive shall not be required to serve as an
officer or director of any of the Company's subsidiaries if to do so would
expose Executive to adverse financial consequences.
Section 2. Compensation.
2.1. Salary. During the Employment Term, the Company shall pay, and
Executive shall be entitled to receive from the Company, as a base salary for
the full-time employment referred to in Section 1 hereof during the first term
of employment, compensation at the rate of $100,000 per annum, payable in 26
equal installments; the base salary shall be increased to $250,000 per annum,
payable in 26 equal installments, commencing the second term of Executive's
employment; and the base salary shall be increased to $275,000 per annum,
payable in 26 equal installments, commencing the third term of Executive's
<PAGE>
employment. The base salary will be reviewed at least once a year by the
Company's Board of directors and may be increased if the performance of the
Company warrants any such increase. If the Board deems that the performance of
the Company is not meeting projections and the resulting cash flow is
insufficient to pay the full salaries in year two and three, the Board shall
renegotiate the salaries with Executive, which salary shall not be less than
$150,000 in year two and $175,000 in year three.
2.2. Bonus. Executive shall be entitled to a bonus of 2% of gross profit of
the Company. One fourth of the bonus will be paid quarterly after the completion
of the Company's quarterly financial statement, and the remaining balance will
be paid after the completion of the annual financial statement.
2.3. Stock Options; Warrants: Executive shall be entitled to receive in the
aggregate warrants to purchase 200,000 shares of the stock of the Company and
shall also share in an employee stock option plan. The warrants shall become
exercisable as follows:
(1) 50,000 warrants will become exercisable if the operating
subsidiary generates revenues of at least $5,000,000, without a pretax
loss, withing one year following the signing of this agreement;
(2) 100,000 warrants will become exercisable if the operating
subsidiary generates revenues of at least $10,000,000 in revenues, with at
least $2,000,000 in pretax profit [before interest, taxes, depreciation,
and amortization ("EBITDA")], within one year following the signing of this
Agreement; and
(3) 50,000 warrants will become exercisable if the operating
subsidiary generates revenue of $10,000,000 with at least $1,000,000 in
pretax profit (EBITDA), within the second year following the signing of
this Agreement;
(4) If the warrants described in paragraph 2.3 (2) do not become
exercisable under the conditions stated, then such warrants will become
exercisable if the operating subsidiary generates $20,000,000 in revenues,
with at least $4,000,000 in pretax income (EBITDA) during the first two
years following the signing of this agreement.
The Company agrees to establish an employee stock option plan and reserve
at least 500,000 shares of the common stock of the Company for issuance under
the plan.
2.4. Expenses. The Company shall reimburse Executive for all expenses
incurred and paid by Executive in the course of the performance of his duties
pursuant to this Agreement and consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, and subject to the Company's requirements with respect to the manner
of reporting such expenses.
<PAGE>
2.6. Fringe Benefits. Executive shall be entitled to participate in various
fringe benefit programs now in force or hereafter established by the Company for
all employees of the Company, provided, however, that such participation shall
be subject to all of the terms and conditions pertaining to said programs as
they may now exist or as hereafter adopted, modified or amended. The fringe
benefit program of the Company may be changed or canceled at any time by the
Company in its sole discretion without prior notice to or consent of Executive.
2.7. Vacation. Executive shall be entitled to a paid vacation of two (2)
weeks commencing six (6) months from the Effective Date of this Agreement, three
(3) weeks after the first year and four (4) weeks every year thereafter.
2.8. Holidays. Executive shall be entitled to the same paid holidays as
authorized by the Company for all its other executives.
Section 3. Employment Term.
3.1. Employment Term. The Employment Term shall be three (3) years
commencing on the date of the signing of this Agreement. The Employment
Agreement will be automatically renewed for another three (3) years unless
otherwise terminated or canceled pursuant to Section 4 hereof.
Section 4. Termination
4.1. Death. The Agreement shall terminate upon death of the Executive.
Should the Agreement terminate as a result of Executive's death, the Executive's
Estate shall be entitled to receive compensation equal to six months of
Executive's base salary, base salary determined at the time of death.
4.2. Termination by Company.
(a) Termination For Cause. Company may terminate Executive's
employment for cause.
(b) 'Cause' Defined. Company shall have cause to terminate Executive's
employment if Executive wilfully fails to substantially perform any duties
required by this Agreement (unless Executive's failure is due to a physical
or mental incapacity), Executive is consistently, flagrantly, and grossly
negligent in the performance of required duties, Executive engages in
conduct that demonstrably and substantially damages Company, Executive is
convicted of a felonious act of moral turpitude, or Executive discloses
material confidential information in violation of this Agreement. No act or
failure to act by Executive may be considered "wilful" unless Executive
acted or failed to act without any reasonable belief that the act or
omission was in Company's best interests and without good faith.
(c) Resolution Finding Cause for Termination of Executive's
Employment. Before Executive's employment may be terminated for cause, a
majority of the entire membership of Company's Board of Directors (not
<PAGE>
including Executive) must duly adopt a resolution finding in good faith
that Company has cause to terminate Executive's employment and specifying
the details of Executive's misconduct. Before the Board of Directors may
adopt such a resolution, Executive must be given reasonable notice and
opportunity to be heard by the Board of Directors and must bet permitted to
appear before the Board of Directors with counsel. The Board of Directors
may not adopt a resolution terminating Executive's employment for cause
unless it receives a report from a firm of independent attorneys (not
including counsel for Company) concluding that the Board of Directors has
cause within the meaning of this agreement to terminate Executive's
employment. The firm of independent attorneys must be selected by a
majority of the entire membership of the Board of Directors (not including
Executive) and must be reasonably acceptable to Executive. If this
Agreement is terminated by Company for cause, each party's obligations
under this Agreement shall thereupon cease and terminate except for
obligations accrued but undischarged to and including the date of such
event
4.3. Termination by Executive. Executive may (but is not obligated to)
terminate this Agreement at any time under the following circumstances:
(a) Executive's health becomes so impaired that continued performance
of Executive's duties under this Agreement would be hazardous to
Executive's physical or mental health.
(b) Change in control. There is a change in control of Company if
someone other than an subscribers to Company's common stock at the time of
the signing of this Agreement becomes the beneficial owner of common stock
representing 20 percent or more of the voting power of Company or during
any three year period during the term of this Agreement the individuals who
constitute the Board of Directors at the beginning of the period cease to
constitute at least a majority of the Board members at the end of the
three- year period for any reason other than death or disability. No
transaction or event will be deemed to have caused a change in control if
Executive gives prior consent to the transaction or event.
(c) Executive is assigned duties that are significantly different than
those described in this Agreement, or duties assigned Executive by this
Agreement are eliminated or transferred to someone else.
(d) Executive is removed from any of the positions described in
Section 1 of this Agreement (other than by Company for cause).
(e) Executive's fringe benefits or other compensation are materially
reduced.
(f) Company requires Executive to travel more frequently than
contemplated by this Agreement.
(g) Company fails to have a successor assume this Agreement.
(h) Company becomes insolvent or files a bankruptcy petition.
4.4. Notice of Termination. Any termination of Executive's employment by
Company or Executive must be communicated to the other party by a written Notice
of Termination. The notice must specify the provision of this Agreement
<PAGE>
authorizing the termination and must set forth in reasonable detail the facts
and circumstances providing the basis for termination of Executive's employment.
4.5. Date Termination Is Effective. If Executive's employment terminates
because this Agreement expires, then Executive's employment will be considered
to have terminated on that expiration date. If Executive's employment terminates
because of Executive's death, then Executive's employment will be considered to
have terminated on the date of Executive's death. If Executive's employment is
terminated by Executive, then Executive's employment will be considered to have
terminated on the date that a Notice of Termination is given. If Executive's
employment is terminated by Company for cause, then Executive's employment will
be considered to have terminated on the date specified by the "Notice of
Termination." If, within 30days after a Notice of Termination is given, the
party receiving the notice notifies the other party that there is a dispute
concerning the termination, then Executive's employment will not be considered
to have terminated until the dispute is ended by a written agreement between the
parties, a final arbitration award, or a final judgment, order, or decree of a
court of competent jurisdiction. A judgment, order, or decree of a court of
competent jurisdiction will be considered final if the time for appealing the
decision has expired and no appeal has been perfected.
4.6. Compensation Following Termination.
(a) If Executive's employment terminates because of Executive's death,
the Company shall pay a lump sum death benefit to the person or persons
designated in a written notice filed with Company by Executive or, if no
person has been designated, to Executive's estate. The amount of the lump
sum death benefit will equal the amount of Executive's then current base
salary plus the amount of incentive compensation paid Executive most
recently prior to Executive's death, multiplied by the number of full and
partial years that Executive was employed by Company. This lump sum death
benefit shall be in addition to any other amounts that Executive's
beneficiaries and estate may be entitled to receive under any employee
benefit plan maintained by Company.
(b) If Executive's employment is terminated by Company for cause,
Company shall pay to Executive Executive's then current base salary through
the date employment is terminated, and Company shall have no further
obligations to Executive under this Agreement.
