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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-29413
NET VALUE HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1085 Mission Street, San Francisco, CA 94103
(Address of principal executive offices) (Zip Code)
415-575-4755
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of Each Exchange on Which Registered
Common Stock, par value $.001 per share None
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
(1) YES [X] NO [ ]
(2) YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of April 30, 2000 was approximately
$113,880,182.
There were approximately 17,680,672 issued and outstanding shares of
the Registrant's common stock, par value $.001 per share, at April 30, 2000,
subject to increase for a contingency described within "Factors Affecting Our
Business Conditions," "Security Ownership of Executive Officers, Directors and
Beneficial Owners of Greater than 5% of Our Common Stock" and "Legal
Proceedings."
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NET VALUE HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I ............................................................................................................1
Item 1. Business...........................................................................................1
Item 2. Properties........................................................................................28
Item 3. Legal Proceedings.................................................................................28
Item 4. Submission of Matters to a Vote of Security Holders...............................................29
PART II ...........................................................................................................29
Item 5. Market Price of the Registrant's Common Equity and Related Stockholder Matters....................29
Item 6. Selected Consolidated Financial Data..............................................................33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................41
Item 8. Financial Statements..............................................................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............41
PART III ...........................................................................................................42
Item 10. Directors and Executive Officers of the Registrant................................................42
Item 11. Executive Compensation............................................................................45
Item 12. Security Ownership of Executive Officers, Directors and Beneficial Owners of Greater Than 5% of Our
Common Stock......................................................................................50
Item 13. Transactions with Officers and Directors and Other Business Relationships.........................52
PART IV ...........................................................................................................54
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
.................................................................................................54
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PART I
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our affiliate companies, that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those discussed elsewhere in this Annual
Report, including the sections entitled "Factors Affecting Our Business
Conditions" and the risks discussed in our other Securities and Exchange
Commission filings, including our Registration Statement on Form S-1 declared
effective on February 15, 2000 by the SEC (File No. 333-88629). The following
discussion should be read in conjunction with our audited Consolidated Financial
Statements and related Notes thereto included elsewhere in this report.
Item 1. Business
General
We are actively engaged in building a network of technology businesses
which offer significant growth opportunities. To date, we have focused on
technology businesses with significant Internet features and applications. Our
operating strategy, however, is to expand the scope of our business to include
Internet businesses, as well as a broad range of other technology oriented
businesses.
Through the collective experience of our management team, we promote
the development of these businesses by offering business development services
that cover the core management disciplines of:
o Strategic Consulting;
o Operations;
o Finance;
o Business Development;
o Marketing/Public Relations;
o Technology; and
o Recruiting.
Additionally, we are able to apply the experience of both our
management team and network of affiliate companies to:
o Review and formulate business models;
o Create specific performance benchmarks;
o Provide introductions to strategic partners;
o Advise on, and facilitate the completion of secondary
rounds of financing; and
o Develop Internet businesses in joint ventures with
non-technology companies.
Our operating strategy is to acquire a significant equity interest in
early stage technology companies and to provide the services listed above to
these companies. We believe this will accelerate the achievement of their
business goals and objectives. We intend to take an active role in the
management and development of these businesses. Each business will be managed as
part of an integrated supportive network of "affiliate companies" that build on
our initial support and develop interrelationships among themselves, thereby
accelerating their growth and development. This network is intended to leverage
the collective financial, strategic, management and industry experience of our
management team, which has over 30 years of collective experience in developing
technology businesses. We also intend to establish relationships with companies
outside of our network that will enable us to deliver additional services to our
affiliate companies that they might not otherwise be able to obtain.
We also expect to create a business that provides information
technology consulting services. This would enable us to expand the services
which we offer internally to our affiliate companies, and to establish a
separate business unit that provides a broad range of technology solutions to
third parties. These services may be internally developed by us
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through training and hiring of qualified and experienced staff. Alternatively,
we are exploring the feasibility of acquiring an established business with
demonstrated capabilities in the information technology/consulting field.
Generally, we will be identifying early stage businesses that have been
started by others and that have sought our financial and management assistance.
We will also fund business models that our management team conceives which fit
within our business model. Our target level of investment will generally be
$2,500,000 or less per initial round of financing. We may also participate in
subsequent rounds of financing, involving potentially larger investments.
Generally our capital and services enable us to secure a significant
interest in the affiliate company. While we remain a significant stockholder of
an affiliate company, we intend to exercise varying degrees of control over its
operations by retaining:
o approval rights over significant corporate decisions
such as annual budgets, executive compensation,
indebtedness, capital expenditures and new securities
issuances;
o the right to establish and maintain the size of the
Board of Directors;
o the right to elect one or more members to the Board
of Directors;
o the right to participate in future fundings;
o certain enhanced voting rights; and
o the right to designate outside accountants and
approval rights over attorneys, public relations
firms and other outside consultants.
Although we recognize that the development of early stage businesses
are subject to material risks (as more fully identified later in this Annual
Report, see "Factors Affecting Our Business Condition"), we expect our value in
the affiliate companies to increase when they:
o commence initial stage operations and begin to
execute on their business plans;
o enter later stages of operations and begin to realize
significant revenues and capture meaningful market
share;
o secure subsequent rounds of venture funding at higher
levels of valuation;
o complete initial public offerings; or
o are sold to a third party.
As of April 30, 2000, our affiliate companies included:
AlarmX.com, Inc. (www.alarmx.com). Founded in 2000, AlarmX.com is
developing a full service vertical portal for security alarm and low voltage
systems industries. The portal will provide one-stop-shopping, content and
services to improve operational efficiencies for both industry buyers and
sellers. Through various vendors, AlarmX.com will offer low voltage control
equipment, intrusion devices, wire, audio, video and communication products.
Based in San Francisco, California, AlarmX.com currently has seven employees.
AssetExchange, Inc. (www.AssetExchange.com). Founded in 1999,
AssetExchange provides banks and other financial institutions with an
Internet-based listing service which allows them to more efficiently trade loan
portfolio assets. Based in Portland, Oregon, AssetExchange currently has ten
employees.
BrightStreet.com, Inc. (www.brightstreet.com). Founded in 1999 by third
party investors and the former managers of our Net Value, Inc. subsidiary,
BrightStreet develops and distributes online promotional campaigns. BrightStreet
commenced business upon the purchase of the former assets and business of our
Net Value, Inc. subsidiary. Simultaneous with this transaction, BrightStreet
completed a $17 million equity financing provided by Cox Enterprises, Inc.,
McClatchy Company (NYSE:MNI), CNI Ventures (NYSE:ECP) and Sandler Capital
Management. Through our Net Value, Inc. subsidiary, we own a 14% interest in
BrightStreet. Based in Cupertino, California, BrightStreet currently has 25
employees.
College 41l.com, Inc. (www.college4ll.com). Founded in 1998, College
411 is an online college community featuring functional academic resources,
comparison shopping for student items such as textbooks, as well as chat,
personalized news and message centers. Based in San Francisco, California,
College 411 currently has eight employees.
IndustrialVortex.com, Inc. (www.industrialvortex.com). Founded in 1999,
IndustrialVortex.com is developing an Internet website that will facilitate the
purchase and sale of industrial automation products. This application will
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provide purchasers of these products with relevant content that will permit them
to make informed and cost-effective purchasing decisions. Based in Laguna Hills,
California, IndustrialVortex.com currently has 28 employees.
metacat.com, Inc. (www.metacat.com). Founded in 1998, metacat is an
Internet-based e-commerce super-boutique that aggregates and searches the
product offerings of specialty retail, catalog and mail order businesses and
will allow consumers to purchase these products through its Internet website.
Based in Portland, Oregon, metacat currently has five employees.
Swapit.com, Inc. (www.swapit.com). Founded in 1999, Swapit.com is
developing a consumer-driven electronic barter exchange on the Internet.
Swapit.com believes that this service will allow the swap and sale of consumer
goods between a centralized warehouse and individuals. Based in Boston,
Massachusetts, Swapit.com currently has 21 employees.
Webmodal, Inc. (www.webmodal.com). Founded in 1999, Webmodal is
developing an Internet application for use by shippers in purchasing and
executing domestic full truckload intermodal freight shipments. This application
will allow shippers to input their specific transportation needs and receive all
of the information necessary for them to schedule and execute intermodal
shipments in a cost-effective manner. Based in Woodstock, Illinois, Webmodal
currently has 15 employees.
YesAsia, Inc. (f/k/a AsiaCD, Inc.)(www.yesasia.com). Founded in 1998,
YesAsia is a leading e-commerce company for the Asian community in the United
States as well as throughout Asia. Based in San Francisco, California, YesAsia
currently has 51 employees.
Identifying Affiliate Companies
We seek to acquire an interest in early stage technology companies that
offer a combination of a compelling market opportunity, a strategic plan for
maximizing the opportunity, and a management team with domain experience capable
of executing that plan.
Early stage companies. Venture capital transactions dramatically
increased both in number and size over the last four years. Increasingly,
traditional venture capital firms seek to invest approximately $2.5 million to
$5 million in the early stage financing of early stage technology companies. The
size of these investments significantly dilutes the ownership interest of the
founders of the issuing company. In additional, traditional venture capital
firms provide little assistance in areas such as marketing, public relations,
technology, recruiting and business development. As a result, most venture
capital firms are an unattractive source of capital for companies that require
less than several million dollars of capital to build the foundation of a new
business. Accordingly, these companies often turn to "friends and family"
investors, usually consisting of a patchwork of friends, family and high net
worth investors who accept the risks associated with investing in development
stage companies. These "friends and family" and "angel" investors typically
provide funding and generally do not provide any of the management and strategic
services which we can provide. With a significant equity position, board
representation and voting rights, we can play a substantial role in directing
the course of a company's development with resources not otherwise available to
the company. Thus, we believe that our services and business model will be
attractive to such early-stage businesses.
We view the penetration of the Internet and its information
capabilities into business to still be in its earliest stage. Compelling
opportunities exist in markets within virtually all industries. The true
investment challenge is to identify the markets within an industry which are
best suited to the Internet's capabilities.
Desirable markets can be characterized by one or more of the following:
o Many disconnected participants;
o High transaction volume or high transaction costs;
o Inefficient flow of information;
o Relatively price sensitive customers; and
o Traditional broker intermediaries.
Business plans targeting these characteristics are the most likely to add value
to both buyers and sellers in their respective markets all the while creating a
significant revenue opportunity for the new business.
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We look for well crafted plans designed to create value for the end
users of the products or services offered, and demonstrate a clear road to
profitability. The design of a strong plan is likely to be focused on "owning"
customers and or "owning" the transactions in a given market. We believe that
the value that a company creates for users will provide long term revenue
opportunities and high switching costs.
We seek long-term relationships with entrepreneurs who recognize that
it takes more than capital to develop a successful business. We target companies
managed by individuals who recognize that creating a technology business
requires a focus on teamwork and operational excellence, developing
relationships with other technology-based companies, both within and outside of
the company's industry, and managing processes in areas as diverse as brand
development, sales, marketing, management and technology. We generally seek
individuals with management experience in the industry in which their company
will operate. We believe that industry experience is a key differentiating
factor, enabling our affiliate companies to enter industries with the
established reputation and experience to effectively operate and grow through
their extensive network of contacts.
In those instances in which we identify a concept and form and fund a
company to develop the concept, we will recruit entrepreneurial management for
the company that has these characteristics.
Joint Venture Opportunities. In addition to early-stage opportunities,
we are also seeking to create joint ventures with non-technology companies that
wish to migrate components of their business to the Internet.
