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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 29, 2000
COMMISSION FILE NUMBER 001-15311
ENVISION DEVELOPMENT CORPORATION
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(Exact name of registrant as specified in its charter)
Florida
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(State or other jurisdiction of incorporation or organization)
65-0981457
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(I.R.S. Employer Identification No.)
100 NICKERSON ROAD, MARLBORO, MA 01752
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(Address of principal executive office)
(508) 480-3000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past ninety (90) days. Yes [X] No [ ]
As of September 12, 2000, Envision Development Corporation had 12,041,956
shares of common stock, $0.01 par value, outstanding.
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ENVISION DEVELOPMENT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JULY 29, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of July 29, 2000
and January 29, 2000 ................................................................ 4
Unaudited Condensed Consolidated Statements of Operations for the Three and Six
Months Ended July 29, 2000 and July 31, 1999 ........................................ 5
Unaudited Condensed Consolidated Statement of Cash Flows for the Six Months
Ended July 29, 2000 and July 31, 1999 ............................................... 6
Unaudited Notes to Condensed Consolidated Financial Statements ...................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................... 19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .................. 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ........................................................... 24
ITEM 2. Changes in Securities and Use of Proceeds ................................... 24
ITEM 5. Other Information ........................................................... 24
ITEM 6. Exhibits and Reports on Form 8-K ............................................ 25
Signatures .......................................................................... 27
</TABLE>
<PAGE> 3
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Report on Form 10-Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include information concerning future results of operations and
financial condition and are subject to known and unknown risks, uncertainties
and other factors, some of which are beyond our control, that may cause the
actual results, performance or achievements of Envision Development Corporation
("Envision" or the "Corporation") or its industry to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Statements that contain words such as
"believes," "expects," "anticipates," "intends," "estimates," "continue,"
"should," "could," "may," "plan," "project," "predict," "will" or similar
expressions are forward-looking statements. These forward-looking statements are
based on our current expectations and are subject to a number of risks,
uncertainties and assumptions relating to our operations, financial condition
and results of operations, including, but not limited to:
o Our brief operating history and uncertain revenue growth make
it difficult to predict our success.
o We have limited operating history with significant operating
losses and our future capital needs exceed our current
financial resources. We anticipate continuing operating losses
in the future and presently are unable to predict when we may
become profitable, if at all.
o Our strategy of expanding our business through acquisitions
and investments in other businesses and technologies presents
special risks. Acquisitions involve a number of special
problems, including, but not limited to, (1) difficulty
integrating acquired technologies, operations, and personnel
with our existing business; (2) diversion of management's
attention in connection with both negotiating the acquisitions
and integrating of the assets; (3) the need to incur
additional debt; (4) strain on managerial and operational
resources as management tries to oversee larger operations;
and (5) exposure to unforeseen liabilities of acquired
companies. We may not be able to successfully address these
problems. Moreover, our future operating results will depend
to a significant degree on our ability to successfully manage
growth and integrate acquisitions. In addition, many of our
investments will be in early-stage companies with limited
operating histories and limited or no revenues. We may not be
able to successfully develop these young companies.
o Our ability to remain competitive and expand operations
through acquisitions and internal growth largely depends on
our access to capital. If our revenues are insufficient to
fund the activities in the short or long term, we would need
to raise additional funds by incurring debt or through public
or private offerings of our stock. We may not be able to do
either on terms favorable to us, if at all. The need to raise
funds could also result in the issuance of potentially
dilutive securities.
o Our future success depends upon the ability of our management
team to improve the operating performance of the Corporation
as it transitions to the new organizational design and
eliminates the previous management structure.
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o There could be unforeseen difficulties in the expansion of our
infrastructure and management of growth along with the related
implementation, enhancement and maintenance of operating and
accounting systems and controls.
o Our growth and acquisitions have placed, and will continue to
place, significant demands on our operational and financial
resources. Our future success depends on our ability to
effectively integrate acquired companies and manage our
growth.
o There is a possibility of unforeseen difficulties arising from
past and future acquisitions and dispositions of businesses,
undiscovered liabilities arising from acquired businesses and
unexpected liabilities arising from divestitures.
o Certain lawsuits and proceedings have been filed against us
which, if determined or settled in a manner adverse to
Envision could adversely affect our results of operations,
financial position or cash flows.
o Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to
goodwill and other intangible assets, which could materially
adversely affect operating results and financial condition.
o Our intangible assets from previous acquisitions represent a
significant portion of our assets. The amortization of our
intangible assets will adversely impact our net income and we
may never realize the full value of our intangibles.
o Our financial results from professional services may fluctuate
from quarter to quarter based on such factors as the number,
complexity, size, scope and lead time of projects in which we
are engaged. More specifically, these fluctuations can result
from the contractual terms and degree of completion of such
projects, any delays incurred in connection with projects,
employee utilization rates, the adequacy of provisions for
losses, the accuracy of estimates of resources required to
complete ongoing projects and general economic conditions.
o We face intense competition. Some of our competitors have
longer operating histories and client relationships, greater
financial, technical, marketing and public relations
resources, larger client databases and greater brand or name
recognition than we have.
o We must attract and retain the qualified personnel in order to
continue our current projects and develop new technologies.
o We must respond to rapid technological changes in our
industry.
o Our business is dependent upon the continued use and growth of
the Internet and electronic commerce. Because of the
Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may
cover issues such as privacy, pricing, taxation and content.
The enactment of any additional laws or regulations may impede
the growth of the Internet and our Internet-related business
and could place additional burdens on our current and future
business.
2
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o Our significant stockholders have the ability to exercise a
controlling interest. Entities affiliated with Andrew L.
Evans, including ZERO.NET, Inc., and Dominion Income
Management Corporation, own approximately 35% of our
outstanding common stock as of September 8, 2000. As a result,
Mr. Evans and these companies are able to exercise a
controlling influence over the outcomes of matters submitted
to our stockholders for approval, including the election of
directors, appointment of new management, amendments to our
certificate of incorporation and mergers and sales of all of
our assets.
If any of these risks or uncertainties materialize, or if any of the underlying
assumptions prove incorrect, actual results may differ significantly from
results expressed or implied in any forward-looking statements made by us. These
and other risks are detailed in the Annual Report on Form 10-K as of and for the
year ending January 29, 2000 and in other documents filed by us with the
Securities and Exchange Commission. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future. Accordingly, for those
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
We undertake no obligation to revise the forward-looking statements included in
this report to reflect any future events or circumstances. Our actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements.
