SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
Amendment No. 3
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
------------------- ------------------------------
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 FoxBox 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.
-- 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.
<PAGE>
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.
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.
<PAGE>
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
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
<PAGE>
production include mother boards, CPU's, cases, Ethernet cards, network
communication cards, hard drives, memory, CPU fans and power supplies. The
Company believes that these materials are available from several companies and
that alternative sources of supply are currently available.
Testing
A majority of testing is performed as part of the manufacturing process. In
addition, NetWolves performs quality testing via the Internet on a periodic
basis to verify that the assembled products meet all production quality
criteria. Also, randomly chosen FoxBox units are shipped from the production
assembly facility back to NetWolves for additional testing.
In addition to testing the product on a regular basis, NetWolves researches
the status of existing components used in the FoxBox to determine if they are
being phased out or prices have changed. If it concludes that a certain
component must be substituted, trial testing is performed on a new component to
determine if it meets product component criteria. If it meets this criteria,
which includes cost effectiveness, longer life expectancy and product
efficiency, a plan to develop and use the component is implemented.
Customer Service and Technical Support
The Company maintains an experienced staff of customer service personnel to
provide technical support to its customers. Each member of the customer service
staff is certified through an ongoing in-house training and testing program to
provide support for each individual product. The Company's customer service
staff provides product support via telephone and e-mail 24 hours per day, seven
days per week. The Company generally provides software and documentation
updates, including maintenance releases, operating system upgrades and major
functional upgrades, as part of its customer support services.
Sales and Marketing
The Company's strategy of marketing and sales plan for it to enter into
agreements with providers of products in a wide variety of markets, including
financial, medical, legal, travel, hospitality, entertainment, hotel and the
auto industries in order to leverage their existing client base for sales of the
Company's products. With this objective, the Company has entered into agreements
with Anicom, Inc. and The Sullivan Group and is seeking additional strategic
alliances on a worldwide basis. The Company intends to hire sales and marketing
consultants in five (5) regional areas, New York, Tampa, Chicago, Washington D.
C. and Los Angeles. These persons will perform several important functions
including managing the master distribution agreements between the Company and
its partners and also customizing solutions for the various market business
segments.
The Company has implemented marketing initiatives to support the sales and
distribution of its products and services, and to communicate corporate
direction. The Company's sales and marketing employees are responsible for
collateral development, lead generation and awareness of the Company and its
products. Marketing programs include public relations, seminars, industry
conferences and trade shows, advertising and direct mail. The Company's
marketing employees also contribute to both the product direction and strategic
planning processes by providing market research and conducting surveys and focus
groups.
<PAGE>
Licensing and Intellectual Property
The Company considers certain features of its products, including its
methodology and technology to be proprietary. The Company relies on a
combination of trade secret, copyright and trademark laws, contractual
provisions and certain technology and security measures to protect its
proprietary intellectual property. The Company does not currently have any
patents or pending patent applications. Notwithstanding the efforts the Company
takes to protect its proprietary rights, existing trade secret, copyright, and
trademark laws afford only limited protection. In addition, effective protection
of copyrights, trade secrets, trademarks and other proprietary rights may be
unavailable or limited in certain foreign countries. The Company believes that,
because of the rapid rate of technological change in the computer industry,
factors such as the knowledge, ability and experience of the Company's
employees, product and service offering development, and quality of customer
support services are more important than any available trade secret or copyright
protection.
The Company does not intend to sell or transfer title of its products to
its clients though this structure may change as the Company expands its
operations. The products are intended to be licensed generally pursuant to
licensing agreements for which extended payment terms may be offered. In the
case of extended payment term agreements, the customer is contractually bound to
equal monthly fixed payments. The first year of maintenance is bundled with
standard licensing agreements. In the case of extended payment term agreements,
maintenance may be bundled for the length of the payment term. Thereafter, in
both instances, the customer may purchase maintenance annually.
Competition
The Company faces competition from the manufacturers of several different
types of products used as multi-service packaged solutions for Internet
gateways. Its major competitors are Whistle, which was recently acquired by IBM,
Team Internet and Free Gate. The Company expects competition to intensify as
more companies enter the market and compete for market share. In addition,
companies currently in the server market may continue to change product
offerings in order to capture further market share. Many of these companies have
substantially greater financial and marketing resources, research and
development staffs, manufacturing and distribution facilities. There can be no
assurance that the Company's current and potential competitors will not develop
products that may or may not be perceived to be more effective or responsive to
technological change than that of the Company, or that current or future
products will not be rendered obsolete by such developments. Furthermore,
increased competition could result in price reductions, reduced margins or loss
of market share, any of which could have a material adverse effect on the
Company's business operating results and financial condition.
The Company believes that an important competitive factor in its market is
the cost effective integration of many services in a single unit. In this
regard, the Company believes that it compares favorably to its competitors in
<PAGE>
price and overall cost of ownership including administrative and maintenance
costs. However, equally important are other factors, including but not limited
to, product reliability, availability, upgradability, and technical service and
support. The Company's ability to compete will depend upon, among other factors,
its ability to anticipate industry trends, invest in product research and
development, and effectively manage the introduction of new or upgraded products
into targeted markets.
Employees
As of 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 3,907,674
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Loss before other income (expense)
and benefit from income taxes (125,570) (3,858,438)
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) (3,829,102)
Benefit from income taxes 20,000 -
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Net loss $ (99,414) $(3,829,102)
========== ==========
Basic and diluted net loss per share $ (0.04) $ (0.89)
========== ==========
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 $3.9 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, all of which were
from sales of the FoxBox. 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 $4,057,184, which consisted
primarily of $1,941,518 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, $2,024,050 relating to selling,
marketing and consulting. Included in the above mentioned operating expenses are
approximately $2,493,000 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. The Company intends to raise additional
monies from the sale of its capital stock to fund its growth over the next 24 to
36 months. However, there can be no assurance that the Company will have
sufficient capital to finance its planned growth.
Year 2000 Issues
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are 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.
<PAGE>
NetWolves Corporation recognizes the significance of the Year 2000 issue as it
relates to internal systems, including IT and non-IT systems. To that extent
NetWolves Corporation has achieved the following:
Internal Information Technology Infrastructure. NetWolves Corporation
believes that it has identified, modified upgraded, or replaced substantially
all of the major computers, software applications, and related equipment used in
connection with its internal operations in order to minimize the possibility of
a material disruption to its business. While most of the upgrades were planned
as part of a general enhancement to its infrastructure, the timing of the
upgrades also result in Year 2000 compliance.
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%
* 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.
<PAGE>
(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.
</TABLE>
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 165,500 shares of
common stock under the 1998 Incentive Plan to its officers and key employees.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation with regard to the
Chief Executive Officer and each of the other executive officers of the Company
for fiscal year ended June 30, 1998. None of the persons in this summary
compensation table received compensation for the fiscal year ended June 30,
1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Fiscal
Principal Position Year Salary Bonus
- ------------------ ------- ------ -----
<S> <C> <C> <C>
Walter M. Groteke 1998 - -
Chairman and Chief
Executive Officer
Daniel G. Stephens 1998 - -
Vice Chairman and
Chief Information
Officer
Kevin Sherlock 1998 - -
Chief Operating Officer
</TABLE>
<PAGE>
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 for a per share cost of approximately
$.02. Messrs. Walter M. Groteke, Daniel G. Stephens, Jr. , Kevin F. Sherlock and
Keith A. Darling each received 528,064 shares and Mr. Marc Jacques received
475,258 shares. Messrs. Groteke, Stephens, Sherlock, Darling and Jacques also
each received 200,000 warrants in connection with the merger, exercisable at a
price of $1.63 per share. The exercise price was based upon the public trading
price of Watchdog Patrols Inc's common stock at the time of the acquisition.
Howard Habberstadt and Joseph Ariola acted as finders for the merger transaction
for which they received 75,000 warrants and 12,500 warrants, respectively,
exercisable at a price of $2.00 per share. The exercise price for the warrants
issued to Messrs. Habberstad and Ariola was determined through arms-length
negotiations between the parties.
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.
ITEM 8. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of their property is the subject.
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NetWolves' common stock has traded on the OTC Bulletin Board under the
symbol "WOLV" since December 1998. Prior to the December name and symbol change,
the Company's stock traded under the symbol "WDGT", Watchdog Patrols, Inc. The
following table sets forth the high and low closing prices for the common stock
for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<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. The book value of the NetWolves, LLC ownership interest totalled
$64,245 at the time of the merger, representing a cost for the 2,640,322 shares
of approximately $.02 per share. 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 (valued at $5.125 per share) 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 (valued at $5.125 per share) 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 (valued at $5.125 per share) were issued to three directors of the Company
in exchange for services rendered. This was transaction by the Company not
involving any public offering which was exempt from the registration
requirements under the Securities Act pursuant to Section 4(2) thereof.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company's authorized capital stock consists of 10,000,000 shares of
common stock, $.0033 par value per share.
Holders of the common stock do not have subscription, redemption,
conversion or preemptive rights. The shares of common stock when issued and paid
for, are fully paid and non-assessable. Each share of common stock is entitled
to participate pro rata in distribution upon liquidation and to one vote on all
matters submitted to a vote of shareholders. The holders of common stock may
receive cash dividends as declared by the Board of Directors out of funds
legally available therefor. Holders of the common stock are entitled to elect
all directors. At each annual meeting of the shareholders all of the directors
will be elected. The holders of the common stock do not have cumulative voting
rights, which means that the holders of more than half of the shares voting for
the election of a class of directors can elect all of the directors of such
class and in such event the holders of the remaining shares will not be able to
elect any of such directors.
<PAGE>
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and By-laws contain provisions
which reduce the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. The Company currently maintains
a liability insurance policy for the benefit of its directors in the sum of
$3,000,000.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Company and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interests of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions). The provisions do not
require a showing of good faith. Moreover, they do not provide indemnification
for liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance.
These provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers and
directors to the maximum extent allowable under New York law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any shareholders derivative action. However,
the provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken.
<PAGE>
The Company also has entered into indemnification agreements with its
officers and directors. The indemnification agreements provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related disbursements) actually and reasonably incurred in
connection with either the investigation, defense or appeal of a proceeding, (as
defined) including amounts paid in settlement by or on behalf of an indemnitee
thereunder.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached statements.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) See Index to Financial Statements at beginning of attached financial
statements.
(b) Exhibits
3.1 Certificate of Incorporation, as amended. *
3.2 By-Laws. *
4.1 Specimen common stock certificate.*
4.2 Form of warrant to investment banking firm. *
4.3 Form of warrant to employees. *
10.1 Merger and Reorganization Agreement dated June 15, 1998 among
Watchdog Patrols, Inc., Watchdog Acquisition Corp. and NetWolves,
LLC. *
10.2 Agreement between The Sullivan Group and NetWolves Corporation dated
January 5, 1999.*
10.3 Distribution Agreement between NetWolves Corporation and Anicom, Inc.
dated as of January 18, 1999.
10.4 Employment Agreement between NetWolves Corporation and Daniel G.
Stephens, Jr. dated June 17, 1998.*
10.5 Employment Agreement between NetWolves Corporation and Walter M.
Groteke dated June 17, 1998.*
10.6 Employment Agreement between NetWolves Corporation and Kevin F.
Sherlock dated June 17, 1998.*
10.7 Warrant Agreement between NetWolves Corporation and Walter M.
Groteke dated June 17, 1998.*
10.8 Warrant Agreement between NetWolves Corporation and Daniel G.
Stephens, Jr. dated June 17, 1998.*
10.9 Warrant Agreement between NetWolves Corporation and Kevin F.
Sherlock dated June 17, 1998.*
10.10 Stock Option Plan.*
10.11 Form of Indemnification Agreement*
10.12 Settlement Agreement and Mutual Release with Keith Darling.*
10.13 Settlement Agreement and Mutual Release with Mark Jacques.*
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
/s/ Walter M. Groteke
By: Walter M. Groteke
Chairman of the Board and
President
Dated: February 9, 2000
<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) ....... 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 5,503,754
Deficit accumulated during the development stage (99,414) (3,928,516)
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 1,000,772 1,836,471 1,941,518
Research and development -- 78,512 91,616 91,616
Sales and marketing 44,463 978,431 1,979,587 2,024,050
----------- ----------- ----------- -----------
149,510 2,057,715 3,907,674 4,057,184
----------- ----------- ----------- -----------
Loss before other income (expense)
and benefit from income taxes (125,570) (2,036,933) (3,858,438) (3,984,008)
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) (2,023,313) (3,829,102) (3,948,516)
Benefit from income taxes 20,000 -- -- 20,000
----------- ----------- ----------- -----------
Net loss $ (99,414) $(2,023,313) $(3,829,102) $(3,928,516)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.04) $ (0.47) $ (0.89) $ (1.07)
=========== =========== =========== ===========
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 2,491,595 - - 2,492,750 -
Net loss, six months ended
December 31, 1998 (unaudited) - - - (3,829,102) - (3,829,102) (3,829,102)
---------- --------- ---------- ----------- ------- ----------- ----------
Total comprehensive loss (unaudited) $(3,631,779)
===========
Balance, December 31, 1998 (unaudited) 4,663,870 $ 15,391 $ 5,503,754 $(3,928,516) $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) $(3,829,102) $ (3,928,516)
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 -- 2,492,750 2,492,750
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 $769,000. Management
determined the fair value of the common stock based on its quoted
market price 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 $1,025,000. Management determined the
fair value of the common stock based on its quoted market price 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, which resulted
in a charge to operations in such quarter of approximately $308,000.
Management determined the fair value of the common stock based on its
quoted market price at the time of issuance. Additionally, Internet
Technologies has the right to receive up to 60,000 shares upon
completion of a $6,000,000 private placement (Note 10c) and an
additional 60,000 shares upon completion of a second private
placement, if any.
. 100,000 shares were issued to a financial consultant for services to
be rendered during the three months ending March 31, 1999, which
resulted in a charge to operations in such quarter of approximately
$513,000. Management determined the fair value of the common stock
based on its quoted market price at the time of issuance.
. 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), which resulted in an aggregate charge to operations in such
quarter of approximately $513,000. Management determined the fair
value of the common stock based on its quoted market price at the time
of issuance.
. 100,000 shares were issued to the Company's legal counsel for services
to be rendered during the three months ending March 31, 1999, which
resulted in a charge to operations in such quarter of approximately
$513,000. Management determined the fair value of the common stock
based on its quoted market price at the time of issuance.
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 $200,000. 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.
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
DISTRIBUTION AGREEMENT
This Agreement is made and entered into as of January 18, 1999 by and
between NetWolves Corporation, a New York corporation ("NetWolves"), and Anicom,
Inc., a Delaware corporation ("Anicom"), both having addresses as set forth on
the signature page of this Agreement.
WITNESSETH:
WHEREAS, NetWolves is engaged in the manufacture, sale and distribution in
the United States of various software and manufactured products;
WHEREAS, Anicom is engaged in the business of distributing various types of
wire, cable and connectivity products;
WHEREAS, Anicom desires to be appointed as an Exclusive Master Distributor
of NetWolves' Products, as hereinafter defined, throughout North America; and
WHEREAS, NetWolves desires to appoint Anicom as an Exclusive Master
Distributor of the Products throughout North America.
NOW, THEREFORE, in consideration of the mutual promises and covenants of
the parties as hereinafter more fully set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
I. DEFINITIONS
1.1 "Anicom Group": Anicom, its subsidiaries and all Anicom Resellers.
1.2 "Anicom Resellers": Those entities identified on Appendix A and such
other entities as Anicom may add to Appendix A from time to time upon NetWolves'
consent, which consent shall not be unreasonably withheld or delayed, provided
that it will not be unreasonable for NetWolves to withhold its consent if the
entity is a direct competitor of NetWolves.
1.3 "Committed Amount": With respect to each Year, and the first six (6)
months of each Year, the Committed Amount for purposes of this Agreement shall
refer to a number of Units determined in accordance with the following:
<PAGE>
<TABLE>
<CAPTION>
Committed Amount
Year First 6 Months Full Year
- ---- -------------- ---------
<S> <C> <C>
1 - 1,500 Units
2 1,000 Units 3,000 Units
3 3,333 Units 10,000 Units
4 6,667 Units 20,000 Units
5 10,000 Units 30,000 Units
</TABLE>
provided, however, if (a) the number of Units purchased by the Anicom Group in a
given Year exceeds the Committed Amount for such Year, then the Committed Amount
in subsequent Years shall be reduced, in the aggregate beginning with the next
succeeding year, by the amount of such excess, and (b) if the Anicom Group
orders at least the Committed Amount for a given Year, but NetWolves is unable
to deliver to the Anicom Group within such year the full number of Units ordered
in such Year, then such shortfall shall be credited against the Committed Amount
for the next Year.
1.4 "Distributor": A wholesaler or an entity whose primary business is
selling products competitive with those of Anicom.
1.5 "Effective Date": February 1, 1999.
1.6 "Product": The Foxbox, as described on Appendix B, and any New
Versions, Competitive Products, updates, enhancements, modifications,
replacements or substitutions thereto.
1.7 "Territory": North America.
1.8 "Unit": A unit of Product, regardless of cost.
1.9 "Year": Each twelve month period ending on an anniversary of the
Effective Date. For example, the twelve-month period ending on the first
anniversary of the Effective Date is referred to as the first Year.