Information Technology/Consulting. We also expect to create a business
that provides e-business consulting services to our affiliate companies and
third parties. This business will focus on providing strategy, web design and
integration solutions to both online and traditional businesses.
Benefits Of Our Services
Affiliation with us will provide our affiliate companies the following
benefits:
o Hands-on strategic, operational and technology expertise. Our
management team is experienced in assisting technology companies in
the implementation and understanding of areas such as strategic
planning, sales, marketing, partnership strategy, capital planning,
brand development, management, technology implementation,
negotiations and divestiture/acquisition planning. Companies which
they have assisted in addition to our affiliate companies include:
o AdAuction.com
o Intervista
o AuctionNet.com
o Noosh
o HealthyPlanet.com
o HomePortfolio.com
o Interworld
o iconjohn.com
o epylon.com
o Agency.com
By sharing the lessons learned from these experiences, we believe
that we can help companies efficiently implement and improve their
business plans.
o Speed and flexibility. As entrepreneurs who are experienced in the
capital raising process, our management team recognizes the
importance of rapid yet prudent funding decisions. Our goal is to
make funding decisions and to deliver funds to those companies which
we choose to fund within several weeks of receiving a business plan
and completing our due diligence review of the prospective
candidate. In addition to acting quickly and prudently, we believe
in providing a high degree of flexibility to our affiliate
companies. For example, although we will encourage our affiliate
companies to take full advantage of our resources, we will not
require the management teams of our affiliate companies to move
their operations to be near our offices, as is common in the case of
most incubators. Although it may be easier for us to assist our
affiliate companies if they are located
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nearby, we believe that we can efficiently communicate our ideas and
knowledge to our affiliate companies located throughout the country.
o Network of companies and people. In a time where marketing, capital,
technology and partnerships are critical, we believe that people and
relationships remain the most important elements of success for
development stage enterprises. The members of our management team
sit on either the board of directors or board of advisers of public
and private technology companies. As a result of these activities,
our management team has participated in transactions involving
alliances among technology companies and possess an extensive
contact list consisting of individuals who work in the technology
industry. Through this network of relationships and experiences, our
management team can provide superior business assistance to our
affiliate companies. For example, we have established a marketing
relationship with an online and catalog marketer of audio books,
tapes and related products pursuant to which we will provide a
variety of consulting services to that company and pursuant to which
that company and other consumer-oriented affiliate companies will
establish Internet links to each other's Internet websites.
o Business experience. Members of our management team are part of a
generation that has spent its entire professional career using
computers and technology. Collectively, we have spent over thirty
years in the Internet industry. We believe that the Internet and the
digital economy reflect an evolutionary way of life. This vision
helps in identifying business models and early stage companies that
leverage technology to create value for the customer, whether it is
a business or consumer. In addition, members of our board of
directors and management team are seasoned in fundamental business
principles due to their experience at firms such as:
o Ernst & Young, LLP;
o KPMG LLP;
o Goldman, Sachs & Co.;
o Merrill Lynch, Pierce, Fenner & Smith, Inc.;
o Venture Partners;
o Booz-Allen and Hamilton;
o Bank of America;
o Bankers Trust;
o CNBC;
o Ziff Davis & Publishing (ZD Net);
o Wild Wild Web;
o Lycos;
o WhoWhere.com;
o Diamond Technology Partners, Inc.;
o Buchanan Ingersoll Professional Corporation;
o LaForce & Stevens; and
o JobDirect.com
We believe that this combination of vision and business acumen will
enable us to efficiently develop an understanding of the seemingly chaotic
digital economy and capitalize upon significant opportunities presented by the
Internet.
Our Affiliation Process
We intend to follow a four-step process for selecting and acquiring
interests in affiliate companies. First, we identify and evaluate potential
affiliate companies which meet our fundamental criteria, strategy and product
commercialization potential. Once a target company is identified, we perform due
diligence on the target opportunity and its senior management team. Once we
determine to proceed, we develop a management and operating plan with that team.
After closing, we provide support both at a management and operational advisory
level and from a board of directors level, we offer strategic relationship
development, planning, senior management staffing, capital structure advice and
budgeting.
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1. Transaction Sourcing
We believe that the following factors have and will continue to enable
us to identify high-quality potential affiliate companies:
o Industry Relationships. We intend to maintain and
further develop relationships with industry leaders
in the high technology and Internet communities. Our
management team has utilized these working
relationships in over a dozen various ventures in the
Internet industry and intends to use these
relationships as a source of new opportunities.
o Executives. Our management team has relationships
with senior executives at successful high technology,
private equity and investment banking companies who
we believe will refer opportunities to us and provide
us with their own perspectives and market
intelligence on the Internet industry.
o Industry Consultants. Our management team has and
will continue to have working relationships with many
specialized industry consultants who we expect to be
positioned to refer opportunities to us.
o Ability to Internally Generate Opportunities. Members
of our management team will identify and explore
potential e-commerce business ideas that have the
potential to complement our business strategy.
Promising ideas will be further developed. As members
of our management team develop these ideas, we will
provide necessary capital, management and operational
services and recruit managers to execute the
developed operating strategies.
2. Due Diligence
Once we have identified a target company or opportunity for our
network, we will perform an extensive due diligence review on the target
company.
Throughout the due diligence process, our management team will interact
with the management and/or owners of the potential affiliate company to analyze
its business and the ability of its existing management to partner with our
management team.
o Thorough Analysis. Our management team is involved in
all components of the due diligence process,
including management, commercial, financial, legal
and operational due diligence. In addition to
reviewing all of the potential affiliate company's
existing contracts, business plans and financial
projections, we conduct extensive interviews with all
members of the potential affiliate company's
management team and perform market research covering
the industry in which the potential affiliate company
operates.
o Assessment of Operations. An important component of
our due diligence process is to assess the
assumptions underlying a potential affiliate
company's business model and growth strategy. We
evaluate each assumption to determine whether the
potential affiliate company's business model presents
a viable business opportunity. In addition, we
determine whether the potential affiliate company's
business model is capable of being efficiently
implemented in the e-commerce field.
o Utilizing Management's Network. Our management team's
relationships and experiences will help us evaluate a
potential affiliate company's management, technology
and competitive environment.
The due diligence process with respect to internally generated
opportunities will involve market research and assessment of the assumptions
underlying the business model and growth strategy.
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In addition, from time to time, we may extend short term secured and
unsecured loans to potential affiliate companies to satisfy their short term
financing needs while we perform our due diligence review of the candidate
company.
3. Development of the Operating Plan
Concurrent with our due diligence review, we will begin to develop a
working relationship with the management team of the potential affiliate company
and assist them in or expand the development of an operating plan for the
affiliate company.
o Develop Realistic Budgets and Operating Assumptions.
We intend to pursue relationships with affiliate
companies where we can develop a close working
relationship with the management team during the due
diligence process. In conjunction with the management
team of the potential affiliate company, we expect to
develop realistic budgets and operating assumptions
and to design and develop an operating plan based on
our experience with Internet start-up companies in
areas such as marketing, technology, financial,
partnership and operations.
o Equity Participation. We intend to take an active
role in structuring equity-based incentives for
members of the management team of affiliate
companies. We expect that senior management of all
affiliate companies will own significant equity in
their company. We believe that it is crucial for all
members of the affiliate company's management to have
an equity stake in their company in order to support
a team approach to the project.
4. Development and Ongoing Support
Following our decision to acquire an interest in a target company or
develop an internally generated opportunity, our management team will work
closely with senior management of the affiliate company in the implementation of
an operating plan. We expect that this mentoring process will be integral to the
success of each of our affiliate companies. This process will consist of the
following components:
o Broaden and Develop Management Teams. We intend to
actively support affiliate companies in the
recruitment and acquisition of additional management
and personnel needed to execute an agreed upon
operating plan and to pursue target opportunities. We
have in-house recruitment professionals to assist
affiliate companies in recruitment and retention of
personnel. As the affiliate companies graduate from
the development stage to mature operating businesses,
their management teams must be expanded and
solidified. We believe that we will be able to assist
our affiliate companies in identifying the need for,
finding and developing qualified personnel to manage
their companies.
o Focus Operating Plan Objectives. A well-developed
operating plan is crucial to the execution of a
promising business concept and will significantly
increase the probability of success within any
start-up organization. Our management will work
closely to assist affiliate companies in implementing
their operating plans and refining and focusing the
detailed components of these plans as the affiliate
companies develop.
o Developing Strategic Relationships. In the Internet
industry, the development of strategic relationships
is crucial to the success of a company's business
model. We will use our management team's experience
to strategically align our affiliate companies with
other Internet companies that will allow them to
realize their full growth potential. For example, we
have established a mutual marketing relationship
between our consumer-oriented affiliate companies and
an established online and catalog marketer of audio
book tapes and related products.
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Disposition of Interests
Although we intend to acquire and hold equity interests in affiliate
companies on a long-term basis, we will negotiate rights that will enable us to
dispose of all or a portion of our interest in an affiliate company. The
decision to sell our equity interest in an affiliate company will be based on a
number of factors, including whether the affiliate company continues to fit
within our business strategy and complements our network of affiliate companies,
whether our assets represented by the interest in the affiliate company can be
better applied to benefit other affiliate companies or to fund new investments
and whether we need to dispose of an interest in order not to be required to
register as an investment company.
In April 2000, College411.com, Inc., a company of which we owned
approximately 25% of the issued and outstanding common stock calculated on a
fully diluted basis, entered into a merger agreement with Student Advantage,
Inc. (Nasdaq: STAD). Pursuant to this transaction, College411 will be merged
into a wholly-owned subsidiary of Student Advantage and the
College411stockholders will receive .0144 shares of Student Advantage common
stock for every share of College411 common stock which they owned on the date of
the merger. As a result of this merger, we will receive 54,100 shares of Student
Advantage's common stock. The parties presently anticipate that the merger will
close in May 2000.
Our Affiliate Companies
As of March 31, 2000, we owned equity in each of the following
affiliate companies:
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Amount of Approximate
Date(s) of Capital Stock Voting
Affiliate Company Location Investment Purchased Ownership
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ALARMX.COM SAN FRANCISCO, CA March 2000 $1,000,000 69%
ASSETEXCHANGE PORTLAND, OR September 1999 $ 400,000 20%
BRIGHTSTREET.COM(1) CUPERTINO, CA December 1999 $4,000,000 14%
COLLEGE411.COM SAN FRANCISCO, CA June 1999 and $ 250,000 29%
September 1999
INDUSTRIALVORTEX.COM LAGUNA HILLS, CA January 2000 $1,000,000 31%
METACAT.COM PORTLAND, OR June 1999 $ 100,000 100%
SWAPIT.COM(2) BOSTON, MA November 1999 $ 500,000 11%
WEBMODAL(3) WOODSTOCK, IL October 1999 $ 350,000 10%
YESASIA SAN FRANCISCO, CA June 1999 and February 2000 $1,300,000 13%
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(1) We own this interest indirectly through Net Value, Inc., a 67% owned
subsidiary at March 31, 2000. BrightStreet acquired the business and
assets of Net Value, Inc. during December 1999. We originally acquired
our interest in Net Value, Inc. during October 1998. A further
description of the transaction in which we acquired this interest can
be found on page 11 under the caption "Net Value,
Inc./BrightStreet.com, Inc."
(2) Does not include a contribution of 1,109,928 shares of common stock of
Swapit.com, Inc. which Thomas Aley, our Executive Vice President,
Business Development and a founder of Swapit.com, has agreed to make to
our company. Subsequent to this transaction, our approximate voting
ownership of Swapit.com will be 30%.