3
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ENVISION DEVELOPMENT CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 29, January 29,
2000 2000
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,515 $ 9,208,501
Restricted cash 500,000 --
Accounts receivable 320,187 --
Prepaid expenses and other current assets 276,993 --
Net assets from discontinued operations -- 832,208
------------- -------------
Total current assets 1,131,695 10,040,709
Property and equipment, net 1,688,390 --
Intangibles, net 126,626,022
Other assets 201,620 --
------------- -------------
Total assets $ 129,647,727 $ 10,040,709
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,033,381 $ 322,900
Notes payable to stockholders 664,783 --
Deferred revenue 316,168 --
Capital lease obligations 119,096 --
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Total liabilities 4,133,428 322,900
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Commitments and contingencies -- --
------------- -------------
Minority interest 2,351,856 --
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Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000
shares authorized, 0 shares issued and outstanding -- --
Common stock, $0.01 par value, 20,000,000
shares authorized, 12,041,956 and 7,500,000 shares
issued and outstanding as of July 29, 2000 and
January 29, 2000, respectively 120,420 75,000
Additional paid in capital 287,936,452 15,194,771
Deferred compensation (1,746,813) --
Accumulated deficit (163,147,616) (5,551,962)
------------- -------------
Total stockholders' equity 123,162,443 9,717,809
------------- -------------
Total liabilities and stockholders' equity $ 129,647,727 $ 10,040,709
============= =============
</TABLE>
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
4
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ENVISION DEVELOPMENT CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
July 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 493,420 $ -- $ 493,420 $ --
------------- ------------- ------------- -------------
Operating expenses 5,755,777 -- 8,094,971 --
Legal settlement 9,850,000 -- 9,850,000 --
Research and development 998,709 -- 1,154,370 --
In-process research and development 4,119,000 -- 4,119,000 --
Depreciation and amortization 17,111,422 -- 20,000,867 --
Impairment of intangibles 122,302,408 -- 122,302,408 --
------------- ------------- ------------- -------------
Total expenses 160,137,316 -- 165,521,616 --
------------- ------------- ------------- -------------
Loss from operations, before loss on sale of
stock by subsidiary, minority interest, interest
income and results of operations from
discontinued operations (159,643,896) -- (165,028,196) --
Loss on sale of stock by subsidiary (see note 7) (17,876,747) -- (17,876,747) --
Minority interest 148,144 -- 148,144 --
Interest income, net 23,070 -- 113,898 --
------------- ------------- ------------- -------------
Loss from operations before results of
operations from discontinued operations (177,349,429) -- (182,642,901) --
Income (loss) from discontinued operations 3,590 (803,994) (1,083,675) (1,568,651)
Gain on sale of discontinued operations 26,130,922 -- 26,130,922 --
------------- ------------- ------------- -------------
Net loss $(151,214,917) $ (803,994) $(157,595,654) $ (1,568,651)
============= ============= ============= =============
Basic and diluted loss per common share:
Loss from continuing operations $ (16.14) $ -- $ (19.27) $ --
Income (loss) from discontinued
operations -- (0.16) (.12) (0.31)
Gain on sale of discontinued
operations 2.38 -- 2.76 --
------------- ------------- ------------- -------------
Net loss $ (13.76) $ (0.16) $ (16.63) $ (0.31)
============= ============= ============= =============
Weighted average number of common shares
outstanding used in basic and diluted
calculation 10,987,601 5,000,000 9,476,213 5,000,000
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
5
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ENVISION DEVELOPMENT CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
July 29, 2000 July 31, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (157,595,654) $ (1,568,651)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 20,000,867 --
In process reseach and development 4,119,000
Impairment of intangibles 122,302,408
Loss from discontinued operations 1,083,675 1,568,651
Gain on sale of discontinued operations (26,130,922) --
Legal settlement 9,850,000 --
Loss on sale of stock by subsidiary 17,876,747 --
Minority interest (148,144) --
Changes in operating assets and liabilities, net of
effect of acquisitions and dispositions:
Increase in restricted cash (500,000) --
Decrease in accounts receivable 189,056 --
Increase in prepaid expenses (29,781) --
Increase in other assets (24,631)
Increase in deferred revenue 117,161 --
Increase in accounts payable 1,773,036 --
------------- -------------
Net cash used by operating activities of continuing operations (7,117,182) --
Net cash used by operating activities
of discontinued operations (2,320,920) 3,350
------------- -------------
Net cash used by operating activities (9,438,102) 3,350
Cash flows from investing activities:
Purchase of property and equipment (1,039,015) --
Advances to affiliates prior to acquisition, net of
cash acquired of $215,164 (675,836) --
------------- -------------
Net cash used in investing activities (1,714,851) --
------------- -------------
Cash flows from financing activities:
Payments to capital leases (18,007) --
Proceeds from stock options exercised 147,000 --
Proceeds from sale of stock by subsidiary 706,114 --
Proceeds from notes payable to stockholders
subsequently converted into preferred stock 1,275,963 --
Payments on notes payable to stockholders (132,103) --
------------- -------------
Net cash provided by financing activities 1,978,967 --
------------- -------------
Net (decrease) increase in cash and cash equivalents (9,173,986) 3,550
Cash and cash equivalents, beginning of period 9,208,501 100,000
------------- -------------
Cash and cash equivalents, end of period $ 34,515 $ 103,550
============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On June 28, 2000, a subsidiary of the Corporation converted
$2.5 million from notes to stockholder into the subsidiary's preferred
stock, resulting in a loss of $17,876,747, reflected in non-cash
operating activities as loss on sale of subsidiary stock (see Note 7).
During the six months ended July 29, 2000, the Corporation
issued stock in connection with certain acquisitions and retired
stocks in connection with or disposition of a business. The most
significant adjustments to the financial position of the Corporation
are disclosed on Notes 4 and 5.
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
6
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ENVISION DEVELOPMENT CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS FOR PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Envision Development Corporation ("Envision" or the "Corporation") include the
accounts of Envision and its wholly and majority owned subsidiaries and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X. All intercompany accounts and transactions have been
eliminated. They do not include all information and notes required by generally
accepted accounting principles for complete financial statements and should be
read together with the audited financial statements and notes for the fiscal
year ended January 29, 2000 which are included in Envision's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The balance sheet
data as of January 29, 2000 was derived from audited financial statements, as
adjusted to reflect the disposition of perfumania.com, inc. ("perfumania.com")
(see Note 5). The financial information furnished reflects all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations and cash flows for the quarterly periods presented. The results of
operations for the periods presented are not necessarily indicative of our
future results of operations for the entire year. Certain prior year amounts
have been reclassified in accordance with generally accepted accounting
principles to conform with the current year presentation.
On January 7, 1999, perfumania.com was created as a wholly-owned subsidiary of
Perfumania, Inc. ("Perfumania"), a wholly-owned subsidiary of E Com Ventures,
Inc. ("E Com Ventures"). perfumania.com operates an online store that
specializes in the sale of fragrances, fragrance related products and bath and
body products on a retail and wholesale basis. perfumania.com launched its
online store in February 1999. On September 29, 1999, perfumania.com completed
its initial public offering (see Note 3).
On January 11, 2000, a change in control of perfumania.com occurred when Alta
Limited ("Alta") exercised an option to purchase 2,000,000 shares of common
stock of perfumania.com from Perfumania at a price of $6.00 per share pursuant
to an Option Agreement, dated December 10, 1999, among Perfumania, Alta and the
optionees who are signatories thereto. In connection with such exercise, Alta
nominated two directors to the Board of Directors of perfumania.com and an
additional four directors were added by the Board of Directors effective upon
the expiration of the waiting requirements of Rule 14f-1 under the Securities
Exchange Act of 1934, as amended. Under the Option Agreement, Alta had a second
option to purchase 500,000 shares of common stock of Envision at a price of
$8.00 per share on or prior to the earlier to occur of December 31, 2000 or
various other events, as defined in the Option Agreement. This second option was
exercised on May 10, 2000 in connection with the disposition of perfumania.com
(see Note 5).
On February 10, 2000, Envision was incorporated in the State of Florida. The
Corporation entered into a plan of merger with perfumania.com and EDC Sub, Inc.,
a Florida corporation and wholly-owned subsidiary of Envision on February 10,
2000. The plan of merger provided for, among other things, the merger of EDC
Sub, Inc. with perfumania.com, with perfumania.com as
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the surviving corporation. As a result, perfumania.com became a direct wholly
owned subsidiary of Envision.
In addition, each share of common stock, par value $0.01 per share, of
perfumania.com issued and outstanding before the reorganization was converted
into and exchanged for one share of common stock, par value $0.01 per share, of
Envision. Consequently, shareholders of perfumania.com became shareholders of
Envision and ceased to be shareholders of perfumania.com. Pursuant to Florida
Statutes, shareholder approval of this reorganization was not required, and the
reorganization was tax-free for Federal income tax purposes to perfumania.com's
shareholders.
NOTE 2 - LIQUIDITY
The Corporation has limited operating history with significant operating losses
and its future capital needs and cash requirements exceed its current financial
resources. The Corporation also anticipates continuing operating losses in the
future and presently is unable to predict when it may become profitable, if at
all. In order to fund current operations, Envision has relied on funding under
various financing arrangements with ZERO.NET, Inc. ("Zero.Net"), a significant
shareholder, and Dominion Income Management Corporation ("Dominion"), a related
company (see Note 7). There can be no assurance that Envision will be able to
obtain the substantial additional capital resources necessary to pursue its
business plan or that any assumptions relating to its business plan will prove
to be accurate. Zero.Net has continued to fund Envision's operations and has
intentions to do so until June 30, 2001. Envision is also pursuing other
financing sources, but there can be no assurances that either such financing
will be available to the Corporation on commercially reasonable terms, if at
all. Any inability to obtain additional financing in the near term will have a
material adverse effect on the Corporation, including possibly requiring the
Corporation to significantly curtail or cease operations.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classifications of assets or the
amounts and classifications of liabilities that may result.
NOTE 3 - INITIAL PUBLIC OFFERING
In September 1999, perfumania.com completed its initial public offering of its
common stock (the "Offering"), in which perfumania.com and Perfumania sold 3.5
million shares of common stock at an offering price of $7.00 per share. Of the
3.5 million shares of common stock, 2.5 million shares of common stock were sold
by perfumania.com. perfumania.com received proceeds of approximately $16.1
million, net of $1.4 million in underwriting discounts and commissions.
perfumania.com used approximately $3.3 million of the proceeds to repay advances
from Perfumania. Additionally, perfumania.com incurred approximately $512,000 in
other costs in connection with the Offering. In connection with the Offering,
perfumania.com granted common stocks warrants to the underwriters to purchase
350,000 shares of its common stock at an exercise price of $9.80 per share. The
common stock warrants can be exercised at any time for a period of five years.