II. PURPOSE
The purpose of this Agreement is to promote and achieve the effective sale
of Products within Anicom's assigned Territory. NetWolves and Anicom recognize
the market in which the Products are sold is extremely competitive; that there
are generally competitive products in the marketplace; and that in order for
NetWolves and Anicom to achieve a satisfactory level of sales it is necessary
that Anicom compete effectively in the marketplace.
<PAGE>
III. APPOINTMENT
3.1 Appointment. NetWolves hereby appoints Anicom as its Exclusive Master
Distributor of Products in the Territory and Anicom hereby accepts the
appointment.
3.2 Nature of Appointment. The appointment is exclusive within the
Territory, and NetWolves shall not appoint any other distributors within the
Territory as long as this Agreement is in full force and effect. In furtherance
of this appointment, NetWolves will clearly identify Anicom as its exclusive
distributor in the Territory on NetWolves' website. Notwithstanding the
foregoing, NetWolves shall have the right to make direct sales or leases of the
Products to customers, Distributors and Anicom Resellers, and NetWolves agrees
to pay Anicom a 6% commission on any sales or leases made by NetWolves that
Anicom is not involved with in the Territory, and to pay Anicom a 5% commission
on NETS (NetWolves Enhanced Technical Support) revenues within the Territory,
provided that any such sales or leases to Distributors shall be counted as
orders from Anicom for purposes of Sections 5.3 and 8.2, but otherwise, sales or
leases of Products by NetWolves to other parties, including without limitation,
the Sullivan Group pursuant to an agreement entered into prior to this
Agreement, will not be counted as orders from Anicom for purposes of Section 5.3
and 8.2. Payment of any commissions to Anicom will be made by NetWolves within
forty-five (45) days of the receipt of funds from such customers. Should
NetWolves fail to pay any commissions when due, Anicom will charge interest on
the outstanding commissions at the lower of 1-1/2% compounded monthly or the
maximum rate permitted by law.
3.3 Commercially Reasonable Efforts. During the term of this Agreement,
Anicom shall promote and sell Products within the Territory. However, the Anicom
Group shall not be obligated to purchase any Products at any time hereunder, and
if the Anicom Group fails to order the Committed Amount in any given Year, for
any reason, NetWolves' sole and exclusive remedy shall be as set forth in
Section 5.3.
3.4 Sales to Resellers. NetWolves shall direct all Anicom Resellers to buy
Products from Anicom. In the event an Anicom Reseller elects not to buy from
Anicom, NetWolves will provide Anicom with a written report concerning such
events. In the event an Anicom Reseller elects not to buy from Anicom and
purchases or leases Products from NetWolves, NetWolves agrees to pay to Anicom a
commission on any such sales or leases equal to Anicom's gross profit that it
would have recognized on such sale. As used herein, the term "gross profit"
shall mean an amount equal (i) the amount that Anicom would have charged such
Anicom Reseller based upon its recent sales of similar Products and historical
sales to that Anicom Reseller, minus (ii) Anicom's discounted price from
NetWolves then in effect pursuant to Section 8.2. Payment of the foregoing
amount to Anicom will be made by NetWolves within forty five (45) days of the
receipt of funds from such Anicom Reseller. Should NetWolves fail to pay any
commissions when due, Anicom will charge interest on the outstanding commissions
at the lower of 1-1/2% compounded monthly or the maximum rate permitted by law.
<PAGE>
IV. NOTIFICATION REGARDING PRODUCT CHANGES
NetWolves shall notify Anicom in writing not less than ninety (90) days
prior to any changes to any of the Products, including without limitation, any
New Versions, updates, modifications, model changes and substitutions. NetWolves
shall also notify Anicom in writing not less than ninety (90) days prior to
adding or deleting a Product.
V. COMMITTED AMOUNTS
5.1 Annual Accounting. Within sixty (60) days after the end of each Year,
NetWolves shall prepare or caused to be prepared and delivered to Anicom a
statement setting forth the actual purchases by the Anicom Group during such
Year, the Committed Amount for such Year, the commissions earned and paid for
such Year, and the bonus discounts earned for such Year (the "Annual
Statement"). If Anicom disagrees with an Annual Statement, Anicom shall notify
NetWolves in writing of such disagreement within thirty (30) days after the date
on which Anicom received the Annual Statement, which written notice shall
specify the nature of the dispute and shall provide in reasonable detail the
facts or circumstances upon which such dispute is based. Thereafter, NetWolves
and Anicom shall attempt in good faith to resolve such disagreement with respect
to the Annual Statement.
5.2 Dispute Resolution. If NetWolves and Anicom are unable to resolve any
disagreement regarding an Annual Statement within twenty (20) days after
NetWolves' receipt of notice of disagreement from Anicom, either NetWolves or
Anicom may give notice (an "Arbitration Notice") to the other party of an intent
to submit such disagreement to a certified independent public accounting firm
that is among the five largest such firms in the United States (the "Independent
Accounting Firm") and mutually agreeable to NetWolves and Anicom. If NetWolves
and Anicom cannot agree upon such election within twenty (20) days after
delivery of the Arbitration Notice, the Independent Accounting Firm shall be
selected by lot from among the five largest independent public accounting firms
in the United States. The dispute shall be immediately submitted by the parties
to the Independent Accounting Firm for resolution of such dispute within twenty
(20) days after submission to the Independent Accounting Firm. At the time of
the submission of such dispute to the Independent Accounting Firm for
resolution, NetWolves shall file with the Independent Accounting Firm a written
statement of its position with regard to any matters in dispute, at which time
Anicom shall have ten (10) days to respond in writing to NetWolves' position.
Upon receipt of written position statements by each of the parties, the
Independent Accounting Firm shall resolve the dispute in accordance with
generally accepted accounting principles, consistently applied. The decision of
the Independent Accounting Firm shall be final and binding upon all parties
hereto. Each party shall bear its own expenses, including expenses of its
accountants and attorneys in connection with the resolution of any such dispute,
and the fees and expenses of the Independent Accounting Firm shall be paid by
the parties as determined by the Independent Accounting Firm.
<PAGE>
5.3 Failure to Meet Committed Amount. Notwithstanding Sections 5.1 and 5.2,
in the event the Anicom Group shall fail to order Products from NetWolves
equaling or exceeding the corresponding Committed Amount for any Year, or the
first six months of any Year, other than as a result of NetWolves' failure to
timely fulfil orders placed by Anicom during such Year, NetWolves may, at its
option, take any or all of the following actions:
(a) convert Anicom's Exclusive Master Distributor rights hereunder to
that of a Master Distributor or Distributor in the Company's Reseller Program at
a level based on the number of Units purchased by the Anicom Group in the prior
Year;
(b) elect to terminate this Agreement, provided that notwithstanding
such termination, NetWolves shall continue to sell to Anicom such quantities of
repair parts, supplies, accessories and replacement inventory of any model of
the Products which Anicom may reasonably require to effectuate an orderly
disposal of Anicom's existing inventory of Products as well as continue to
service the Products theretofore sold by Anicom; and
(c) immediately upon written notice to Anicom, stop any and all
override commissions referred to in Section 3.2 and Section 8.2, provided that
NetWolves shall remain obligated to pay any such commissions earned prior to
such notice.
5.4 Committed Amount to be Renegotiated. In the event that this Agreement
shall be extended beyond its original five (5) year term, the parties hereto
shall jointly agree upon a new Committed Amount for each subsequent Year hereof,
and the same shall be endorsed by the parties and made a part of this Agreement,
failing which the Agreement shall not be renewed.
VI. NETWOLVES' OBLIGATIONS
6.1 Instruction Manuals. NetWolves shall provide to Anicom reasonable
quantities of instruction manuals as well as catalogues, circulars and other
printed or electronic media material which it may have on hand and which are or
may be useful to Anicom in the conduct of sales of the Products.
6.2 Advertising Materials. NetWolves shall furnish to Anicom in such
amounts as NetWolves and Anicom reasonably deem necessary, for a minimal
handling fee as NetWolves shall determine, such advertising aids which NetWolves
may have from time to time and which Anicom may use in advertising and
promotional campaigns for the Products. Anicom may adapt, translate, reproduce
and distribute such advertising aids as Anicom deems appropriate or necessary
with NetWolves' prior written consent, which consent will not be unreasonably
withheld or delayed.
6.3 Access to NetWolves' Employees. NetWolves agrees to provide reasonable
access to its Internet Sales Consultants to assist Anicom in selling Products.
<PAGE>
6.4 Warranties and Representations of NetWolves. NetWolves represents and
warrants that (a) it is a corporation duly organized and existing and in good
standing under and by virtue of the laws of the state set forth on the title
page hereof; (b) it has the corporate power and authority to enter into this
Agreement and to conduct its business as currently conducted and as contemplated
hereunder; (c) the signatory to this Agreement for NetWolves has the power and
authority to bind NetWolves; (d) NetWolves owns or has the right to use all
patents, patent rights, copyrights, trade secrets and other proprietary rights
in or to the Products; (e) to the Company's knowledge, the Products do not
infringe any patent, copyright, trade secret or other proprietary right owned by
a third person; (f) NetWolves' execution and performance of this Agreement will
not violate any other agreement or obligation by which NetWolves may be bound;
(g) NetWolves will be entitled to exercise its rights under this Agreement, free
of any attribution, accounting or consent obligation, except as otherwise
specified herein; (h) to the Company's knowledge, the occurrence in or use of
dates on or after January 1, 2000, including leap year calculations (the
"Millennial Dates") will not adversely affect the performance of the Products
with respect to date dependent data, computations, output or other functions
(including, without limitation, calculating, computing and sequencing) and the
Products will create, sort and generate output data related to or including
Millennial Dates without errors or omissions; and (i) the Products do not
contain any "time bomb," "Trojan horse," "worm," "drop dead device," "virus" (as
these terms are commonly used in the computer software industry), to disable or
erase software, hardware, or data, or to perform any other similar type of
functions.
6.5 Copies of Products. Upon the execution of this Agreement, NetWolves
will deliver two (2) copies of the current Products to Anicom to be used for the
purposes described in Section 7.7.
6.6 Training. NetWolves will provide personnel of the Anicom Group training
at no additional charge, to the extent NetWolves and Anicom reasonably believe
it will enable the Anicom Group to adequately promote and sell the Products,
including without limitation, the initial training described on Appendix C (the
"Initial Training").
6.7 Product Support. During the term of this Agreement, NetWolves will
provide support (as defined below) to the Anicom Group and Anicom's customers
and resolve reported problems in a timely and professional manner. "Support"
means (a) providing to the Anicom Group any corrections, releases and updates to
the Products; (b) consultation with the Anicom Group and Anicom's customers with
respect to technical questions and suspected errors reported by the Anicom Group
and/or Anicom's customers; and (c) resolution of errors in the Products.
NetWolves will provide Support seven (7) days per week, twenty-four (24) hours
per day, and support will be in the form of telephone, e-mail and fax
communication.
6.8 Upgrades and New Versions. During the term of the Agreement, NetWolves
will provide to Anicom, at prices to be determined in accordance with Section
8.2, the enhancements, upgrades and new versions of the Products that may be
developed by or for NetWolves for use in the Territory (each, a "New Version"),
together with sufficient explanatory materials to enable Anicom to promote and
sell the Products. Such New Versions will become additional Products and will be
<PAGE>
subject to the terms and conditions of this Agreement. NetWolves will promptly
offer to Anicom any new computer programs that it develops or acquires the right
to distribute in the Territory which competes with or that can be used as a
substitute for the Products in whole or in part or that perform similar
functions to the Products on computer hardware platforms that are different from
the computer hardware platforms on which the Products currently operate
("Competitive Product"). In the event Anicom accepts such Competitive Product,
the Competitive Product will become additional Products subject to the terms and
conditions of this Agreement.
6.9 Product Development. Anicom and NetWolves will meet not less often than
once each fiscal quarter, at such times and places as the parties mutually
agree, to discuss NetWolves' development plans and any maintenance and support
problems. NetWolves will make reasonable efforts to accommodate Anicom's
requests for Product modification, enhancement or porting to new hardware
platforms.
6.10 Future Deliverables. NetWolves will deliver New Versions and
Competitive Products to Anicom no later than the time NetWolves releases such
Products in final form to any other person or entity, together with any related
documentation, for testing and acceptance in accordance with Anicom's quality
assurance procedures. NetWolves will make reasonable efforts to correct any
errors that Anicom may report to NetWolves, at no additional charge.
6.11 Capacity. NetWolves will use its commercially reasonable efforts to
maintain relationships with manufacturers so that required production capacity
can be maintained to fulfill orders in a timely manner.
VII. RIGHTS, OBLIGATIONS AND RESPONSIBILITIES OF ANICOM
7.1 Warranties and Representations of Anicom. Anicom represents and
warrants as follows: (a) Anicom is a company organized, existing and in good
standing under and by virtue of the laws of the State of Delaware; (b) it has
the power and authority to enter into this Agreement; and (c) the signatory to
this Agreement for Anicom has the power and authority to bind Anicom.
7.2 Sales and Service Responsibility. Anicom shall promote, advertise,
merchandise and sell the Products in the Territory to meet its commitments, and
in connection therewith, shall:
(a) establish and maintain adequate facilities and personnel that
Anicom reasonably believes may be necessary to meet the obligations assumed
hereunder;
(b) formulate and execute marketing and sales plans;
<PAGE>
(c) supply sales and inventory data as may be reasonably requested by
NetWolves from time to time in such form as NetWolves may reasonably request,
and which Anicom can readily generate, to assist NetWolves in its production
planning and to provide a basis for evaluating Anicom performance;
(d) maintain at all times the number of Products and assortment of
Products, which Anicom reasonably believes are necessary and appropriate for the
market involved;
(e) maintain and employ in connection with Anicom's business and
operations such working capital as Anicom reasonably believes may be required to
enable Anicom to properly and fully carry out and perform all of Anicom's
duties, obligations and responsibilities under this Agreement;
(f) promote the sale of Products in the Territory, and specifically in
furtherance thereof:
(i) collect technical and engineering requirements from
customers and, to the extent reasonably able, assist in the adaptation
of the Products to customers' uses;
(ii) to the extent it is reasonably able, assist
customers in gathering data on the adaptability of the Products to
customers' potential use of the Products;
(iii) to the extent it is reasonably able, act as a
liaison and coordinator between Anicom's customers and NetWolves in
communicating both customer and NetWolves requirements for technical
specifications, manufacturing schedules, delivery schedules, and other
terms and conditions of sale; and
(iv) to the extent it is reasonably able, follow-up
with Anicom's customers to determine that the Products have
satisfactorily met customer requirements.
7.3 State and Local Taxes. Where required, Anicom shall pay, or cause to be
paid, all taxes (except NetWolves' income taxes), assessments and charges that
are based upon the sale, use or ownership of the Products hereunder, or upon
Anicom's right to sell or lease the same.
7.4 Trademarks. Anicom shall not use any trademark or trade name owned by
NetWolves, either alone or with any other word or words as part of Anicom's
trade or corporate name, without the express written permission of NetWolves.
Anicom shall not remove any such trademarks or trade names from the Products.
Upon request by NetWolves, and in any event upon termination of this Agreement,
Anicom agrees to completely discontinue any use of any of NetWolves' trademarks
or trade names, for any purpose whatsoever, including use in Anicom's trade or
corporate name.
<PAGE>
7.5 Anicom Not Agent. Anicom is an independent contractor in relation to
NetWolves, solely and exclusively responsible for its own acts at all times.
Anicom is not authorized to act as agent for NetWolves and has neither the right
nor authority to assume or create obligations of any kind whatsoever on behalf
of NetWolves, or to accept service of legal processes of any kind addressed to
or intended for NetWolves, or to bind NetWolves in any respect whatsoever. The
relationship between NetWolves and Anicom is that of vendor and vendee, and not
of principal and agent.
7.6 Prices. Anicom will establish, at its sole discretion, the prices or
fees that Anicom may charge for the Products. Anicom may offer discounts against
such prices and fees. NetWolves, at its sole discretion, shall establish the
manufacturers' suggested retail price for the Products which shall be made
available to potential purchasers which price shall be the basis for applying
Anicom's discount from list price pursuant to Section 8.2.
7.7 Demonstration and Trial Use Copies. The Anicom Group has the
non-exclusive, non-transferable and royalty-free right to use two copies of the
Products as set forth in Section 6.5, (a) to conduct demonstrations of the
Products at the Anicom Group's premises, (b) to permit potential Anicom Group
customers to conduct evaluations of the Products at the potential Anicom Group
customers' premises and (c) to conduct internal education of the Anicom Group's
employees in the use and operation of the Products. The Anicom Group will take
reasonable measures necessary to remove the Products from its potential Anicom
Group customers' computer hardware on or before the expiration of the trial use
period.
7.8 Repair Items. NetWolves shall sell to the Anicom Group and the Anicom
Group's customers any needed repair parts, supplies, accessories and shall
supply the Anicom Group any needed replacement inventory. In the absence of a
NETS Service Agreement, NetWolves shall charge for such parts, supplies and
accessories in accordance with its published prices from time to time.
7.9 Point-of-Sale Reports. Anicom shall provide NetWolves, within fifteen
(15) days after the end of each month, a copy of Anicom's point-of-sale report
for such month.