(3) Does not include our purchase of 563,000 shares of Series A Preferred
Stock and warrants to purchase 170,000 shares of common stock of
Webmodal for $5,000,000 which closed on May 9, 2000. Subsequent to this
transaction, our approximate voting ownership of Webmodel is 38%.
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AlarmX.com
AlarmX.com is developing an internet portal to streamline the ordering
process for the security alarm industry. This industry is highly fragmented,
with over 1,000 suppliers (manufacturers and distributors) in the United States
alone selling to over 16,000 alarm companies. Today, the purchasing process for
an alarm company has embedded inefficiencies due to the lack of accurate
information, uniform pricing, and product knowledge among order takers, all of
which results in high transaction costs. For example, a typical medium-size
alarm company that sells approximately 300-400 new systems per year will
purchase the majority of its products from roughly 50 different suppliers. Each
company has its own ordering process, requires a separate phone call or fax
request sheet, maintains numerous pricing levels, and ships in different
manners.
AlarmX.com is a vertical business-to-business portal that has been
established to streamline the ordering process of alarm companies. AlarmX.com is
currently developing an Internet application that aggregates the product
offerings and pricing policies of a large majority of alarm suppliers into a
central Internet portal. By enabling electronic exchange with their customers,
suppliers benefit from:
o reduced costs involved with paper-based purchasing, invoicing and
payment;
o reduced collections activities;
o greater exposure to potential customers;
o increased marketing opportunities; and
o shorter supply chain management links.
By allowing buyers access to a broad range of suppliers and by
streamlining the ordering process, AlarmX.com expects to greatly reduce the
costs associated with an alarm company's purchasing process. Additionally,
AlarmX.com enhances the businesses of buyers by:
o placing multiple orders from any location at one Internet website;
o creating a searchable database of products and suppliers;
o automating the ordering, tracking and reorderin capabilities;
o enforcing compliance of spending limits and ordering guidelines; and
o creating real-time reports of parts shipped for management analysis.
In addition to developing an e-commerce engine for buyers and
suppliers, AlarmX.com plans to develop a resource library of current and older
equipment technology information. In order to supplement our Internet website
content with value added applications, AlarmX.com plans to post the technical
specifications for various products of manufacturers that use its Internet
website, thereby providing a valued resource for technicians, customer service
representatives, and owners.
AlarmX.com expects to generate revenues from three primary sources:
o supplier transaction fees;
o services in support of customization and advanced functions for sellers
and buyers, and;
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o advertising, through banners and product showcasing.
AlarmX.com commenced operations in March 2000 and has not generated any
revenues. AlarmX.com plans to launch its Internet website in May 2000. Allison
Stollmeyer, our Director of Business Development, and Lee C. Hansen, our
President, current serve on AlarmX.com's Board of Directors.
AssetExchange, Inc.
AssetExchange, Inc. has developed a network of financial institutions
to create an efficient and active loan portfolio exchange. AssetExchange
supports this network by providing an Internet-based listing service of
financial assets. Although AssetExchange initially focused on credit card
portfolios, it is presently offering listings in additional asset classes
including automobile loans, mortgages, small business loans and other consumer
loans. AssetExchange's Internet website was launched in August 1999. Currently,
AssetExchange's network consists of over 350 registered members who combined
hold approximately 85% of all U.S. credit card assets including nine of the ten
biggest issuers. The registered members are entities that are generally in the
market to buy and sell portfolios.
Financial institutions regularly buy and sell a variety of loan
portfolios from each other. These loan portfolios include credit card accounts,
automobile loans, mortgages, small business loans and student loans. Financial
institutions purchase and sell these assets for both strategic and tactical
purposes. The volume of these transactions among financial institutions has been
increasing. The banking and financial industry's trend toward specialization,
consolidation and increased risk management have driven the increase in
transaction volume.
The markets for the purchase and sale of these assets are currently
fragmented and inefficient. Many transactions are completed based on personal
contacts made by brokers or investment bankers. Transaction costs are
substantial and matches between buyers and sellers are unlikely to be the best
available matches in the financial markets. Subsequently, small and medium sized
banks are deterred from participating in these markets.
AssetExchange addresses the inefficiencies which are inherent in these
markets by providing a secure and confidential Internet-based listing and e-mail
notification service for financial institutions. AssetExchange's Internet
website supports posting, browsing and searching for assets. E-mail notification
alerts buyers of new listings of loan portfolios. AssetExchange's primary role
is "matchmaking" between sellers and buyers of loan portfolios. Outside vendors
provide valuations of loan portfolios, legal advice and credit analysis.
AssetExchange may later elect to provide these services based on customer
demand. These vendors currently may purchase advertising and links to their own
Internet websites from AssetExchange. AssetExchange's goal is to provide an
efficient conduit for transacting a broad range of financial assets among
financial institutions.
AssetExchange is currently focusing on transactions involving credit
card portfolios. Credit card portfolios generally consist of consumer accounts
associated with a particular financial institution's credit card program. These
portfolios typically include total outstanding balances ranging from less than
$1 million to over $1 billion. In 1998, credit card portfolio transactions
totaled approximately $32 billion in asset value. This represented an
approximate 55% increase over 1997 transactions. AssetExchange is currently
targeting loan portfolios valued at between $5,000,000 and $200,000,000 for
listing on its Internet-based service. AssetExchange believes that this is an
appropriate portfolio value to target because investment bankers and brokers
generally charge expensive fees that make selling portfolios in this valuation
range cost prohibitive to the selling financial institution. AssetExchange
believes that financial institutions will view its Internet-based service as a
viable alternative for selling credit card portfolios in this value range.
AssetExchange believes that the total value of credit card portfolios in this
range is approximately $5 billion. Other classes of loan portfolios, such as
mortgage loans, auto loans and student loans, create an overall accessible loan
portfolio transaction market of approximately $50 billion.
AssetExchange anticipates that its primary customers will include
banks, finance companies, thrifts, community banks, credit unions and other
financial institutions. Brokers and investment bankers may also use
AssetExchange's services to expand their transaction base and reduce their
transaction costs. AssetExchange is unaffiliated with existing market
participants. This practice allows AssetExchange to provide an impartial and
powerful tool for gaining market exposure.
AssetExchange anticipates that its primary source of revenues will be
commissions on completed transactions. Based on discussions with financial
institutions and brokers, in today's market, commissions typically range from 50
to 300 basis points, which is approximately 0.50% to 3% of a transaction's
value, depending on the
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level of services provided by the finder or broker. AssetExchange currently
charges 30-150 basis points of a transaction's value and this fee is divided
between the buyer and seller equally. This pricing structure may be adjusted to
meet the practices of other industries as AssetExchange expands into other
classes of loan portfolios. AssetExchange anticipates that it will generate
additional revenues by providing links to its Internet website and selling
advertising space on its Internet website to vendors of related services.
AssetExchange believes that a possible future revenue stream may be subscription
fees paid by users of its network.
AssetExchange's initial marketing efforts will focus on aggressively
pursuing market-share and building the AssetExchange.com brand recognition. In
addition to the direct selling efforts of AssetExchange's employees, these
marketing efforts will include advertising in trade journals and direct mail
marketing programs. AssetExchange launched its Internet website in August 1999.
Lee Hansen, our President, currently sits on the Board of Directors of
AssetExchange, Inc. As of December 31, 1999, AssetExchange had not generated any
revenues, had assets of $367,128, net losses for the year ended December 31,
1999 of $112,049 and had an accumulated deficit of $112,049.
BrightStreet.com, Inc.
BrightStreet enables manufacturers, retailers and other Internet
websites to deliver, track, and analyze promotions targeted to Internet users.
BrightStreet's technology delivers its promotional offers to customers via the
Internet. BrightStreet operates a permission-based system which requires
consumers to register before they are permitted to receive promotional offers.
BrightStreet's technology allows its customers to track and analyze consumer
behavior by reporting the amount and type of promotional offers that each
consumer views, prints and redeems. BrightStreet licenses its services directly
to manufacturers, retailers, and Internet websites that publish non-product
related information for consumers. BrightStreet also offers a network of
affiliated Internet websites that distributes promotional offers for
manufacturers and retailers.
BrightStreet markets an Internet based service that allows
manufacturers, retailers, and Internet websites that publish non-product related
information for consumers to deliver customized promotions such as coupons and
free samples via their Internet websites. In doing so, these businesses develop
a rich consumer database, built from registration data that consumers provide as
a prerequisite to receiving valuable promotions, such as discounts on
merchandise and free product samples.
In addition to allowing consumers to register and download offers via
its customers' Internet websites, BrightStreet has created the BrightStreet
Network, a promotional network of affiliated Internet websites. The BrightStreet
Network offers customers who want a wider distribution of their promotions the
ability to place the promotions on the Internet websites of companies with whom
BrightStreet has a relationship. BrightStreet licenses a service from a third
party that allows its customers to create promotions. This system then delivers
these promotions to the affiliated network websites which are authorized to
display these promotions and deliver them to consumers. In these situations,
BrightStreet serves as an intermediary between its customers and consumers.
Manufacturers and retailers experience broader distribution of their promotions
and the portals get the Internet website content and revenues which they need,
with a high perceived value to the consumer.
BrightStreet intends to generate revenues from two sources:
o licensing fees from licensing its technology
platform and promotion services, and
o network fees from transactions,
sponsorships, and other marketing programs
on affiliate Internet websites.
As of December 31, 1999, BrightStreet had assets of approximately $19.1
million (unaudited), had generated minimal revenues, had net losses for the year
ended December 31, 1999 of $349,209 (unaudited) and had an accumulated deficit
of $349,209 (unaudited).
Net Value, Inc./BrightStreet.com, Inc.
Asset Sale Transaction
On December 3, 1999, Net Value, Inc. sold substantially all of its
assets to BrightStreet.com, Inc. (f/k/a Promotions Acquisition, Inc.), a
Delaware corporation formed by the former management team of Net Value, Inc. for
the purpose of acquiring the assets of Net Value, Inc. and succeeding to its
business. In exchange for substantially all of its assets, Net Value, Inc.
received:
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o cash of $2,000,000;
o the assumption of Net Value, Inc. liabilities
presently valued at approximately $1,600,000;
o the release of all of Net Value, Inc.'s obligations
under employment agreements;
o the cancellation of the majority of the issued and
outstanding Net Value, Inc. stock options held by Net
Value, Inc.'s employees; and
o 2,958,819 shares of BrightStreet common stock equal
to an approximate 14% ownership interest in
BrightStreet.
Simultaneous with this transaction, BrightStreet completed a
$17,000,000 equity financing of Series A Preferred Stock representing a 63%
interest in its stock, on a fully-diluted basis. The financing was provided by
Cox Enterprises, Inc., McClatchy Company (NYSE:MNI), CNI Ventures (NYSE:ECP) and
Sandler Capital Management.
Following the transaction, Net Value, Inc. loaned us the $2,000,000
proceeds it received in this transaction. We have agreed to use this cash to
satisfy Net Value, Inc.'s existing obligations which were not assumed by
BrightStreet. Any payments which we make to creditors on behalf of Net Value,
Inc. will reduce the unpaid principal and interest related to this loan.