NOTE 4 - ACQUISITIONS
INTEROSA, INC. (SUCCESSOR TO QUI VIVE, INC.). On April 7, 2000, Envision
completed the first stage of the acquisition of 80% of Interosa, Inc. (formerly
Qui Vive, Inc.) ("Interosa"), a developer of proprietary "Interosa" technology
which provides security features to email communications, pursuant to the terms
of an Amended and Restated Stock Acquisition Agreement, dated as of March 31,
2000, among Envision, QV Acquisition Corporation, a Delaware corporation ("QV
Acquisition"), Sundog Technologies, Inc., a Delaware corporation ("Sundog"), and
RockMountain Ventures Fund, LP ("Rock") ("Interosa Agreement"). QV Acquisition,
a wholly-owned subsidiary of Envision, acquired shares of Series A Preferred
Stock
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and shares of Series B Preferred Stock of Interosa from Sundog and Rock. In
consideration therefor, Envision issued shares of Envision common stock to
Sundog and Rock. The total purchase price is valued at approximately $110.0
million, consisting of 1,813,000 shares of Envision common stock. Envision
issued 1,492,500 shares of its common stock to Sundog and Rock to complete the
first stage of the acquisition. An additional 320,500 shares of Envision common
stock will be issued to Sundog and Rock to complete the second stage of the
acquisition following the approval of Envision's shareholders. The additional
shares are not subject to adjustment for subsequent fluctuations in the stock
price. The shares issued by the Corporation in connection with the Interosa
acquisition are not registered under the Securities Act of 1933 and are subject
to restrictions on transferability for a period of 18 months from the date of
issuance. The market value was calculated using the average of the closing price
of the previous ten trading days of Envision common stock prior to consummation
of the transaction. The number of shares of Envision common stock given in
exchange for such shares of Interosa capital stock was determined by
negotiations among the parties to the Interosa Agreement.
The acquisition of Interosa has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price of the Interosa acquisition was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. The results of operations for
Interosa are included with those of the Corporation from the date of the
acquisition.
The purchase price for the above acquisition was allocated as follows:
Fair value of net assets acquired (net liabilities assumed):
Prepaid expenses and other assets $ 176,751
Property and equipment, net 232,023
-----------
Total assets acquired 408,774
-----------
Accounts payable and accrued expenses (199,442)
Notes payable to stockholder (998,175)
-----------
Total liabilities assumed (1,197,617)
-----------
Cash acquired 80,676
-----------
Net liabilities assumed $ (708,167)
===========
The following is a reconciliation of the purchase price to the excess of the
estimated fair value of net assets acquired allocated to intangible assets:
Purchase price $110,026,436
Net liabilities assumed 708,167
------------
Amount allocated to intangible assets $110,734,603
============
Interosa, founded in 1998, was a development stage enterprise with no revenues.
Based on a preliminary independent third party appraisal, approximately $3.95
million was allocated to in-process research and development and expensed in the
accompanying condensed consolidated statement of operations. This amount was
developed by estimating the stage of development of in-process research and
development projects at the date of the acquisition, estimating incremental cash
flows generated from such projects, and discounting the net cash flows back to
their present value using a discount rate of 30%, which represents a premium to
Envision's cost
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of capital to take into account the uncertainty surrounding the successful
development of the purchased in-process technology. The projections were based
on management's estimates of market size and growth, expected trends in
technology, expected research and development and selling and general
administrative expenditures, and the expected timing of new product
introductions. Approximately $24.7 million of the total purchase price was
allocated to existing technology, which is being amortized over three years. The
value of the existing technology was developed based on similar assumptions
using a discount rate of 30%. Approximately $1.4 million of the purchase price
was allocated to the valuation of the assembled workforce, which is also being
amortized over three years. The value of the workforce was developed by
estimating the cost to replace each employee based on average hiring and
training costs. Approximately $50,000 of the purchase price was allocated to
domain names, which is being amortized over three years. The remaining amount of
the purchase price was allocated to goodwill, which is being amortized on a
straight-line basis over three years. The projections used in developing the
values should not be considered an accurate predictor of future performance for
several reasons, including the consideration of many factors outside the control
of the Corporation. These intangible assets are subject to review of
recoverability based on various factors including Envision's ability to generate
future revenues sufficient to warrant the intangible amounts capitalized.
VP IP, INC. On April 27, 2000, the Board of Directors of Envision approved the
Amended and Restated Stock Purchase Agreement ("VP IP Agreement"), dated April
10, 2000, with VP IP, Inc. ("VP IP"), a Delaware corporation. Pursuant to the
terms of this Agreement, Envision acquired the software and URL of VP IP from
the owners of VP IP, which were William J. Patch, director and former Chief
Executive Officer of Envision, Mr. Patch's immediate family and Alex
Adamopoulos, former officer of Envision. The total purchase price is valued at
approximately $12.3 million, consisting of 200,000 shares of Envision common
stock. The shares issued by the Corporation in connection with the VP IP
acquisition are not registered under the Securities Act of 1933 and are subject
to restrictions on transferability for a period of 12 months from the date of
issuance. The market value was calculated using the average of the closing price
of the previous ten trading days of Envision common stock prior to consummation
of the transaction. The number of shares of Envision common stock given in
exchange for the assets of VP IP was determined by negotiations among the
parties to the VP IP Agreement. As a part of this acquisition, Mr. Patch and Mr.
Adamopoulos entered into employment agreements with the Corporation (see Note
9).
The acquisition of VP IP is an acquisition of assets, and, accordingly, the
purchase price was preliminarily allocated to the assets acquired, primarily
goodwill. Based upon the change in circumstances due to the departures of Mr.
Patch and Mr. Adamopoulos during the second fiscal quarter, management reviewed
the recoverability of the carrying amount of the assets (see Note 6).
LIQ, INC. On May 5, 2000, the Board of Directors of Envision approved an
Agreement and Plan of Merger Among Envision, LiQ Acquisition Sub, Inc., a
Delaware corporation and a direct wholly owned subsidiary of Envision, LiQ, Inc.
("LiQ"), a Delaware corporation, and Syed Abbas Ali Shah ("LiQ Agreement"). LiQ
integrates voice-enabled communications via VoIP, document sharing, and
co-browsing over the Internet or corporate intranets. The LiQ IsoSpace platform
enables live, Web-based communications, transactions, and real-time knowledge
exchange. In consideration therefor, Envision issued 640,000 shares of its
common stock in exchange for all of the issued and outstanding shares of LiQ.
The total purchase price is valued at approximately $43.3 million. The shares
issued by the Corporation in connection with the LiQ acquisition are not
registered under the Securities Act of 1933 and are subject to restrictions on
transferability for
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a period of 12 months from the date of issuance. The market value was
calculated using the average of the closing price of the previous ten trading
days of Envision common stock prior to consummation of the transaction. The
number of shares of Envision common stock given in exchange for such shares of
LiQ capital stock was determined by negotiations among the parties to the LiQ
Agreement.
The acquisition of LiQ has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price of the LiQ acquisition was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. The results of operations for LiQ
are included with those of the Corporation from the date of the acquisition.
The purchase price for the above acquisition was allocated as follows:
Fair value of net assets acquired (net liabilities assumed):
Prepaid expenses and other assets $ 123,497
Property and equipment, net 78,753
---------
Total assets acquired 202,250
---------
Accounts payable and accrued expenses (46,085)
Note payable to Envision (141,000)
Note payable to shareholders (427,261)
Other liabilities (116,611)
---------
Total liabilities assumed (730,957)
---------
Cash acquired --
---------
Net liabilities assumed $(528,707)
=========
The following is a reconciliation of the purchase price to the excess of the
estimated fair value of net assets acquired allocated to intangible assets:
Purchase price $43,316,032
Net liabilities assumed 528,707
-----------
Amount allocated to intangible assets $43,844,739
===========
LiQ, founded in 1999, was a development stage enterprise with no revenues. Based
on a preliminary independent third party appraisal, approximately $169,000 was
allocated to in-process research and development and expensed in the
accompanying condensed consolidated statement of operations. This amount was
developed by estimating the stage of development of in-process research and
development projects at the date of the acquisition, estimating incremental cash
flows generated from such projects, and discounting the net cash flows back to
their present value using a discount rate of 30%, which represents a premium to
Envision's cost of capital to take into account the uncertainty surrounding the
successful development of the purchased in-process technology. The projections
were based on management's estimates of market size and growth, expected trends
in technology, expected research and development and selling and general
administrative expenditures, and the expected timing of new product
introductions. Approximately $6.7 million of the total purchase price was
allocated to existing technology, which is being amortized over three years. The
value of the existing technology was developed based on similar assumptions
using a discount rate of 30%. Approximately $800,000
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of the purchase price was allocated to the valuation of the workforce, which is
also being amortized over three years. The value of the workforce was developed
by estimating the cost to replace each employee based on average hiring and
training costs. Approximately $100,000 of the purchase price was allocated to
domain names, which is being amortized over three years. The remaining amount of
the purchase price was allocated to goodwill, which is being amortized on a
straight-line basis over three years. The projections used in developing the
values should not be considered an accurate predictor of future performance for
several reasons, including the consideration of many factors outside the control
of the Corporation. These intangible assets are subject to review of
recoverability based on various factors including Envision's ability to generate
future revenues sufficient to warrant the intangible amounts capitalized.