VIII. PURCHASE ORDERS, PRICES, AND TERMS OF PAYMENT
8.1 Purchase Orders. All purchase orders of Anicom shall, unless otherwise
agreed by NetWolves from time to time, be in writing and shall set forth the
quantity of the Products desired, the specifications thereof, the desired
delivery date, the price of each Product, and all other relevant information
necessary to effectuate shipment of the Products by NetWolves. It is
contemplated that from time to time purchase orders in forms prepared by the
Anicom Group or other purchasers, may be used in ordering the Products and that
there may be included in such forms certain stipulations, conditions or
agreements not otherwise contained herein. It is expressly understood and agreed
that the provisions of this Agreement shall be deemed a part of each purchase
order accepted by NetWolves and any provision in any purchase order which shall
<PAGE>
be inconsistent with or contrary to the provisions of this Agreement shall be
deemed amended or deleted, as the case may be. NetWolves shall deliver to the
destinations directed by the Anicom Group.
8.2 Prices and Terms of Sale.
(a) For the original five year term herein, Anicom shall be invoiced at the
rate of sixty percent (60%) of NetWolves' established list prices, such amount
to be reduced to fifty percent (50%) of NetWolves' established list prices
commencing with the purchase of the first Unit after Anicom has ordered, in the
aggregate, 3,000 Units. NetWolves will provide Anicom with thirty (30) days'
written notice prior to any increase in NetWolves' established list prices. In
the event Anicom produces an account that purchases 1,000 Units before Anicom
reaches 3,000 Units of Product, NetWolves agrees to provide Anicom with an
additional 5% discount for that particular order or orders.
(b) All invoices shall be paid net fort-five (45) days from date of invoice
except Anicom's initial purchase order which will be paid for as follows: (i)
10% of the amount due will be paid within ten (10) days of the date of this
Agreement and (ii) the balance will be paid within fifteen (15) days after the
delivery of the initial purchase order to the destination of Anicom's choice.
Should Anicom fail to pay any invoice when due, NetWolves will charge interest
on the outstanding balance of invoices at the lower of 1-1/2% compounded monthly
or the maximum rate permitted by law. Anicom shall make payment to NetWolves for
all Products purchased by Anicom in a timely fashion, all in accordance with the
terms of payment set forth above.
(c) Products shall be shipped F.O.B. destination, such destination to
be determined by Anicom. Title and risk of loss shall remain with NetWolves
until delivery to such destination and Anicom will pay the cost of freight so
long as the Products are shipped in accordance with Anicom's instructions.
8.3 Acceptance of Orders. NetWolves shall accept all orders for the
Products submitted to NetWolves by the Anicom Group at NetWolves' Tampa, Florida
or Melville, New York locations. The Anicom Group may cancel an order or any
portion thereof, without charge or penalty, only in the event that such order is
not delivered within seventy-five (75) days of the date on which the order is
submitted to NetWolves.
8.4 Sales through Reseller Program. All orders of Anicom Resellers shall be
processed and made directly through Anicom. All Anicom Resellers appointed by
NetWolves under the Reseller Program shall be required to purchase Products
<PAGE>
through Anicom or from NetWolves at their choice, subject to Section 3.4 above.
All sales of Products to distributors in NetWolves' Reseller Program shall be
pursuant to the pricing schedule set forth on Appendix D, or as amended from
time to time at NetWolves' option.
8.5 Inventory Adjustments.
(a) NetWolves agrees to provide Anicom with the opportunity to adjust
its levels of NetWolves inventory of Products under the following conditions.
NetWolves shall repurchase or exchange, at NetWolves' option (an "Inventory
Adjustment"): (i) any newly introduced Products, defined as Products which are
in the first six (6) months of the Product introduction period and were not
previously stocked by Anicom (for purposes herein, the product introduction
period begins upon first receipt of the Products by Anicom), and (ii) any slow
move return items, defined as new, unused products in original cartons which (1)
have been in Anicom's inventory for at least three months and (2) have not been
reordered from NetWolves during such three month period.
(b) NetWolves agrees to exchange or credit to Anicom's account all
Products in Anicom's inventory which have been replaced by updated, modified,
enhanced, newly released and/or enhanced Products, New Versions and/or
Competitive Products ("Improved Product Adjustment").
(c) NetWolves agrees that it will allow Anicom to exchange for
Products of equal value up to fifteen percent (15%) of the prior purchases made
during each of NetWolves' fiscal quarters subject to the following:
(i) Products returned must be unused, undamaged, sealed
in their original packages and in merchantable condition;
(ii) all freight charges for said returns shall be paid
by Anicom;
(iii) sales of special configurations of Products
shall not be subject to exchange; and
(iv) Products returned to NetWolves as an Improved
Product Adjustment shall not be included in determining the fifteen
percent (15%) rotation amount.
8.6 Inspection Rights.
(a) Anicom agrees that NetWolves may conduct periodic examinations of
the NetWolves' stock at Anicom's location and Anicom agrees to cooperate with
NetWolves' designated Quality Representative in conducting such periodic
<PAGE>
examinations of Anicom's inventory rotation. NetWolves shall provide Anicom with
at least thirty (30) days' notice prior to conducting any such examinations. All
examinations will be conducted during Anicom's normal business hours.
(b) NetWolves agrees that Anicom may conduct periodic examinations of
such of NetWolves' books and records as are necessary in connection with
Anicom's review of any Annual Statement pursuant to Section 5.1, and NetWolves
agrees to cooperate with Anicom's designated representatives during such
examination of NetWolves' books and records. Anicom shall provide NetWolves with
reasonable notice prior to conducting any such examinations. All examinations
shall be conducted during NetWolves' normal business hours.
8.7 Force Majeure. Neither party hereto shall have any liability to the
other party hereto on account of any non-performance or delay resulting from any
strike, lockout, accident, fire, act of God, embargo or governmental action, or
any other like cause beyond the control of such party, whether the same or
different from the matters and things hereinabove specifically enumerated.
IX. WARRANTY, LIMITATION OF LIABILITY AND INDEMNIFICATION
9.1 Warranty. All Products sold to the Anicom Group pursuant to this
Agreement are sold subject to the standard warranty of NetWolves as may be in
effect from time to time (the "Standard Warranty"). The Anicom Group shall be
entitled to pass on the Standard Warranty and the warranty set forth in Section
6.4 hereof to any of the Anicom Group's customers. NetWolves agrees to accept
any such warranty claims directed to the Anicom Group or NetWolves by the Anicom
Group's customers. The Anicom Group is not authorized to assume on behalf of
NetWolves any other obligation or liability in connection with the sale of the
Products in addition to the Standard Warranty and the warranty set forth in
Section 6.4 except as specifically approved by NetWolves. THE ABOVE-MENTIONED
WARRANTIES SHALL BE THE SOLE AND EXCLUSIVE WARRANTIES OF NETWOLVES AND ARE IN
LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT
LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS, AND NETWOLVES
NEITHER ASSUMES NOR AUTHORIZES ANICOM TO ASSUME FOR IT ANY OTHER OBLIGATIONS OR
LIABILITY IN CONNECTION WITH THE PRODUCTS WITHOUT NETWOLVES' PRIOR WRITTEN
CONSENT.
9.2 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS
OF PROFIT) OF THE OTHER FOR ANY REASON WHATSOEVER, WHETHER ANY CLAIM FOR SUCH
RECOVERY IS BASED UPON THEORIES OF CONTRACT, NEGLIGENCE OR TORT (INCLUDING
STRICT LIABILITY), AND EVEN IF THE PARTY HAS KNOWLEDGE OF THE POSSIBILITY OF THE
POTENTIAL LOSS OR DAMAGE.
9.3 Indemnification. Anicom will promptly notify NetWolves in writing if
any claim is brought or threatened against the Anicom Group that arises from
breach of the representations and warranties set forth in Section 6.4 and 9.1
above. Provided that NetWolves diligently defends any such claim, Anicom will
not settle or compromise any such actual or threatened claim without NetWolves'
prior written consent. Subject to these conditions, NetWolves will indemnify,
defend and hold harmless the Anicom Group against all damages, losses and
expenses (including reasonable attorneys' fees) that they may suffer or incur in
connection with any such actual or threatened claim. Anicom shall have the right
to employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall not be at the expense
of NetWolves unless NetWolves fails to promptly defend or a conflict shall exist
between the positions of NetWolves and Anicom, in which case, the reasonable
fees and expenses of such separate counsel shall be borne by NetWolves.
<PAGE>
X. TERM; RENEWAL; TERMINATION
10.1 Term and Renewal. This Agreement shall take effect on the commencement
date as set forth on the title page hereof and shall continue in full force and
effect for a five year period subject to the terms of Sections 5.3(b) and 10.2.
10.2 Termination. The provision of Section 10.1 to the contrary
notwithstanding, this Agreement may be terminated pursuant to the terms of
Section 5.3 and additionally as follows:
(a) By NetWolves, immediately upon giving written notice, in the event
Anicom fails to make full payment of its initial purchase order within fifteen
(15) days after delivery of the Products in accordance with this Agreement;
(b) By NetWolves, upon thirty (30) days' prior written notice to Anicom at
any time during the first two (2) Years, provided that, as a condition to the
effectiveness of such termination, NetWolves shall pay to Anicom a termination
fee of (i) $750,000 if such termination occurs in Year 1, or (ii) $1,500,000 if
such termination occurs in Year 2, in each case, payable within ten (10) days of
notice thereof;
(c) By NetWolves, immediately upon giving written notice, in the event that
there are instituted proceedings by or against Anicom in bankruptcy or under
insolvency laws which are not vacated within sixty (60) days from the date of
filing, Anicom makes an assignment of all or part of its assets for the benefit
of creditors or Anicom shall admit insolvency or ceases to exist;
(d) By either party, if a material breach shall occur which is not
cured within a period of thirty (30) days (ten (10) days with respect to any
payment default) after written notice thereof from the non-breaching party;
<PAGE>
(e) By Anicom immediately upon giving written notice, in the event
that there are instituted proceedings by or against NetWolves in bankruptcy or
under insolvency laws which are not vacated within sixty (60) days from the date
of filing, NetWolves makes an assignment of all or part of its assets for the
benefit of creditors or NetWolves shall admit insolvency or ceases to exist; or
(f) By Anicom in the event that the Products cease to be manufactured
by or on behalf of NetWolves.
10.3 Obligations Upon Termination. In the event that this Agreement is
terminated by Anicom in accordance with the terms hereof, or NetWolves
terminates this Agreement pursuant to Section 10.2(b), Anicom shall have the
right, but not the obligation, to direct NetWolves to repurchase from Anicom all
or any portion of any new, undamaged, and unused Products which are in their
original containers theretofore sold by NetWolves to Anicom, and owned by and
remaining in Anicom's inventory (other than Products that have been in inventory
for more than one year), at the original purchase prices, exclusive of any
transportation charges originally paid by Anicom and less any non-reimbursed
transportation charges originally paid by NetWolves. In the event that this
Agreement is terminated by NetWolves in accordance with the terms hereof (other
than pursuant to Section 10.2(b)), NetWolves shall have the right, but not the
obligation, to repurchase Products from Anicom in accordance with the foregoing
at the lower of the prevailing or original purchase prices, exclusive of any
transportation charges originally paid by Anicom and less any non-reimbursed
transportation charges originally paid by NetWolves.
XI. GENERAL PROVISIONS
11.1 Assignment. This Agreement may not be assigned by either party to any
other individual or business entity without the prior written approval of the
non-assigning party, provided that either party may assign its rights and
obligations hereunder to any successor-in-interest resulting from a business
combination without the consent of the other party.
11.2 Notice. All notices permitted or required hereunder shall be in
writing, and shall be effective: (a) as of the date sent, if by confirmed
facsimile or personal delivery, (b) as of the next day following the date on
which sent, if sent by nationally recognized overnight courier or (c) as of the
third day following the date sent, if sent by United States mail, registered or
certified mail, return receipt requested, postage pre-paid. All such notices
shall be sent to the respective parties at the address or facsimile number set
forth on the signature page hereof or to such other address as may be designated
by either party from time to time by notice given in accordance herewith.
<PAGE>
11.3 Entire Agreement. This Agreement, together with all attachments hereto
and all purchase orders issued hereunder, constitutes the entire agreement
between the parties and supersedes any and all previous agreements, memoranda or
other understandings of the parties.
This Agreement may be amended only in writing.
11.4 Severability of Provisions. A judicial or administrative declaration
in any jurisdiction of the invalidity of any one or more of the provisions
hereof shall not invalidate the remaining provisions of this Agreement in any
jurisdiction, nor shall such declaration have any effect on the validity or
interpretation of this Agreement outside of that jurisdiction.
11.5 Waiver of Compliance. Any failure by any party hereto to enforce at
any time any term or condition under this Agreement shall not be construed as a
waiver of that party's right thereafter to enforce each and every term and
condition of this Agreement.
11.6 Binding Upon Successors. This Agreement shall be binding upon the
successors and legal representatives of the parties hereto.
11.7 Jurisdiction and Governing Law. This Agreement shall be deemed to have
been made in the State of New York, and shall be construed according to the laws
of that state. Anicom consents to the jurisdiction of any court of general
jurisdiction located within the Borough of Manhattan, City of New York, with
respect to any legal proceedings arising out of this Agreement, and agrees that
the mailing to its last known address by registered mail of any process shall
constitute lawful and valid service of process in any such proceeding, suit, or
controversy. Anicom shall bring any legal proceeding arising out of this
Agreement only in the federal or state courts located in the Borough of
Manhattan, City of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate originals by their duly authorized representatives the
date and year first set forth on the title page hereof.
NETWOLVES CORPORATION
Telecopy No.:
Attn:
BY:/s/____________________________
TITLE:__________________________
DATE:__________________________
ANICOM, INC.
6133 North River Road
Suite 1000
Rosemont, Illinois 60018-5171
Telecopy No.: (847) 518-8777
Attn: Scott C. Anixter
BY:/s/___________________________
TITLE:__________________________
DATE:__________________________
<PAGE>
APPENDIX A
ANICOM RESELLERS
Midwest Datacomm
SER Communication
Teknon
Cal Communications
Comdisco
List to be updated from time to time by Anicom.
<PAGE>
APPENDIX B
DESCRIPTION OF PRODUCT
See Price List attached as Appendix D.
<PAGE>
APPENDIX C
INITIAL TRAINING SCHEDULE
Training to be completed by February 28, 1999.
<PAGE>
APPENDIX D
PRICE LIST
SEE ATTACHED NETWOLVES PRICE LIST DATED 10/98
<PAGE>
INTERNET SOLUTION SERVER - PRICE LIST
<TABLE>
<CAPTION>
Effective: 10/98
Base Units
<S> <C> <C>
Part No. Description List Price
FB-DDR FoxBox DDR $3,400
Connection type: Dial-on-Demand
Includes: 200MHz processor, 16 Megabyte memory, 3.2 Gigabyte storage,
1 10 Megabit Ethernet and 1 v.90 Modem port; web server - intranet only;
mail server - POP/IMAP Internal and SMTP External. Security Features
include: SMTP, FTP, HTTP, DNS LAN to Internet proxies; stateful filters -
all TCP and UDP protocols; no firewall configuration required.
Administrative Interface: Web-based GUI only accessible from Local LAN.
Recommended number of users - up to 8
FB-ISDN FoxBox ISDN $4,400
Connection type: Dial-on-Demand
Includes: 200 MHz processor, 16 Megabyte memory, 3.2 Gigabyte storage, 1
10 Megabit Ethernet and 1 128Kbps ISDN port; web server - intranet/optional
internet; mail server - POP/IMAP Internal and SMTP External. Security
Features include: SMTP, FTP, HTTP, DNS LAN to Internet proxies, optional
Internet to LAN proxies; stateful filters - all TCP and UDP protocols; no
firewall configuration required. Administrative Interface: Web-based GUI
only accessible from Local LAN.
Recommended number of users - up to 25
FB-56K FoxBox56K $5,500
Connection type: Dedicated
Includes: 200MHz processor, 16 Megabyte memory, 3.2 Gigabyte storage, 1
10 Megabit Ethernet and 1 56Kbps Sync Serial port; web server -
intranet/internet; mail server - POP/IMAP Internal and SMTP External.
Security Features include: SMTP, FTP, HTTP, DNS LAN to Internet proxies,
SMTP, FTP, HTTP, DNS Internet to LAN proxies; stateful filters - all TCP
and UDP protocols; Administrative Interface: Web-based GUI only
accessible from Local LAN.
Recommended number of users - up to 20
FB-T1 FoxBox T1 $7,100
Connection type: Dedicated
Includes: 200MHz processor, 16 Megabyte memory, 3.2 Gigabyte storage, 1
10 Megabit Ethernet and 1 T1/E1 Sync Serial port; web server -
intranet/internet; mail server - POP/IMAP Internal and SMTP External.
Security Features include: SMTP, FTP, HTTP, DNS LAN to Internet proxies,
SMTP, FTP, HTTP, DNS Internet to LAN proxies; stateful filters - all TCP
and UDP protocols; Administrative Interface: Web-based GUI only
accessible from Local LAN.