(c) If Company terminates Executive's employment other than for cause,
Company shall pay Executive Executive's then current base salary through
the date employment is terminated and any legal fees and expenses incurred
by Executive to enforce Executive's rights under this Agreement. In
addition, Company shall pay Executive as liquidated damages an amount equal
to the sum of Executive's then current base salary plus the amount of
incentive compensation paid to Executive most recently before the date
Executive's employment was terminated, multiplied by the number of full and
partial years remaining in the term of this Agreement (including
extensions), and further multiplied by 50% percent if Executive's
employment terminates during the year ending December 31, 1998, 75% percent
if Executive's employment terminates during the year ending December 31,
1999, or 100% percent if Executive's employment terminates during the year
ending December 31, 2000 or a subsequent year.
<PAGE>
(d) If Executive's employment is terminated by Executive in accordance
with the provisions of this Agreement, Company shall pay Executive
severance pay in an amount equal to the sum of Executive's base salary plus
the amount of incentive compensation paid to Executive most recently before
the date Executive's employment was terminated, multiplied by fifty percent
(50%).
(e) Company and Executive intend that no portion of the payments to
Executive contingent on a change in control of Company be deemed a
parachute payment, as that term is defined by Section 28OG(b)(2) of the
Internal Revenue Code. Company and Executive agree that the present value
(as that term is defined by Section 28OG(d)(4) of the Internal Revenue
Code) of the termination payments contingent on a change in control of
Company shall not exceed the amount that could cause the payments to be
characterized as a parachute payment. If the present value of the payments
to be made to Executive exceed the amount; that could cause the payments to
be characterized as a parachute payment, then the amount of those payments
shall be reduced so that their present value equals one dollar less than
the amount that would cause the payments to be characterized as a parachute
payment.
4.7. Health insurance upon termination. In the event the Company terminates
this Agreement with Executive for reasons other than those in Sections 4.1, and
4.2(a), the Executive shall be entitled to receive continuing benefits of health
insurance coverage for a six month period.
Section 5. Disability.
5.1. Replacement Because of Disability. If, because of illness or injury,
Executive becomes unable to work full time for the Company for a period of more
than 90 days, Company may, in its sole discretion at any time after that period
give Executive 30 days written notice that it will replace Executive if
Executive is unable to return to work full time before the date specified in the
written notice. Replacement of Executive shall not be considered a termination
of Executive's employment under this Agreement.
5.2. Compensation During Periods of Disability.
(a) Executive shall continue to receive Executive's base salary and
incentive compensation while Executive is unable to work full time until
Executive is replaced or until Executive terminates Executive's employment
with Company because Executive's health becomes so impaired that continued
performances of Executive's duties under this Agreement would be hazardous
to Executive's physical or mental health.
(b) While Executive is unable to work full time because of illness or
injury and through the full term of this Agreement, including extensions,
Company shall maintain for Executive's benefit all employee benefit plans
in which Executive was participating at the time Executive was replaced. If
Executive is barred from participating in any employee benefit plan because
of Executive's disability, Company shall pay Executive an amount equal to
what Company would have contributed on Executive's behalf to the employee
benefit plan if Executive's participation had not been barred.
(c) After Executive is replaced or receives notice that Executive is
terminating employment because Executive's health has become so impaired
that continued performance of Executive's duties under this Agreement would
be hazardous to Executive's physical or mental health, Company shall pay
Executive an amount equal to the sum of Executive's base salary plus the
amount of incentive compensation paid to Executive most recently before the
date Executive's employment was terminated, multiplied by fifty percent
(50%)
(d) Executive is not required to seek other employment to mitigate any
amounts payable under this Agreement. Nor will amounts due Executive under
this Agreement be reduced by any amounts received by Executive for other
employment.
5.3. Disability Insurance. Company shall purchase and use its best efforts
to maintain disability insurance in force for the benefit of Executive
throughout the term of this Agreement (including extensions). The policy shall
replace fifty percent of Executive's Base Salary, start paying benefits after
Executive has been unable to work full-time for 90 days, continue paying
benefits until Executive reaches age 65, and waive premium payments while
Executive is disabled. If Company fails to make a premium payment, Executive
shall have the right in Executive's sole discretion to advance such funds as may
be required to maintain the policy in force and shall thereafter be entitled to
recover amounts paid from Company.
Section 6. Business Properties.
6.1. Business Properties. Other than as required to perform his duties in
accordance with this Agreement and for purpose of furthering the business of the
Company, Executive shall not use or cause to be used Company's trade secrets or
any other confidential business information by him as a result of his employment
or relationship to the Company or any affiliate of the Company.
6.2. Revealing Trade Secret, etc. Executive acknowledges the interest of
the Company in maintaining the confidentiality of information related to its
business and shall not at any time during the Employment Term or thereafter,
directly or indirectly, reveal or cause to be revealed to any person or entity
the production processes, inventions, formulae, trade secrets, customer lists or
any other confidential information obtained by him as a result of his employment
or relationship with the Company or any affiliate of the Company, except when
authorized in writing to do so by the Company, provided, however, that it is not
the intent of this Section 5.2 to include within the subject matter information
not proprietary to the Company or information which is in the public domain.
Confidential information does not include any information that is known
generally by the public (other than as a result of unauthorized disclosure by
Executive) or information that is not the type of information considered
confidential by persons engaged in a business that is the same of similar to
that conducted by the company. Confidential information is material if its
disclosure would be materially damaging to the Company.
<PAGE>
Section 7. Non-Competition.
7.1. Non-Competition. During the Employment Term and for a period of one
(1) year thereafter, Executive shall not (a) compete, engage, or participate,
directly or indirectly, in the business or business substantially similar to the
business as conducted by the Company or as may thereafter be conducted by the
Company at any time during the Employment Term, (b) solicit or cause to be
solicited any customers of the Company, or recruit or cause any other person to
recruit any employee of the Company to any of said business or businesses.
7.2. Prior Notice. Prior to engaging in any activity or accepting
employment with another company any time within one (1) year after Executive
leaves the employment of the Company, which activity or employment is in the
same or related industry in which the Company is engaged, Executive agrees to
provide at least thirty (30) days prior written notice (by certified mail) to
the Company, stating the description of the activities or position sought to be
undertaken by Executive, together with such further information as the Company
may request in connection therewith (including, but not limited to, location
where the services would be performed, the present or former customers of the
Company who may be anticipated to receive such services, etc.). Upon receipt of
such information from Executive, the Company shall, within fifteen (15) days of
the receipt of all of the requested information, notify Executive whether the
Company objects to the otherwise prohibited services of activities by Executive.
If the Company does not object or does not respond, the restrictions set forth
in Section 6 shall have no force and effect. The Company shall be free to object
or not to object in unfettered discretion, and parties agree that any actions
taken or not taken by the Company with respect to any other employees or former
employees shall have no bearing whatsoever on the Company's decision or on any
question regarding the enforceability of this restraint with respect to
Executive.
7.3. Limitations. It is also agreed that if for any reason the area or time
restrictions set forth above are too broad so as to be unenforceable by law,
then they, or either one of them, shall be reduced to such area or time as shall
be legally enforceable. If it is judicially determined that this agreement not
to compete, or any potion thereof, is illegal of offensive under any applicable
law (statute, common law or otherwise), then it is hereby agreed by Executive
and the Company that the non-competition covenant shall be in full force and
effect to the full extent permitted by law. By this agreement, the parties
intend to have this agreement not to compete to be in full force and effect to
the greatest extent permitted.
Section 8. Inventions.
8.1. Assignment. Without further consideration Executive shall fully and
promptly report to the Company all ideas, concept, inventions, discoveries,
formulae and designs conceived or produced by Executive at any time during the
Employment Term, whether alone of with others and whether patentable or
unpatentable (collectively, "Inventions") pertaining, directly or indirectly, to
the business of the Company as conducted at any time during the Employment Term,
and shall assign and hereby does assign to the Company or its nominee
Executive's entire right, title and interest in and to all such Inventions.
<PAGE>
8.2. Cooperation. Executive shall take all reasonable action requested by
the Company to protect or obtain title to any and all United States and/or
foreign patents on any such Inventions, including execution and delivery of all
applications. assignments and other documents deemed necessary or desirable by
the Company, provided Executive is reimbursed for reasonable expenses incurred
by Executive in connection with such execution and delivery.
Section 9. Miscellaneous.
9.1. Remedies. The parties acknowledge that any breach or violation by
Executive of the terms of this Agreement will result in immediate and
irreparable injury and harm to the Company, and will do damage to the Company in
amounts difficult to ascertain. Accordingly, the company shall be entitled to
remedies of injunction, as well as to all other legal or equitable remedies to
which the Company may be entitled, including, without limitation termination of
the Employment Term and this Agreement.