ENVISION DEVELOPMENT CORPORATION, A MASSACHUSETTS CORPORATION. On May 16, 2000,
Envision acquired Envision Development Corporation, a Massachusetts corporation
with the same name as the Corporation ("Envision Massachusetts"), pursuant to
the terms of the First Amended and Restated Agreement and Plan of Merger, dated
March 10, 2000, as amended by Amendment No. 1, dated May 12, 2000, Among
Envision Development Corporation, a Florida corporation, perfumania.com, inc., a
Florida corporation, Envision Acquisition Corporation ("EAC"), a Massachusetts
corporation, Envision Development Corporation, a Massachusetts corporation, and
the Stockholders of Envision Development Corporation, a Massachusetts
corporation ("Envision Massachusetts Agreement"). Envision Massachusetts merged
with and into EAC, a wholly owned subsidiary of the Corporation, with Envision
Massachusetts surviving as a wholly-owned subsidiary of the Corporation.
Pursuant to Amendment No. 2 to the Envision Massachusetts agreement, the
conversion ratio for the number of shares of Envision Massachusetts common stock
to be converted into shares of Envision common stock was reduced to 1.91815 from
1.97711. Based on the amended conversion ratio, all the issued and outstanding
common stock of Envision Massachusetts was converted into 1,467,953 shares of
common stock, par value $0.01, of Envision, and all the issued and outstanding
options for common stock of Envision Massachusetts were converted into 368,107
options for common stock of Envision with a weighted average exercise price of
$14.40. The total purchase price is valued at approximately $102.6 million. The
shares issued by the Corporation in connection with the Envision Massachusetts
acquisition are not registered under the Securities Act of 1933 and are subject
to restrictions on transferability for a period of 12 months from the date of
issuance. The market value was calculated using the average of the closing price
of the previous ten trading days of Envision common stock prior to consummation
of the transaction. The number of shares of Envision common stock given in
exchange for such shares of Envision Massachusetts common stock was determined
by negotiations among the parties to the Envision Massachusetts Agreement.
The acquisition of Envision Massachusetts has been accounted for using the
purchase method of accounting, and, accordingly, the purchase price of the
Envision Massachusetts acquisition was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the acquisition
date. The results of operations for Envision Massachusetts are included with
those of the Corporation from the date of the acquisition.
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<PAGE> 15
The purchase price for the above acquisition was allocated as follows:
Fair value of net assets acquired (net liabilities assumed):
Accounts receivable $ 509,243
Property and equipment, net 436,259
Other assets 123,953
-----------
Total assets acquired 1,069,455
-----------
Value of stock options assumed (21,000,000)
Accounts payable and accrued expenses (430,773)
Note payable to Envision (750,000)
Other liabilities (382,469)
-----------
Total liabilities assumed (22,563,242)
-----------
Cash acquired 134,488
-----------
Net liabilities assumed $(21,359,299)
===========
The following is a reconciliation of the purchase price to the excess of the
estimated fair value of net assets acquired allocated to intangible assets:
Purchase price $ 102,582,600
Net liabilities assumed 21,359,299
------------
Amount allocated to intangible assets $ 123,941,899
============
The remaining amount of the purchase price was allocated to goodwill which is
being amortized on a straight-line basis over ten years. These intangible assets
are subject to review of recoverability based on various factors including
Envision's ability to generate future revenues sufficient to warrant the
intangible amounts capitalized. This ability is subject to various risks and
many factors outside the control of the Corporation. Based upon the change in
circumstances due to the events of the departures of certain management
personnel and employees during the second fiscal quarter and revised revenue
estimates for the current and future periods, management reviewed the
recoverability of the carrying amount of the assets (see Note 6).
UNAUDITED PRO FORMA INFORMATION. Presented below is the unaudited selected pro
forma financial information for the six month periods ended July 29, 2000 and
July 31, 1999 as if the acquisitions of Interosa, LiQ and Envision Massachusetts
had occurred at the beginning of the periods. The unaudited pro forma financial
information is provided for informational purposes only and should not be
construed to be indicative of the Corporation's consolidated results of
operations had the acquisition been consummated on the dates assumed and do not
project the Corporation's results of operations for any future period:
Six Months Six Months
Ended Ended
------------- -------------
July 29, 2000 July 31, 1999
------------- -------------
Revenue................................. $ 1,216,350 $ 465,300
Loss from continuing operations......... $(181,749,754) (40,380,688)
Loss per share.......................... $ (16.19) (4.70)
Weighted average number of shares....... $ 11,224,538 8,599,953
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NOTE 5 - DISCONTINUED OPERATIONS
On May 10, 2000, Envision sold its wholly-owned subsidiary, perfumania.com, to E
Com Ventures, Inc. ("E Com Ventures"), formerly known as Perfumania, Inc.,
pursuant to the terms of a Stock Purchase Agreement, dated April 29, 2000, among
Envision, Zero.Net and E Com Ventures. Envision sold all the common stock of
perfumania.com in exchange for 400,000 shares of common stock of Envision from E
Com Ventures. The 400,000 shares of Envision common stock were valued at
approximately $28.2 million. The market value was calculated using the average
of the closing price of the previous ten trading days of Envision common stock
prior to consummation of the transaction. The 400,000 shares of Envision common
stock were retired subsequent to the acquisition. As part of the transaction,
Zero.Net acquired 100,000 shares of common stock of Envision from E Com Ventures
for $2,500,000. The transaction requires approval by Envision's shareholders.
The disposition is accounted for as a discontinued operation, and accordingly,
amounts in the accompanying condensed consolidated financial statements and
related notes for all periods shown have been restated to reflect discontinued
operations accounting. Summarized results of the discontinued business are shown
separately as discontinued operations in the accompanying condensed consolidated
financial statements. The net assets from discontinued operations is primarily
comprised of inventory, net of liabilities. Revenue for the six months ended
July 29, 2000 and July 31, 1999 approximated $1.0 million and $390,000,
respectively.
NOTE 6 - INTANGIBLES, NET
As described in Note 4, the Corporation acquired VP IP and Envision
Massachusetts in April 2000 and May 2000, respectively. The acquisitions have
been accounted for using the purchase method of accounting, and, accordingly,
the purchase price of the acquisitions was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the acquisition date
including among others, existing technology, workforce, domain names, etc. The
remaining amount of the purchase price following the allocation was allocated to
goodwill and will be amortized on a straight-line basis over three to ten years.
The Corporation assesses long-lived assets for impairment under the Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121"). Under
SFAS 121, goodwill associated with assets acquired in a purchase business
combination is included in impairment evaluations when events or circumstances
exist that indicate the carrying amount of those assets may not be recoverable.
This evaluation of recoverability is based on the undiscounted estimated future
cash flows of the business acquired over the remaining amortization period.
Should the review indicate that the goodwill is not recoverable, the carrying
value of the goodwill would be reduced by the estimated shortfall of the
estimated future cash flows on a discounted basis.
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<PAGE> 17
Subsequent to the acquisitions, the Corporation experienced significant changes
related to the Envision Massachusetts and VP IP operations. Specifically, four
executive officers of the Corporation, including William Patch and Alex
Adampoulos, Chief Executive Officer and Executive Vice President, respectively,
and a significant portion of the original Envision Massachusetts employees,
primarily executives, management and administrative staff, either resigned or
were terminated in the second fiscal quarter. Following the acquisition,
executives of the original Envision Massachusetts were no longer involved in the
operations. These executives had previously been involved in the day-to-day
operations, including customer relations. Envision intensified its focus on the
improvement of the operating performance of Envision Massachusetts. This focus
led to revised estimates of future sales and future operating cash flows and
several Envision Massachusetts employees were terminated to reduce operating
expenses. The Corporation also cancelled the lease for the new corporate
headquarters (see Note 9) due to revised projections of the number of employees
and operating cash flows. These initial terminations, coupled with the change in
management subsequent to the acquisition and the lease termination, were
substantially disruptive to the remaining employees and to some of the customer
relationships. Sales and operating cash flows were further revised and a new
organizational structure was established to implement the strategic changes
recommended by the Board of Directors of the Corporation. This new structure
further reduced the number of employees through terminations and resignations.