Alternatively, Net Value, Inc. may issue additional equity to satisfy these
liabilities. We then plan to complete a merger with Net Value, Inc. pursuant to
which we intend to issue .4 shares of our common stock for every share of Net
Value, Inc. common stock tendered to us by the existing Net Value, Inc.
stockholders. We will also issue common stock purchase warrants and stock
options to the holders of Net Value, Inc.'s common stock purchase warrants and
vested stock options at the same exchange ratio. We currently own approximately
63% of the issued and outstanding shares of Net Value, Inc.'s common stock and
100% of the issued and outstanding shares of Net Value, Inc.'s Series A
Preferred Stock. Net Value, Inc.'s Series A Preferred Stock has the following
rights and preferences:
o Liquidation preference of $1.00 per share;
o Convertible at the option of either Net
Value, Inc. or the holder into 12.5 shares
of Net Value, Inc.'s common stock; and
o No dividends or voting rights.
College 411.com, Inc.
According to the U.S. Department of Education, in 1995 there were
approximately 13.9 million college students in the United States. This amount is
projected to increase to 16.1 million by 2007 for an average annual growth rate
of 1.7%. College students have significant buying power and influence in our
economy. Jupiter Communications estimates that United States college students
spend $100 billion annually and online student spending is expected to increase
to $2.5 billion by 2002.
College 41l's goal is to provide college students with an Internet
website that enables them to link to a large collection of student-oriented
resources on the Internet. College 411 intends to provide a wide array of
information and products and services that are useful to a college student.
College 411's Internet website provides the following content to college
students:
o news;
o research information;
o career counseling;
o procrastination tips; and
o dating tips.
College 411 has designed and launched several communication
applications on its Internet website that provide the following services:
o Proprietary search techniques are search methods developed by
College 411 that allow students to find more information about
a particular product or topic. For example, Comparison Book
Finder is a textbook price comparison tool which allows
students to obtain and compare prices for textbook titles from
multiple electronic stores (i.e., Amazon.com,
Barnesandnoble.com, etc.),
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o Communication applications such as Instant Messenger, an
application that allows college students to send messages to
each other,
o an Academics Research Engine that allows students to instantly
access information regarding over 10,000 topics, and
o a College Localization Tool which allows students to instantly
access information about their college or university.
College 411 is currently designing additional content sections of its
Internet website which will provide:
o auction services;
o online radio broadcasts
o classified advertisements
o travel guides, and
o game services
College 411 is attempting to enter into relationships with original
equipment manufacturers whereby College 411 will license its products and
services to these manufacturers for use with their equipment. College 411
believes that these co-branded relationships will be beneficial because they
will help to direct users to College 411's Internet website. College 411's
Internet website became operational in October 1999 and plans to begin adding
the additional content sections described above in January 2000. College 411
plans to generate cash flow from five sources: affiliate programs,
general/targeted advertising, firm branding, chargeable services and rental fees
for prominent partnerships on its Internet website.
We currently own 3,750,000 shares of College 411's common stock. This
represents approximately 27% of College 411's issued and outstanding common
stock. Darr Aley currently serves on College411's Board of Directors. As of
December 31, 1999, College 411 had not generated any revenues, had assets of
$60,717, net losses of $319,153 for the year ended December 31, 1999 and had an
accumulated deficit of $319,153.
IndustrialVortex.com, Inc.
IndustrialVortex.com is developing an Internet website that will
facilitate the purchase and sale of industrial automation products such as:
o motors;
o valves;
o sensors;
o timers;
o temperature controllers;
o generators;
o compressors;
o drives; and
o push buttons.
As a facilitator of business-to-business e-commerce,
IndustrialVortex.com is designing this website to provide purchasers with
relevant content that will permit them to make informed and cost-effective
purchasing decisions. IndustrialVortex.com's website will allow purchasers to
efficiently access many vendors of these products, to browse their product
offerings and pricing schedules, and to negotiate transactions with these
vendors through one website.
IndustrialVortex.com's Internet website will provide purchasers with a
set of e-commerce transaction tools, including catalog purchases, supplier
bidding, purchaser pooling, auctions and product showcasing. Purchasers will
access the website and have the ability to:
o chat with vendors on-line;
o chat with other purchasers of the products on-line;
o view pricing schedules;
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o view vendors' inventory records;
o view their past purchasing history; and
o track orders.
In this manner, IndustrialVortex.com is seeking to create an electronic
marketplace where vendors can communicate with existing and new customers in an
efficient manner. IndustrialVortex.com believes that its website will provide a
valuable service that would otherwise be extremely costly for individual vendors
to develop on their own. IndustrialVortex.com anticipates that it will generate
revenues from:
o transaction fees charged to vendors;
o service fees in connection with set-up and custom
features in support of these transactions; and
o the sale of reports describing purchasing and selling
patterns of the market, product performance and life
cycles as derived from data obtained based on
transactions conducted through its website.
IndustrialVortex.com believes that the cost of these fees to vendors
will be accompanied by significant reductions in selling costs which they
currently experience including telephone and telecopier charges, preparation and
delivery of mail catalogs, and the costs associated with bidding procedures,
proposals and purchase orders. IndustrialVortex.com launched its Internet
website on March 13, 2000. Allison Stollmeyer, our Director of Business
Development, is a director of IndustrialVortex.com. As of December 31, 1999,
IndustrialVortex.com had not generated any revenues, had assets of $21,631 and
had an accumulated deficit of $48,048.
metacat.com, Inc.
metacat is an online superstore for small catalogs. It offers a
one-stop shopping Internet website that allows consumers to browse and purchase
a wide variety of items. metacat has entered into merchant relationships with 12
multi-catalog and retail companies whose combined product offerings consist of
an aggregate of approximately 11,000 product SKU bar codes. metacat offers a
wide variety of goods at a single, searchable database. metacat believes that by
pairing the penetration and specialization of the catalog industry with the
Internet's unique retailing power, it will provide consumers with a convenient
and useful way to browse or shop over the Internet. metacat launched its
Internet website, which allows consumers to purchase a variety of consumer goods
from catalogs and mail order services that are linked to its Internet website,
in December 1999.
metacat is building an online store by aggregating the content of
thousands of small, print-based mail order catalogs into a database. This
database contains product descriptions and allows consumers to browse, obtain
information regarding the products and purchase the products directly from one
Internet website. metacat intends to form relationships with many different
catalogs and to use the pre-established distribution and inventory expertise of
individual catalogs to market products. Management believes that metacat will
offer small catalogs the high Internet profile that they could not otherwise
afford, serving as a front-end marketing organization for their products.
As a company that brings together a collection of useful information
and the ability to purchase products and services related to the information
presented, metacat serves as an intermediary between catalog retailers and
Internet customers. As the popularity of its Internet website grows, metacat
hopes to capitalize on the economies of scale possible in Internet retailing.
Economies of scale exist when a company experiences decreasing per-unit costs as
its total sales unit volume increases. Internet retailers can generally
experience economies of scale in their marketing, customer service and
technology functions. Marketing costs generally decrease on a per-unit basis as
Internet retailers grow, due to the increasing strength of their brand name via
word-of-mouth, and the decreasing per-unit costs of advertising as individual
advertising purchases increase in size. Customer service costs decrease on a
per-unit basis as staffing requirements can be spread over an expanded customer
base. Finally, since technology costs are generally a one-time investment that
is required to build an Internet website, this investment becomes a smaller
percentage of per unit costs as the company's sales volume increases.
metacat expects to focus on pre-existing distribution channels for the
many product categories too small, specialized, or diffuse to be exploited by
"category killers." A "category killer" is a retailer that attempts to present a
selection of merchandise that is so broad that it covers all consumer needs in a
given product category. For example, Toys "R" Us has often been described as a
"category killer" in the toys and entertainment retailing space. In the Internet
space, "category killer" refers to an Internet website that brings together
substantially all relevant information
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and product/service providers for a given category at one, unified Internet
website. For example, Amazon.com, Inc. provides consumers with an Internet
website that provides all of the information and service necessary to purchase
books and compact discs. metacat's management team anticipates that metacat will
establish itself as an important shopping destination on the Internet for
specialized and unique products through:
o A User-Friendly Interface: metacat is developing a
user-friendly interface that will include a full-featured
shopping cart, cookie-based tracking of past purchases to
facilitate payment processing and approval of credit card
orders while the consumer is on metacat's Internet website.
o Customer Service: metacat will focus on being responsive to
customer's needs throughout the ordering process. metacat will
accurately fill its product orders and promptly respond to
customers' questions and complaints regarding their purchases
through its Internet website. metacat plans to invest in
customer service software as well as training programs for its
customer service staff. In this manner, metacat hopes to
present a unified, consistently positive message to its
customers regarding service issues. Finally, customer service
will be delivered by hiring sufficient staff to handle service
requirements efficiently and in a courteous manner.
o Sales and Marketing: metacat's goal is to work with Internet
websites which serve as links or portals to many other
Internet websites and other companies that will increase
traffic to its Internet website. metacat will seek to develop
advertising relationships with these entities that will
include significant pay-for-performance components such as
revenue sharing agreements.
metacat plans to generate revenues by charging retailers who sell
products on its Internet website a commission calculated based on the gross
retail revenue of transactions completed on its Internet website. In the future,
metacat plans to develop additional revenue streams from selling advertisements
on its Internet website and charging product placement fees. metacat does not
expect to generate revenues from these sources until the third quarter of 2000.
As of December 31, 1999, metacat has not recognized any revenues, had
minimal assets, had net losses of $266,000 for the year ended December 31, 1999,
and had an accumulated deficit of $266,000.
Swapit.com
Swapit.com is creating a consumer-driven electronic barter exchange on
the Internet. Swapit.com believes that this service will enable the swap or sale
of consumer goods between individuals. Swapit.com 's goal is to build a service
that attempts to consolidate the fragmented $180 billion (DLJ) secondhand
distribution market. Swapit.com's service will first permit the trading of
music, movies, books and games, and will then diversify into other consumer
products. Swapit.com intends to generate revenues from:
o listing, transaction and referral fees;
o direct sales; and
o advertising revenues
Swapit.com's service will provide an environment that enables a
three-party exchange-based system. Consumers willing to trade will submit their
products to a central repository/warehouse. Once the consumer submits his
products into the warehouse, he can use the service to identify other consumer
goods of like value which he can then withdraw from the warehouse. Swapit.com
believes that using this three-party exchange system will exponentially increase
the chances of a successful trade, thereby generating a higher level of
revenues. Swapit.com launched its Internet website in April 2000.
Thomas Aley, our Executive Vice President, currently serves on
Swapit.com's Board of Directors. As of December 31, 1999, Swapit.com had not
generated any revenue, had assets of $1,392,058 and had an accumulated deficit
of $222,336.
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Webmodal, Inc.
Webmodal is developing an Internet application for use by shippers in
purchasing and executing domestic full-truckload intermodal freight shipments.
Domestic intermodal shipping involves the movement of freight over long
distances in the following manner:
o via truck from an origin point to the nearest railroad
hub;
o then via railroad for a majority of the trip; and
o via truck from the destination railroad hub to the
freight's final destination.
Intermodal shipping provides shippers with an opportunity to achieve
significant cost reductions in comparison to shipping freight via highway-only
trucking. However, intermodal shipping is presently characterized by a complex
and inefficient purchasing and execution process.
Webmodal is in the process of building an Internet application that it
anticipates will improve the process of evaluating and purchasing intermodal
transportation services. This interface will allow shippers to:
o input their specific transportation needs;
o view relevant transportation alternatives which may
satisfy those needs;
o assemble the service components of an intermodal
shipment, including an origin trucking carrier, a
railroad carrier and a destination trucking carrier; and
o execute an order for transportation services.
Today, shippers generally purchase intermodal transportation through
marketing intermediaries. The marketing intermediaries perform logistical
coordination tasks using labor intensive marketing and customer service
processes involving telephone and facsimile communications with customers and
carriers. In using these traditional intermediaries to purchase transportation
services, shippers do not generally have access to information on prices and
schedules associated with underlying transportation services. As a result,
shippers are typically unable to confirm that optimal service selections are
being made on their behalf. In addition, because shippers using traditional
intermediaries are not typically made aware of the costs associated with the
underlying transportation services, they are unable to readily observe the fee
that is being paid to the intermediary for management of their shipments.