Recommended number of users - up to 400
FB-S2E FoxBox Secure 2E $4,100
Connection type: Dedicated
Includes: 200MHz processor, 16 Megabyte memory, 3.2 Gigabyte storage, 2 10 Megabit
Ethernet port; web server - intranet/internet; mail server - POP/IMAP Internal and SMTP
External. Security Features include: SMTP, FTP, HTTP, DNS LAN to Internet proxies,
SMTP, FTP, HTTP, DNS Internet to LAN proxies; stateful filters - all TCP and UDP
protocols; Administrative Interface: Web-based GUI only accessible from Local LAN.
Recommended number of users - N/A
</TABLE>
<PAGE>
INTERNET SOLUTION SERVER - "OPTIONS" PRICE LIST
Effective: 10/98
Available Upgrade
<TABLE>
<CAPTION>
Name Version Part Number Description Notes/Requirements Price
<S> <C> <C> <C> <C> <C>
FoxBox SCSI Tape 1.1 FB-UN-STAPE-1.1 Includes Adaptec 1520 SCSI Works with all FoxBox $2,522
Backup Controller, HP Superstore models
8e External Tape Drive, SCSI
Cable, and Backup Software
version 1.1. For use with all
FoxBox models.
FoxBox Fast SCSI 1.0 FB-UN-FSSYS-1.0 Includes Adaptec 2940 Works with all FoxBox $1,864
Hard Drive System Busmastered SCSI Controller, models.
Seagate 9.1 Gig internal
SCSI II Wide hard drive
and cable.
FoxBox Extra 9.1 1.0 FB-UN-SCSID-9.1 Includes Seagate 9.1 Gig Requires FB-UN-SSYS- $1,286
Gig SCSI Hard Drive internal SCSI II Wide 1.0 or later.
hard drive
</TABLE>
<PAGE>
Software Applications
<TABLE>
<CAPTION>
Name Version Part Number Description Notes/Requirements Price
<S> <C> <C> <C> <C> <C>
FoxBox Mail 1.1 FB-DED-MAILA-1.1 Makes the FoxBox email system Works only with Dedicated $ 395
Archive Module compliant with the SEC email FoxBox models (56K, T1,
archiving requirements. S2E)
Archives all inbound and
outbound mail.
FoxBox Advanced 1.1 FB-UN-AACL-1.1 Allows the FoxBox Administrator Works with all FoxBox $ 395
Access Control to block certain web sites from models.
access by computer/users on the
LAN. Also allows FoxBox
Administrator to force users to
authenticate (i.e., login) before
they access the Internet with a
web browser.
FoxBox Advanced 1.0 FB-DED-ANAT-1.0 Allows the FoxBox Administrator Works only with $ 395
NAT Control to create very specific and Dedicated FoxBox models
flexible Network Address (56K, T1, S2e). Adds
Translation NAT) rules that work
seemlessly with the built-in
FoxBox firewall.
FoxBox VPN 1.0 FB-DED-VPN-1.0 Allows the FoxBox Administrator Works only with $ 595
to create an encrypted, virtually Dedicated FoxBox models
dedicated connection between any (56K, T1, 52e). Adds
two Foxboxes running the packet overhead to network
VPN 1.0 software. traffic between FoxBoxes
participating in the VPN due
to encryption.
FoxBox DHCP 1.0 FB-UN-DHCP-1.0 Allows the FoxBox Administrator Works on all FoxBox N/C
to manage and assign IP addresses models. Ships as standard
centrally from the FoxBox using software with FoxBox A1
the standard DHCP protocol. Version 1.5.
</TABLE>
<PAGE>
Maintenance Agreement
<TABLE>
<CAPTION>
Name Version Part Number Description Notes/Requirements Price
<S> <C> <C> <C> <C> <C>
NetWolves 1.0 FB-UN-NETS-1.0 NetWolves Enchanced Technical Renewable annually. If 14% of the
Enchanced Support (NETS) agreement purchased at the same FoxBox
Technical provides 24x7 12 month time as the system, list price.
Support coverage by telephone, e-mail maintenance starts
(NETS) and remote access. Covers: after 30 day warranty
Agreement advanced hardware replacement expires.
due to hardware failure. Minor
software upgrades for the contract
term for purchased systems. Access
to special areas of the Web site.
</TABLE>
<PAGE>
APPENDIX E
RESELLER PROGRAM
NetWolves Reseller Program (the Program) is designed to give resellers of
its products a discount off of the established list price determined by
NetWolves in order to quickly penetrate the market. Various levels of
distributorships have been established to accomplish this. All distributorships
are given on a non-exclusive bases, except as provided in the Agreement to which
this is attached, although resellers below the Master Distributor level are
required to select a Master Distributor through whom all of their sales are
ordered and processed. All participants in the Program must enter into a written
agreement with NetWolves which specifically sets forth all of the requirements
and obligations. The following is a list of the current levels of participation
in the Program:
1. Exclusive Master Distributor
(a) Commit to the purchase of 1,500, 3,000, 10,000, 20,000, 30,000 units
of product in years 1,2,3,4 and 5 respectively and have established
national distribution channels. All other resellers may order through
the Exclusive Master Distributor in order to obtain the listed
discount off list price.
(b) Platinum Level Reseller/Distributor: Sell a minimum volume of 1000
Units of product per year and receive 40% off list.
(c) Gold Level Reseller/Distributor: Sell a minimum volume of 501-999
Units of Product per year and receive 35% off list.
(d) Silver Level Reseller/Distributor: Sell a minimum volume of 250-500
Units of product per year and receive 30% off list.
(e) Bronze Level Reseller/Distributor: Sell a minimum volume of 1-249
Units of Product per year and receive 25% off list.
Master Program Agreement
This Master Program Agreement ("Agreement") dated July 26, 1999 is entered into
between NetWolves Corporation, a New York corporation, located at 200
Broadhollow Road, Melville, New York 11747, ("NetWolves"), and Comdisco, Inc., a
Delaware Corporation, located at 6111 N. River Road, Rosemont, IL 60018
("Comdisco").
NetWolves is the manufacturer of certain equipment known as the FoxBox and
Comdisco is in the business of financing equipment and providing services in
connection with the equipment.
This Agreement contemplates an on-going business relationship in which Comdisco
will (i) acquire from NetWolves, all of the right, title and interest in the
equipment with the exception of intellectual property rights, software upgrades
and software application and content; (ii) take an assignment in associated
leases between NetWolves and certain customers of NetWolves; and (iii) provide
services with respect to the equipment as NetWolves' subcontractor and take an
assignment of the services fees in connection therewith.
NOW THEREFORE, in consideration of the foregoing and the covenants and
conditions set forth herein, the parties have entered into this Agreement and
mutually agree as follows.
Definitions
"Commencement Certificate" means an acceptance certificate substantially in the
form of Exhibit A confirming acceptance of the leased Equipment.
"Equipment" means the FoxBox equipment which will be sold to Comdisco under this
Agreement and leased to Target Customers by NetWolves or sold directly by
NetWolves to Target Customers. The Equipment is specified in Exhibit B.
"Lease" or "Lease Documents" means the Product Agreement and related Equipment
Schedule in the form of Exhibit C which NetWolves will use to lease the
Equipment and provide Services to Target Customers.
"Lessee" means a Target Customer under a Lease.
"Losses" means all losses, claims, liabilities, demands and expenses whatsoever
including, without limitation, reasonable attorney's fees.
"Related Software" means NetWolves' software described in Exhibit D which is an
integral part of the Equipment.
"Services" means the roll-out, maintenance, deinstallation and other services as
detailed in the Statement of Work under Services and Lease Documents provided by
Comdisco to Target Customers as NetWolves' subcontractor.
"Services Documents" means the Services Agreement and Services Schedule in the
form of Exhibit E which NetWolves will use to provide Services to Target
Customers who purchase the Equipment directly from NetWolves.
"Software Application and Content"
"Target Customer" shall be limited to companies that will lease or purchase the
Equipment as detailed in Exhibit F.
"Transaction Package for Leased Equipment" means the following completed and
properly executed documents between NetWolves and the Target Customer: (i)
Product Agreement; (ii) Equipment Schedule.
"Transaction Package for Purchased Equipment" means the following completed and
properly executed documents between NetWolves and the Target Customer: (i)
Services Agreement; (ii) Services Schedule; and (iii) Master Sale Agreement.
<PAGE>
1.0 Transaction Origination, Administration and Assignment
1.1 Comdisco and NetWolves will, simultaneously with the execution of this
Agreement, execute the Master Agreement and Services Schedule in the form
of Exhibit G to provide the Services on behalf of NetWolves to Target
Customers pursuant to the terms of this Agreement.
1.2 Upon approving the credit of a Target Customer (as detailed in Section 3.0)
Comdisco will prepare and forward original Lease or Services Documents to
NetWolves, as applicable, to present to the Target Customer for execution.
Any changes to the Lease or Services Documents will require Comdisco's
approval.
1.3 Upon Comdisco's receipt and approval of the Transaction Package for Leased
Equipment, NetWolves, upon receipt of payment from Comdisco for the
Equipment, will be deemed to have assigned to Comdisco all of NetWolves'
right, title and interest in the Equipment, with the exception of
intellectual property rights, software upgrades and Software Application
and Content, the Product Agreement, and the Equipment Schedule, including
the right to receive any rental payments included therein. Thereafter,
NetWolves will have no further right to any rentals associated with the
Lease Documents during the Initial Term of any Equipment Schedule.
Notwithstanding the foregoing assignment, NetWolves shall not be relieved
of any of its obligations as a manufacturer, including warranty
obligations.
1.4 Upon Comdisco's receipt and approval of a Transaction Package for Purchased
Equipment, NetWolves, upon receipt of payment from Comdisco for the
Equipment, will be deemed to have assigned to Comdisco all amounts due, if
any, under a Master Sale Agreement, and all right, title and interest to
the Services Agreement and Services Schedule (except for any obligations to
be performed by NetWolves pursuant to the Master Agreement) and all amounts
due or to become due thereunder. Thereafter, NetWolves will have no further
right to any revenues associated with the foregoing documents.
1.5 Upon taking an assignment as described in 1.3 and 1.4 above or upon receipt
of the executed Master Sale Agreement, Comdisco will undertake all
invoicing on NetWolves' letterhead to the Target Customer in accordance
with the terms of the Lease or Services Documents or the Master Sale
Agreement, as applicable. If NetWolves becomes aware of any default by a
Target Customer under the Lease or Services Documents, it shall promptly
notify Comdisco.
1.6 Lessee shall be responsible for and shall file and pay all property taxes
incurred in connection with the lease of the Equipment. The Product
Agreement shall provide that Lessee shall indemnify and hold Lessor
harmless from and against all taxes, other than those taxes based upon the
net income of Lessor.
1.7 NetWolves will at all times remain the owner of the Related Software and
agrees to transfer all Related Software to the Target Customers, pursuant
to the terms of NetWolves' standard documentation evidencing such transfer.
1.8 Comdisco acknowledges that it is purchasing the Equipment for resale/lease
and will provide NetWolves with valid exemption certificates.
2.0 Financial Arrangement
<PAGE>
2.1 Comdisco has entered into this financial arrangement on the basis of
NetWolves intending to implement 40,000 Target Customer locations within
forty-eight (48) months from the date of this Master Program Agreement.
2.2 The calculation of the Equipment purchase price is contingent upon whether
the Target Customer purchases or leases the Equipment ("purchase price").
2.2.1Target Customer Elects to Purchase the Equipment. If a Target Customer
elects to purchase the Equipment from NetWolves instead of entering
into a Lease, and elects not to take the Services, then upon
Comdisco's receipt and approval of a Transaction Package for Purchased
Equipment containing the Master Sale Agreement only, and receipt of
the sale price from the Target Customer, Comdisco will remit to
NetWolves an amount equal to the purchase price of the Equipment less
$1,400. If a Target Customer elects to purchase the Equipment and
elects to take the Services, then upon Comdisco's receipt and approval
of a Transaction Package for Purchased Equipment and receipt of the
sale price from the Target Customer, Comdisco will remit to NetWolves
the full purchase price. All Services provided will be based on a term
of forty-eight (48) months.
2.2.2Target Customer Elects to Lease the Equipment. If a Target Customer
elects to lease the Equipment, then upon Comdisco's receipt and
approval of a Transaction Package for Leased Equipment, the purchase
price for each unit of Equipment will equal the present value of the
rental stream at an interest rate commensurate with the Target
Customer's credit rating and prevailing market rates. Comdisco will
purchase the Equipment from NetWolves, without recourse but subject to
Section 4.1(h), at 95% of the purchase price. Comdisco agrees to remit
payment to NetWolves for the Equipment within ten (10) days of
Comdisco's receipt and approval of the applicable Transaction Package
for Leased Equipment and Commencement Certificate. At the time of
payment, NetWolves will provide Comdisco with a bill of sale.
2.3 Comdisco will charge a Service fee of $600.00 to install each item of
Equipment. Comdisco will charge a minimum Service fee of $300.00 to
deinstall each item of Equipment. In the event NetWolves charges a Target
Customer a Service Fee greater than $300.00 to deinstall an item of
Equipment, NetWolves and Comdisco will share the excess amount on the basis
of 73% to NetWolves and 27% to Comdisco. All amounts in connection with the
installation or deinstallation of the Equipment will be invoiced upon
completion of such installation or deinstallation.
2.4 For the first twelve (12) months of an Equipment Schedule or a Services
Schedule, as applicable, the Target customer will not be obligated to pay
Service fees other than for installation and deinstallation, because the
Equipment is considered to be under manufacturer warranty. Beginning in
month thirteen (13) of the Equipment or Services Schedule, Customer will be
obligated to pay a Service fee of $28.00 per month per item of Equipment.
2.5 The rent under an Equipment Schedule is estimated to be $200.00 per month
per item of Equipment installed, exclusive of taxes.
2.6 The Lease Documents will require Lessee to pay Lessor the last month's rent
at the time that the first rent payment is due.
2.7 Comdisco's obligation to purchase the Equipment and to pay NetWolves the
purchase price is contingent upon the following:
<PAGE>
a. Lessee's credit has been approved and there is no adverse change in
Lessee's credit as defined under the Equipment Schedule.
b. The Lessee is not in default under any Equipment Schedule.
c. Comdisco has received a completed and approved Transaction Package for
Leased Equipment, and an executed Commencement Certificate.
d. Comdisco has received a completed and approved the applicable
Transaction Package for Purchased Equipment and the sale price from
the Target Customer.
e. NetWolves is not in default under this Agreement, the Master Agreement
or the Services Schedule.
f. Neither NetWolves nor a Target Customer is in default under any Lease
or Services Documents.
2.8 NetWolves agrees that Comdisco may, on a periodic basis, review and audit,
at reasonable times and on reasonable notice, NetWolves' sale of Equipment
to Target Customers.
3.0 Credit Review
3.1 Prior to entering into Lease or Services Documentation with a Target
Customer, NetWolves will request credit approval from Comdisco with respect
to the Target Customer. Credit approval and the rent under the Lease
Documents will be calculated based on the Credit Table set forth below and
all credit approval will be valid for a period of forty-five (45) days from
the date of approval.
3.2 Credit Table
Moodys Rating Basis Points Above Like Term Treasuries
------------- ---------------------------------------
AAA Aa3 175 basis points
A1 A3 200
Baa1 Baa3 225
Below Baa3 Individual Credit Review Needed
Comdisco reserves the right to re-adjust the basis points listed above
based upon a change in market conditions as determined by Comdisco within
six (6) months from the date of this Agreement and every six (6) months
thereafter. If market conditions change so that Comdisco readjusts the
basis points as provided for herein, and NetWolves deems such readjustment
to be above competitive market rates, NetWolves will obtain three (3)
quoted rates from a third party using a similar point structure (the
"Quoted Rates"). If Comdisco matches the average of the Quoted Rates,
NetWolves will be deemed to accept Comdisco's readjustment. If Comdisco
elects not to match the Quoted Rates, NetWolves may obtain hardware
financing from one of the three parties supplying the Quoted Rates.
4.0 Representations and Warranties
4.1 NetWolves hereby represents and warrants (as of the date of execution of
this Agreement as to (a) and (b) below) that:
<PAGE>
a. It is a corporation duly organized and validly existing in good standing
under the laws of the jurisdiction of its incorporation with full corporate
power to enter into this Agreement and to carry out transactions
contemplated herein.
b. The execution and delivery of this Agreement, and all other documents
contemplated herein (including but not limited to the Warrant Agreement),
as well as performance of the contemplated transactions hereunder have been
duly authorized by all necessary corporate action and this Agreement, and
all other documents contemplated herein, constitute a legal, valid and
binding obligation enforceable in accordance with its terms.
c. Except as detailed in this Agreement, there will be no other agreements
between NetWolves and the Target Customer relating to the Equipment and
Services in contradiction of the terms of this Agreement. Nothing contained
in this Agreement shall preclude NetWolves from selling or leasing other
services to the Target Customer.
d. All credit information known to NetWolves concerning a Target Customer will
have been disclosed or made available to Comdisco.
e. The Target Customer is not be in default under any other agreement with
NetWolves which is not the subject of this Agreement.
f. As of the payment of the purchase price to NetWolves, it is the owner of
the Equipment and that title to the Equipment will be free and clear of all
liens, claims, interests and encumbrances of any kind, including, but not
limited to, infringement for claims of third party proprietary rights.
g. If Comdisco purchases the Equipment from NetWolves, pursuant to the Target
Customer's election to lease the Equipment, title to the Equipment will
vest in Comdisco upon payment of the purchase price.
h. The Equipment will be in working order at the time of installation at the
Target Customer location, will perform in all material respects in
accordance with NetWolves specifications published at the time the
Equipment is installed, and will be subject to NetWolves then current
manufacturer warranties.