Mr. Patch and Mr. Adampoulos left the Corporation during this period. Mr. Patch
and Mr. Adamopoulos were an integral part of the Envision Massachusetts
acquisition as they negotiated the transaction and spent a significant portion
of their time at the Corporation overseeing the Envision Massachusetts
operations. Furthermore, Mr. Patch and Mr. Adamopoulos developed the VP IP
software, URL and business plan and were an essential part of the planned
implementation of the VP IP business plan. There is no alternative future use
for the the VP IP software, URL or business plan.
As a result of the significance of the aforementioned events and circumstances,
the management began an evaluation of the recoverability of the assets of
Envision Massachusetts and VP IP. Management concluded from the results of this
evaluation that a significant impairment of intangible assets had occurred based
on the methodology described above. An impairment charge was required because
the estimated fair value was less than the carrying value of the assets. An
impairment charge of $122.3 million is reflected in the accompanying condensed
consolidated statement of operations as impairment of intangibles.
Considerable management judgment is necessary to estimate the fair value.
Accordingly, actual results could vary significantly from management's
estimates. The remaining intangible assets are subject to review of
recoverability based on various factors including Envision's ability to generate
future revenues sufficient to warrant the intangible amounts capitalized. The
estimate of the cash flows resulting from the expected revenues generated from
the projects is dependent upon a number of risk factors and uncertainties.
NOTE 7 - RELATED PARTY TRANSACTIONS
On April 27, 2000, the Board of Directors of Envision approved the Amended and
Restated Stock Purchase Agreement, dated April 10, 2000, with the owners of VP
IP, which were Mr. William J. Patch, director and former Chief Executive Officer
of Envision, Mr. Patch's immediate family and Alex Adamopoulos, former officer
of Envision (see Note 4). On May 10, 2000, Envision sold perfumania.com (see
Note 5).
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<PAGE> 18
Prior to the acquisition by Envision, Interosa entered into three notes payable
for $300,000 each with Zero.Net, a significant stockholder of Envision, on
February 28, 2000, March 15, 2000 and March 30, 2000. A fourth note payable for
$200,000 was entered into with Zero.Net in April 2000. Each note payable is due
on demand and bears interest at LIBOR plus 350 basis points. The interest is due
bi-annually commencing in the third fiscal quarter of 2001. On June 28, 2000,
this total outstanding debt amount plus interest and cash, totalling $2.5
million was converted into 1,432,662 shares of Series C Interosa preferred
stock. This represents all of the issued and outstanding Series C preferred
stock of Interosa, a subsidiary of Envision. The Series C Interosa preferred
stock is convertible into common stock of Interosa and has voting rights. As a
result of the issuance of the Series C preferred stock, the Corporation's
interest in Interosa has been reduced from 82.0% to 57.3%. Envision has recorded
a loss of $17.9 million on the sale of subsidiary stock related to the issuance
of these shares.
On June 29, 2000, LiQ entered into a promissory note in the amount of $200,000
with Zero.Net, a significant shareholder of Envision. The note shall bear
interest at the prime rate as quoted in the Wall Street Journal. The full
balance of the loan amount is due any time after December 29, 2000 upon demand.
The interest is payable on March 30 and September 30 of each year, commencing on
September 30, 2000, and upon the repayment of the principal amount of the note.
In the event of a default, the note is secured by a security agreement dated
June 29, 2000 for all property of LiQ, including, but not limited to, all
tangible and intangible assets. There is no prepayment penalty.
On August 10, 2000, Interosa entered into a promissory note in the amount of
$640,000 with Zero.Net. The full balance of the loan amount, together with
accrued interest from the date of the note, is due no later than August 10,
2001. Interest shall accrue on the unpaid principal balance at a rate per annum
equal to the prime rate, as quoted within the Wall Street Journal, plus two
percent. In connection with the note, Interosa issued warrants to acquire an
aggregate amount of 183,381 shares of Series C Interosa stock at a cost of $0.01
per share. In the event of a default, the note is secured by a security
agreement dated August 10, 2000 for all property of Interosa, including, but not
limited to, all tangible and intangible assets. There is no prepayment penalty.
On September 8, 2000, Envision entered into a promissory note in the amount of
$540,000 with Dominion Income Management Corp, ("Dominion"), a related company
to Envision. The full balance of the loan amount is due upon demand, or if no
demand before August 31, 2001, together with interest from the date for this
note on the unpaid balance. The note shall bear interest at the prime rate as
quoted in the Wall Street Journal computed on the basis of the actual number of
days elapsed and a calendar year of 365 days. In the event of a default, the
balance shall be accelerated without further notice, and interest shall accrue
thereon at the rate of 18% per annum until paid in full. The note is secured by
a security agreement dated September 8, 2000 for all property of Envision,
including, but not limited to, all tangible and intangible assets. There is no
prepayment penalty.
On September 11, 2000, Envision entered into a promissory note in the amount of
$650,000 with Dominion. The full balance of the loan amount is due upon demand,
or if no demand before September 11, 2001, together with interest from the date
for this note on the unpaid balance. The note shall bear interest at the prime
rate as quoted in the Wall Street Journal computed on the basis of the actual
number of days elapsed and a calendar year of 365 days. In the event of a
default, the balance shall be accelerated without further notice, and interest
shall accrue thereon at the rate of 18% per annum until paid in full. The note
is secured by the aforementioned security agreement dated September 8, 2000 for
all property of Envision, including, but not limited to, all tangible and
intangible assets. There is no prepayment penalty.
On September 11, 2000, Envision entered into a promissory note in the amount of
$170,000 with Zero.net. This amount was advanced on July 29, 2000. The full
balance of the loan amount is due upon demand, or if no demand before September
11, 2001, together with interest from the date for this note on the unpaid
balance. The note shall bear interest at the prime rate as quoted in The Wall
Street Journal computed on the basis of the actual number of days elapsed and a
calendar year of 365 days. In the event of a default, the balance shall be
accelerated without further notice, and interest shall accrue thereon at the
rate of 18% per annum until paid in full. The note is
Pursuant to the acquisition of LiQ, Envision assumed two LiQ shareholder loans
totaling approximately $427,000. The loans have no repayment terms or stated
interest rate. Envision repaid approximately $132,000 during the second fiscal
quarter.
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<PAGE> 19
secured by a security agreement dated September 11, 2000 for all property of
Envision including but not limited to all tangible and intangible assets. There
is no prepayment penalty.
NOTE 8 - EARNINGS PER SHARE
Basic loss per common share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted loss per common share is computed by dividing the loss available to
common shareholders by the weighted average number of common shares outstanding
including the dilutive effect of stock options and warrants using the treasury
stock method.
Potentially dilutive shares for the six and three months ended July 29, 2000 and
July 31, 1999 have not been included in the diluted loss per share because their
effects would be anti-dilutive due to the losses incurred by Envision.
Accordingly, diluted loss per common share is the same as basic loss per common
share for the periods presented.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS. Envision entered into employment agreements with four of
its executive officers for a three-year period. Among the provisions of the
employment agreements, the executive officers will receive aggregate salaries of
$715,000, aggregate annual and sign-on bonuses of $722,500 and stock options to
buy 1,346,547 shares of common stock at an exercise price ranging from $22.00 to
$26.13 per share. William Patch and Alex Adamopoulos, two of the four executive
officers, are no longer with the Corporation (see Legal Proceedings - William
Patch, Alex Adamopoulos and Jill Haselman).
LEASE AGREEMENT. On April 20, 2000, the Board of Directors approved a lease for
the new corporate headquarters in Bridgewater, Massachusetts. The lease was
intended to commence on August 1, 2000 for a term of seven years with minimum
lease payments of approximately $529,000 annually for years one to five and
approximately $568,000 annually for years six and seven. In connection with the
lease and the construction of leasehold improvements, the Corporation was
required to provide a stand-by letter of credit in the amount of $650,000. The
Corporation cancelled this lease in July 2000. Pursuant to a mutually agreed
upon settlement with the landlord, the Corporation paid a cancellation penalty
of $150,000 and was released from the stand-by letter of credit in August 2000.