9.2. Certain definitions. For the purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Engage in or participate in any business" referred to in Section
7 hereof shall be deemed to mean engaging in or participating in any
business or businesses, directly or indirectly, whether for his own account
or for that of any other person, firm, or corporation, and whether as a
stockholder (except as a stockholder in a publicly-held corporation with
more than 500 holders of common stock of which Executive owns less than 1 %
of the outstanding securities of any class), principal, agent, proprietor,
partner, officer, director, employee or consultant, or in any other
capacity;
9.3. Notices. Any notice or other communications required or permitted to
be given to the parties hereto shall be deemed to have been given when received,
addressed as follows (or at such other address as the party addressed may have
substituted by notice pursuant to this Section 8.3.
(a) If to the Company: Watchdog Pilots, Inc.
33 Walt Whitman Dr., Suite 125
Huntington Station, New York 11743;
(b) If to Executive: Kevin F. Sherlock
162 Boney Lane
St. James, New York 11780
9.4. Heading. The captions set forth in this Agreement are for convenience
only and shall not be considered as part of this Agreement or as in any way
limiting or amplifying the terms and provision hereof.
<PAGE>
9.5. Governing Law. The Agreement shall in all respects be interpreted,
construed and governed by and in accordance with the law of the State of New
York.
9.6. Severability. In case this Agreement or any one or more of the
provisions hereof, shall be held to be invalid, illegal or unenforceable within
any governmental jurisdiction or subdivision thereof, the Agreement or any such
provision or provisions shall not as a consequence thereof be deemed to be
invalid, illegal or unenforceable in any other governmental jurisdiction or
subdivision thereof. In case any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any other respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein and there shall be deemed substituted such other provision as
will most nearly accomplish the intent of the parties to the extent permitted by
applicable law.
9.7. Whole Agreement. This Agreement embodies all the representations,
warrants covenants and agreements of the parties in relation to subject matter
hereof, and no representations, warranties, covenants, understandings or
agreements, or otherwise, in relation thereto exist between the parties except
as herein expressly set forth herein, or in any instrument in writing by the
party to be bound thereby which makes reference to this Agreement.
9.8. No Rights in Third Parties. Nothing herein expressed or implied is
intended to or shall be construed to confer upon or give to any person, firm or
other entity, other than the parties hereto and their respective successors and
assigns or personal representatives, any rights or remedies under or by reason
of this Agreement.
9.9. Amendment. This Agreement may not be amended orally but only by an
instrument in writing duly executed by the parties hereto.
9.10. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
In WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
EXECUTIVE
/s/ Kevin F. Sherlock
__________________________
Kevin F. Sherlock
Watchdog Patrols, Inc.
/s/Mark Jacques
__________________________
Mark Jacques, President
Draft dated June 2, 1998
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.N003
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 Walter M. Groteke, residing at 64 Hodson Ave. Ave., Lynbrook, New Yorl
11563 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:
<PAGE>
"THE ISSUANCE OF THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID
ACT OR APPLICABLE STATE SECURITIES LAWS, SUPPORTED BY AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED."
5. Certain Dividends. If the Company pays a dividend or makes a distribution on
the Common Stock ("Dividend"), other than a stock dividend payable in shares of
Common Stock, then the Company will pay or distribute to the Registered Holder
of this Warrant, upon the exercise hereof, in addition to the Warrant Shares
purchased upon such exercise, the Dividend which would have been paid to such
Registered Holder if it had been the owner of record of such Warrant Shares
immediately prior to the date on which a record is taken for such Dividend or,
if no record is taken, the date as of which the records holders of Common Stock
entitled to such Dividend are determined.
6. Notices of Record Date. In case: (i) the Company shall take a record of the
holders of its Common Stock (or other stock or securities at the time
deliverable upon the exercise of this Warrant) for the purpose of entitling or
enabling them to receive any dividend or other distribution, or to receive any
right to subscribe for or purchase any shares of any class or any other
securities, or to receive any other right, or (ii) of any capital reorganization
of the Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving entity), or
any transfer of all or substantially all of the assets of the Company, or (iii)
of the voluntary or involuntary dissolution, liquidation or winding-up of the
Company, then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up is to take place, and the time, if any is to be fixed,
as of which the holders of record of Common Stock (or such other stock or
securities at the time deliverable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other stock or
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up. Such notice shall be mailed at least ten (10) days
prior to the record date or effective date for the event specified in such
notice, provided that the failure to mail such notice shall not affect the
legality or validity of any such action.
7. Reservation of Stock. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
such shares of Common Stock and other stock, securities and property, as from
time to time shall be issuable upon the exercise of this Warrant. So long as
this Warrant remains outstanding, the Company shall maintain the listing of the
shares of Common Stock to be issued upon exercise on each national securities
exchange on which Common Stock is listed or on the Nasdaq Stock Market if the
Common Stock is then quoted on the Nasdaq Stock Market.
<PAGE>
8. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction) upon delivery of an indemnity
agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
9. Transfers, etc.
9.1 Warrant Register. The Company will maintain a register containing the
names and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its, his or her address as shown on the warrant register by
written notice to the Company requesting such change.
9.2 Registered Holder. Until any transfer of this Warrant is made in the
warrant register, the Company may treat the Registered Holder of this Warrant as
the absolute owner hereof for all purposes; provided, however, that if and when
this Warrant is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
10. No Rights as Stockholder. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as
a stockholder of the Company.
11. Successors. The rights and obligations of the parties to this Warrant will
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, successors, assigns, pledgees, transferees and purchasers.
Without limiting the foregoing, the registration rights set forth in this
Warrant shall inure to the benefit of the Registered Holder and all the
Registered Holder's successors, heirs, pledgees, assignees, transferees and
purchasers of this Warrant and the Warrant Shares.
12. Change or Waiver. Any term of this Warrant may be changed or waived only by
an instrument in writing signed by the party against which enforcement of the
change or waiver is sought.
13. Headings. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning of any provision of this
Warrant.
14. Governing Law. This Warrant shall be governed by and construed in accordance
with the laws of the State of New York as such laws are applied to contracts
made and to be fully performed entirely within that state between residents of
that state.
<PAGE>
15. Jurisdiction and Venue. The Company (i) agrees that any legal suit, action
or proceeding arising out of or relating to this Warrant shall be instituted
exclusively in New York State Supreme Court, County of New York or in the United
States District Court for the Southern District of New York, (ii) waives any
objection to the venue of any such suit, action or proceeding and the right to
assert that such forum is not a convenient forum for such suit, action or
proceeding, and (iii) irrevocably consents to the jurisdiction of the New York
State Supreme Court, County of New York, and the United States District Court
for the Southern District of New York in any such suit, action or proceeding,
and the Company further agrees to accept and acknowledge service or any and all
process which may be served in any such suit, action or proceeding in New York
State Supreme Court, County of New York or in the United States District Court
for the Southern District of New York and agrees that service of process upon it
mailed by certified mail to its address shall be deemed in every respect
effective service of process upon it in any suit, action or proceeding.
16. Mailing of Notices, etc. All notices and other communications under this
Warrant (except payment) shall be in writing and shall be sufficiently given if
sent to the Registered Holder or the Company, as the case may be, by hand
delivery, private overnight courier, with acknowledgment of receipt, or by
registered or certified mail, return receipt requested, as follows:
Registered Holder: To Registered Holder's address on page 1 of this Warrant
Attention: [Name of Holder]
The Company: To the Company's Principal Executive Offices Attention:
President
or to such other address as any of them, by notice to the others may designate
from time to time. Time shall be counted to, or from, as the case may be, the
delivery in person or by overnight courier or five (5) business days after
mailing.
WATCHDOG PATROLS, INC.
By: /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
-------------------------------------------------------------------------
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER ANY STATE SECURITIES LAW. THE COMPANY WILL NOT TRANSFER THIS WARRANT, OR
ANY SHARES OF COMMON SHARES ISSUABLE UPON EXERCISE, UNLESS (i) THERE IS AN
EFFECTIVE REGISTRATION COVERING THIS WARRANT OR SHARES UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, (ii) IT FIRST RECEIVES AN OPINION FROM AN
ATTORNEY, REASONABLY ACCEPTABLE TO THE COMPANY, STATING THAT THE PROPOSED
TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE ACT AND UNDER ALL APPLICABLE
STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144
PROMULGATED UNDER THE ACT.
For the Purchase of
200,000 shares of
Common Stock
No. N006
WARRANT FOR THE PURCHASE OF
SHARES OF COMMON STOCK
OF
WATCHDOG PATROLS, INC.
(A New York corporation)
FOR VALUE RECEIVED, Watchdog Patrols, Inc. ("Company"), hereby certifies
that Daniel G. Stephens, Jr. residing at 3216 W. Santiago St. No. 1, Tampa, FL
33629 ("Registered Holder"), is entitled, subject to the terms set forth below,
to purchase from the Company, $1.63 shares of Common Stock, $.0033 par value, of
the Company ("Common Stock"), at a purchase price equal $1.63. The number of
shares of Common Stock purchasable upon exercise of this Warrant, and the
purchase price per share, each as adjusted from time to time pursuant to the
provisions of this Warrant, are hereinafter referred to as the "Warrant Shares"
and the "Exercise Price," respectively.