4.2 Comdisco hereby represents and warrants that, as of the date of execution
of this Agreement that:
a. It is a corporation duly organized and validly existing in good
standing under the laws of the jurisdiction of its incorporation with
full corporate power to enter into this Agreement and to carry out the
transactions contemplated herein.
b. The execution and delivery of this Agreement, and all other documents
contemplated herein, as well as the performance of the contemplated
transactions hereunder have been duly authorized by all necessary
corporate action and this Agreement, and all other documents
contemplated herein, constitute a legal, valid and binding obligation
enforceable in accordance with its terms.
5.0 Indemnification
5.1 NetWolves agrees to indemnify and hold harmless Comdisco and its
affiliates, subsidiaries, employees and agents, successors and assigns
from any and all:
<PAGE>
a. Losses arising from any third party claims based upon a breach of
NetWolves' representations, warranties or obligations under this
Agreement.
b. Losses resulting directly or indirectly from claims including,
without limitation, third party claims arising in strict
liability or negligence or claims of infringement or
misappropriation of any proprietary interest or right of any
third party, including without limitation any trademark, patent,
copyright or trade secret in connection with the Equipment and/or
Related Software:
c. Losses arising from third party claims based upon any inaccurate
or incomplete information willfully or intentionally provided by
NetWolves.
5.2 In the event that a third party claims that the Equipment or any Related
Software infringes a trade secret, patent, copyright or any proprietary
right of a third party, NetWolves agrees to defend Comdisco, at NetWolves'
expense, and NetWolves will pay all costs, damages and reasonable
attorney's fees awarded to a third party arising from such infringement.
Comdisco agrees to promptly notify NetWolves of any such claim and will
allow NetWolves to control the defense and any related settlement
negotiations, provided such settlement does not affect Comdisco's right as
owner of the Equipment nor diminish or increase Comdisco's or Target
Customer's rights or obligations under the Lease or Services Documentation.
Comdisco may participate in the defense of any such claim at its own cost
and expense.
6.0 Limitation of Liability
IN CONNECTION WITH THIS AGREEMENT, NEITHER COMDISCO NOR NETWOLVES WILL BE
LIABLE TO THE OTHER FOR INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF
ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
<PAGE>
7.0 Equipment Maintenance
7.1 The responsibilities of Comdisco and NetWolves in connection with
maintenance will be as detailed in the Statement of Work, attached to the
Services Schedule under the Master Agreement.
8.0 Remarketing
8.1 Comdisco will, at the request of NetWolves, either directly or indirectly
through its subcontractor, perform the following services following a Lease
termination:
a. Upon expiration of the Initial Term of any Equipment Schedule, any
in-place extension rental and in-place purchase price negotiated
between Comdisco and Lessee will be apportioned between Comdisco and
NetWolves as follows: NetWolves 73% and Comdisco 27%.
b. For any Equipment that is returned to Comdisco by a Lessee at lease
termination, and that is remarketed to a subsequent user, Comdisco
will take the first $400.00 per item of Equipment for storage and
refurbishing costs incurred by Comdisco. Any remarketing proceeds in
excess of $400.00 shall be apportioned 73% to NetWolves and 27% to
Comdisco.
9.0 Term and Termination
9.1 This Agreement shall be effective as of the date first set forth above and
shall continue for an initial period of four (4) years (the "initial
term"), and thereafter shall be automatically renewed for additional
one-year periods (the "extended term"), unless terminated in writing by
either party given thirty (30) days prior to the expiration of the initial
term. During the extended term, either party may terminate this Agreement
at any time upon thirty (30) days prior written notice.
9.2 Either party may, by written notice, terminate this Agreement for cause if
the other party fails to cure a material default under the Agreement. Any
material default must be specifically identified in the notice of
termination. After written notice, the notified party will have thirty (30)
days to remedy any default. Failure to remedy the material default within
the time period provided for herein will give cause for immediate
termination.
9.3 Notwithstanding any termination of this Agreement, the terms and conditions
of this Agreement will survive for purposes of any Equipment Schedule or
Services Schedule in effect with a Target Customer.
9.4 Provided Comdisco is not in material default under this Agreement and
subject to paragraphs 4.1(c) and 3.2, during the initial or any extended
term of this Agreement or upon the lease or purchase of 20,000 units of
Equipment as contemplated under this Agreement, whichever comes first,
NetWolves agrees not to enter into any agreement in connection with any
Target Customer with any other technology services provider for the purpose
of providing hardware financing and the Services specified under the
Statement of Work in Exhibit E.
10.0 Publicity
<PAGE>
Except as hereinafter provided in this Section, NetWolves and Comdisco will
consult with each other before issuing any press release or otherwise
making any public statements with respect to this Agreement or the other
transactions contemplated hereby, including using any tradename, or service
mark which identifies the other party, and shall not issue any press
release or make any such public statement prior to receiving the consent of
the other party, which consent will not be unreasonably withheld or
delayed. Nothing contained herein shall prohibit any party from making a
press release or other statement required by law or by obligations pursuant
to any agreement with any automated interdealer quotation system if the
party making the disclosure has first consulted with the other party
hereto.
11.0 Warrant Coverage
In consideration of entering into this Agreement, NetWolves will
simultaneous with the execution of this Agreement issue a Warrant Agreement
granting to Comdisco the right to purchase 175,000 shares of NetWolves
Common Stock, for an Exercise Price of $10.00 per share, with a term of no
less than five (5) years. The form of Warrant Agreement shall be as
attached to this Agreement as Exhibit H, "Warrant Agreement". The number
and purchase price of shares shall be subject to adjustment as provided in
Section 8 of the Warrant Agreement. The Exercise Price may be paid at
Comdisco's election either by cash or check or by surrender of Warrants
("Net Issuance") as determined in the Warrant Agreement.
12.0 Confidentiality
Each party (including its employees and agents) will use the same standard
of care to protect any confidential information of the other disclosed
during negotiation or performance of this Agreement that it uses to protect
its own confidential information. Confidential Information will not include
information which (i) is or becomes publicly available through no wrongful
act of the receiving party; (ii) was known by the receiving party at the
time of disclosure without any obligation of confidentiality; (iii) was
acquired by the receiving party from a third party without restriction on
nondisclosure; or (iv) was developed independently by the receiving party.
13.0 Miscellaneous
13.1 Each party is an independent contractor and, except as expressly set forth
herein, will have no authority to bind or commit the other party. Nothing
herein shall be deemed or construed to create a joint venture, partnership
or agency relationship between the parties.
13.2 Except as set forth herein, neither party may assign their rights and
obligations described in this Agreement without the prior written consent
of the other party except for assignments to affiliates or subsidiaries who
agree to be bound by the terms of this Agreement. In addition, in the event
of any such assignment on the part of NetWolves, NetWolves agrees to remain
primarily liable for the performance of all obligations hereunder.
Notwithstanding the foregoing, Comdisco may subcontract the performance of
its Services to a third party or assign its rights as provided for under
the Lease.
13.3 The waiver by either party of a breach of any provision of this Agreement
will not be construed as a waiver of any subsequent breach. The invalidity,
in whole or in part, of any provision of this Agreement will not affect the
validity of the remaining provisions.
<PAGE>
13.4 This Agreement including each Exhibit represents the entire agreement
between the parties and supersedes all oral or other written agreements
understandings between the parties concerning the Equipment and Services.
This Agreement may not be modified unless in writing and signed by the
party against whom enforcement of the modification is sought.
13.5 Any notice, request or other communication under this Agreement will be
given in writing and deemed received upon the earlier of actual receipt or
three (3) days after mailing if mailed postage prepaid by regular or
airmail to the address set forth above or, one day after such notice is
sent by courier or facsimile transmission. Copies to NetWolves also are to
be provided to David H. Lieberman, Esq., Blau, Kramer, Wactlar & Lieberman,
P.C., 100 Jericho Quadrangle, Jericho, NY 11731.
13.6 Those terms and conditions which would, by their meaning or intent, survive
the expiration or termination of this Agreement will so survive.
13.7 THIS AGREEMENT IS GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO ITS CONFLICT OF LAWS PROVISIONS. If there is any dispute or
litigation as a result of this Agreement, the prevailing party will be
entitled to reasonable attorney's fees. Any action by either party must be
brought within two (2) years after the cause of action arose.
13.8 All Exhibits to this Agreement are hereby incorporated into and deemed to
be a part of this Agreement.
13.9 In connection with the Services, in the event of any conflict between this
Agreement and the Master Agreement, the Master Agreement will govern.
13.10Terms and conditions on any NetWolves' purchase order or other
acknowledgment form in addition to, different from or in conflict with the
terms of this Agreement will be of no force or effect.
13.11NetWolves will promptly deliver to Comdisco after filing such documents
with the Securities and Exchange Commission, at Comdisco's request:
a. NetWolves' Quarterly and Annual forms 10Q and 10K.
b. Such other information concerning the financial condition of NetWolves
which is available to the public as Comdisco may from time to time
request.
13.12Comdisco and NetWolves will cooperate by furnishing such records and
supporting material relating to transactions contemplated hereunder as may
be reasonably requested by each party, and in the preparation of forms,
including notices to Lessees, and the execution of such other documents as
may be necessary to fulfill the intent and effectuate the purpose of this
Agreement.
13.13This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, personal representatives,
executors, heirs and permitted assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
set forth above.
NETWOLVES CORPORATION COMDISCO, INC.
By; /s/ Walter M. Groteke By: /s/ John Christopher
Title: ___________________________ Title: ____________________________
Date: _____________________________ Date: ____________________________
<PAGE>
Exhibit A
to the Master Program Agreement
between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
COMMENCEMENT CERTIFICATE
------------------------
This Certificate dated is executed pursuant to Equipment Schedule No. __ to
the Product Agreement dated _______ between NetWolves Corporation ("Lessor") and
________________________ ("Lessee").
1. Equipment:
---------
Equipment
Qty. Mfg. Type/Model Serial # Location
---- ---- ---------- -------- --------
2. Commencement Date:
-----------------
3. Total Equipment Cost: $
--------------------
(Please total attached invoices)
4. Representations of Lessee:
-------------------------
The Equipment has been delivered to the location indicated above,
tested, inspected, found to be in good working order and accepted by
the Lessee on the Commencement Date.
as Lessee
By:_______________________________
Title:____________________________
<PAGE>
Exhibit B
to the Master Program Agreement
between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
FoxBox Product Family
FoxBox ESCN
-----------
<TABLE>
<CAPTION>
Connection Type Dial on Demand
- --------------- --------------
Hardware Specs
- --------------
<S> <C>
Processor 266 Mhz
Memory 32 Megabytes
Storage 4.3 Gigabytes
Ports (1) 100 Megabit Ethernet & (1) V.90 Modem
Web Server Internet only
Mail Server IMAP IMAP Internal
POP3 Internal
SMTP External
Security Features
Proxies - LAN to Internet SMTP, HTTP, DNS
Stateful Filters All TCP and UDP Protocols
Administrative Interface (AI) Web Based AI only accessible from local LAN
Recommended Number of Users Up to 8
Thin Client
-----------
Hardware Specs
- --------------
Processor 300 Mhz
Memory 64 Megabytes
Storage No Disk
Network Card 100 Megabit Ethernet
Video 4 Megabyte Video
</TABLE>
<PAGE>
Exhibit C
to the Master Program Agreement
between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
Form of Product Agreement and Equipment Schedule attached
PRODUCT AGREEMENT
This Product Agreement dated ______________________________ is made by and
between NetWolves Corporation ("NetWolves") with offices at 200 Broadhollow
Road, Melville, New York 11747, and ____________________________________________
____________________________________________________("Customer") with offices at
____________________________________________________.
SECTION 1. PROPERTY LEASED
NetWolves leases to Customer all of the Products described on any Schedule
entered into pursuant to the terms of this Product Agreement.
SECTION 2. TERM
On the Commencement Date Customer will be deemed to accept the Products, will be
bound to its rental obligations for the Products and the term of a Schedule will
begin and continue through the Initial Term and thereafter until terminated by
either party upon prior written notice received during the Notice Period. No
termination may be effective prior to the expiration of the Initial Term.
SECTION 3. RENT AND PAYMENT
Rent is due and payable in advance, in immediately available funds, on the first
day of each Rent Interval to the payee and at the location specified in
NetWolves' invoice. Interim Rent is due and payable when invoiced. If any
payment is not made when due, Customer will pay interest at the Overdue Rate.
SECTION 4. SELECTION AND WARRANTY AND DISCLAIMER OF
WARRANTIES
4.1 Selection. Customer acknowledges that it has selected the Products and
disclaims any reliance upon statements made by NetWolves.
4.2 Warranty and Disclaimer of Warranties. NetWolves warrants to Customer that,
so long as Customer is not in default, NetWolves will not disturb Customer's
quiet and peaceful possession, and unrestricted use of the Products. During the
term of the Schedule, NetWolves grants to Customer all applicable warranties for
the Products. NetWolves assigns to Customer during the term of the Schedule any
manufacturer's warranties for the Products. NetWolves is not responsible for any
liability, claim, loss, damage or expense of any kind (including strict
liability in tort) caused by the Products except for any loss or damage caused
by the negligent acts of NetWolves. UNDER NO CIRCUMSTANCES, WILL NETWOLVES BE
LIABLE FOR INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
SECTION 5. TITLE AND ASSIGNMENT
5.1 Title. Customer holds the Products subject and subordinate to the rights of
the Owner, NetWolves, any Assignee and any Secured Party. Customer authorizes
NetWolves, as Customer's agent, to prepare, execute and file in Customer's name
precautionary Uniform Commercial Code financing statements showing the interest
of the Owner, NetWolves, and any Assignee or Secured Party in the Products and
to insert serial numbers in Schedules as appropriate. Except as provided in
Sections 5.2 and 7.2, Customer will, at its expense, keep the Products free and
clear from any liens or encumbrances of any kind (except any caused by
NetWolves) and will indemnify and hold NetWolves, Owner, any Assignee and
Secured Party harmless from and against any loss caused by Customer's failure to
do so.
5.2 Relocation or Sublease. Upon prior written notice, Customer may relocate
Products to any location within the continental United States provided (i) the
Products will not be used by an entity exempt from federal income tax and (ii)
all additional costs (including any administrative fees, additional taxes and
insurance coverage) are reconciled and promptly paid by Customer.
Customer may sublease the Products upon the reasonable consent of NetWolves and
the Secured Party. Such consent to sublease will be granted if: (i) Customer
meets the relocation requirements set out above, (ii) the sublease is expressly
subject and subordinate to the terms of the Schedule, (iii) Customer assigns its
rights in the sublease to NetWolves and the Secured Party as additional
collateral and security, (iv) Customer's obligation to maintain and insure the
Products is not altered, (v) all financing statements required to continue the
Secured Party's prior perfected security interest are filed, and (vi) the
sublease is not to a leasing entity affiliated with the manufacturer of the
Products described on the Schedule. NetWolves acknowledges Customer's right to
sublease for a term which extends beyond the expiration of the Initial Term. If
Customer subleases the Products for a term extending beyond the expiration of
such Initial Term of the applicable Schedule, Customer shall remain obligated
upon the expiration of the Initial Term to return such Products, or, at
NetWolves' sole discretion to (i) return Like Products or (ii) negotiate a
mutually acceptable lease extension or purchase. If the parties cannot mutually
agree upon the terms of an extension or purchase, the term of the Schedule will
extend upon the original terms and conditions until terminated pursuant to
Section 2.
<PAGE>
No relocation or sublease will relieve Customer from any of its obligations
under this Product Agreement and the applicable Schedule.
5.3 Assignment by NetWolves. The terms and conditions of each Schedule have been
fixed by NetWolves in order to permit NetWolves to sell and/or assign or
transfer its interest or grant a security interest in each Schedule and/or the
Products to a Secured Party or Assignee. In that event the term NetWolves will
mean the Assignee and any Secured Party. However, any assignment, sale, or other
transfer by NetWolves will not relieve NetWolves of its obligations to Customer,
including its warranty obligations, and will not materially change Customer's
duties or materially increase the burdens or risks imposed on Customer. The
Customer hereby consents to any such assignment, sale or transfer. Customer also
agrees that:
(a) The Secured Party will be entitled to exercise all of NetWolves' rights,
but will not be obligated to perform any of the obligations of NetWolves.
The Secured Party will not disturb Customer's quiet and peaceful possession
and unrestricted use of the Products so long as Customer is not in default
and the Secured Party continues to receive all Rent payable under the
Schedule;
(b) Customer will pay all Rent and all other amounts payable to the Secured
Party, despite any defense or claim which it has against NetWolves.
Customer reserves its right to have recourse directly against NetWolves for
any defense or claim; and
(c) Subject to and without impairment of Customer's leasehold rights in the
Products, Customer holds the Products for the Secured Party to the extent
of the Secured Party's rights in the Products.
SECTION 6. NET LEASE AND TAXES
6.1 Net Lease. Each Schedule constitutes a net lease. Customer's obligation to
pay Rent and all other amounts is absolute and unconditional and is not subject
to any abatement, reduction, set-off, defense, counterclaim, interruption,
deferment or recoupment for any reason whatsoever.