The unpaid amount has been included in the accompanying condensed consolidated
balance sheet as restricted cash. The cancellation penalty is included in
operating expenses in the accompanying condensed consolidated statement of
operations.
LEGAL PROCEEDINGS - BIZ2NET. On May 24, 2000 Envision received notice of a
complaint filed by Biz2Net Corporation ("Biz2Net" or "Plaintiff") in the
Superior Court, County of Worcester, Commonwealth of Massachusetts, naming
Envision, certain of its officers, directors and others, as defendants.
In its complaint, Biz2Net, among other things, sought injunctive relief and
damages based on its allegations that certain of the defendants hired former
Biz2Net personnel in violation of contracts, misappropriated Biz2Net's business
plan and other proprietary and confidential information and took corporate
opportunities away from Biz2Net.
On May 31, 2000, a hearing was held in the Worcester County Superior Court, and
the Judge denied the Plaintiff's request for injunctive relief.
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<PAGE> 20
On August 22, 2000, Envision and Biz2Net agreed upon the form of a Settlement
Agreement and Release ("Settlement Agreement"), having reached agreement in
principle to resolve the dispute. No party to the lawsuit admitted or denied
liability. The Settlement Agreement is and will remain confidential but for
certain exceptions provided for in the agreement. Pursuant to the Settlement
Agreement, Envision shall transfer 800,000 shares of Envision common stock to
Biz2Net. The shares issued by the Corporation in connection with the Biz2Net
settlement will not be registered under the Securities Act of 1933 and are
subject to restrictions on transferability for a period of 12 months from the
date of issuance. During restriction period, the shares may not be voted except
in matters that would dilute Biz2Net's ownership percentage.
As of July 29, 2000, Envision had accrued an estimate of the settlement based on
the transfer of 800,000 shares of Envision common stock to Biz2Net. The accrual
was subsequently adjusted to reflect the market price of the stock using the
average of the closing price of the previous ten trading days of Envision common
stock prior to August 22, 2000, the date on which the terms of the Settlement
Agreement were agreed to in principal, and is reflected in the accompanying
condensed consolidated financial statements. Management expects to consummate
the settlement in the third quarter.
LEGAL PROCEEDINGS - LIQ, INC. On July 26, 2000, Envision Development Corporation
("Envision") filed for declaratory judgment in the Superior Court, County of
Middlesex, Commonwealth of Massachusetts against Syed Abbas Ali Shah and Ronald
Keusch as shareholders of LiQ, Inc. ("LiQ") to have declared valid and
enforceable the merger agreement or contract between Envision and LiQ. LiQ
merged with Envision on May 8, 2000 pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated May 5, 2000 between Envision, LiQ and Mr. Shah.
Mr. Shah was appointed to the Board of Directors of Envision pursuant to the
Merger Agreement. Mr. Shah resigned from the Board of Directors of Envision
prior to the filing of the aforementioned complaint. Mr. Shah and Mr. Keusch
have been suspended as officers as LiQ. On September 1, 2000, the defendants
removed the case to the United States District Court for the District of
Massachusetts.
On July 27, 2000, Envision received notice of a complaint filed by Mr. Shah, Mr.
Keusch and Alan Nathan ("Plaintiffs") in the United States District Court,
Southern District of New York, naming Envision and Andrew L. Evans (see
"Cautionary Statements Regarding Forward Looking Statements and Associated
Risks" for relationship) as defendants. Plaintiffs are shareholders of Envision.
The complaint was filed under seal by the plantiffs. In its complaint, LiQ,
among other things, sought to rescind the merger between LiQ and Envision (see
Note 4). On August 24, 2000, Envision moved to dismiss the matter on subject
matter jurisdiction grounds, which motion is pending. While the ultimate outcome
of the litigation cannot be ascertained at this time, Envision believes that the
allegations are without merit and will vigorously defend this action.
LEGAL PROCEEDINGS - WILLIAM PATCH, ALEX ADAMOPOULOS AND JILL HASELMAN. On
September 11, 2000, Envision received notice of a complaint filed by William
Patch, Alex Adamopoulos and Jill Haselman, former executive officers of
Envision, ("Plantiffs") in the Superior Court, County of Middlesex, Commonwealth
of Massachusetts naming Envision Development Corporation, Dean Willard, Michael
Amideo, Andrew Evans and Zero.Net as defendants. In their complaint, the
plantiffs, among other things, allege that Envision breached the employment
contracts of each defendant and seek severance benefits. Envision believes that
William Patch, Alex Adamopoulos, and Jill Haselman were terminated for cause.
While the ultimate outcome of the litigation cannot be ascertained at this time,
Envision believes that the allegations are without merit and will vigorously
defend this action.
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<PAGE> 21
LEGAL PROCEEDINGS. The Corporation is also involved in legal proceedings and
litigation arising from the normal course of business. Management does not
anticipate any material losses with respect to these legal proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes herein included. This
discussion contains forward-looking statements that reflect our plans,
estimates, and beliefs and that involve risks and uncertainties (see Cautionary
Statements Regarding Forward Looking Statements). Our actual results may differ
materially from those anticipated in these forward-looking statements.
RECENT DEVELOPMENTS AND OUTLOOK FOR 2000
The Corporation has recently undergone significant organizational changes. On
August 9, 2000, the Corporation announced that Dean M. Willard would replace
William J. Patch, the Corporation's former chairman of the Board of Directors
and Chief Executive Officer, as Chairman and Interim Chief Executive Officer.
Mr. Willard is also the Chief Executive Officer and Chairman of the Board of
Directors of Zero.Net, a significant shareholder. On September 5, 2000, Michael
E. Amideo by the Board of Directors was appointed as Chief Executive Officer.
Mr. Amideo has served as the Corporation's Chief Financial Officer since
February 2000 and previously served as the Chief Financial Officer of
perfumania.com. Prior to joining perfumania.com, Mr. Amideo worked in the audit
and business advisory practices at Arthur Andersen LLP and
PricewaterhouseCoopers LLP.
During the second fiscal quarter, the Corporation's Board of Directors lead a
review of the organizational structure and business strategy to assure their
adequacy, or, when appropriate, to implement improvements. One important
objective of the review was to improve performance in a number of areas,
including sales and operating expenses. The Board of Directors, along with
management, identified areas of improvement, which would result in immediate
reductions of operating expenses. Specifically, operating expense reductions are
expected from decreases in payroll and related expenses and the cancellation of
the lease in Bridgewater. Payroll reductions were achieved through employee
terminations of management and administrative personnel. Expenses relating to
the new strategy, including the lease cancellation (see Note 9) and severance,
were not material and are included in the accompanying condensed consolidated
financial statements.
Management believes that the changes during the second fiscal quarter will
enhance the evolution of Envision's Internet-related business solutions and
allow the Corporation to concentrate on the development of its Internet-related
business technologies, including secure email applications, distance
collaboration software and wireless web-access technologies.
Management is continually evaluating opportunities to expand operations and form
strategic alliances through acquisitions. Our ability to consummate these
acquisitions largely depends on our access to capital. If our revenues are
insufficient to fund the activities in the short or long term, we would need to
raise additional funds by incurring debt or through public or private offerings
of our stock. We may not be able to do either on terms favorable to us, if at
all. The need to raise funds could also result in the issuance of potentially
dilutive securities.
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<PAGE> 22
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Corporation operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Corporation's control.
Forward-looking statements in this document and those made from time to time by
the Corporation through its senior management are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements concerning the expected future revenues or earnings
or concerning projected plans, performance, product development, product
release, as well as other estimates related to future operations are necessarily
only estimates of future results and there can be no assurance that actual
results will not materially differ from expectations. Factors that could cause
actual results to differ materially from results anticipated in forward-looking
statements are discussed in Cautionary Statement Regarding Forward Looking
Statements.
RESULTS OF OPERATIONS
The sale of perfumania.com has been accounted for as a discontinued operation in
accordance with Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". Accordingly, results from continuing operations for the current
and prior periods exclude the impact of the perfumania.com business. The net
results for the prior periods are reflected in the loss from discontinued
operations and for the current periods as gain (loss) from and gain on the sale
of discontinued operations.