Webmodal's services will allow shippers to replace their dependence on
these traditional marketing intermediaries with an on-line solution which will
provide complete information regarding carrier rates, schedules and service
performance records. Analogous to an online travel agent, Webmodal plans to
eliminate the need for cumbersome research and negotiation with marketing
intermediaries by collecting all relevant information into a single
user-friendly database. Webmodal will also reduce the manpower costs associated
with traditional marketing intermediaries. Webmodal's service will replace the
telephone, facsimile and other labor-intensive processes and communications
necessary to initiate and coordinate intermodal shipments with immediate,
automated digital connections with carriers.
In addition to creating an Internet application that it believes will
simplify the purchase and execution of domestic full-truckload intermodal
transportation, Webmodal is also positioned to expand into related market
segments such as the provision of a similar purchasing interface for:
o over-the-road trucking;
o railroad shipping; and
o international container shipping.
Webmodal also plans to offer related products such as:
o online traffic analysis tools for shipping customers;
and
o multi-carrier shipment coordination product for
marketing to carriers and intermediaries.
By replacing labor-intensive marketing and carrier coordination
functions with a simple Internet application, Webmodal hopes to streamline the
relationship between shippers and carriers and lower the costs associated with
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intermodal freight transportation. Webmodal is currently designing its
technology and expects to launch its Internet website in 2000.
As of December 31, 1999, Webmodal had not generated any revenues, had
assets of approximately $1,450,000 (unaudited), net losses of approximately
$350,000 (unaudited) for the twelve months ended December 31, 1999 and an
accumulated deficit of approximately $350,000 (unaudited).
YesAsia, Inc.
YesAsia is an e-commerce company catering to individuals of Asian
descent located throughout the world who either lack easy access to a broad
range of media titles when living outside their native country or who simply
enjoy media from other cultures. With over 60,000 product offerings, YesAsia's
revenues and customer base have grown by more than 80% per calendar quarter
since its inception. Management believes that YesAsia is poised to expand its
United States based e-commerce business model into new international markets and
to take advantage of the rapidly growing Asian online presence in the United
States and worldwide. YesAsia was founded in January 1998 and launched its
Internet website, www.YesAsia.com, in May 1998. YesAsia currently has 51
employees working in four offices located in the following cities:
o San Francisco (38);
o Hong Kong (6);
o Taiwan (5); and
o Japan (2).
YesAsia has over 38,000 customers who have purchased products from its
Internet website. Approximately 44% of these customers have returned to
YesAsia's Internet website and made at least one additional purchase. The
average order size for each YesAsia customer is approximately $40. YesAsia
expects to experience continued sales growth as a result of its aggressive
marketing in the United States. YesAsia currently plans to initiate a marketing
campaign that will include:
o Television and radio commercials;
o Print advertisements;
o Public relations and event sponsorships; and
o Internet advertisements.
YesAsia also plans to expand into other Asian markets where it will
apply its concept of "cross-cultural sales." By establishing business
infrastructure across multiple markets across Asia and with Hong Kong as its
strategic hub, YesAsia will extend its geographic reach to various Asian markets
while diversifying its product selection. By providing convenient, inexpensive
access to a broad range of titles "foreign" to a given market, YesAsia taps into
the increasingly global nature of mass media and uses the Internet to fulfill a
need that is not adequately serviced in the traditional bricks and mortar world.
In the United States, YesAsia's Internet website offers access to Cantonese,
Mandarin, Japanese and Korean products. In Hong Kong and Taiwan, it intends to
offer convenient access to European, Japanese and American titles, at
competitive prices which include local rather than international shipping costs.
YesAsia has established accounts with three major record companies and five
movie production companies in Hong Kong. YesAsia purchases all products which it
sells in Hong Kong and Taiwan either directly from these companies or from
authorized distributors of these companies. YesAsia intends to utilize its
presence in multiple nations to increase distribution and purchasing power.
YesAsia currently sells compact discs, digital video discs, electronic video
games, karaoke, videocassettes and related electronics. YesAsia recently
completed a private placement offering pursuant to which it raised approximately
$11.7 million. This placement was provided by Walden International Investment
Group, Morgan Stanley Dean Witter Private Equity and Hong Kong
Telecommunications. YesAsia plans to use the proceeds of this offering to expand
its Asian online business and plans to open offices in China, Singapore and
Korea by December 31, 2000.
Stephen George, a member of our Board of Directors, currently serves on
YesAsia's board of directors. For year ended December 31, 1999, YesAsia had
generated $2,278,429 in revenues (unaudited). YesAsia's losses for the year
ended December 31, 1999 were $572,634 (unaudited). As of December 31, 1999,
YesAsia's accumulated deficit was $716,124 (unaudited).
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Competition
We face competition for capital from publicly-traded Internet
companies, venture capital companies, consulting firms and large corporations.
Many of these competitors have greater financial resources and brand name
recognition than we do. These competitors may limit our opportunity to acquire
interests in new affiliate companies. If we cannot acquire interests in or
internally develop promising companies, then our strategy to develop and build a
collaborative network of affiliate companies may not succeed.
Competition for Internet products and services is intense. As the
market for e-commerce products and services grows, we expect that competition
will intensify. Barriers to entry are minimal, and competitors can offer
products and services at a relatively low cost.
In addition, some of our affiliate companies compete to attract and
retain a critical mass of buyers and sellers. Several companies offer
competitive solutions that compete with one or more of our affiliate companies.
We expect that additional companies will offer competing solutions on a
stand-alone or combined basis in the future. Furthermore, our affiliate
companies' competitors may develop Internet products or services that are
superior to, or have greater market acceptance than, the solutions offered by
our affiliate companies. If our affiliate companies are unable to compete
successfully against their competitors, then our affiliate companies may fail.
Many of our affiliate companies' competitors have greater brand
recognition and greater financial, marketing and other resources than our
affiliate companies. This may place our affiliate companies at a disadvantage in
responding to their competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
AlarmX.com expects to face competition for online ordering of security
alarm and low voltage products from various industry manufacturers and
distributors. As the business-to-business marketplace grows, and manufacturers
and distributors look for new channels of business, online ordering will likely
be a natural progression for them. For example, ADI, the security alarm
industry's largest distributor, recently launched online ordering for its
customer base www.adilink.com. Another industry distributor, Supply Dog
(www.supplydog.com), is an inventory shipping company that accepts security
alarm product orders online. Additionally, www.orderzone.com is serving the
electrical supply market and carries some low voltage products. While some niche
market companies may establish e-commerce ordering markets targeted by
AlarmX.com, none have attempted to aggregate all of the security and low voltage
products industries. This is the market in which AlarmX.com plans to
participate. In addition, AlarmX.com will also compete with bricks and mortar
locations, which have traditionally serviced the security and low voltage
products industry.
AssetExchange competes for financial asset transaction business with an
existing highly fragmented marketplace of buyers and sellers working directly or
through a variety of intermediaries to complete transactions. AssetExchange
allows members to transact a variety of types of loan portfolios, with an
initial focus on credit card portfolios. There are competitors supporting
transactions of residential and commercial mortgages, but none offering credit
card portfolios or multiple asset classes. The online asset brokerage business
is new and rapidly evolving and it is likely that other entities will emerge and
attempt to compete in this market. It is feasible for buyers and sellers to make
direct contact to negotiate transactions without using AssetExchange or a
competing service, and buyers and sellers may also continue to use existing
brokers. However, AssetExchange believes that the demonstrated efficiencies such
as improved price and deal discovery, the ability to quickly access and analyze
data and cost savings associated with its service will be attractive even to
sophisticated buyers and sellers. Potential competitors include businesses
currently conducting online mortgage portfolio auctions and existing brokers who
may enter the market for credit card portfolio transactions or otherwise broaden
their offerings.
BrightStreet faces significant competition from many promotion and
advertising companies as well as on-line publishers which compete, directly or
indirectly, for consumer advertising and promotion business from advertisers and
for consumers' time and attention. Competitors include Catalina Marketing
Corporation, Money Mailer, Val-Pak Direct Marketing Systems, Interactive Coupon
Network, Valassis Communications, Inc. and News America Holdings Incorporated,
who to date primarily operate by distribution of coupons in printed form through
mailings, newspaper inserts and other mass media. These competitors and others
may initiate programs and services involving the Internet which would compete
directly with BrightStreet. Additionally, the Internet is a relatively new
format through which retailers and consumers conduct business. As the Internet
evolves and consumers gain greater confidence in the Internet and other means of
electronic commerce, it is likely that competition will increase.
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College 411 has several principal competitors, including College Club,
MyBytes and Student Advantage. College Club seeks to create virtual college
communities online to enhance the educational experience of college students.
MyBytes provides free academic resources, community-building capabilities,
communications tools, lifestyle services and original content to college
students. Student Advantage, originally an off-line provider of retail discounts
to college students at stores in the areas around college campuses, is building
a similar on-line presence. Each of these Internet websites provides products
and services similar to those provided by College 411. In addition to these
entities, College 411 will compete secondarily with many other online providers
of content that appeals to college students and with print and electronic media
including television and radio, newspapers and magazines that target young
adults. College 411's ability to compete will be dependent on its ability to
provide content and services that appeal to college students. In order to do so,
College 411 will have a staff of recent college graduates evaluating and
producing its content and services.
IndustrialVortex.com expects to face competition from many
business-to-business Internet websites that are entering various segments of the
industrial products market. For example, www.industria.com is serving the
process control industry for maintenance and repair products,
www.purchasingcenter.com is serving the industrial market for maintenance and
repair products, and www.grainger.com is also serving the industrial market for
maintenance and repair products While each of the companies that operate these
Internet websites has expertise in each of their substantive industries, none of
these companies has attempted to enter the market for industrial automation
products such as programmable logic controllers, drives, sensors, temperature
controllers, generators, motors, valves and measurement devices.
IndustrialVortex.com will also compete with catalogs and bricks and mortar
locations which have traditionally serviced the industrial products industry.
The key differentiation between many of the maintenance and repair products
companies and IndustrialVortex.com is that IndustrialVortex.com is addressing
the complex nature of the sales cycle, products and supply chain that is
inherent in the complex industrial automation products sector. As a result,
IndustrialVortex.com directs its sales efforts towards industrial engineers
instead of purchasing managers, who are generally the targets of the sales
efforts of companies targeting the maintenance and repair products industry
segment.
metacat.com, Inc. competes with a wide variety of online and offline
sources for mail order products. metacat's competition includes thousands of
sources from which consumers can make purchases, including traditional bricks
and mortar stores, print-based mail order catalogs, individual merchants' online
catalogs and online aggregators of products and catalogs. metacat directly
competes with online competitors including catalogcity.com and The Good Catalog
Company. Catalogcity.com has indexed thousands of print catalog titles on their
Internet website. Each catalog offers a limited number of products for direct
sale through the catalogcity.com Internet website, with links to the catalog
merchant's own Internet website (if one exists). Catalogcity targets well-known
retailers such as Sharper Image, Land's End and Hammacher Schlemmer, many of
whom have their own Internet websites that compete directly with catalogcity.
metacat targets smaller merchants. In addition, metacat is not organized by
catalog, permitting consumers to make a more directed search by product.