6.2 Taxes and Fees. Lessee will pay when due or reimburse Lessor for all taxes,
fees or any other charges (together with any related interest or penalties not
arising from the negligence of Lessor) accrued for or arising during the term of
each Schedule against Lessor, Lessee or the Products by any governmental
authority (except only Federal, state and local taxes on the capital or the net
income of Lessor). Lessee will file all personal property tax returns for the
Products and pay all property taxes due. Lessee will reimburse Lessor for
property taxes within thirty (30) days of receipt of an invoice.
SECTION 7. CARE, USE AND MAINTENANCE, ATTACHMENTS AND
RECONFIGURATIONS AND INSPECTION BY NETWOLVES
7.1 Care, Use and Maintenance. Customer will maintain the Products in good
operating order and appearance, protect the Products from deterioration, other
than normal wear and tear, and will not use the Products for any purpose other
than that for which it was designed. If commercially available, Customer will
maintain in force a standard maintenance contract with the manufacturer of the
Products, or another party acceptable to NetWolves, and upon request will
provide NetWolves with a complete copy of that contract. If Customer has the
Products maintained by a party other than the manufacturer, Customer agrees to
pay any costs necessary for the manufacturer to bring the Products to then
current release, revision and engineering change levels, and to re-certify the
Products as eligible for manufacturer's maintenance at the expiration of the
lease term. The lease term will continue upon the same terms and conditions
until recertification has been obtained.
7.2 Attachments and Reconfigurations. Upon prior written notice to NetWolves,
Customer may reconfigure and install Attachments on the Products. In the event
of such a Reconfiguration or Attachment, Customer shall, upon return of the
Products, at its expense, restore the Products to the original configuration
specified on the Schedule in accordance with the manufacturer's specifications
and in the same operating order, repair and appearance as when installed (normal
wear and tear excluded). If any parts are removed from the Products during the
Reconfiguration or Attachment, the restoration will include, at Customer's
option, the installation of either the original removed parts or Like Parts.
Alternatively, with NetWolves' prior written consent which will not be
unreasonably withheld, Customer may return the Products with any Attachment or
upgrade. If any parts of the Products are removed during a Reconfiguration or
Attachment, NetWolves may require Customer to provide additional security,
satisfactory to the NetWolves, in order to ensure performance of Customer's
obligations set forth in this subsection. Neither Attachments nor parts
installed on Products in the course of Reconfiguration shall be accessions to
the Products.
<PAGE>
However, if the Reconfiguration or Attachment (i) adversely affects NetWolves'
tax benefits relating to the Products; (ii) is not capable of being removed
without causing material damage to the Products; or (iii) if at the time of the
Reconfiguration or Attachment the manufacturer does not offer on a commercial
basis a means for the removal of the additional items; then such Reconfiguration
or Attachment is subject to the prior written consent of NetWolves.
7.3 Inspection by NetWolves. Upon request, Customer, during reasonable business
hours and subject to Customer's security requirements, will make the Products
and its related log and maintenance records available to NetWolves for
inspection.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF CUSTOMER
Customer represents and warrants that for each Schedule entered into under this
Product Agreement:
(a) The execution, delivery and performance of the Customer have been duly
authorized by all necessary corporate action;
(b) The individual executing was duly authorized to do so;
(c) The Master Agreement, Product Agreement and each Schedule constitute legal,
valid and binding agreements of the Customer enforceable in accordance with
their terms; and
(d) The Products are personal property and when subjected to use by the
Customer will not be or become fixtures under applicable law.
SECTION 9. DELIVERY AND RETURN OF PRODUCTS
Customer assumes the full expense of transportation and in-transit insurance to
Customer's premises and for installation of the Products. Upon expiration or
termination of each Schedule, Customer will, at NetWolves' instructions and at
Customer's expense (including transportation and in-transit insurance), have the
Products deinstalled, audited by the manufacturer, packed and shipped in
accordance with the manufacturer's specifications and returned to NetWolves in
the same operating order, repair and appearance as when installed (ordinary wear
and tear excluded), to a location within the continental United States as
directed by NetWolves. All items returned to NetWolves in addition to the
Products become property of NetWolves.
SECTION 10. LABELING
Upon request, Customer will mark the Products indicating NetWolves' interest.
Customer will keep all Products free from any other marking or labeling which
might be interpreted as a claim of ownership.
SECTION 11. INDEMNITY
Customer will indemnify and hold NetWolves, any Assignee and any Secured Party
harmless from and against any and all claims, costs, expenses, damages and
liabilities, including reasonable attorney's fees, arising out of the ownership
(for strict liability in tort only), selection, possession, leasing, operation,
control, use, maintenance, delivery, return or other disposition of the
Products. However, Customer is not responsible to a party indemnified hereunder
for any claims, costs, expenses, damages and liabilities occasioned by the
negligent acts of such indemnified party. Customer agrees to carry bodily injury
and property damage liability insurance during the term of the Schedule in
amounts and against risks customarily insured against by the Customer on
Products owned by it. Any amounts received by NetWolves under that insurance
will be credited against Customer's obligations under this Section.
SECTION 12. RISK OF LOSS
12.1 Customer's Risk of Loss. If the Schedule indicates that the Customer has
responsibility for the risk of loss of the Products, then the following terms
will apply:
Effective upon delivery and until the Products are returned, Customer relieves
NetWolves of responsibility for all risks of physical damage to or loss or
destruction of the Products. Customer will carry casualty insurance for the
Products in an amount not less than the Casualty Value. All policies for such
insurance will name NetWolves and any Secured Party as additional insured and as
loss payee, and will provide for at least thirty (30) days prior written notice
to NetWolves of cancellation or expiration. The Customer will furnish
appropriate evidence of such insurance.
Customer shall promptly repair any damaged Product unless such Product has
suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss, Customer
will provide written notice of that loss to NetWolves and Customer will, at
NetWolves' option, either (a) replace the damaged Product with Like Products and
marketable title to the Like Products will automatically vest in NetWolves or
(b) pay the Casualty Value and after that payment and the payment of all other
amounts due and owing, Customer's obligation to pay further Rent for the damaged
Product will cease.
12.2 NetWolves' Risk of Loss. If the Schedule indicates that NetWolves has
responsibility for the risk of loss of the Products, then the following terms
will apply:
<PAGE>
Effective upon delivery and throughout the Initial Term of a Schedule and any
extension, NetWolves agrees to insure the Products against physical damage to or
loss or destruction due to external cause as specified by the terms of
NetWolves' then current insurance policy. NetWolves relieves Customer of
responsibility for physical damage to or loss or destruction of Products
reimbursed by that insurance. Customer will give NetWolves prompt notice of any
damage, loss or destruction to any Product and NetWolves will determine within
fifteen (15) days of its receipt of that notice whether the item has suffered a
Casualty Loss. If any Product suffers damage or a Casualty Loss which is
reimbursable under NetWolves' insurance, upon payment by Customer of NetWolves'
deductible, NetWolves will: (i) (for damaged Products) arrange and pay for the
repair of any damaged Product; or (ii) (for any Casualty Loss) at NetWolves'
option either replace the damaged Product with Like Products, or upon payment of
all other amounts due by Customer terminate the relevant Schedule as it relates
to the damaged Product.
If any Product suffers damage or a Casualty Loss which is not reimbursable under
NetWolves' insurance, then Customer will comply with the provisions of the last
paragraph of Section 12.1 regarding repair, replacement or payment of Casualty
Value.
If NetWolves fails to maintain insurance coverage as required by this subsection
12.2, Customer will assume such risk of loss and, at the request of any Assignee
or Secured Party, will promptly provide insurance coverage. This paragraph does
not relieve NetWolves of its obligations to maintain coverage of the Products.
SECTION 13. DEFAULT, REMEDIES AND MITIGATION
13.1 Default. The occurrence of any one or more of the following Events of
Default constitutes a default under a Schedule:
(a) Customer's failure to pay Rent or other amounts payable by Customer when
due if that failure continues for ten (10) days after written notice; or
(b) Customer's failure to perform any other term or condition of the Schedule
or the material inaccuracy of any representation or warranty made by the
Customer in the Schedule or in any document or certificate furnished to the
NetWolves hereunder if that failure or inaccuracy continues for fifteen
(15) days after written notice; or
(c) An assignment by Customer for the benefit of its creditors, the failure by
Customer to pay its debts when due, the insolvency of Customer, the filing
by Customer or the filing against Customer of any petition under any
bankruptcy or insolvency law or for the appointment of a trustee or other
officer with similar powers, the adjudication of Customer as insolvent, the
liquidation of Customer, or the taking of any action for the purpose of the
foregoing; or
(d) The occurrence of an Event of Default under any Schedule or other agreement
between Customer and NetWolves or its Assignee or Secured Party.
13.2 Remedies. Upon the occurrence of any of the above Events of Default,
NetWolves, at its option, may:
(a) enforce Customer's performance of the provisions of the applicable Schedule
by appropriate court action in law or in equity;
(b) recover from Customer any damages and or expenses, including Default Costs;
(c) with notice and demand, recover all sums due and accelerate and recover the
present value of the remaining payment stream of all Rent due under the
defaulted Schedule (discounted at the same rate of interest at which such
defaulted Schedule was discounted with a Secured Party plus any prepayment
fees charged to NetWolves by the Secured Party or, if there is no Secured
Party, then discounted at 6%) together with all Rent and other amounts
currently due as liquidated damages and not as a penalty;
(d) with notice and process of law and in compliance with Customer's security
requirements, NetWolves may enter Customer's premises to remove and
repossess the Products without being liable to Customer for damages due to
the repossession, except those resulting from NetWolves', its assignees',
agents' or representatives' negligence; and
(e) pursue any other remedy permitted by law or equity.
The above remedies, in NetWolves' discretion and to the extent permitted by law,
are cumulative and may be exercised successively or concurrently.
13.3 Mitigation. Upon return of the Products pursuant to the terms of Section
13.2, NetWolves will use its best efforts in accordance with its normal business
procedures (and without obligation to give any priority to such Products) to
mitigate NetWolves' damages as described below. EXCEPT AS SET FORTH IN THIS
SECTION, CUSTOMER HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE
OR OTHERWISE WHICH MAY REQUIRE NETWOLVES TO MITIGATE ITS DAMAGES OR MODIFY ANY
OF NETWOLVES'S RIGHTS OR REMEDIES STATED HEREIN. NetWolves may sell, lease or
otherwise dispose of all or any part of the Products at a public or private sale
for cash or credit with the privilege of purchasing the Products. The proceeds
from any sale, lease or other disposition of the Products are defined as either:
<PAGE>
(a) if sold or otherwise disposed of, the cash proceeds less the Fair Market
Value of the Products at the expiration of the Initial Term less the
Default Costs; or
(b) if leased, the present value (discounted at three points over the prime
rate as referenced in the Wall Street Journal at the time of the
mitigation) of the rentals for a term not to exceed the Initial Term, less
the Default Costs.
Any proceeds will be applied against liquidated damages and any other sums due
to NetWolves from Customer. However, Customer is liable to NetWolves for, and
NetWolves may recover, the amount by which the proceeds are less than the
liquidated damages and other sums due to NetWolves from Customer.
SECTION 14. ADDITIONAL PROVISIONS
14.1 Binding Nature. Each Schedule is binding upon, and inures to the benefit of
NetWolves and its assigns. CUSTOMER MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS.
14.2 Applicable Law. THIS PRODUCT AGREEMENT AND EACH SCHEDULE IS GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS.
NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE
WILL BE CONFERRED ON CUSTOMER UNLESS EXPRESSLY GRANTED HEREIN OR A SCHEDULE.
14.3 Counterparts. Any Schedule may be executed in any number of counterparts,
each of which will be deemed an original, but all such counterparts together
constitute one and the same instrument. If NetWolves grants a security interest
in all or any part of an Schedule, the Products or sums payable thereunder, only
that counterpart Schedule marked "Secured Party's Original" can transfer
NetWolves' rights and all other counterparts will be marked "Duplicate".
14.4 Nonspecific Features and Licensed Products. If the Products are supplied
from NetWolves' inventory and contains any features not specified in the
Schedule, Customer grants NetWolves the right to remove any such features. Any
removal will be performed by the manufacturer or another party acceptable to
Customer, upon the request of NetWolves, at a time convenient to Customer,
provided that Customer will not unreasonably delay the removal of such features.
Customer acknowledges that the Products may contain or include software or other
licensed products of a third party. Customer will obtain no title to the
software or licensed products which at all times remains the property of the
owner of the software or licensed products. A license from the owner may be
required and it is Customer's responsibility to obtain any required license
before the use of the software or licensed product. Customer agrees to treat the
software and licensed products as confidential information of the owner, to
observe all copyright restrictions, and not to reproduce or sell the software or
licensed products.
14.5 Additional Documents. Customer will, upon execution of this Product
Agreement and as may be requested thereafter, provide NetWolves with a
secretary's certificate of incumbency and authority and any other documents
reasonably requested by NetWolves. Upon the execution of each Schedule with an
aggregate Rent in excess of $2,000,000, Customer will provide NetWolves with an
opinion from Customer's counsel regarding the representations and warranties in
Section 8. Customer will furnish, upon request, audited financial statements for
the most recent period.
14.6 NetWolves' Right to Match. Customer's rights under Section 5.2 and 7.2 are
subject to NetWolves' right to match any sublease or upgrade proposed by a third
party. Customer will provide NetWolves with the terms of the third party offer
and NetWolves will have three (3) business days to match the offer. Customer
shall obtain such upgrade from or sublease the Products to NetWolves if
NetWolves has timely matched the third party offer.
14.7 Electronic Communications. Each of the parties may communicate with the
other by electronic means under mutually agreeable terms.
SECTION 15. DEFINITIONS
Assignee - means an entity to whom NetWolves has sold or assigned its rights as
owner and lessor of the Products.
Attachment - means any accessory, equipment or device and the installation
thereof that does not impair the original function or use of the Products and is
<PAGE>
capable of being removed without causing material damage to the Products and is
not an accession to the Products.
Casualty Loss - means the irreparable loss or destruction of Products.
Casualty Value - means the greater of the aggregate Rent remaining to be paid
for the balance of the lease term or the Fair Market Value of the Products
immediately prior to the Casualty Loss. However, if a Casualty Value Table is
attached to the relevant Schedule its terms will control.
Commencement Certificate - means the NetWolves provided certificate which must
be signed by Customer within ten (10) days of the Commencement Date as requested
by NetWolves.
Commencement Date - is defined in each Schedule.
Default Costs - means reasonable attorney's fees and remarking costs resulting
from a Customer default or NetWolves' enforcement of its remedies.
Event of Default - means the events described in Subsection 13.1.
Fair Market Value - means the aggregate amount which would be obtainable in an
arm's-length transaction between an informed and willing buyer/user and an
informed and willing seller under no compulsion to sell.
Initial Term - means the period of time beginning on the first day of the first
full Rent Interval following the Commencement Date for all Products and
continuing for the number of Rent Intervals indicated on an Schedule.
Interim Rent - means the pro-rata portion of Rent due for the period from the
Commencement Date through but not including the first day of the first full Rent
Interval included in the Initial Term.
Licensed Products - means any software or other licensed products attached to
the Products.
Like Part - means a substituted part which is lien free and of the same
manufacturer and part number as the removed part, and which when installed on
the Products will be eligible for maintenance coverage with the manufacturer of
the Products.
Like Products - means replacement Products which are lien free and of the same
model, type, configuration and manufacture as Products.
Notice Period - means the time period described in a Schedule during which
Customer may give NetWolves notice of the termination of the term of that
Schedule.
Overdue Rate - means the lesser of 18% per year or the maximum rate permitted by
the law of the state where the Products are located.
Owner - means the owner of the Products.
Products - means the property described on a Schedule and any replacement for
that property required or permitted by this Product Agreement or a Schedule but
not including any Attachment.
Reconfiguration - means any change to Products that would upgrade or downgrade
the performance capabilities of the Products in any way.
Rent - means the rent, including Interim Rent, Customer will pay for the
Products expressed in an Schedule either as a specific amount or an amount equal
to the amount which NetWolves pays for the Products multiplied by a lease rate
factor plus all other amounts due to NetWolves under this Product Agreement or a
Schedule.
Rent Interval - means a full calendar month or quarter as indicated on a
Schedule.
Schedule - means a Schedule which incorporates all of the terms and conditions
of this Product Agreement and the Master Agreement and, for purposes of Section
14.3, its associated Commencement Certificate(s).
Secured Party - means an entity to whom NetWolves has granted a security
interest in a Schedule and related Products for the purpose of securing a loan.
IN WITNESS WHEREOF, the parties have caused this Product Agreement to be
executed by their duly authorized officers as of the day and year first set
forth above.