1. Exercise.
1.1 Procedure for Cash Exercise. This Warrant may be exercised by the
Registered Holder, in whole or in part, by the surrender of this Warrant (with
the Notice of Exercise Form attached hereto as Exhibit I duly executed by such
Registered Holder) at the principal office of the Company, or at such other
office or agency as the Company may designate,
<PAGE>
1.2 accompanied by payment in full, in lawful money of the United States,
of an amount equal to the then applicable Exercise Price multiplied by the
number of Warrant Shares then being purchased upon such exercise.
1.3 Procedure for Cashless Exercise. In lieu of the payment of the Exercise
Price in the manner set forth in Section 1.1, the Registered Holder shall have
the right (but not the obligation) to convert this Warrant, in whole or part,
into Common Stock ("Conversion Right") as follows: Upon exercise of the
Conversion Right, the Company shall deliver to the Registered Holder (without
payment by the Registered Holder of any of the Exercise Price) that number of
shares of Common Stock equal to the quotient obtained by dividing (x) the
"Value" (as defined below) of the portion of the Warrant being converted on the
second trading day immediately preceding the date the Warrant is delivered to
the Company pursuant to Section 1.3 if the Conversion Right is exercised
("Valuation Date") by (y) the "Market Price" (as defined below) on the Valuation
Date.
The "Value" of the portion of the Warrant being converted shall equal the
remainder derived from subtracting (a) the Exercise Price multiplied by the
number of shares of Common Stock underlying the portion of the Warrant being
converted from (b) the Market Price of the Common Stock multiplied by the number
of shares of Common Stock underlying the portion of the Warrant being converted.
As used herein, the term "Market Price" at any date shall be deemed to be the
last reported sale price of the Common Stock on such date, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the immediately preceding three trading days, in either case, as
reported by the national securities exchange on which the Common Stock is listed
or admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or if any such exchange on which the
Common Stock is listed or admitted to trading is not its principal trading
market, the last sale price as reported by the Nasdaq Stock Market if the Common
Stock is quoted on the Nasdaq National Market or Nasdaq SmallCap Market. If the
Common Stock is not listed on a national securities exchange or quoted on the
Nasdaq National Market or Nasdaq SmallCap Market, but is traded in the residual
over-the-counter market, the Market Price shall mean the last sale price for the
Common Stock, as reported by the NASD OTC Bulletin Board if quoted on the NASD
OTC Bulletin Board and, if not, the average of the bid and asked prices as
published by the National Quotation Bureau, Incorporated, or similar publisher
of such quotations. If the Market Price cannot be determined pursuant to the
above, the Market Price shall be such price as the Board of Directors of the
Company shall determine in good faith.
1.4 Exercise of Conversion Right. The Conversion Right may be exercised by
the Holder on any business day by delivering to the Company the Warrant with a
duly executed Notice of Exercise Form attached hereto as Exhibit I with the
conversion section completed by specifying the total number of shares of Common
Stock the Registered Holder will purchase pursuant to such conversion.
1.5 Date of Exercise. Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which
this Warrant shall have been surrendered to the Company. At such time, the
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>
1.6 Issuance of Certificate. As soon as practicable after the exercise of
the purchase right represented by this Warrant, the Company at its expense will
use its best efforts to cause to be issued in the name of, and delivered to, the
Registered Holder, or, subject to the terms and conditions hereof, to such other
individual or entity as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of full shares of
Warrant Shares to which such Registered Holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such Registered Holder
would otherwise be entitled, cash in an amount determined pursuant to Section 4
hereof, and
(ii) in case such exercise is in part only, a new warrant or warrants
(dated the date hereof) of like tenor, stating on the face or faces thereof the
number of shares currently stated on the face of this Warrant minus the number
of such shares purchased by the Registered Holder upon such exercise as provided
in subsections 1.1 and 1.2 above.
1.7 Exercise Schedule. Subject to Section 1.7 hereof, the Warrant may be
exercised as follows:
(i) up to 50,000 Warrant Shares may be purchased if NetWolves
Corporation, a wholly owned subsidiary of the Company ("NetWolves") generates
revenues of at least $5,000,000, without a loss before provision for income
taxes, for the twelve month period commencing July 1, 1998 ("Fiscal Year");
(ii) up to 100,000 Warrant Shares may be purchased if NetWolves
generates at least $10,000,000 in revenues, with at least $2,000,000 in income
before provisions for income taxes, within the Fiscal Year;
(iii) up to 50,000 Warrant Shares may be purchased if NetWolves
generates revenue of $10,000,000, with at least $1,000,000 in income before
provision for income taxes, during the twelve month period following the Fiscal
Year; and
(iv) if the Warrant Shares described in clause (ii) did not become
purchasable under the condition stated, then such Warrant Shares will become
purchasable if NetWolves generates $20,000,000 in revenues, with at least
$4,000,000 in income before provision for income taxes, during the twelve month
period following the Fiscal Year.
1.8 Determination of NetWolves Revenues. In order to determine whether
NetWolves has generated the threshold level of revenues ("Threshold Level")
required pursuant to Section 1.6 hereof, for the exercise of this Warrant in any
applicable period, the Company shall cause its accountants to perform (i) a SAS
No. 71 review of the NetWolves statement of operations if it reasonably believes
that the revenues for such period are in excess of 20% of the Threshold Level or
(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:
<PAGE>
"THE ISSUANCE OF THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID
ACT OR APPLICABLE STATE SECURITIES LAWS, SUPPORTED BY AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED."
5. Certain Dividends. If the Company pays a dividend or makes a distribution on
the Common Stock ("Dividend"), other than a stock dividend payable in shares of
Common Stock, then the Company will pay or distribute to the Registered Holder
of this Warrant, upon the exercise hereof, in addition to the Warrant Shares
purchased upon such exercise, the Dividend which would have been paid to such
Registered Holder if it had been the owner of record of such Warrant Shares
immediately prior to the date on which a record is taken for such Dividend or,
if no record is taken, the date as of which the records holders of Common Stock
entitled to such Dividend are determined.
6. Notices of Record Date. In case: (i) the Company shall take a record of the
holders of its Common Stock (or other stock or securities at the time
deliverable upon the exercise of this Warrant) for the purpose of entitling or
enabling them to receive any dividend or other distribution, or to receive any
right to subscribe for or purchase any shares of any class or any other
securities, or to receive any other right, or (ii) of any capital reorganization
of the Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving entity), or
any transfer of all or substantially all of the assets of the Company, or (iii)
of the voluntary or involuntary dissolution, liquidation or winding-up of the
Company, then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up is to take place, and the time, if any is to be fixed,
as of which the holders of record of Common Stock (or such other stock or
securities at the time deliverable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other stock or
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up. Such notice shall be mailed at least ten (10) days
prior to the record date or effective date for the event specified in such
notice, provided that the failure to mail such notice shall not affect the
legality or validity of any such action.
7. Reservation of Stock. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
such shares of Common Stock and other stock, securities and property, as from
time to time shall be issuable upon the exercise of this Warrant. So long as
this Warrant remains outstanding, the Company shall maintain the listing of the
shares of Common Stock to be issued upon exercise on each national securities
exchange on which Common Stock is listed or on the Nasdaq Stock Market if the
Common Stock is then quoted on the Nasdaq Stock Market.
<PAGE>
8. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction) upon delivery of an indemnity
agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
9. Transfers, etc.
9.1 Warrant Register. The Company will maintain a register containing the
names and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its, his or her address as shown on the warrant register by
written notice to the Company requesting such change.
9.2 Registered Holder. Until any transfer of this Warrant is made in the
warrant register, the Company may treat the Registered Holder of this Warrant as
the absolute owner hereof for all purposes; provided, however, that if and when
this Warrant is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
10. No Rights as Stockholder. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as
a stockholder of the Company.
11. Successors. The rights and obligations of the parties to this Warrant will
inure to the benefit of and be binding upon the parties hereto and their
respective heirs, successors, assigns, pledgees, transferees and purchasers.
Without limiting the foregoing, the registration rights set forth in this
Warrant shall inure to the benefit of the Registered Holder and all the
Registered Holder's successors, heirs, pledgees, assignees, transferees and
purchasers of this Warrant and the Warrant Shares.
12. Change or Waiver. Any term of this Warrant may be changed or waived only by
an instrument in writing signed by the party against which enforcement of the
change or waiver is sought.
13. Headings. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning of any provision of this
Warrant.
14. Governing Law. This Warrant shall be governed by and construed in accordance
with the laws of the State of New York as such laws are applied to contracts
made and to be fully performed entirely within that state between residents of
that state.
<PAGE>
15. Jurisdiction and Venue. The Company (i) agrees that any legal suit, action
or proceeding arising out of or relating to this Warrant shall be instituted
exclusively in New York State Supreme Court, County of New York or in the United
States District Court for the Southern District of New York, (ii) waives any
objection to the venue of any such suit, action or proceeding and the right to
assert that such forum is not a convenient forum for such suit, action or
proceeding, and (iii) irrevocably consents to the jurisdiction of the New York
State Supreme Court, County of New York, and the United States District Court
for the Southern District of New York in any such suit, action or proceeding,
and the Company further agrees to accept and acknowledge service or any and all
process which may be served in any such suit, action or proceeding in New York
State Supreme Court, County of New York or in the United States District Court
for the Southern District of New York and agrees that service of process upon it
mailed by certified mail to its address shall be deemed in every respect
effective service of process upon it in any suit, action or proceeding.