Finally, metacat intends to offer for direct sale a large selection of the
products offered in the catalogs of its merchants rather than a selected few
products from each merchant. While The Good Catalog Company has product content
that overlaps with metacat's products, the companies' business models are
significantly different. Fundamentally, The Good Catalog Company works with
manufacturers rather than catalog retailers or other specialty merchants. Many
of these manufacturers lack significant direct fulfillment capability and use
The Good Catalog Company to service a retail channel which they cannot service
internally. metacat believes that the significant differences in the product mix
and ease of purchase that its Internet website provides will permit it to
compete effectively with these online merchants.
Swapit.com expects competition in the market for trading and sales over
the Internet to intensify in the future. Though its business concept can be
differentiated from existing person-to-person trading services, barriers to
entry are relatively low, and the necessary hardware and software is
commercially available. Services similar to Swapit.com could therefore appear at
any time. In addition Swapit.com expects that it will compete heavily with
existing person-to-person trading services including eBay, Yahoo!, Auctions,
Amazon.com, Excite, Inc., Auction Universe and a number of other small services.
It will also compete indirectly with business-to-consumer online auction
services such as Onsale, First Auction, Surplus Auction and uBid. It potentially
faces competition from any number of large online communities and services that
have expertise in developing online commerce and in facilitating online trading
and who could rapidly develop and launch services similar to Swapit.com prior to
or after Swapit.com's appearance. Some current and many potential competitors
have longer company operating histories, larger customer bases and greater brand
recognition in other business and Internet markets than Swapit.com. Some of
these competitors also have significantly greater financial, marketing,
technical and other resources.
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Webmodal faces competition from at least 50 intermodal marketing
companies such as The Hub Group and Mark VII Transportation, Inc., approximately
five large intermodal-enabled trucking companies such as J.B. Hunt
Transportation Services, Inc. and Schneider National, numerous railroads and
trucking companies and third-party logistics providers, as well as
transportation-related e-commerce ventures such as Freightwise, Transplace.com,
The National Transportation Exchange, Inc., FreightQuote and Celarix. Many
actual and potential competitors possess advantages such as existing business
relationships and substantially greater financial resources. Some of these
companies have introduced on-line capabilities which offer some of the services
intended to be offered by Webmodal or which offer services which are similar to
Webmodal's intended services to customers outside of Webmodal's target
intermodal market. These companies could expand their marketing and operational
efforts or existing online capabilities to develop a system similar to
Webmodal's intended system. However, Webmodal is not aware of a competitor who
has developed or introduced a product concept for intermodal transportation that
includes all of Webmodal's intended product capabilities. Webmodal believes it
will have operational advantages that will allow it to compete effectively. For
example, Webmodal expects to realize considerably greater marketing and customer
service staff productivity than traditional transportation and transportation
marketing companies. Webmodal believes an existing transportation intermediary
interested in deploying a similar business model would risk significant profit
margin erosion and disruption of existing selling processes.
YesAsia competes generally with all retailers of entertainment media
titles that include Asian selections. Most mass market retailers, including
bricks and mortar retailers such as Walmart, HMV and Borders, and online
retailers such as Amazon.com, carry a limited number of Asian titles and
therefore compete only slightly with YesAsia. If a large, well-funded company
launches an Internet website directed at sales of Asian media titles to the
Asian population in the United States, it will compete directly with YesAsia and
could reduce YesAsia's revenues and cause an increase in YesAsia's marketing
expenses in response. However, YesAsia is not aware of any Internet website that
is proposing to materially increase its Asian media offerings or launch an
Asia-specific Internet website. As YesAsia becomes a more prominent player in
the online Asian video and music space, it is likely to experience increased
competition, either from larger entities with broad offerings that include Asian
titles or from other Asia-specific Internet websites. YesAsia believes that it
will have a significant competitive advantage due to its status as the first
such Internet website and its use of local language that captures and enhances
the visitor's experience.
Investment Company Act of 1940
We are primarily engaged in the building of technology companies that
we manage as part of an integrated supportive network of "affiliate companies".
However, due to our ownership of equity securities of our affiliate companies,
we could be considered an "investment company" under the Investment Company Act
of 1940, which regulates mutual funds and other entities which meet the
definition of an "investment company." An "investment company" generally
includes any entity that is engaged primarily in the business of investing,
reinvesting and trading in securities. The rules under the Investment Company
Act provide in part that an entity is presumed not to be an investment company
if 45% or less of the value of its total assets (excluding government securities
and cash) consists of, and 45% or less of its income over the last four quarters
is derived from, securities other than either government securities or
securities issued by entities that it does not primarily control which are not
themselves engaged in the business of investing in securities. As the
regulations governing the relationship between an investment company and the
entities in which it invests are inconsistent with the manner in which we intend
to provide services to our affiliate companies, it is critical to our business
plan that we not be an investment company subject to the Investment Company Act.
Under current federal securities regulations, we will be considered to
primarily control an entity if we own more than 25% of its voting securities and
have more control than any other single owner. Accordingly, at March 31, 2000,
we are considered to control metacat, Swapit.com, Industrialvortex.com,
AlarmX.com and College411.com. Prior to the sale of Net Value, Inc.'s assets to
BrightStreet, the assets and income of our affiliate companies that we do not
primarily control did not exceed the limits described above. As a result of the
sale, the assets and income of our non-primarily controlled affiliate companies
currently exceed those limits. Under current regulations, we have a "safe
harbor" period of one year during which we will not be considered an investment
company, provided that we have a bona fide intent to primarily engage in a
business other than that of investing, reinvesting and trading in securities as
soon as reasonably possible. Our board of directors has adopted a resolution
confirming this intent. We intend to meet this standard by providing substantial
services to our affiliate companies and, to the extent possible, structuring
future affiliate company investments to include at least a 25% voting
percentage, board representation, approval rights over material decisions and
other features that will give us "primary control" for purposes of the
Investment Company Act. In this manner, we will maintain the assets of and
income
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derived from our non-primarily controlled affiliate companies below 45% of our
total assets and income. However, fluctuations in the value of our interests in
our affiliate companies may make it difficult for us to accomplish and maintain
this goal. Accordingly, in order to satisfy this goal we may from time to time
dispose of interests in some of our non-controlled affiliate companies.
The regulations under the Investment Company Act provide an exemption
from the definition of an investment company for any entity which the Securities
and Exchange Commission finds is primarily engaged in a business other than
investing in securities. We may apply to the Securities and Exchange Commission
for this exemption. If we are granted this exemption, we may have greater
latitude in structuring investments in affiliate companies and may not be
compelled to dispose of interests in non-controlled affiliate companies in order
to maintain our non-investment company status.
Employees
As of April 30, 2000, excluding our affiliate companies, we had 23
full-time employees. None of our employees are currently covered by collective
bargaining agreements and we consider our relations with our employees to be
satisfactory.
History
We were formed as a Florida corporation in 1991. We did not have any
operations until our change of domicile into Delaware in October 1998. This
occurred in conjunction with our acquisition of a controlling interest in Net
Value, Inc. during the fourth quarter of 1998.
The operation of Net Value, Inc. was the primary focus of our
activities during the first half of 1999. In recognition, however, of the
evolving growth opportunities within the Internet industry, during the second
half of 1999, we shifted the focus of our business strategy to the development
and management of a network of early stage technology businesses. We commenced
this business by acquiring our equity interests in metacat.com, Inc., YesAsia,
Inc. and College411.com, Inc. in July 1999 when we merged with Strategicus
Partners, Inc. We acquired the remainder of our affiliate companies thereafter
in 1999 and 2000 in separately negotiated independent transactions. As of April
30, 2000, we owned equity interests in nine affiliate companies.
Factors Affecting Our Business Condition
In addition to other information included in this report, the following
factors should be considered in evaluating our business and future prospects:
RISKS PARTICULAR TO NET VALUE HOLDINGS, INC.
We have a very limited operating history upon which you may evaluate an
investment in Net Value Holdings.
We did not begin to implement our current business plan until July 1999
and therefore have a very limited operating history upon which you may evaluate
making an investment in our company. In addition, all of our current affiliate
companies are early stage companies that have limited operating histories and
have generated very limited, if any, revenues or earnings from operations since
inception. Accordingly, you will only be able to examine limited operating
results of our affiliate companies in making your investment decision.
Our proposed operations are speculative in nature and may not ever result in any
operating revenues or profits.
We are not certain that our business model, even if successful, will
result in operating revenues or profits. Our success depends upon our ability to
develop or select affiliate companies that are ultimately successful. As a
holding company without significant income from operations, we expect to
ultimately derive the cash flow necessary to fund our operations from the
operations and/or sale of our affiliate companies. As of the date of this Annual
Report, none of our affiliate companies have generated operating revenues
sufficient to pay dividends to us. Furthermore, we have not yet sold any of our
equity interests in our affiliate companies. Accordingly, we do not have an
established history of selecting and developing successful affiliate companies.
Economic, governmental,
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regulatory and industry factors outside our control affect each of our affiliate
companies. If our affiliate companies do not successfully implement their
business plans with the assistance of our experiences and methodologies, then we
will not be able to achieve our business plan. Accordingly, if these events
occur, then we will not generate any revenues and the value of our assets and
the market price of our common stock will decline. There are also material risks
relating to the businesses of our affiliate companies. Accordingly, the success
of our operations will be dependent upon the management and operations of our
affiliate companies, the timing of the marketing of our affiliate companies'
products and numerous other factors beyond our control.
We have had a history of losses and expect continued losses in the foreseeable
future.
For the year ended December 31, 1999, we realized a net loss to common
stockholders of $30,436,357. For the year ended December 31, 1998, we realized a
net loss to common stockholders of $27,987,645. We expect to continue to incur
losses for the foreseeable future and, if we ever have profits, we may not be
able to sustain them. Our expenses will increase as we continue in the
development stage of our business model and as we continue to build an
infrastructure for our network of affiliate companies. For example, we expect to
hire additional employees to manage both our operations and the operations of
our majority-owned affiliate companies and to provide services to our
minority-owned affiliate companies. If any of these and other expenses are not
accompanied by increased revenues, then our losses will be greater than we
anticipate.
Our success could be impaired by valuations placed on Internet-related companies
by the investment community.
Our strategy involves creating value for our stockholders by developing
our affiliate companies and helping them to gain access to the capital markets
so that they can raise additional funds to satisfy their business plans. Since
our initial acquisitions have been equity interests in Internet companies, we
are dependent on the success of the market for Internet-related companies in
general and for initial public offerings of those companies in particular. Until
March 2000, there had been a substantial number of Internet-related initial
public offerings and private venture financings. During the second half of March
2000 and throughout April 2000, the domestic and international stock markets
have generally experienced a correction and the public trading prices, market
capitalizations and valuations of many technology and Internet-related companies
have significantly decreased. During this period, Internet-related initial
public offerings and private venture financings have decreased in both number
and size. If present market conditions continue for an extended period of time,
then the ability of our affiliate companies to grow and access the capital
markets may be impaired and we may need to provide additional capital to our
affiliate companies in order to ensure that they meet their business plans on a
timely basis and to protect the value of our equity holdings. Furthermore, if
present market conditions continue for an extended period of time, then we may
be unable to access the capital markets to raise sufficient funds to enable us
to provide additional capital to our affiliate companies on a timely basis. If
we are unable to provide additional capital to our affiliate companies in these
circumstances on a timely basis, then our affiliate companies' operations may
suffer, we will not successfully implement our business plan and the value of
our common stock may decrease.
Our existing stockholders may experience additional dilution of their ownership
interests due to the issuance of shares of our common stock upon exercise or
conversion of existing derivative securities, the hiring of additional
personnel, in settlement of an outstanding claim by a former employee, or in
connection with future acquisitions of other companies.