_____________________________________ NETWOLVES, CORPORATION
Customer
By: _________________________________ By: ___________________________________
Title: ______________________________ Title: ________________________________
Form 6004 2/99
<PAGE>
EQUIPMENT SCHEDULE NO. ___
DATED _______
TO THE PRODUCT AGREEMENT DATED ________
LESSEE: LESSOR: NetWolves Corporation
Address for Legal Notices: Address for All Notices:
- -------------------------
Attn: Corporate Secretary Attn:
Address for Administrative
- --------------------------
Correspondence: Address for Invoices:
- -------------- --------------------
Attn: Attn:
Phone:
Fax: Lessee Reference No:
-------------------
(24 digits maximum)
Initial Term: 48 Months
Location of Equipment:
- --------------------- Rent:
----
Estimated Equipment Rent:
------------------------
Months 1-48: $200.00 Per Unit/ Per Month
Service Rent:
------------
Installation: $600.00
Ongoing Maintenance: Months 1-12: $0
Months 13-48: $28.00 Per Unit/Per Month
Transportation Charges (Select one):
----------------------------------
Attn: ____ Amortized Over Initial Term
Phone: ____ Lessee Pays Vendor Directly
EQUIPMENT (as defined below):
- ---------
Item Machine Model/
No. Qty. Mfg. Type Feature Description
- --- ---- ---- ------- ------- -----------
<PAGE>
Risk of Loss: Pursuant to the Product Agreement, Lessor and Lessee agree that
the risk of loss is the responsibility of the Lessee.
Notice Period: The Notice Period will be not less than ninety (90) days nor more
than twelve (12) months prior to the expiration of the Initial Term, or any
extension thereof. If Lessee gives proper written notice of termination but
fails to return the Equipment on the expiration date of the Initial Term, or any
extension thereof, the Schedule will continue in full force and effect and
Lessee will be required to provide an additional sixty (60) days written notice
of termination. Such termination will be effective at the end of the month in
which the last day of the sixty (60) day notice requirement occurs. The Rent
will continue at the current rate until the effective date of the written notice
of termination and the Equipment is properly returned.
Special Terms: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Product Agreement as they pertain to
this Equipment Schedule are modified and amended as follows:
For purposes of this Equipment Schedule, all references to "Equipment" will be
deemed to mean "Product", and all references to "Lessee" will be deemed to mean
"Customer" as set forth in the Product Agreement. In addition, all references to
"Lessor" will be deemed to mean "NetWolves Corporation" as set forth in the
Product Agreement.
Multiple Delivery Special Term
- ------------------------------
1. Equipment
---------
Lessor's obligation to lease Equipment under this Equipment Schedule applies to
Equipment described in this Equipment Schedule for which Lessor receives
Commencement Certificates from Lessee during the period from ____ to _____ up to
an aggregate purchase price of $_________. Lessee acknowledges that it has
either received or approved Lessor's purchase documentation. If the cost or
configuration of the Equipment changes, Lessor may adjust the Lease Rate Factors
to reflect these additional costs or related expenses.
2. Commencement Date
-----------------
The Commencement Date for each item of Equipment will be the day on which the
Equipment is installed and qualified for a commercially available manufacturer's
standard maintenance contract or warranty coverage. Lessee agrees to confirm the
Commencement Date by providing Lessor with a Commencement Certificate in the
form attached hereto. Lessor will summarize all Commencement Certificates
received in the same calendar month into a Summary Schedule in the form attached
to this Equipment Schedule as Exhibit I, and the Initial Term will begin on the
first day of the next calendar month. Lessee agrees that for administrative
purposes, including without limitation, invoicing of Rent and taxes and
assignment of an identifying lease number, Lessor may administer the Summary
Schedule as if it constituted a separate Equipment Schedule. Alternatively, if
Lessor requests Lessee to execute a Summary Schedule, Lessee will have an
appropriate official of Lessee execute and promptly return the Summary Schedule
to Lessor. Executed Summary Schedules will incorporate the terms and conditions
of the Product Agreement and this Equipment Schedule and will constitute a
separate Equipment Schedule.
3. Adverse Change
--------------
If Lessee defaults or there is an adverse change in Lessee's credit standing,
Lessor, at its option with prior written notice to Lessee, will be relieved of
its obligations to lease Equipment for which Lessor has not received
Commencement Certificates from Lessee prior to the date of such notice.
4. Prepayment
----------
In consideration of Lessor entering into this Equipment Schedule, Lessee agrees
to remit payment of the Rent payment for Month 48 with the Rent payment for
Month 1.
<PAGE>
5. Vendor Credits
--------------
If after the Commencement Date for an item of Equipment, Lessee finds such item
of Equipment to be inoperable, Lessee will seek recourse solely against the
vendor of the Equipment for resolution of any problems concerning performance of
the Equipment. If the item of Equipment is replaced by the vendor, Lessee agrees
to provide Lessor with the serial number for the replacement equipment within 10
days of replacement. Lessor will not process any invoices associated with the
Equipment being returned to vendor or the replacement equipment.
Notwithstanding the foregoing, if after the Commencement Date for an item of
Equipment, Lessee finds that (i) the vendor has over-charged for an item of
Equipment, or (ii) the vendor has shipped an incorrect item of Equipment, upon
30 days prior written notice from Lessee, Lessor agrees to process any credits
received from the vendor and apply the credits to the Rent hereunder. The rental
adjustment will be effective on Lessor's next billing cycle following the 30 day
notice period.
6. Requirements for Return of Equipment at Lease Termination
---------------------------------------------------------
Lessee will appoint a principal contact person (the "Contact") with
responsibility for coordinating delivery and return of Equipment to one
centralized shipping location.
Lessee's Contact will provide Lessor a ten day written notice of the Equipment's
availability for pick-up, but in no event prior to Lessee's notice of
termination pursuant to the "Notice Period" provision of the Schedule.
If Lessee elects to return less than all of the Equipment, Lessee will provide
Lessor with the description of the Equipment being returned, including the line
number. Upon Lessee's request, Lessor will provide Lessee with a report which
Lessee can use to identify the Equipment description by line number.
Lessor will make arrangements for its transportation carrier to contact Lessee's
Contact to coordinate the return of the Equipment. Lessor's transportation
carrier will be responsible for packing the Equipment on site on the date of
pick-up.
Lessee will be responsible and submit payment upon receipt of an invoice for the
Fair Market Value of any Equipment or Equipment parts which are missing or
returned damaged (the "Affected Equipment"), provided Lessor or its agents did
not cause such Affected Equipment.
7. Personal Property Tax
---------------------
Notwithstanding anything to the contrary contained in the Product Agreement,
Lessor hereby appoints Lessee as its agent for the purpose of filing personal
property tax returns. Lessee will pay the appropriate taxing jurisdiction for
any personal property tax owed that is imposed against Lessee or Lessor in
connection with the Equipment, together with any penalties, fines or interest
thereon.
Lessee agrees to pay when due and indemnify and hold Lessor harmless from and
against Lessee's failure to remit payment of personal property tax owed
(together with any related interest or penalties not arising from negligence on
the part of Lessee) now or hereafter imposed or assessed against the Lessor or
the Equipment by the relevant taxing jurisdiction. Lessee will cooperate with
Lessor in obtaining all relevant documentation necessary to substantiate payment
of such personal property tax if requested by Lessor.
8. General Services Terms:
----------------------
Lessor will begin performing the Services as described in the Statement of Work
attached as Exhibit II within thirty (30) days from execution of this Equipment
Schedule. The performance of the Services will be coterminous with the Initial
Term of the associated Equipment. The Service Rent will be as set forth in
Section 9 herein. Any change to the Statement of Work must be documented in
writing. Lessor will have no obligation to commence work in connection with a
change request until the change has been approved in writing by Lessor and
Lessee. Lessee will reimburse Lessor for all reasonable expenses incurred in
connection with Lessor's performance under the Statement of Work.
<PAGE>
Lessor warrants that the Services will be performed in a professional manner.
EXCEPT AS EXPRESSLY SET FORTH IN THIS EQUIPMENT SCHEDULE OR THE PRODUCT
AGREEMENT, LESSOR MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
Proprietary Materials will mean all materials, information and other deliverable
items developed under a Statement of Work as well as proprietary tools,
methodologies, documentation and methods of analysis used in connection with the
Services. Lessee acknowledges and agrees that all such Proprietary Materials are
owned by either Lessor or its subcontractor and that Lessee receives no
ownership interest herein. Notwithstanding the foregoing, Lessor grants to
Lessee the right to use such Proprietary Materials delivered to Lessee under a
Statement of Work for Lessee's internal business use only and not for the
benefit of a third party.
Each party (including its employees and agents) will use the same standard of
care to protect any confidential information of the other, or a subcontractor of
Lessor, disclosed during negotiation or performance of the Statement of Work
that it uses to protect its own confidential information. Confidential
information will not include information which (i) is or becomes publicly
available through no wrongful act of the receiving party; (ii) was known by the
receiving party at the time of disclosure without any obligation of
confidentiality; (iii) was acquired by the receiving party from a third party
without restriction on nondisclosure; or (iv) was developed independently by the
receiving party.
Lessor's liability to Lessee from any cause whatsoever arising out of the
Services under this Equipment Schedule will not, in any event, exceed the
aggregate of the Service Rent paid by Lessee for the Services, excluding the
monthly Rent paid for the Equipment under this Equipment Schedule, giving rise
to the claim during the twelve (12) month period immediately prior to the
occurrence of the claim. UNDER NO CIRCUMSTANCES, WILL EITHER PARTY BE LIABLE FOR
INDIRECT, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Lessee will provide Lessor with access to each site specified in the site list
to be provided by Lessee. Lessee will be responsible for preparing each site for
the installation of the Equipment, including but not limited to, providing
specified power and cabling, environmental and wiring requirements, and
obtaining and maintaining necessary permits and certifications. In the event
that Lessee fails to fully prepare the site prior to installation of the
Equipment as described above, Lessee will be responsible for an additional
charge at the hourly rate set forth in the Statement of Work.
9. Services Rent:
-------------
Installation Services: Lessee will be responsible for an Installation charge of
$600.00 upon delivery and acceptance of the Equipment as evidenced by Lessee
completing a Commencement Certificate. Lessor will invoice Lessee for the
Installation charge at the time that Lessor invoices Lessee for the Rent payment
for Months 1 and 48 of the Initial Term.
On-Going Maintenance Services: Service Rent will be invoiced and due on the
first day of each month, in advance, beginning on the 13th month of the Initial
Term of each Summary Schedule.
10. Principal Contact
-----------------
Lessee agrees that it will designate an individual as a central contact to
coordinate confirmation of delivery and acceptance of the Equipment at the
end-user locations. The central contact will consolidate Commencement
Certificates from the end-user locations prior to forwarding such verification
to Lessor.
Product Agreement: This Equipment Schedule is issued pursuant to the Product
Agreement identified on page 1 of this Equipment Schedule. All of the terms and
conditions of the Product Agreement are incorporated in and made a part of this
Equipment Schedule as if expressly described in this Equipment Schedule, and
this Equipment Schedule constitutes a separate lease for the Equipment. The
parties reaffirm all of the terms and conditions of the Product Agreement
(including, without limitation, the representations and warranties set forth in
<PAGE>
the Product Agreement) except as modified by this Equipment Schedule. This
Equipment Schedule may not be amended or rescinded except by a writing signed by
both parties.
NetWolves Corporation
as Lessee as Lessor
By:_______________________________ By:_____________________________________
Title:____________________________ Title:__________________________________
Date:_____________________________ Date:___________________________________
<PAGE>
EXHIBIT I
SUMMARY SCHEDULE
----------------
This Summary Schedule dated _________ is executed pursuant to Equipment
Schedule No. ______ to the Product Agreement dated ____ between NetWolves
Corporation ("Lessor") and _______ ("Lessee"). All of the terms, conditions,
representations and warranties of the Product Agreement and Equipment Schedule
No. are incorporated herein and made a part hereof and this Summary Schedule
constitutes an Equipment Schedule for the Equipment described below.
1. Equipment:
---------
Equipment
Qty. Mfg. Type/Model Serial # Location
--- --- ---------- -------- --------
"SEE ATTACHED"
2. Commencement Date: (See attached)
-----------------
3. Initial Term Begins:
-------------------
4. Total Equipment Cost:
--------------------
5. Rent:
----
6. Representations of Lessee:
-------------------------
Each item of Equipment has been delivered to the location indicated above,
tested, inspected, found to be in good working order and accepted by the
Lessee on the Commencement Date.
Please sign and return one copy of this Summary Schedule to Lessor within ten
(10) days of receipt.
NetWolves Corporation
as Lessee as Lessor
By: SAMPLE By:
----------------------------- -------------------------------------
Title: Title:
-------------------------- ----------------------------------
<PAGE>
COMMENCEMENT CERTIFICATE
------------------------
This Certificate dated is executed pursuant to Equipment Schedule No. _____
to the Product Agreement dated __________ between NetWolves Corporation.
("Lessor") and _________ ("Lessee").
1. Equipment:
---------
Equipment
Qty. Mfg. Type/Model Serial # Location
--- --- ---------- -------- --------
2. Commencement Date:
-----------------
3. Representations of Lessee:
-------------------------
The Equipment has been delivered to the location indicated above, tested,
inspected, found to be in good working order and accepted by the Lessee on the
Commencement Date.
as Lessee
By:_________________________________
Title:______________________________
<PAGE>
EXHIBIT II
STATEMENT OF WORK NO. 1
TO THE EQUIPMENT SCHEDULE
DATED ____________________, 1999
BETWEEN NETWOLVES CORPORATION ("NETWOLVES")
AND _________________________ ("CUSTOMER")
1.0 Scope of Services
NetWolves will provide the following services at the sites detailed in
document to be supplied by customer to the Services Schedule for Customer's
systems.
Installation
Maintenance
Tier 1 Help Desk
Moves, Adds, Changes (Optional)
De-Installation (Optional)
Project Planning (management)
2.0 Service Components
2.1 Installation
NetWolves will install the equipment for which site surveys have been
completed.
2.1.1 Service Scope
Perform and review site survey for each site and confirm
readiness. Resolve any open issues to complete site readiness.
Develop site specific installation procedures.
Coordinate and finalize scheduling of:
* All involved NetWolves, Customer and third party personnel.
* Shipping and receipt of equipment at each site.
* Physical implementation of the equipment.
* Testing and certification of installed equipment in
accordance with the test script.
* Site sign-off by Customer's site representative.
* Circuit provisioning.
2.1.2 Service Deliverables
Site specific installation procedures.
Fully installed, tested, and functional equipment.
Comprehensive installation documentation, including:
* Descriptions, configurations and other pertinent information
for each item of installed equipment.
* Checklist of completed implementation steps and results.
* Outstanding or open issues list.
* Completed sign-off forms.
2.1.3 Assumptions
Customer personnel will be available as scheduled to assist in
the installation pursuant to the project plan.
Customer will provide NetWolves with an implementation test
script for each site.
Installation schedules will be agreed upon between NetWolves and
Customer.
<PAGE>
Installations will occur during normal business hours (8:00 AM to
5:00 PM local time, Monday through Friday excluding New Year's
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
the Friday after Thanksgiving, and Christmas Day).
NetWolves will provide implementation test script per Customer
request.
Shipping costs are not included.
2.2 Maintenance
NetWolves will provide maintenance for the equipment identified in Exhibit
B.
2.2.1 Service Scope
Determine maintenance coverage requirements.
Maintain inventory of configured "hot swap" boxes to be deployed upon
dispatch.
Upon notification from NetWolves help desk, inventory box will be
shipped overnight for installation.
Technician will arrive at site and de-install current box, install and
test new box and ship broken unit to Netwolves facility for
refurbishment
Provide documentation on all of the above to Customer and, if
appropriate, to the NetWolves Help Desk or NetWolves Network
Management Center.
2.2.2 Service Deliverables
Next day on-site replacement for broken boxes
2.3 Moves, Adds and Changes (Optional)
NetWolves will provide moves, adds, and changes on a demand basis to
facilitate modifications to the network environment.
2.3.1 Service Scope
Determine scope of work to be performed, including scheduling and
pricing.
Coordinate necessary services or materials to facilitate the change
(equipment, software, telecommunications, etc.).
Identify resources to perform the change (NetWolves, Customer, and/or
third-party personnel).
Schedule and coordinate execution of the change.
Execute the change and test, as applicable.
6x12 to next day on-site response.
2.3.2 Service Deliverables
Implementation of the change as specified by an authorized change
request.
Notification and documentation upon completion, as appropriate.
2.3.3 Assumptions
Moves, adds, and changes are modifications to the network environment
which are outside the scope of this Statement of Work and are
therefore priced on a demand basis.
Customer will provide access to Customer sites where these activities
will be performed.
Customer will provide site contacts, as appropriate, for inspection,
decision-making and site sign-off.
Moves, adds and changes will only be provided based upon authorized
change requests.
2.4 De-Installation (Optional)
NetWolves will de-install the equipment for which site surveys have been
completed.
2.4.1 Service Scope
Development of site specific de-installation procedures.
De-installation of equipment as determined by procedures.
<PAGE>
Prepare equipment for shipment.
2.4.2 Service Deliverables
Site specific de-installation procedures.
De-installation documentation, including:
* Descriptions, serial numbers, versions, and/or other pertinent
information identified in the de- installation procedures.
* Checklist of completed de-installation steps and results.
* Outstanding or open issues list.
2.4.3 Assumptions
NetWolves will perform de-installations only at those sites at which
NetWolves is performing implementation of new equipment.
Customer will provide a list of the equipment to be de-installed
2.5 Help Desk Operation
* Customer will have access to the Help Desk on a 7x24x365 basis except for
New Year's Day, Memorial Day, July 4, Labor Day, Thanksgiving Day, the
Friday after Thanksgiving, and Christmas Day. NetWolves will route all
calls outside of the scheduled access hours to Customer for resolution.