16. Mailing of Notices, etc. All notices and other communications under this
Warrant (except payment) shall be in writing and shall be sufficiently given if
sent to the Registered Holder or the Company, as the case may be, by hand
delivery, private overnight courier, with acknowledgment of receipt, or by
registered or certified mail, return receipt requested, as follows:
Registered Holder: To Registered Holder's address on page 1 of this Warrant
Attention: [Name of Holder]
The Company: To the Company's Principal Executive Offices Attention:
President
or to such other address as any of them, by notice to the others may designate
from time to time. Time shall be counted to, or from, as the case may be, the
delivery in person or by overnight courier or five (5) business days after
mailing.
WATCHDOG PATROLS, INC.
By: /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
--------------------------------------------------------------------------
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
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(Print in Block Letters)
Address
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INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, made and entered into this 11th day of
March, 1999 ("Agreement"), by and between NETWOLVES CORPORATION. a New York
corporation (the "Corporation", which term shall include any one or more of its
subsidiaries where appropriate), and ________________ ("Indemnitee"):
WHEREAS, highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or as officers or in other capacities
unless they are provided with adequate protection through insurance or adequate
indemnification against inordinate risks of claims and actions against them
arising out of their service to, and activities on behalf of, such corporations;
and
WHEREAS, the statutes and judicial duties regarding the duties of
officers and directors are often difficult to apply, ambiguous or conflicting
and therefore fail to provide such directors and officers with adequate and
reliable knowledge of legal risks to which they are exposed or information
regarding the proper cause of action to take; and
WHEREAS, the current impracticability of obtaining adequate insurance
and the uncertainties relating to indemnification have increased the difficulty
of attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Corporation (the "Board of
Directors") has determined that the difficulty in attracting and retaining such
persons is detrimental to the best interests of the Corporation's stockholders
and that the Corporation should act to assure such persons that there will be
increased certainty of such protection in the future; and
WHEREAS, the Corporation believes it is unfair for the directors and
officers to assume the risk of huge judgments and other expenses which may occur
in cases in which the director or officer acted in good faith; and
WHEREAS, Article 7 of the Business Corporation law of New York ("Article
7") under which the Corporation is organized, empowers the Corporation to
indemnify its officers and directors by agreement and expressly provides that
the indemnification provided by Article 7 is not exclusive; and
<PAGE>
WHEREAS, it is reasonable, prudent and necessary for the Corporation
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will serve or continue to serve the
Corporation free from undue concern that they will not be so indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to serve and/or to
take on additional service for or on behalf of the Corporation on the condition
that he be so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Corporation and Indemnitee do hereby covenant and agree as
follows:
1. DEFINITIONS FOR PURPOSES OF THIS AGREEMENT:
(a) "Change in Control" means a change in control of the
Corporation of a nature that would be required to be reported in response to
Item 5(f) of Schedule 14A of Regulation 14A (or in response to any similar item
or similar schedule or form) promulgated under the Securities Exchange Act of
1934 (the "Act"), whether or not the Corporation is then subject to such
reporting requirement; provided, however, that, without limitation, such a
Change in Control shall be deemed to have occurred if (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Act), directly or
indirectly, of securities of the Corporation representing 20% or more of the
combined voting power of the Corporation's then outstanding securities without
the prior approval of at least two-thirds of the members of the Board of
Directors in office immediately prior to such person attaining such percentage
interest; (ii) the Corporation is a party to a merger, consolidation, sale of
assets or other reorganization, or a proxy contest, as a consequence of which
members of the Board of Directors in office immediately prior to such
transaction or event constitute less than two-thirds of the Board of Directors
thereafter; (iii) during any period of twenty-four (24) consecutive months,
individuals who at the beginning of such period constituted the Board of
Directors (including for this purpose any new director whose election or
nomination for election by the Corporation's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who were directors
at the beginning of such period) cease for any reason to constitute at least
two-thirds of the Board of Directors; or (iv) the stockholders of the
Corporation approve a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation (in one transaction or
a series of transactions) of all or substantially all of the Corporation's
assets.
(b) "Potential Change in Control" shall be deemed to have occurred
if (i) the Corporation enters into an agreement, the consummation of which would
result in the occurrence of a Change in Control; (ii) a person (including the
Corporation) publicly announces a legitimate intention to take or to consider
taking actions which if consummated would constitute a Change in Control; (iii)
any person, other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or a corporation owned, directly or
indirectly, by the shareholders of the Corporation in substantially the same
proportions as their ownership of stock of the Corporation, who is or becomes
the beneficial owner, directly or indirectly, of securities of the Corporation
representing 9.5% or more of the combined voting power of the Corporation's then
outstanding Voting Securities, increases his beneficial ownership of such
securities by five percentage points or more over the percentage so owned by
such person; or (iv) the Board of Directors adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in Control has
occurred.
<PAGE>
(c) "Corporate Status" describes the status of a person who is or
was or has agreed to become a director, officer, employee or agent of the
Corporation, or served at the request of the Corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint, venture,
trust or other enterprise.
(d) "Disinterested Director" means a director of the Corporation
who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(e) "Proceeding" includes any threatened, pending or completed
inquiry, action, suit, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding, whether civil,
criminal, administrative or investigative, except one initiated by an Indemnitee
pursuant to Section 12(a) of this Agreement to enforce his rights under this
Agreement.
(f) "Expenses" includes all direct and indirect costs of any type
or nature whatsoever (including, without limitation, all attorneys' fees and
related disbursements, other out-of-pocket costs and reasonable compensation for
time spent by the Indemnitee for which he is not otherwise compensated by the
Corporation or any third party, provided that the rate of compensation and
estimated time involved is approved in advance by the Board of Directors),
actually and reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a Proceeding (including amounts paid in
settlement by or on behalf of Indemnitee), or the prosecution of an action or
proceeding, including appeals, to establish or enforce a right to
indemnification under this Agreement, Article 7 or otherwise. Expenses as
defined herein, shall not include any judgments, fines or penalties actually
levied against the Indemnitee.
(g) "Independent Counsel" means (i) any law firm or member of a law
firm which the Board of Directors may designate from time to time provided that
the law firm or member of the law firm so designated is experienced in matters
of corporation law and neither presently is, nor in the past five years has
been, retained to represent: (A) the Corporation or Indemnitee in any matter
material to either such party, or (B) any other party to the Proceeding giving
rise to a claim for indemnification hereunder. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Corporation or Indemnitee in an
action to determine Indemnitee's rights under this Agreement arising on or after
the date of this Agreement, regardless of when the Indemnitee's act or failure
to act occurred.
<PAGE>
2. SERVICES BY INDEMNITEE.
Indemnitee agrees to serve or continue to serve as a Director of
the Corporation so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the By-Laws of the Corporation or
the By-Laws of any subsidiary of the Corporation or until such time as he
tenders his resignation in writing. This Agreement shall not impose any
obligation on the Indemnitee or the Corporation to continue the Indemnitee's
position with the Corporation beyond any period otherwise applicable, nor to
create any right to continued employment of the Indemnitee in any capacity.
3. GENERAL.
The Corporation shall indemnify, and shall advance Expenses to
Indemnitee as provided in this Agreement and to the fullest extent permitted by
law.
4. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION.
Indemnitee shall be entitled to the rights of indemnification
provided in this Section 4 if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to any Proceeding, other than a Proceeding by or
in the right of the Corporation. Pursuant to this Section 4, Indemnitee shall be
indemnified against Expenses, including amounts paid in settlement, as well as
any judgments, fines and penalties levied or awarded against him in connection
with such Proceeding or any claim, issue or matter therein, if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Corporation, and, with respect to any criminal Proceeding,
had no reasonable cause to believe his conduct was unlawful.
5. PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION.
Indemnitee shall be entitled to the rights of indemnification
provided in this Section 5, if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to any threatened, pending or completed
Proceeding brought by or in the right of the Corporation to procure a judgment
in its favor. Pursuant to this Section, Indemnitee shall be indemnified against
Expenses actually incurred by him or on his behalf in connection with such
Proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation. Notwithstanding
the foregoing, no indemnification against such Expenses shall be made in respect
of any claim, issue or matter as to which Indemnitee shall have been adjudged to
be liable to the Corporation if such indemnification is not permitted by the
laws of the State of New York or other applicable law; provided, however, that
indemnification against Expenses nevertheless shall by made by the Corporation
in such event to the extent that the courts of the State of New York, or the
court in which such Proceeding shall have been brought or is pending, shall
determine.
<PAGE>
6. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY
SUCCESSFUL.
Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified against all Expenses actually incurred by him or on his behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Corporation shall
indemnify Indemnitee against all Expenses actually incurred by him or on his
behalf in connection with each successfully resolved claim, issue or matter. For
purposes of this Section, but without limitation, the termination of any claim,
issue or matter in such a Proceeding by dismissal or withdrawal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter.
7. ADVANCE OF EXPENSES.
The Corporation shall advance all reasonable Expenses incurred by
or on behalf of Indemnitee in connection with any Proceeding within twenty days
after the receipt by the Corporation of a statement or statements from
Indemnitee requesting such advance or advances from time to time, whether prior
to or after final disposition of such Proceeding. Such statement or statements
shall evidence or reflect the Expenses incurred by Indemnitee and shall include
or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to
repay any Expenses advanced if it is determined ultimately that Indemnitee is
not entitled to be indemnified against such Expenses.
8. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
(a) To obtain indemnification under this Agreement, Indemnitee
shall submit to the Corporation a written request, including therein or
therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. Promptly upon receipt of such a
request for indemnification, the Secretary of the Corporation shall advise the
Board of Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant
to Section 8(a) hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in the specific case
as follows: (i) if a Change in Control shall have occurred, by Independent
Counsel in a written opinion to the Board of Directors, a copy of which shall be
delivered to Indemnitee (unless Indemnitee shall request that such determination
be made by the Board of Directors, in which case the determination shall be made
in the manner provided below in clauses (ii) or (iii)); (ii) if a Change of
Control shall not have occurred, (A) by the Board of Directors by a majority
vote of a quorum consisting of Disinterested Directors, or (B) if a quorum of
the Board of Directors consisting of Disinterested Directors is not obtainable
<PAGE>
or, even if obtainable, if such quorum of Disinterested Directors so directs, by
Independent Counsel in a written opinion to the Board of Directors, a copy of
which shall be delivered to Indemnitee; (iii) as provided in Section 9(b) of
this Agreement; and, if it is determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within ten (10) days after
such determination. Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
costs or Expenses (including attorneys' fees and disbursements) incurred by
Indemnitee in so cooperating shall be borne by the Corporation (regardless of
the determination as to Indemnitee's entitlement to indemnification) and the
Corporation hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 8(b) of
this Agreement, and no counsel shall have been designated previously by the
Board of Directors or the Independent Counsel so designated is unwilling or
unable to serve, then, (i) if no Change of Control shall have occurred, the
Independent Counsel shall be selected by the Board of Directors and the
Corporation shall give written notice to Indemnitee advising him of the identity
of the Independent Counsel so selected; (ii) if a Change of Control shall have
occurred, the Independent Counsel shall be selected by Indemnitee (unless
Indemnitee shall request that such selection be made by the Board of Directors,
in which event the preceding sentence shall apply), and Indemnitee shall give
written notice to the Corporation advising it of the identity of the Independent
Counsel so selected. In either event, Indemnitee or the Corporation, as the case
may be, may, within 7 days after such written notice of selection shall have
been given, deliver to the Corporation or to Indemnitee, as the case may be, a
written objection to such selection. Such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirement of
"Independent Counsel" as defined in this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If such written
objection is made, the Independent Counsel so selected may not serve as
Independent Counsel unless and until a court has determined that such objection
is without merit. If, within 20 days after submission by Indemnitee of a written
request for indemnification pursuant to Section 8(a) hereof, no Independent
Counsel shall have been selected or if selected, shall have been objected to, in
accordance with this Section 8(c), either the Corporation or Indemnitee may
petition the courts of the State of New York or other court of competent
jurisdiction for resolution of any objection which shall have been made by the
Corporation or Indemnitee to the other's selection of Independent Counsel and/or
for the appointment as Independent Counsel of a person selected by the Court or
by such other person as the Court shall designate, and the person with respect
to whom an objection is favorably resolved or the person so appointed shall act
as Independent Counsel under Section 8(b) hereof. The Corporation shall pay any
and all reasonable fees and expenses of Independent Counsel incurred by such
Independent Counsel in connection with the performance of his responsibilities
pursuant to Section 8(b) hereof, and the Corporation shall pay all reasonable
fees and Expenses incident to the implementation of the procedures of this
Section 8(c), regardless of the manner in which such Independent Counsel was
selected or appointed. Upon the due commencement of any judicial proceeding or
arbitration pursuant to Section 12 of this Agreement, Independent Counsel shall
be discharged and relieved of any further responsibility in such capacity
(subject to the applicable standards of professional conduct then prevailing).
<PAGE>
9. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
(a) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification hereunder, the
person, persons or entity making such determination shall presume that the
Indemnitee is entitled to indemnification under this Agreement if the Indemnitee
has submitted a request for indemnification in accordance with Section 8(a) of
this Agreement, and the Corporation shall have the burden of proof to overcome
that presumption in connection with the making of any determination contrary to
that presumption by any person, persons or entity.
(b) If within 30 days after receipt by the Corporation of the
request for indemnification, the Board shall not have made a determination under
Section 8(b)(i) or 8(b)(ii)(A) with regard thereto, the requisite determination
of entitlement to indemnification shall be deemed to have been made in favor of
the Indemnitee who then shall be entitled to such indemnification. The foregoing
provisions of this Section 9(b) shall not apply if the determination of
entitlement to indemnification is to be made by Independent Counsel pursuant to
Section 8(b)(i) or 8(b)(ii)(B) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or
matter therein by judgment, order, settlement or conviction, or upon a plea of
nolo contendere or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely affect the right of the
Indemnitee to indemnification or create a presumption that the Indemnitee did
not act in good faith and in a manner which he reasonably believed to be in, or
not opposed to, the best interests of the Corporation or, with respect to any
criminal Proceeding, that the Indemnitee had reasonable cause to believe that
his conduct was unlawful.
10. ASSUMPTION OF DEFENSE.
In the event the Corporation shall be obligated to pay the Expenses
of any Proceeding against the Indemnitee, the Corporation, if appropriate, shall
be entitled to assume the defense of such Proceeding, with counsel reasonably
acceptable to the Indemnitee, upon the delivery to the Indemnitee of written
notice of its election to do so. After delivery of such notice, approval of such
counsel by the Indemnitee and the retention of such counsel by the Corporation,
the Corporation will not be liable to the Indemnitee under this Agreement for
any fees of counsel subsequently incurred by the Indemnitee with respect to the
same Proceeding, provided that (i) the Indemnitee shall have the right to employ
his counsel in such Proceeding at the Indemnitee's expense; and (ii) if (a) the
employment of counsel by the Indemnitee has been previously authorized in
writing by the Corporation, (b) the Corporation shall have reasonably concluded
that there may be a conflict of interest between the Corporation and the
Indemnitee in the conduct of any such defense, or (c) the Corporation shall not,
in fact, have employed counsel to assume the defense of such Proceeding, the
fees and Expenses of the Indemnitee's counsel shall be at the expense of the
Corporation.
<PAGE>
11. ESTABLISHMENT OF A TRUST.
(a) In the event of a Potential Change in Control, the Corporation,
upon written request by the Indemnitee, shall create a trust for the benefit of
the Indemnitee and from time to time upon written request of the Indemnitee
shall fund such trust in an amount sufficient to satisfy any and all Expenses
which at the time of each such request it is reasonably anticipated will be
incurred in connection with a Proceeding for which the Indemnitee is entitled to
rights of indemnification under Section 4 or 5 hereof, and any and all
judgments, fines, penalties and settlement amounts of any and all proceedings
for which the Indemnitee is entitled to rights of indemnification under Section
4 or 5 from time to time actually paid or claimed, reasonably anticipated or
proposed to be paid. The amount or amounts to be deposited in the trust pursuant
to the foregoing funding obligation shall be determined by the party who would
be required to make the determination of the Indemnitee's right to
indemnification under Section 8(b) hereof (the "Reviewing Party"). The terms of
the trust shall provide that upon a Change in Control (i) the trust shall not be
revoked or the principal thereof invaded, without the written consent of the
Indemnitee, (ii) the trustee shall advance, within two business days of a
request by the Indemnitee, any and all Expenses to the Indemnitee (and the
Indemnitee hereby agrees to reimburse the trust under the circumstances under
which the Indemnitee would be required to reimburse the Corporation under
Section 7 hereof), (iii) the trust shall continue to be funded by the
Corporation in accordance with the funding obligation set forth above, (iv) the
trustee shall promptly pay to the Indemnitee all amounts for which the
Indemnitee shall be entitled to indemnification pursuant to this Agreement or
otherwise, and (v) all unexpended funds in such trust shall revert to the
Corporation upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The trustee shall be an
institutional trustee with a highly regarded reputation chosen by the
Indemnitee. Nothing in this Section 11 shall relieve the Corporation of any of
its obligations under this Agreement.
(b) Nothing contained in this Section 11 shall prevent the Board of
Directors of the Corporation in its discretion at any time and from time to
time, upon request of the Indemnitee, from providing security to the Indemnitee
for the Corporation's obligations hereunder through an irrevocable line of
credit or other collateral. Any such security, once provided to the Indemnitee,
may not be revoked or released without the prior consent of the Indemnitee.