We may in the future issue our previously authorized and unissued
securities which will result in the dilution of the ownership interests of our
present stockholders. We currently have 50,000,000 shares of common stock that
are authorized for issuance, of which we have issued 17,680,672 shares as of
April 30, 2000. We may in the future issue up to 12,518,653 additional shares of
our common stock to holders of our convertible securities which are currently
issued and outstanding, as follows:
Common Stock Purchase Warrants 1,934,738
Series C Preferred Stock 4,166,667
Options to Purchase Shares of Common Stock
Granted to Employees, Consultants and
Advisory Board Members 6,417,248
---------
12,518,653
We may issue additional shares of our common stock in connection with
o the hiring of additional personnel;
o future acquisitions;
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o settlement or resolution of a pending legal
proceeding described on page 28 of this Annual Report
filed against us by Douglas Spink, a former employee,
whom we recently terminated "for cause;" and
o for other valid business purposes within the
discretion of our Board of Directors.
Our issuance of these shares of common stock will also dilute the
ownership interests of our existing stockholders.
The influx of additional shares of our common stock onto the market may create
downward pressure on the trading price of our common stock.
The initial sale or secondary resale of substantial amounts of our
common stock in the public markets can have an adverse effect on the market
price of our common stock and make it more difficult for us to sell our equity
securities in the future at prices which we deem appropriate. Since our
operations have been funded primarily through the sale of restricted securities,
a significant amount of our issued and outstanding securities have not been
eligible for public resale. By virtue of registration rights which we granted in
connection with our recently completed private financings, and by operation of
Rule 144 of the Securities Act of 1933, we estimate that approximately
16,500,000 shares of our common stock will become periodically eligible for
public resale through June 30, 2001. The resale of these shares into the public
market, or the mere perception that these resales could occur, could adversely
affect the market price of our common stock and could impair our ability to
obtain capital through securities offerings.
There is a scarcity of and competition for acquisition opportunities.
There are a limited number of technology-based businesses seeking
investment capital which we deem to be desirable candidates to become affiliate
companies and there is a very high level of competition among companies seeking
to acquire interests in these entities. We are and will continue to be a very
minor participant in the business of seeking business relationships with, and
acquisitions of interests in early stage technology businesses of which Internet
companies presently constitute the largest concentration. A large number of
established and well-financed entities, including venture capital firms, are
active in acquiring interests in companies which we may find to be desirable
candidates to become affiliate companies. Many of these investment- oriented
entities have significantly greater financial resources, technical expertise and
managerial capabilities than us. Consequently, we will be at a competitive
disadvantage in negotiating and executing possible investments in these entities
as they generally have easier access to capital, which entrepreneurs of
development stage companies generally place greater emphasis on than obtaining
the management skills and networking services that we provide to our affiliate
companies. Even if we are able to successfully compete with these venture
capital entities, this competition may affect the terms of completed
transactions and, as a result, we may pay more than we expected for interests in
affiliate companies. We may not be able to identify companies that complement
our strategy, and even if we identify a company that complements our strategy,
we may be unable to acquire an interest in the company for many reasons,
including:
o a failure to agree on the terms necessary for a
transaction, such as the amount or price of our
equity interest;
o incompatibility between our operational strategies
and management philosophies and those of the
affiliate company;
o competition from other acquirers of Internet
companies;
o a lack of sufficient capital to acquire an interest
in a potential affiliate company; and
o the unwillingness of a potential affiliate company to
affiliate with our corporation or our other affiliate
companies.
If we are unable to successfully compete with other entities in
identifying and executing possible business opportunities, then we will not be
able to successfully implement our business plan.
We may be required to dispose of our interests in our affiliate companies or
take other actions which we would not otherwise take in order to avoid
classification as an investment company under the Investment Company Act of
1940.
Although we are primarily engaged in the business of e-commerce through
our affiliate companies, our ownership of equity interests in our affiliate
companies that are not majority interests could result in our classification as
an investment company under the Investment Company Act of 1940. If we are
required to register as an investment company, then we will incur substantial
additional expense as the result of the Investment Company Act of 1940's record
keeping, reporting, voting, proxy disclosure and other requirements. In
addition, restrictions on transactions between an investment company and its
affiliates under the Investment Company Act of 1940 would
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make it difficult, if not impossible, for us to fully implement our strategy of
actively managing, operating and promoting collaboration among our network of
affiliate companies. As a result, we intend to take whatever steps are necessary
in order not to be required to register as an investment company, and may be
forced to sell interests in affiliate companies which we otherwise would
continue to hold. Such sales may be for less than fair market value due to the
Company's need to dispose of the securities. A company is presumed to be an
investment company under the Investment Company Act of 1940 if more than 45% of
its total assets consists of, and more than 45% of its income/loss and revenue
attributable to it over the last four quarters is derived from, ownership
interests in companies it does not primarily control. Under the Investment
Company Act of 1940, we are considered to primarily control a company if we own
more than 25% of that company's voting securities and have more control than any
other single owner. Prior to the sale by Net Value, Inc. of its assets to
BrightStreet, Net Value, Inc. alone constituted greater than 55% of our total
assets and substantially in excess of 55% of income/loss and revenues for the
past four fiscal quarters. As a result of the sale, we have more than 45% of our
total assets comprised of and more than 45% of our income/loss over the prior
four fiscal quarters derived from ownership interest in companies we do not
primarily control.
The rules under the Investment Company Act of 1940 provide us with a
grace period of one year, at the end of which we must be primarily engaged in a
business other than that of investing reinvesting owning, holding or trading in
securities. We intend to meet the foregoing tests by expanding the range of
services that we provide and operating our business through our affiliate
companies in a manner that demonstrates that our primary business activity is
e-commerce, as well as through our ownership interests in companies which we
primarily control. However, because six of our affiliate companies are not
majority-owned subsidiaries and we may not retain a majority ownership interest
in our other two affiliate companies, changes in the value of our ownership
interests in our affiliate companies and the income/loss and revenue
attributable to our affiliate companies could require us to register as an
investment company under the Investment Company Act of 1940 unless we take
action to avoid registration requirements. For example, we may be forced to sell
our minority ownership interests in some of our affiliate companies which we do
not want to sell and any sale may be at less than fair market value as we will
be selling restricted securities in privately negotiated transactions. We may
also have to ensure that we retain at least a 25% voting ownership interest in
our majority-owned affiliate companies after their initial public offerings, if
any. In addition, we may have to acquire additional income or loss generating
assets that we might not otherwise have acquired or may have to forego
opportunities to acquire interests in companies that we would otherwise want to
acquire in connection with executing our business strategy.
In order to be certain of our status under the Investment Company Act
of 1940, we may apply to the Securities and Exchange Commission for an order
finding that we are primarily engaged in a business other than investing in
securities. We can give no assurance that such an order, if applied for, will be
granted.
We are not required to follow any specific criteria for identifying affiliate
companies, and therefore may acquire interests in affiliate companies that do
not meet the criteria we have described.
To date, we have focused our acquisition and affiliating efforts on
technology businesses whose operations are focused in the Internet industry and
generally meet the following criteria:
o early stage entity;
o seeking less than $2.5 million in capital;
o management that is experienced in the substantive
industry in which the affiliate company will operate;
and
o offer compelling market opportunities.
However, we are not obligated to follow any particular operating, financial,
geographic or other criteria in evaluating candidates for potential business
combinations. In addition, we are not required to acquire interests in any
number of affiliate companies, complete any number of business combinations, or
internally develop any number of affiliate companies in any calendar year. We
will determine which target companies provide the best potential financial
return for our stockholders and we will determine the amount of equity and other
terms and conditions of investments. Stockholders will not have the opportunity
to evaluate the relevant economic, financial and other information that our
management team will use and consider in deciding whether or not to enter into a
particular business combination or factors or strategies which they will
implement in developing such relationships. We are not certain that we will be
successful in identifying and evaluating suitable business opportunities and
consummating business combinations with or acquiring interests in additional
affiliate companies. We do not anticipate that our affiliate companies'
operations will have a short-term positive impact on our operations. Thus, we
continue to seek additional target companies and are continuing to develop
companies based on our internally conceived business
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ideas. These companies may operate in industries in which members of our
management team have little or no prior experience.
We expect our affiliate companies to grow rapidly and if we are unable to assist
them in sustaining and managing their growth, our affiliate companies'
businesses will suffer, which will adversely affect our business.
Our affiliate companies may experience rapid growth as they introduce
new products and services and hire additional employees to manage expanded areas
of development and service a growing number of consumers. Since such growth may
not be accompanied by immediate increases in revenues, this growth is likely to
place significant strain on their resources and on the resources we allocate to
assist our affiliate companies. In addition, our management may be unable to
convince our affiliate companies to adopt our ideas effectively, and the
affiliate companies may fail in their attempt to execute our ideas or
successfully manage their growth. If we are unable to effectively assist our
affiliate companies in managing their growth, then they may not sustain
profitable operations and the value of our common stock may decrease.
Our Officers and Directors have acquired personal interests in our affiliate
companies which may create conflicts of interest that may adversely affect our
stockholders' best interests.
Darr Aley, Stephen George, Andrew P. Panzo, Barry Uphoff and Lee
Hansen, who are among our Officers and Directors, personally own interests or
rights to purchase interests in YesAsia, Inc. Tom Aley, an Officer of our
company, personally owns an interest in Swapit.com. This may cause the interests
of these individuals to conflict with our stockholders' best interests. If the
operations of YesAsia, Inc. or Swapit.com are unsuccessful, it may be in our
stockholders' best interests for us to either divest our ownership interest in
this affiliate company or devote a smaller percentage of our management
resources to assisting in the development of this affiliate company. In
addition, in order to avoid registration under the Investment Company Act of
1940, we may have to divest our ownership interest in a particular affiliate
company. However, the officer(s) or director(s) who own a personal interest in
this affiliate company may vote not to take this action or may seek to continue
to devote management resources to this affiliate company due to his personal
interest. Our Board of Directors has implemented a policy prohibiting our
officers and directors from acquiring personal interests in our affiliate
companies in the future.
If we are unable to obtain additional financing, then our business will suffer.
We will need to raise substantial additional financing in the future to
support our working capital needs or our affiliate companies' working capital
needs and to provide us with sufficient funding to enter into additional
business relationships and start additional early stage companies. As of April
30, 2000, we had on hand existing cash and cash equivalents of approximately
$44.8 million. Based on our projected level of operations and funding
requirements, these funds should be sufficient to sustain our operations until
June 30, 2001. However, should the level of our operations or funding
requirements increase, we will require additional capital sooner than we expect.
This could occur for a number of reasons, including:
o We purchase an interest in a greater number of
affiliate companies than we presently anticipate;
o Our level of investment in affiliate companies is
greater than we presently anticipate; or
o We participate in subsequent rounds of financing
conducted by our affiliate companies to a greater
extent than we presently anticipate.
If we are unable to secure additional financing on acceptable terms, then we
will not be able to fully implement our business plan.
Our success is dependent on our continued employment of Andrew P. Panzo and Lee
C. Hansen, and the continued employment by our affiliate companies of their key
personnel, and if we were to lose the services of these individuals, our
business and the businesses of our affiliate companies would be negatively
affected.
We believe that our success will depend on continued employment by us
and our affiliate companies of senior management and key technical personnel. If
one or more members of our management team or the management teams of any of our
affiliate companies are unable or unwilling to continue in their present
positions, then our business and operations could be disrupted.
25
<PAGE>
As of April 30, 2000, our entire management team, other than Andrew P.