* The Help Desk will provide the first point of contact for end users. End
users may submit requests to the Help Desk via telephone, e-mail, or voice
mail.
* The first point of contact will consist of providing the initial problem
analysis and resolution. Escalations will be handled under mutually agreed
upon escalation procedures.
* NetWolves will provide a Help Desk Supervisor who will manage the daily
operation of the Help Desk. The Help Desk Supervisor will report directly
to the NetWolves Help Desk Service Manager who will be responsible for the
overall management of the Help Desk.
<PAGE>
Exhibit D
to the Master Program Agreement between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
Related Software
----------------
Fox OS
Fox A1
ESCN Navigator
ESCN Mother
ESCN Workbench
ESCN Mission Control
All training content provided through the ESCN System, created or licensed by
NetWolves Corporation/The Sullivan Group.
<PAGE>
Exhibit E
Comdisco Services
to the Master Program Agreement
between NetWolves Corporation and Comdisco, Inc.
Dated July 26, 1999
Form of Services Agreement and Services Schedule Attached.
<PAGE>
SERVICES AGREEMENT
This Services Agreement dated ______________________________ is made by and
between NetWolves Corporation ("NetWolves") with offices at 200 Broadhollow
Road, Melville, New York 11747, and ______________________
__________________________________________________ ("Customer") with offices at
____________________________________________________________________________.
SECTION 1. SCOPE
1.1 Schedules. NetWolves will provide Services under the terms and conditions of
this Services Agreement and as more particularly defined in each Schedule. Each
Schedule will constitute a separate agreement with respect to the Services
provided.
1.2 Changes. Any change to this Services Agreement must be documented in
writing. NetWolves will have no obligation to commence work in connection with a
change request until the change has been approved in writing by NetWolves and
Customer.
1.3 NetWolves may, as it deems appropriate, use subcontractors for all or any
portions of the Services.
SECTION 2. FEES
2.1 Fees. Customer will pay the fees for the Services in the amounts and in
accordance with the payment terms set forth in each Schedule.
2.2 Late Fee. Whenever any payment is not made within thirty (30) days of the
invoice date, Customer will pay interest at the lesser of one and one-half
percent (1.5%) per month or the maximum amount permitted by law.
2.3. Expenses. Customer will reimburse NetWolves for all reasonable expenses
incurred in connection with services requested by Customer which are outside the
scope of the Services outlined under a Schedule.
2.4 Taxes. Customer will pay or reimburse NetWolves for any taxes, fees or other
charges imposed by any local, state or federal authority (together with any
related interest or penalties not due to the fault of NetWolves) resulting from
this Services Agreement, or from any activities hereunder, except for taxes
based on NetWolves' net income.
SECTION 3. TERM
Each Schedule will take effect upon the signature of both parties and continue
through the term as specified therein.
The Services to be provided under each Schedule will begin on the date set forth
in the Schedule.
SECTION 4. WARRANTIES AND LIABILITY
4.1 Services. NetWolves warrants that the Services will be performed in a
professional manner.
4.2 Exclusive Warranty. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NETWOLVES MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
4.3 Liability. NetWolves' liability to Customer from any cause whatsoever
arising out of this Services Agreement will not, in any event, exceed the
aggregate of the fees paid by Customer for the Services giving rise to the claim
during the twelve (12) month period immediately prior to the occurrence of the
claim. UNDER NO CIRCUMSTANCES, WILL EITHER PARTY BE LIABLE FOR INDIRECT,
SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
<PAGE>
SECTION 5. MUTUAL INDEMNIFICATION
Each party will indemnify and hold the other party and its employees and agents,
harmless against any and all claims, liabilities, losses, damages and causes of
action relating to bodily injury, including death, arising out of the
intentional or negligent acts or omissions of the indemnifying party during the
performance of a Schedule. The indemnifying party, however, will not be
responsible for injury attributed to the intentional or negligent acts or
omissions of the indemnified party, its employees or agents.
SECTION 6. OWNERSHIP AND CONFIDENTIALITY
6.1 Ownership. Proprietary Materials will mean all materials, information and
other deliverable items developed under a Schedule as well as proprietary tools,
methodologies, documentation and methods of analysis used in connection with the
Services. Customer acknowledges and agrees that all such Proprietary Materials
are owned by either NetWolves' or its subcontractor and that Customer receives
no ownership interest herein. Notwithstanding the foregoing, NetWolves grants to
Customer the right to use such Proprietary Materials delivered to Customer under
a Schedule for Customer's internal business use only and not for the benefit of
a third party. Any proprietary software product will be licensed to Customer
under a separate license agreement.
6.2 Confidentiality. Each party (including its employees and agents) will use
the same standard of care to protect any confidential information of the other,
or a subcontractor, disclosed during negotiation or performance of this Services
Agreement that it uses to protect its own confidential information. Confidential
information will not include information which (i) is or becomes publicly
available through no wrongful act of the receiving party; (ii) was known by the
receiving party at the time of disclosure without any obligation of
confidentiality; (iii) was acquired by the receiving party from a third party
without restriction on nondisclosure; or (iv) was developed independently by the
receiving party.
SECTION 7. TERMINATION
Either party may, by written notice, terminate a Services Schedule for cause if
the other party fails to cure a material default under the Schedule. Any
material default must be specifically identified in the notice of termination.
After written notice, the notified party will have ten (10) days to remedy any
monetary default and thirty (30) days to remedy any other default. Failure to
remedy the material default within the time period provided for herein will give
cause for immediate termination. If termination is due to Customer's material
default, Customer will immediately pay to NetWolves the amounts then owing under
the relevant Schedule up to the date of termination. The foregoing payments will
be in addition to all other legal and equitable rights of NetWolves and any
remedies set forth in a Services Schedule.
SECTION 8. MISCELLANEOUS
8.1 Each party is an independent contractor and, except as expressly set forth
herein, will have no authority to bind or commit the other party. Nothing herein
shall be deemed or construed to create a joint venture, partnership or agency
relationship between the parties.
<PAGE>
8.2 Customer may not assign this Services Agreement, or any of its rights or
obligations therein.
8.3 The waiver by either party of a breach of any provision of this Services
Agreement will not be construed as a waiver of any subsequent breach. The
invalidity, in whole or in part, of any provision of this Services Agreement
will not affect the validity of the remaining provisions.
8.4 This Services Agreement including each Schedule represents the entire
agreement between the parties and supersedes all oral or other written
agreements or understandings between the parties concerning the Services. This
Agreement may not be modified unless in writing and signed by the party against
whom enforcement of the modification is sought.
8.5 Any notice, request or other communication under this Services Agreement
will be given in writing and deemed received upon the earlier of actual receipt
or three (3) days after mailing if mailed postage prepaid by regular or airmail
to the address set forth above or, one day after such notice is sent by courier
or facsimile transmission.
8.6 No third party is intended to be, or will be construed to be, a beneficiary
of any provision of this Services Agreement nor have any right to enforce any of
its provisions or to pursue any remedy for its breach.
8.7 Those terms and conditions which would, by their meaning or intent, survive
the expiration or termination of any Schedule will so survive.
8.8 THIS SERVICES AGREEMENT AND EACH SCHEDULE
IS GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK WITHOUT REGARD TO ITS CONFLICT OF LAWS
PROVISIONS. If there is any dispute or litigation as a result of this Services
Agreement, the prevailing party will be entitled to reasonable attorney's fees.
Any action by either party must be brought within two (2) years after the cause
of action arose.
8.9 During the term of each Schedule and for a period of one (1) year from the
completion of the Services thereunder, Customer agrees not to knowingly employ
or solicit for employment any NetWolves or subcontractor employee who was
involved in the furnishing of the Services under the relevant Schedule.
8.10 Terms and conditions on Customer's purchase order or other acknowledgment
form will be of no force or effect.
<PAGE>
8.11 NetWolves will not be considered in default hereunder due to any failure in
its performance of this Services Agreement should such failure arise out of
causes beyond its control. Such causes include, but are not limited to, acts of
God, acts of any federal, state or local government or authority, fires, floods,
or other disasters, strikes, degradation of telephone or other means of
communication services or utility outages.
IN WITNESS WHEREOF, the parties have caused this Services Agreement to be
executed by their duly authorized officers as of the day and year first set
forth above.
______________________________________ NetWolves Corporation
Customer
By: __________________________________ By: __________________________________
Title: _______________________________ Title: _______________________________
Form 6000, 10/98
<PAGE>
SERVICES SCHEDULE DATED [INSERT DATE]
TO THE SERVICES AGREEMENT
DATED [INSERT DATE]
BETWEEN NETWOLVES CORPORATION ("NETWOLVES")
AND [CUSTOMER NAME] ("CUSTOMER")
A. Scope of Services
NetWolves will provide the Services in the attached Statement of Work. In
the event of any conflict between this Services Schedule and a Statement of
Work, the Statement of Work will govern.
B. Fees
[Include the details of the payment schedule here or on an attached
Exhibit. As part of the payment schedule indicate when NetWolves will begin
invoicing for each fee component.]
Expenses will be billed monthly, or at NetWolves' option, as incurred.
C. Commencement of the Services
The Services will commence on [insert date that Services will begin].
D. Term
The term of this Schedule will commence upon execution by both parties and
will continue for a period of [months/weeks] from [insert trigger date].
E. Change Control
Upon the identification of any mutually acceptable change to this Schedule,
Customer and NetWolves will complete a Change Authorization Form.
F. Responsibilities
Customer will assign a program sponsor who will have full authority with
respect to all matters pertaining to this Schedule and who will be
NetWolves' primary contact. If Customer reassigns its program sponsor or
such individual has any other conflict which would impact the delivery of
the Services, Customer will promptly replace such person with another
person no less qualified or knowledgeable as to Customer's business.
Customer will also make available to NetWolves other necessary resources on
a timely basis and will ensure that Customer's personnel involved in the
Services have sufficient knowledge of all relevant aspects of Customer's
business, including technical, financial and functional requirements
relevant to this Schedule.
Customer acknowledges and agrees that NetWolves' ability to perform in
accordance with this Schedule is contingent on Customer's accurate and
timely performance of its responsibilities. In the event that Customer
fails to perform any of its responsibilities specified herein, NetWolves
may perform such responsibilities and Customer will reimburse NetWolves for
all costs incurred. Notwithstanding the foregoing, NetWolves has no
obligation to perform any such responsibilities.
Schedule - Page 1
This document is proprietary and confidential to NetWolves, Inc. Unauthorized
distribution is prohibited.
<PAGE>
G. Reviews
When Customer review or acceptance of procedures, plans or any other items
are provided for, and NetWolves has not received written notice from
Customer of acceptance or objection within three (3) business days of
Customer's receipt of the submitted item, the item will be deemed accepted.
H. Delays
In the event that NetWolves is delayed in the performance of the Services
as a result of Customer's acts or failure to act, Customer will reimburse
NetWolves for all costs incurred, including but not limited to any cost
associated with NetWolves' resources. In the event of a delay in the
commencement of the Services, NetWolves and Customer will mutually agree
upon a new commencement date.
I. Exhibits
The Exhibits to this Services Schedule are hereby incorporated into and
deemed to be a part of this Services Schedule.
[List Exhibits here.]
J. Special Terms
Customer will provide NetWolves with access to each Site specified in
Exhibit __ to enable NetWolves to perform the Services. Customer will be
responsible for preparing each Site for the installation of the equipment,
including but not limited to, providing specified power and cabling,
environmental and wiring requirements, and obtaining and maintaining
necessary permits and certifications.
This Services Schedule is issued pursuant to the Services Agreement identified
above. All of the terms and conditions of the Services Agreement are
incorporated herein and made a part hereof. This Services Schedule constitutes a
separate agreement with respect to the Services provided.
_________________________________ NetWolves Corporation
Customer
By:______________________________ By:_____________________________
Title:___________________________ Title:__________________________
Date:____________________________ Date:___________________________
The terms and conditions of this Schedule, including pricing, are valid only if
executed by [insert date].
3/99
Schedule - Page 2
This document is proprietary and confidential to NetWolves, Inc. Unauthorized
distribution is prohibited.
<PAGE>
EXHIBIT A
STATEMENT OF WORK NO. 1
TO THE SERVICES SCHEDULE
DATED ____________________, 1999
BETWEEN NETWOLVES ("NETWOLVES")
AND _________________________ ("CUSTOMER")
1.0 Scope of Services
NetWolves will provide the following services at the sites detailed in
document to be supplied by customer to the Services Schedule for Customer's
systems. For purposes of this Statement of Work, "systems" will mean the
equipment identified in Exhibit B.
Installation
Maintenance
Tier 1 Help Desk
Moves, Adds, Changes (Optional)
De-Installation (Optional)
2.0 Service Components
2.1 Installation
NetWolves will install the equipment for which site surveys have been
completed.
2.1.1 Service Scope
Obtain and review site survey for each site and confirm
readiness. Resolve any open issues to complete site readiness.
Develop site specific installation procedures.
Coordinate and finalize scheduling of:
* All involved NetWolves, Customer and third party personnel.
* Shipping and receipt of equipment at each site.
* Physical implementation of the equipment.
* Testing and certification of installed equipment in
accordance with the test script.
* Site sign-off by Customer's site representative.
2.1.2 Service Deliverables
Site specific installation procedures.
Fully installed, tested, and functional equipment.
Comprehensive installation documentation, including:
* Descriptions, configurations and other pertinent information
for each item of installed equipment.
* Checklist of completed implementation steps and results.
* Outstanding or open issues list.
* Completed sign-off forms.
2.1.3 Assumptions
Customer personnel will be available as scheduled to assist in
the installation pursuant to the project plan.
Customer will provide NetWolves with an implementation test
script for each site.
Installation schedules will be agreed upon between NetWolves and
Customer.
Installations will occur during normal business hours (8:00 AM to
5:00 PM local time, Monday through Friday excluding New Year's
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
the Friday after Thanksgiving, and Christmas Day).
<PAGE>
2.2 Maintenance
NetWolves will provide maintenance for the equipment identified in Exhibit
B.
2.2.1 Service Scope
Determine maintenance coverage requirements.
Maintain inventory of configured "hot swap" boxes to be deployed upon
dispatch.
Upon notification from NetWolves help desk, inventory box will be
shipped overnight for installation.
Technician will arrive at site and de-install current box, install and
test new box and ship broken unit to Netwolves facility for
refurbishment
Provide documentation on all of the above to Customer and, if
appropriate, to the NetWolves Help Desk or NetWolves Network
Management Center.
2.2.2 Service Deliverables
Next day on-site replacement for broken boxes
2.3 Moves, Adds and Changes (Optional)
NetWolves will provide moves, adds, and changes on a demand basis to
facilitate modifications to the network environment.
2.3.1 Service Scope
Determine scope of work to be performed, including scheduling and
pricing.
Coordinate necessary services or materials to facilitate the change
(equipment, software, telecommunications, etc.).
Identify resources to perform the change (NetWolves, Customer, and/or
third-party personnel).
Schedule and coordinate execution of the change.
Execute the change and test, as applicable.
2.3.2Service Deliverables Implementation of the change as specified by an
authorized change request. Notification and documentation upon
completion, as appropriate.
2.3.3 Assumptions
Moves, adds, and changes are modifications to the network environment
which are outside the scope of this Statement of Work and are
therefore priced on a demand basis.
Customer will provide access to Customer sites where these activities
will be performed.
Customer will provide site contacts, as appropriate, for inspection,
decision-making and site sign- off.
Moves, adds and changes will only be provided based upon authorized
change requests.
2.4 De-Installation (Optional)
NetWolves will de-install the equipment for which site surveys have been
completed.
2.4.1 Service Scope
Development of site specific de-installation procedures.
De-installation of equipment as determined by procedures.
Prepare equipment for shipment.
2.4.2 Service Deliverables
Site specific de-installation procedures.
De-installation documentation, including:
* Descriptions, serial numbers, versions, and/or other pertinent
information identified in the de- installation procedures.
<PAGE>
* Checklist of completed de-installation steps and results.
* Outstanding or open issues list.
2.4.3 Assumptions
NetWolves will perform de-installations only at those sites at which
NetWolves is performing implementation of new equipment.
Customer will provide a list of the equipment to be de-installed
2.5 Help Desk Operation
* Customer will have access to the Help Desk on a 7x24x365 basis except for
New Year's Day, Memorial Day, July 4, Labor Day, Thanksgiving Day, the
Friday after Thanksgiving, and Christmas Day. NetWolves will route all
calls outside of the scheduled access hours to Customer for resolution.
* The Help Desk will provide the first point of contact for end users. End
users may submit requests to the Help Desk via telephone, e-mail, or voice
mail.
* The first point of contact will consist of providing the initial problem
analysis and resolution. Escalations will be handled under mutually agreed
upon escalation procedures.
* NetWolves will provide a Help Desk Supervisor who will manage the daily
operation of the Help Desk. The Help Desk Supervisor will report directly
to the NetWolves Help Desk Service Manager who will be responsible for the
overall management of the Help Desk.
<PAGE>
Exhibit F
to the Master Program Agreement
between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
Target Customer
---------------
Any company or account engaged in the distance learning application through the
Sullivan Group and NetWolves Corporation.
<PAGE>
Exhibit G
to the Master Program Agreement
between NetWolves Corporation and
Comdisco, Inc.
Dated July 26, 1999
Form of Master Agreement and Services Schedule attached.