12. REMEDIES OF INDEMNITEE.
(a) In the event that any one or more of the following events shall
have occurred: (i) a determination is made pursuant to Section 8 of this
Agreement that Indemnitee is not entitled to indemnification under this
Agreement; (ii) Expenses are not advanced timely in accordance with Section 7 of
this Agreement; (iii) the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to Section 8(b) of this Agreement and
such determination shall not have been made and delivered in a written opinion
within 90 days after receipt by the Corporation of the request for
<PAGE>
indemnification; (iv) payment of indemnification is not made pursuant to Section
6 of this Agreement within ten days after receipt by the Corporation of a
written request therefor; (v) payment of indemnification is not made within ten
days after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made pursuant to
Section 9(b) of this Agreement; and/or (vi) the Corporation fails to comply with
its obligations under Section 11(a) with regard to the establishment or funding
of a trust for Expenses, the Indemnitee shall be entitled to an adjudication of
his entitlement to such indemnification, advancement of Expenses or the
establishment and funding of the trust in an appropriate court of the State of
New York, or in any other court of competent jurisdiction. Alternatively,
Indemnitee, at his option, may seek an award in arbitration to be conducted by a
single arbitrator pursuant to the rules of the American Arbitration Association.
Indemnitee shall commence such proceeding seeking an adjudication or an award in
arbitration within 180 days following the date on which Indemnitee first has the
right to commence such proceeding pursuant to this Section 12. The Corporation
shall not oppose Indemnitee's right to seek any such adjudication or award in
arbitration.
(b) Whenever a determination is made pursuant to Section 8 of this
Agreement that Indemnitee is not entitled to indemnification, the judicial
proceeding or arbitration commenced pursuant to this Section 12 shall be
conducted in all respects as a de novo trial, or arbitration, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination. If a
Change of Control shall have occurred, the Corporation shall have the burden of
proving that Indemnitee is not entitled to indemnification or advancement of
Expenses, as the case may be, in any judicial proceeding or arbitration
commenced pursuant to this Section 12.
(c) If a determination shall have been made or deemed to have been
made pursuant to Section 8 of this Agreement that Indemnitee is entitled to
indemnification, the Corporation shall be bound by such determination in any
judicial proceeding or arbitration commenced pursuant to this Section 12 absent
(i) a misstatement by Indemnitee of a material fact, or an omission of a
material fact necessary to make Indemnitee's statement not materially
misleading, in connection with the request for indemnification, or (ii) a
prohibition of such indemnification under applicable law.
(d) The Corporation shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Section 12 that
the procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Agreement.
<PAGE>
(e) In the event that Indemnitee, pursuant to this Section 12,
seeks a judicial adjudication or an award in arbitration to enforce his rights
under, or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Corporation, and shall be indemnified by the
Corporation against, any and all expenses (of the types described in the
definition of Expenses in this Agreement) actually incurred by him in connection
with obtaining such judicial adjudication or arbitration, but only if he
prevails therein. If it shall be determined in said judicial adjudication or
arbitration that Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall be
appropriately prorated.
13. NON-EXCLUSIVITY; DURATION OF AGREEMENT; INSURANCE: SUBROGATION.
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Corporation's certificate of incorporation or by-laws, any other
agreement, a vote of stockholders or a resolution of directors, or otherwise.
This Agreement shall continue until and terminate upon the later of: (a) 10
years after the date that Indemnitee shall have ceased to serve as an officer or
director of the Corporation, or (b) the final termination of all pending
Proceedings in respect of which Indemnitee is granted rights of indemnification
or advancement of Expenses hereunder and of any proceeding commenced by
Indemnitee pursuant to Section 12 of this Agreement relating thereto. This
Agreement shall be binding upon the Corporation and its successors and assigns
and shall inure to the benefit of Indemnitee and his heirs, executors and
administrators.
(b) (i) To the extent that the Corporation maintains an insurance
policy or policies providing liability insurance for directors and officers of
the Corporation, Indemnitee shall be covered by such policy or policies in
accordance with the terms thereof to the maximum extent of the coverage
available for any such director or officer under such policy or policies. The
Corporation shall take all necessary or appropriate action to cause such
insurers to pay on behalf of the Indemnitee all amounts payable as a result of
the commencement of a proceeding in accordance with the terms of such policy.
(ii) For a period of three years after the date the Indemnitee
shall have ceased to serve as an officer or director of the Corporation, the
Corporation will provide officers and directors liability insurance for
Indemnitee on terms no less favorable than the terms of the liability insurance
which the Corporation then provides to the current officers and directors;
provided, that the Corporation provides officers and directors liability
insurance to its current officers and directors; and provided further, that the
annual premiums for the liability insurance to be provided to the Indemnitee do
not exceed by more than 50% the premium charged for the coverage available for
any of the Corporation's current officers and directors.
(c) In the event of any payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Corporation to bring suit to enforce
such rights.
<PAGE>
(d) The Corporation shall not be liable under this Agreement to
make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee otherwise actually has received such payment under any
insurance policy, contract, agreement or otherwise.
14. SEVERABILITY.
If any provision or provisions of this Agreement shall be held to
be invalid, illegal or unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any Section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby; and (b) to the fullest extent
possible the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
15. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES.
Except as otherwise provided specifically herein, Indemnitee shall
not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding, or any claim herein, brought or made
by him against the Corporation.
16. HEADINGS.
The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect the construction thereof.
17. MODIFICATION AND WAIVER.
This Agreement may be amended from time to time to reflect changes
in New York law or for other reasons. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
<PAGE>
18. NOTICE BY INDEMNITEE.
Indemnitee agrees promptly to notify the Corporation in writing
upon being served with any summons, citation, subpoena, complaint, indictment,
information or other document relating to any Proceeding or matter which may be
subject to indemnification or advancement of Expenses covered hereunder;
provided, however, that the failure to give any such notice shall not disqualify
the Indemnitee from indemnification hereunder.
19. NOTICES.
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if (i) delivered
by hand to the party to whom said notice or other communication shall have been
directed, (ii) mailed by certified or registered mail with postage prepaid or
(iii) delivered by facsimile transmission electronically confirmed.
(a) If to Indemnitee, to:
(b) If to the Corporation, to:
NETWOLVES CORPORATION
200 Broadhollow Road - Suite 207
Melville, New York 11747
with a copy to:
BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C.
100 Jericho Quadrangle
Jericho, New York 11753
Attn: David H. Lieberman
Fax No: (516) 822-4824
or to such other address as may have been furnished to Indemnitee by the
Corporation or to the Corporation by Indemnitee, as the case may be.
20. GOVERNING LAW.
The parties agree that this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
NETWOLVES CORPORATION
By:
-----------------------------------
Name:
Title:
INDEMNITEE:
----------------------------------------
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
SETTLEMENT AGREEMENT AND MUTUAL RELEASE made this January 6, 1999 day of
December, 1998 by and between NetWolves Corporation (hereinafter called "the
Company" or "NetWolves") and Keith Darling (hereinafter called "Darling").
RECITALS
WHEREAS, the Company entered into an Employment Agreement with Darling
which commenced on or about June 15, 1998 (the "Employment Agreement"); and
WHEREAS, Darling is currently a Vice President and a director of the
Company and owns 528,000 shares of the Company's outstanding Common Stock; and
WHEREAS, Darling presently operates out of the Company's office in
Columbus, Ohio; and
WHEREAS, the parties desire, deem it in their respective mutual best
interests and have agreed to terminate certain relationships and agreements
between them, and all other claims and controversies which may exist between
them under the terms and provisions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Each of the above set forth Recitals is hereby incorporated herein and
made a part hereof as Paragraph 1.
2. Darling resigns as a Vice President and Director of the Company,
effective immediately.
3. The Employment Agreement between the parties is hereby terminated in all
respects, except for paragraph 6 thereof which shall continue in full force and
effect. In lieu thereof, Darling (a) shall receive an aggregate of $50,000 for a
period of six (6) months payable in equal monthly installments of $8,333.33
commencing January 1999, (b) shall continue to be paid for medical coverage for
such six (6) month period, (c) shall be reimbursed for all expenses reasonably
incurred by him in the performance of his duties prior hereto upon submission of
written documentation acceptable to the Company in its reasonable discretion,
and (d) shall receive 50,000 warrants in the form annexed as Exhibit "A", each
warrant entitling him to purchase one share of the Company's Common Stock at
$5.00 per share, provided that the right to receive these warrants is
conditioned upon Darling and Mark Jacques submitting valid, legally binding
purchase orders under their Manufacturer's Representative Agreement for an
aggregate of $10,000,000 for the period January 1, 1999 through December 31,
1999.
4. The Company agrees to pay an outstanding invoice to Creative Spot in the
sum of $4,000.