REVENUE. Revenues of approximately $493,000 for the three and six months ended
July 29, 2000 represent fees generated from professional services during the
second quarter. We provide our services on a time and material basis and
fixed-price, fixed time-frame basis. When we provide services on a time and
materials basis, we recognize revenue as we incur costs. When we provide
services on a fixed-price, fixed-timeframe basis, we use an internally developed
process to estimate and propose fixed prices for such projects. The estimation
process accounts for standard billing rates particular to each project, the
technology environment and application type to be applied, and the project's
timetable and overall technical complexity. An Envision management member must
approve all of our fixed-price proposals. For these contracts, we recognize
revenue using a percentage-of-completion method primarily based on costs
incurred. We make provisions for estimated losses on uncompleted contracts on a
contract by contract basis and recognize such provisions in the period in which
the losses are determined.
Our financial results from professional services may fluctuate from quarter to
quarter based on such factors as the number, complexity, size, scope and lead
time of projects in which we are engaged. More specifically, these fluctuations
can result from the contractual terms and degree of completion of such projects,
any delays incurred in connection with projects, employee utilization rates, the
adequacy of provisions for losses, the accuracy of estimates of resources
required to complete ongoing projects and general economic conditions. In
addition, revenue from a large client may constitute a significant portion of
our total revenue in a particular quarter. Approximately 58% of the revenue was
attributed to three customers.
OPERATING EXPENSES. Operating expenses consist primarily of payroll and related
expenses, severance, professional fees, facilities costs and other general
corporate expenses. Operating expenses approximated $5.8 million and $8.1
million for the three and six months ended July 29, 2000, respectively. The
relative increase for the three months ended July 29, 2000 compared to the
operating expenses for the three month period ended April 29, 2000 is due to the
acquisitions of Interosa, LiQ and Envision Massachusetts. Management expects
operating expenses to decrease based upon the Recent Developments described
above.
LEGAL SETTLEMENT. Legal settlement consists of the fair market value of shares
to be issued to Biz2Net in connection with the settlement agreement (per Note
9).
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IN-PROCESS RESEARCH AND DEVELOPMENT. Based on independent third party
appraisals of Interosa and LiQ, approximately $4.1 million of the purchase price
was allocated to in-process research and development. This amount was developed
by estimating the stage of development of in-process research and development
projects at the date of the acquisition, estimating incremental cash flows
generated from such projects, and discounting the net cash flows back to their
present value using a discount rate of 30%, which represents a premium to the
Corporation's cost of capital to take into account the uncertainty surrounding
the successful development of the purchased in-process technology. The
projections were based on management's estimates of market size and growth,
expected trends in technology, expected research and development and selling and
general administrative expenditures, and the expected timing of new product
introductions.
RESEARCH AND DEVELOPMENT. Research and development for the three and six months
ended July 29, 2000 was $1.0 million and $1.2 million, respectively. These are
primarily comprised of research and development expenses for the Interosa and
LiQ products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, primarily
amortization of intangible assets, for the three and six month periods ended
July 29, 2000 was $17.1 million and $20.0 million, respectively. Intangible
assets are amortized on a straight-line basis over three to ten years. These
intangible assets are subject to review of recoverability based on various
factors including Envision's ability to generate future revenues sufficient to
warrant the intangible amounts capitalized. The estimate of the cash flows
resulting from the expected revenues generated from the projects is dependent
upon a number of risk factors and uncertainties (see Cautionary Statements
Regarding Forward Looking Statements).
IMPAIRMENT OF INTANGIBLES. As a result of the significance of the events and
circumstances described in Note 6 to the condensed consolidated financial
statements, the management began an evaluation of the recoverability of the
assets of Envision Massachusetts and VP IP. Management concluded from the
results of this evaluation that a significant impairment of intangible assets
had occurred based on the methodology described in Note 6. An impairment charge
was required because the estimated fair value was less than the carrying value
of the assets. An impairment charge approximating $122.3 million was recorded
during the three months ended July 29, 2000.
DISCONTINUED OPERATIONS. Income from discontinued operations approximated $4,000
for the three months ended July 29, 2000, compared to a loss of approximately
$804,000 for the same period in 1999. Losses from discontinued operations
approximated $1.1 million for the six months ended July 29, 2000 compared to a
loss of approximately $1.6 million for the same period in 1999. The differences
between the current and prior periods are primarily due to the brief period of
operations included in the current periods as the operation was disposed of on
May 10, 2000.
NET LOSS. As a result of the factors discussed above, primarily relating to
impairment charges, depreciation and amortization and litigation charges, the
net loss approximated $151.2 million and $157.6 million for the three and six
months ended July 29, 2000, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are for working capital purposes, including
payroll and general operating expenses.
At July 29, 2000, we had negative working capital of $3.0 million compared to
working capital of $8.9 million (excluding assets from discontinuing operations
of $832,000) at January 29, 2000. The decrease in working capital was due mainly
to the decrease in cash for operating expenses along with increase in accounts
payable and accrued expenses and notes payable to stockholders. The results also
reflect the consolidation of the acquisitions.
During the six months ended July 29, 2000, we used approximately $9.4 million in
our operating activities. This was mainly the result of losses from continuing
operations of $182.6 million offset by impairment and amortization of goodwill,
losses on Biz2Net litigation, loss on sale of stock by subsidiary, an increase
in accounts payables and accrued expenses and the gain on the sale of
discontinued operations.
Net cash used in investing activities approximated $1.7 million for the six
months ended July 29, 2000. These expenditures are primarily related to the
purchase of computer hardware and software to support the operations and
advances to affiliates.
Net cash provided by financing activities approximated $2.0 million for the six
months ended July 29, 2000 was related to proceeds from stockholders.
The Corporation has limited operating history with significant operating losses
and its future capital needs and cash requirements exceed its current financial
resources. The Corporation also anticipates continuing operating losses in the
future and presently is unable to predict when it may become profitable, if at
all. In order to fund current operations, Envision has relied on funding under
various financing arrangements with ZERO.NET, Inc. ("Zero.Net"), a significant
shareholder, and Dominion Income Management Corporation ("Dominion"), a related
company (see Note 7). There can be no assurance that Envision will be able to
obtain substantial additional capital resources necessary to pursue its business
plan or that any assumptions relating to its business plan will prove to be
accurate. Zero.Net has continued to fund Envision's operations and has
intentions to do so until June 30, 2001. Envision is also pursuing other
financing sources, but there can be no assurances that either such financing
will be available to the Corporation on commercially reasonable terms, if at
all. Any inability to obtain additional financing in the near term will have a
material adverse effect on the Corporation, including possibly requiring the
Corporation to significantly curtail or cease operations.
YEAR 2000 READINESS
Envision has not experienced any material problems with the network
infrastructure, software, hardware and computer systems relating to the
inability to recognize appropriate dates related to the year 2000. Envision is
not aware of any Year 2000 problem with customers, suppliers or vendors.
Accordingly, Envision does not anticipate incurring material expenses or
experiencing any material operational disruptions as result of any Year 2000
issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 137, which delays the effective date of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
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("SFAS 133"). Among other provisions, SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
also requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for financial statements for fiscal years
beginning after June 15, 2000. Management has not determined the effect, if any,
of adopting SFAS 133.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB
101 provides guidance for revenue recognition under certain circumstances. The
accounting and disclosures prescribed by SAB 101 will be effective for the
fourth quarter of 2000. Management has not determined the effect, if any, of
adopting SAB 101.
FASB recently issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25". FIN 44 provides guidance regarding the scope of APB Opinion No.
25, "Accounting for Stock Issued to Employees", and its application to certain
transactions. FIN 44 is effective on July 1, 2000. It applies on a prospective
basis to events occurring after that date, except for certain transactions
involving options granted to nonemployees, repriced fixed options and
modifications to add reload option features. The adoption had a material effect
on the Corporation's current consolidated financial statements for the
acquisition of Envision Massachusetts and it may impact future accounting
regarding stock option transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Envision is exposed to interest rate risk in the normal course of business.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 9, "Commitments and Contingencies" of the
condensed consolidated financial statements included in Part I of this report is
incorporated by reference into Part II of this report.
ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS
The information regarding the issuances of shares set forth in Note 4,
"Acquisitions", and Note 9, "Commitments and Contingencies", of the condensed
consolidated financial statements included in Part I of this report is
incorporated by reference into Part II of this report.
The following information will end the Corporation's requirements of the
reporting of uses of proceeds resulting from its initial public offering. In
September 1999, perfumania.com completed its initial public offering and
received proceeds of approximately $16,100,000, net of $1,400,000 underwriting
discounts and commissions, from the sale of 2,500,000 shares of its common
stock. perfumania.com used $3,344,000 of the proceeds to repay advances from the
Parent. Additionally, perfumania.com incurred approximately $512,000 in other
costs in connection with the offering.