<PAGE>
5. The Company agrees to pay the rent only at its Columbus, Ohio facility
for the remainder of its lease agreement which terminates on July 31, 1999 and
further agrees to pay the sum of $85 monthly to maintain a parking space at this
facility. In accordance with Exhibit "B" annexed hereto, certain office
equipment located at the Columbus, Ohio facility shall be immediately returned
to NetWolves, at NetWolves expense, with the balance of the equipment set forth
therein retained at the Columbus, Ohio office and thereafter returned at
NetWolves expense to NetWolves in Tampa, Florida.
6. The parties agree to enter into a Manufacturer's Representative
Agreement in the form annexed hereto as Exhibit "C".
7. In consideration of the mutual promises and the terms of this Agreement,
NetWolves, for itself, its directors, officers, shareholders, employees, agents,
affiliates, successors, predecessors, representatives, and assigns, does hereby
release Darling, his successors, executors, administrators, heirs and assigns,
from and against any and all causes or causes of action, suits, administrative
actions, claims, demands, liabilities and obligations of whatever kind or
character, at law or in equity, that it may have now or in the future, by reason
of any matter, cause or thing whatsoever, including, but not limited to, claims
or causes of action concerning or relating to the action and the allegations
referenced therein.
Darling, for himself and his successors, executors, administrators,
heirs and assigns, does hereby release NetWolves, and its directors, officers,
shareholders, employees, agents, affiliates, successors, predecessors,
representatives, and assigns, from and against any and all cause or causes of
action, suits, administrative claims, demands, liabilities and obligations of
whatever kind or character, at law or in equity, that he may have now, by reason
of any matter, cause or thing whatsoever, including, but not limited to, claims
or causes of action concerning or relating to the action and the allegations
referenced therein.
It is the intent of the parties hereto that this release be a general
release of all claims of whatever kind or character, whether known or unknown,
and whether they arise under state law, federal law, or otherwise. However, this
release shall not be construed as a release of any rights or claims that the
parties may have to enforce the terms of this Agreement, or any violations
thereof.
8. Notwithstanding the general releases set forth in paragraph 7 above, it
is the intent of the parties that this Agreement and the said general releases
shall not operate to discharge any claims that either party may have in the
future against the other under the Manufacturer's Representative Agreement
annexed hereto as Exhibit "C" or any future rights as shareholders of NetWolves.
9. This Agreement constitutes the entire agreement between the parties
hereto and supersedes any and all prior or contemporaneous agreements,
discussions and/or representations, oral or written, with respect to the subject
matter hereof, and the parties acknowledge that they have been advised by legal
counsel, have read and understand all of the paragraphs of this Agreement, and
that they voluntarily execute this Agreement and agree to be bound hereby. No
modification or amendment of this Agreement shall be valid unless made in
writing and signed by the parties.
10. The parties acknowledge that the undersigned are vested with full
authority to execute this Agreement and bind the respective parties hereto. This
Agreement shall be binding upon the parties and shall inure to the benefit of
their respective representatives, successors and assigns.
11. No right of indemnity, contractual or otherwise, shall arise as a
result of, or from the execution of this Agreement.
12. The parties hereto agree and understand that this Agreement is to be
governed by and interpreted in accordance with the laws of the State of New
York. In the event that any portion of this Agreement should be invalid under
applicable law, the invalid portion(s) will not render this Agreement or any
part thereof invalid.
13. This Agreement may be executed in counterparts, provided each signatory
to a counterpart has initialed each page of the Agreement and delivers the
initialed pages and counterpart to the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day first above written.
NetWolves Corporation
By: /s/ Walter M. Groteke
----------------------
/s/ Keith Darling
----------------------
Keith Darling
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
SETTLEMENT AGREEMENT AND MUTUAL RELEASE made this January 6, 1999 day of
December, 1998 by and between NetWolves Corporation (hereinafter called "the
Company" or "NetWolves") and Mark Jacques (hereinafter called "Jacques").
RECITALS
WHEREAS, the Company entered into an Employment Agreement with Jacques
which commenced on or about June 15, 1998 (the "Employment Agreement"); and
WHEREAS, Jacques is currently a Vice President and a director of the
Company and owns 478,000 shares of the Company's outstanding Common Stock; and
WHEREAS, Jacques presently operates out of the Company's office in
Columbus, Ohio; and
WHEREAS, the parties desire, deem it in their respective mutual best
interests and have agreed to terminate certain relationships and agreements
between them, and all other claims and controversies which may exist between
them under the terms and provisions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Each of the above set forth Recitals is hereby incorporated herein and
made a part hereof as Paragraph 1.
2. Jacques resigns as a Vice President and Director of the Company,
effective immediately.
3. The Employment Agreement between the parties is hereby terminated in all
respects, except for paragraph 6 thereof which shall continue in full force and
effect. In lieu thereof, Jacques (a) shall receive an aggregate of $50,000 for a
period of six (6) months payable in equal monthly installments of $8,333.33
commencing January 1999, (b) shall continue to be paid for medical coverage for
such six (6) month period, (c) shall be reimbursed for all expenses reasonably
incurred by him in the performance of his duties prior hereto upon submission of
written documentation acceptable to the Company in its reasonable discretion,
and (d) shall receive 50,000 warrants, in the form annexed as Exhibit "A", each
warrant entitling him to purchase one share of the Company's Common Stock at
$5.00 per share, provided that the right to receive these warrants is
conditioned upon Jacques and Mark Jacques submitting valid, legally binding
purchase orders under their Manufacturer's Representative Agreement for an
aggregate of $10,000,000 for the period January 1, 1999 through December 31,
1999.
4. The Company agrees to pay an outstanding invoice to Creative Spot in the
sum of $4,000.
<PAGE>
5. The Company agrees to pay the rent only at its Columbus, Ohio facility
for the remainder of its lease agreement which terminates on July 31, 1999 and
further agrees to pay the sum of $85 monthly to maintain a parking space at this
facility. In accordance with Exhibit "B" annexed hereto, certain office
equipment located at the Columbus, Ohio facility shall be immediately returned
to NetWolves, at NetWolves expense, with the balance of the equipment set forth
therein retained at the Columbus, Ohio office and thereafter returned at Net
Wolves expense to NetWolves in Tampa, Florida.
6. The parties agree to enter into a Manufacturer's Representative
Agreement in the form annexed hereto as Exhibit "C".
7. In consideration of the mutual promises and the terms of this Agreement,
NetWolves, for itself, its directors, officers, shareholders, employees, agents,
affiliates, successors, predecessors, representatives, and assigns, does hereby
release Jacques, his successors, executors, administrators, heirs and assigns,
from and against any and all causes or causes of action, suits, administrative
actions, claims, demands, liabilities and obligations of whatever kind or
character, at law or in equity, that it may have now or in the future, by reason
of any matter, cause or thing whatsoever, including, but not limited to, claims
or causes of action concerning or relating to the action and the allegations
referenced therein.
Jacques, for himself and his successors, executors, administrators,
heirs and assigns, does hereby release NetWolves, and its directors, officers,
shareholders, employees, agents, affiliates, successors, predecessors,
representatives, and assigns, from and against any and all cause or causes of
action, suits, administrative claims, demands, liabilities and obligations of
whatever kind or character, at law or in equity, that he may have now, by reason
of any matter, cause or thing whatsoever, including, but not limited to, claims
or causes of action concerning or relating to the action and the allegations
referenced therein.
It is the intent of the parties hereto that this release be a general
release of all claims of whatever kind or character, whether known or unknown,
and whether they arise under state law, federal law, or otherwise. However, this
release shall not be construed as a release of any rights or claims that the
parties may have to enforce the terms of this Agreement, or any violations
thereof.
8. Notwithstanding the general releases set forth in paragraph 7 above, it
is the intent of the parties that this Agreement and the said general releases
shall not operate to discharge any claims that either party may have in the
future against the other under the Manufacturer's Representative Agreement
annexed hereto as Exhibit "C" or any future rights as shareholders of NetWolves
.
9. This Agreement constitutes the entire agreement between the parties
hereto and supersedes any and all prior or contemporaneous agreements,
discussions and/or representations, oral or written, with respect to the subject
matter hereof, and the parties acknowledge that they have been advised by legal
counsel, have read and understand all of the paragraphs of this Agreement, and
that they voluntarily execute this Agreement and agree to be bound hereby. No
modification or amendment of this Agreement shall be valid unless made in
writing and signed by the parties.
<PAGE>
10. The parties acknowledge that the undersigned are vested with full
authority to execute this Agreement and bind the respective parties hereto. This
Agreement shall be binding upon the parties and shall inure to the benefit of
their respective representatives, successors and assigns.
11. No right of indemnity, contractual or otherwise, shall arise as a
result of, or from the execution of this Agreement.
12. The parties hereto agree and understand that this Agreement is to be
governed by and interpreted in accordance with the laws of the State of New
York. In the event that any portion of this Agreement should be invalid under
applicable law, the invalid portion(s) will not render this Agreement or any
part thereof invalid.
13. This Agreement may be executed in counterparts, provided each signatory
to a counterpart has initialed each page of the Agreement and delivers the
initialed pages and counterpart to the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day first above written.
NetWolves Corporation
By: /s/ Walter M. Groteke
----------------------
/s/ Mark Jacques
----------------------
Mark Jacques