As of July 29, 2000, the Corporation had utilized the net offering proceeds as
follows:
Repayment of pre-offering advances from affiliate 3,344,000
Underwriting discounts and premiums 1,400,000
Other offering costs 512,000
Working capital 7,914,000
Advances to affiliates prior to acquisition 891,000
Purchase of property, plant and equipment 863,000
Acquisition from affiliate 50,000
Dividend to affiliate 450,000
Payment of costs related to terminated acquisitions 400,000
Payments on borrowings from affiliates 276,000
----------
16,100,000
Total ==========
None of the net offering proceeds was paid to officers, directors or persons
owning 10% or more of the Corporation's outstanding common stock with the
exception of the dividend to affiliate, acquisition from affiliate and advances
to affiliates prior to acquisitions.
In connection with the offering, perfumania.com granted common stock warrants to
the underwriters to purchase 350,000 shares of common stock at an exercise price
of $9.80 per share. The common stock warrants can be exercised at any time for a
period of five years. The market value of the warrants was established using the
Black-Scholes model at $1,284,500, of which $917,500 was allocated to the
Corporation. In addition, perfumania.com granted an option to the underwriters
to purchase up to 525,000 shares of common stock at $7.00 per share. The option
agreement was subsequently canceled.
ITEM 5. OTHER INFORMATION
The information set forth in "Recent Developments and Outlook for 2000" under
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations included in Part I of this report is incorporated by reference
into Part II of this report.
The information set forth in Note 7, "Related Party Transactions" and Note 9,
"Commitments and Contingencies" of the condensed consolidated financial
statements included in Part I of this report is incorporated by reference into
Part II of this report.
On June 23, 2000, Jake Weinstock announced that he was resigning as a director
of the Corporation, effective immediately. Mr. Weinstock was the Chief Executive
Officer of Zero.Net, a significant shareholder of the Corporation, during his
tenure on the board of Envision. Doug Moore was appointed to replace Mr.
Weinstock. Mr. Moore was president of Zero.Net during his tenure on the board of
Envision. On August 30, 2000, Mr. Moore announced that he was resigning as a
director of the Corporation. George Barraza, chief financial officer of
Automotive Performance Group. Inc. ("APG") and PBT Brands, Inc. ("PBT"), was
appointed to replace Mr. Moore. Dean Willard, Chairman of the Board of Envision,
is also the Chief Executive Officer and Chairman of the Board of Zero.Net and
Chief Executive Officer of APG and PBT. On July 17, 2000, Syed Abbas Ali Shah
resigned from the Board of Directors of Envision, effective immediately. A
replacement has not been appointed by the Board.
On July 14, 2000, Envision and PureEdge Solutions, Inc. ("PureEdge") announced
that after extensive review by both parties that the companies decided to
explore other business opportunities other than the proposed acquisition of
PureEdge outlined in a letter of intent announced on June 2, 2000. The companies
also announced that they have negotiated terms whereby Envision will offer its
customers the PureEdge software solutions allowing legally binding transactions
for e-commerce over the Internet.
On July 24, 2000, QVtech, Inc. announced that it changed its name to Interosa,
Inc. after extensive focus group feedback, customer comments and a desire to
more closely relate to its flagship product, InterosaMail.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this report:
10.1 Amendment No. 2 to the First Amended and Restated Agreement
and Plan of Merger, dated as of March 10, 2000, as amended by
Amendment No. 1 dated as of May 12, 2000 Among Envision
Development Corporation, a Florida corporation,
perfumania.com, inc., a Florida corporation, Envision
Acquisition Corporation, a Massachusetts corporation,
Envision Development Corporation, a Massachusetts corporation,
and the Stockholders of Envision Development Corporation, a
Massachusetts corporation
10.2 Promissory Note, dated as of June 29, 2000, Among LiQ, Inc., a
Delaware corporation and ZERO.NET, Inc., a Delaware
corporation
10.3 Security Agreement, dated as of June 29, 2000, made by LiQ,
Inc., a Delaware corporation in favor of ZERO.NET, Inc., a
Delaware corporation
10.4 Loan Agreement and Note for $640,000 between Interosa, Inc., a
Delaware corporation, and ZERO.NET, Inc., a Delaware
corporation
10.5 Warrant to Purchase Shares of Series C Preferred Stock of
Interosa, Inc.
10.6 Promissory Note for $540,000, dated as of September 8, 2000,
Among Envision Development Corp., a Florida corporation and
Dominion Income Management Corp. a Washington corporation
10.7 Security Agreement, dated as of September 8, 2000, made by
Envision Development Corp., a Florida corporation, in favor of
Dominion Income Management Corp. a Washington corporation
10.8 Promissory Note for $650,000 dated as of September 11, 2000
made by Envision Development Corporation, a Florida
corporation, in favor of Dominion Income Management Corp., a
Washington Corporation
10.9 Promissory Note for $170,000 dated as of September 11, 2000
made by Envision Development Corporation, a Florida
corporation, in favor of ZERO.NET, Inc., a Delaware
corporation
10.10 Security Agreement, dated as of September 11, 2000, made by
Envision Development Corp., a Florida corporation, in favor of
ZERO.NET, Inc., a Delaware corporation
10.11 Stock Purchase Agreement between Interosa, Inc. and Zero.Net,
Inc. dated as of June 28, 2000
10.12 Amended and Restated Investor Rights Agreement dated as of
June 28, 2000 between Interosa, Inc., Envision Development,
Corporation, Rock Mountain Ventures Fund LP and Zero.Net, Inc.
27.1 Financial Data Schedule
99.1 Press release, dated July 14, 2000, announcing the non-renewal
of the letter of intent between Envision Development
Corporation and PureEdge Solutions, Inc.
99.2 Press release, dated July 24, 2000, announcing the name change
of QVtech, Inc. to Interosa, Inc.
99.3 Press release, dated August 9, 2000, announcing corporate
reorganization
99.4 Press release, dated September 5, 2000, announcing the
appointment of Michael E. Amideo to Chief Executive Officer
(b) Reports on Form 8-K
On August 9, 2000, Envision filed a Current Report on Form 8-K dated August 9,
2000, to report certain information under Item 5, Other Events, to attach a
press release describing a corporate reorganization.
On June 29, 2000, Envision filed a Current Report on Form 8-K dated June 23,
2000, to report certain information under Item 6, Resignation of a Director, to
announce the resignation of Jake Weinstock.
On June 2, 2000, Envision filed a Current Report on Form 8-K dated May 24, 2000,
to report certain information under Item 5, Other Events, regarding the Biz2Net
litigation.
On May 30, 2000, Envision filed a Current Report on Form 8-K dated May 16, 2000,
to report certain information under Item 2, Acquisition or Disposition of
Assets, regarding its acquisition of Envision Development Corporation, a
Massachusetts corporation. On July 31, 2000, Amendment No. 1 to such Current
Report on Form 8-K was filed by Envision.
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On May 25, 2000, Envision filed a Current Report on Form 8-K dated May 10, 2000,
to report certain information under Item 2, Acquisition or Disposition of
Assets, regarding the disposition of perfumania.com, inc.
On May 22, 2000, Envision filed a Current Report on Form 8-K dated May 5, 2000,
to report certain information under Item 2, Acquisition or Disposition of
Assets, regarding its acquisition of LiQ, Inc., a Delaware corporation. On July
19, 2000, Amendment No. 1 to such Current Report on Form 8-K was filed by
Envision.
On May 3, 2000, Envision filed a Current Report on Form 8-K dated May 2, 2000,
to report certain information under Item 4, Change in Registrant's Certifying
Accountant, regarding the appointment of Grant Thornton LLP as the principal
accountants.
On May 3, 2000, Envision filed a Current Report on Form 8-K dated April 27,
2000, to report certain information under Item 2, Acquisition or Disposition of
Assets, regarding its acquisition of VP IP, Inc. On July 7, 2000, Amendment No.
1 to such Current Report on Form 8-K was filed by Envision.
On April 24, 2000, Envision filed a Current Report on Form 8-K dated April 7,
2000, to report certain information under Item 2, Acquisition or Disposition of
Assets, regarding its acquisition of Interosa, Inc. On June 21, 2000, Amendment
No. 1 to such Current Report on Form 8-K was filed by Envision.
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ENVISION DEVELOPMENT CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENVISION DEVELOPMENT CORPORATION
Registrant
September 15, 2000
/s/ Michael E. Amideo
-----------------------------------
Michael E. Amideo
Chief Executive Officer and Chief
Financial Officer (Principal Financial
and Accounting Officer)
September 15, 2000
/s/ Dean M. Willard
-----------------------------------
Dean M. Willard
Chairman of the Board of Directors
27