Panzo, has worked for us for less than one year. Andrew P. Panzo joined our
management team in January 1999. Other than Lee C. Hansen, our President who
joined us on October 1, 1999, the remainder of our management team and directors
joined our company in July 1999 in connection with our merger with Strategicus
Partners, Inc. and thereafter. Our efficiency may be limited while these
employees, directors and future employees are being integrated into our
operations. In addition, we may be unable to identify and hire additional
qualified management and professional personnel to help lead us and our
affiliate companies.
Our affiliate companies will need to continue to hire additional
qualified personnel as their businesses grow. A shortage in the number of
trained technical and marketing personnel could limit the ability of our
affiliate companies to increase the sales of their existing products and
services and launch new product offerings.
We have issued a significant amount of stock-based compensation to our
employees, consultants and members of our Board of Directors, and this
compensation has significantly decreased and will continue to significantly
decrease our earnings.
In 1999, we recorded deferred compensation of $32.3 million related to
compensatory stock options and restricted stock awards to our employees,
consultants and members of our Board of Directors. As a result of these
compensatory option grants and restricted stock awards, we recorded amortization
of deferred compensation of $5.0 million to stock-based compensation during
1999. We will continue to record amortization of deferred compensation as these
option and stock awards vest, thus reducing our earnings in future years.
We will incur a significant expense in each of the next three years as a result
of amortization expense which we will record relating to our acquisition of
Strategicus Partners, Inc. and our acquisition of equity interests accounted for
under the equity method of accounting.
We will incur amortization expense of approximately $4 million from
2000 through 2003 and our earnings will be reduced by this expense in each year
that it is recorded. This expense is the result of:
o the amortization of the goodwill which we have
recorded in connection with our acquisition of
Strategicus Partners, Inc.; and
o the amortization of the amount by which the purchase
price of each of our equity interests accounted for
under the equity method of accounting exceeds our
proportionate share of the underlying net assets of
each of these affiliate companies.
Pursuant to our business plan, we contemplate acquiring equity interests in
additional affiliate companies over the next several years. If these
acquisitions result in our purchase of additional goodwill or our payment of a
purchase price which exceeds our share of the underlying net assets of these
affiliate companies, then we will record additional amortization expense in
future years. Sales of equity method investments will reduce additional
amortization expense in future years.
Fluctuations in our quarterly results may adversely affect our stock price.
Because we acquire significant interests in early stage companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. We do not know if
we will report net income in any period, and we expect that we will report net
losses in many quarters for the foreseeable future. While our affiliate
companies have consistently reported losses, we may have net income in certain
periods and may experience significant volatility from period to period due to
non-recurring transactions and other events incidental to our ownership
interests in and advances to affiliate companies. These transactions include
dispositions of, and changes to, our affiliate company ownership interests, and
impairment charges.
RISKS GENERALLY APPLICABLE TO OUR AFFILIATE COMPANIES.
Each of our affiliate companies has a very limited operating history and has
generated very limited, if any, revenues.
Other than BrightStreet.com, Inc., our affiliate companies were all
formed less than two years ago. Each of our affiliate companies is in the
development stage and has generated very limited, if any, revenues. Accordingly,
we have no historical basis on which to evaluate the future success of any of
our affiliate companies.
26
<PAGE>
Most of our affiliate companies will require significant additional financing to
execute their business plans.
Other than BrightStreet and YesAsia, each of our affiliate companies
only has sufficient capital resources to meet operating expenses for less than
one year. Accordingly, most of our affiliate companies will require significant
additional financing to execute their business plans. Although we intend to
assist our affiliate companies in obtaining this financing, there is no
assurance that these affiliate companies will be able to obtain this financing
on a timely basis. If any of our affiliate companies are unable to obtain the
required financing on a timely basis, then they may not be able to execute their
business plans.
The success of our affiliate companies depends on the development of the
e-commerce market, which is uncertain.
All of our affiliate companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not continue to
develop, or if the Internet does not expand as an effective medium for the sale
of products and services, then our affiliate companies may not succeed. For
example, YesAsia, Swapit.com and metacat each allow consumers to purchase
products over the Internet. If consumer use of the Internet to purchase goods
and services does not continue to develop and expand, then these affiliate
companies may not attract a sufficient customer base and their businesses may be
adversely affected. In addition, if businesses do not continue to use or expand
their use of the Internet for conducting business then some of our affiliate
companies may not develop an adequate customer base to execute their business
plans.
A number of factors could prevent the long-term acceptance of
e-commerce business, including the following:
o the unwillingness of businesses to shift from
traditional business processes to e-commerce
processes;
o the necessary network infrastructure for substantial
growth in usage of e-commerce may not be adequately
developed;
o increased government and securities regulation or
taxation may adversely affect the viability of
e-commerce;
o insufficient availability of telecommunication
services or changes in telecommunication services
could result in slower response times for the users
of e-commerce; and
o concern and adverse publicity about the security of
e-commerce transactions.
Our affiliate companies may fail if their competitors provide superior
Internet-related products or continue to have greater resources than our
affiliate companies.
Competition for Internet products and services is intense and grows on
a daily basis. As the market for e-commerce grows, we expect that competition
will intensify. Barriers to entry are minimal and competitors can offer products
and services at a relatively low cost. As no physical presence is required to
commence operations, our affiliate companies' competitors may emerge without the
same degree of warning that competitors who are traditional bricks and mortar
businesses would provide to those businesses. Our affiliate companies compete
for a share of a customer's:
o purchasing budget for services, materials and
supplies with other online providers and traditional
distribution channels; and
o advertising budget with online services and
traditional off-line media, such as print and trade
associations.
Many of our affiliate companies' existing competitors have greater
brand recognition and greater financial, marketing and other resources than our
affiliate companies. This may place our affiliate companies at a competitive
disadvantage in responding to other companies' pricing strategies, technological
advances, advertising campaigns, strategic partnerships and other initiatives.
In addition, our affiliate companies compete to attract and retain a
critical mass of buyers and sellers. Our affiliate companies' competitors may
develop Internet products or services that are superior to, or have greater
market acceptance than, those offered by our affiliate companies. If our
affiliate companies are unable to compete successfully against their existing
and developing competitors, then our affiliate companies may fail.
27
<PAGE>
Changes in federal and state tax treatment of Internet sales could result in
decreased revenues for some of our affiliate companies.
The imposition of sales taxes on Internet sales would increase the
effective cost of goods to purchasers from metacat.com, College 411, YesAsia and
Swapit.com and may result in lower sales. Currently, these affiliate companies
are not required to charge any customer sales and usage tax, and there is a
federally imposed moratorium on taxation of Internet transactions. However, the
growth of Internet commerce is likely to lead state revenue agencies to pursue
taxation on Internet sales. To the extent that states are successful in imposing
taxes on Internet sales, the result will be an effective increase in the cost of
goods purchased through Internet websites. Consumers may respond by shifting to
traditional purchasing methods such as catalog sales which often do not impose
sales tax or interstate shipments or store purchases which do not involve
shipping costs.
All of our affiliate companies anticipate rapid growth, and failure to manage
that growth could adversely affect their businesses.
Each of our affiliate companies anticipates rapid growth, which will
require continual enhancement to financial and management controls, reporting
systems and procedures and expansion, training and management of personnel. If
any affiliate company fails to have systems, procedures and controls which are
adequate to support its growth and operations, it may be unable to successfully
implement its business plan. In addition, it may lose customers who become
dissatisfied as the result of operational problems created by the failure to
manage growth, adversely impacting revenues, expenses and earnings.
Item 2. Properties
In February 2000, we entered into a lease agreement for our executive
offices located at 1085 Mission Street, San Francisco, California. The office
space consists of approximately 5,000 square feet at a monthly rental of
$17,383. The lease agreement terminates on March 31, 2004. In addition, we also
lease an aggregate of approximately 5,000 square feet of office space for
offices located in Philadelphia, Pennsylvania, New York, New York and Waltham,
Massachusetts, at a combined monthly rental of approximately $17,000.
Item 3. Legal Proceedings
In October 1999, we terminated our employment agreement with Douglas
Spink, our former Chief Technology Officer and director, for cause due to Mr.
Spink's material breach of this agreement and his breach of his fiduciary duties
to our company. We believe that Mr. Spink engaged in various acts that were not
in our best interests, including various instances of misappropriation or
attempted misappropriation of our assets and various acts of insubordination and
dishonesty in his dealings with our other officers and directors. The various
agreements which we entered into with Mr. Spink stated that if Mr. Spink's
employment was terminated for cause, he forfeits all unvested shares of our
common stock which he held on the date of termination and he would be obligated
to repay all loans which we advanced to him if the termination date was prior to
December 31, 1999 and 50% of the principal balance of these loans and all
accrued interest thereon if the termination date was prior to May 28, 2000.
On January 7, 2000, Mr. Spink filed an action against us in the United
States District Court for the District of Oregon, alleging that our termination
of his employment constituted a breach of his employment agreement and violated
Oregon statutes regarding the payment of wages. The complaint seeks damages in
the amount of $17,000,000 on the breach of contract claim, plus prejudgment
interest from the date of the alleged breach of the employment agreement or, in
the alternative, an order directing us to specifically perform our obligations
under our employment agreement with Mr. Spink. The complaint seeks damages in
the amount of $150,000 on the wage claim, plus penalty wage, prejudgment
interest, costs and disbursements.
We intend to vigorously defend this action. In addition, on May 5,
2000, we filed an action against Mr. Spink and Merus Partners, Inc., an Oregon
corporation principally owned by Mr. Spink, in the United States District Court
for the District of Delaware, asserting counterclaims and additional claims,
including a claim for injunctive relief requiring Mr. Spink to forfeit and
return 1,610,835 of his unvested shares of our common stock since he was
terminated for cause.
On August 23, 1999, coolsavings.com, Inc. filed an action against Net
Value, Inc. in the United States District Court for the Northern District of
Illinois, Eastern Division. Pursuant to the Asset Purchase Agreement which Net
Value, Inc. entered into with BrightStreet.com, inc. (f/k/a Promotion
Acquisition, Inc.) BrightStreet has agreed to assume all liabilities related to
this lawsuit, including all legal expenses incurred in defending against these
claims. The complaint alleges that Net Value, Inc. infringed upon United States
Letters Patent No. 5,761,648 entitled "Interactive
28
<PAGE>
Marketing Network and Process Using Electronic Certificates" held by
coolsavings. The complaint alleges that Net Value, Inc., through its Internet
website and products, has committed acts of infringement by:
o performing or completing steps of the methods and
processes described and claimed in Patent No.
5,761,648;
o by actively inducing others to practice the methods
and processes described and claimed in Patent No.
5,761,648 by, among other things, performing or
completing steps of such methods and processes; and
o by offering to sell or selling a system or service
for offering and providing targeted electronic
certificates such as coupons, for use in practicing
the methods and processes described and claimed in
Patent No. 5,761,648.
The complaint seeks both a preliminary and permanent injunction
prohibiting Net Value, Inc. from further acts of infringement, as well as
damages. On November 23, 1999, Net Value, Inc. filed its answer to this
complaint as well as a counterclaim against coolsavings.com, Inc. seeking a
declaratory judgment of invalidity and noninfringement of Patent No. 5,761,648.
Neither a discovery schedule nor a trial have been set in this matter.
BrightStreet cannot estimate the amount of damages that it may incur if the
court issues a final judgment concluding that Net Value, Inc. has infringed on
coolsavings' patent. In addition, based on its estimate of the cost of defending
this type of litigation, BrightStreet may decide to settle this case for an
amount that, although substantially less than the damages sought by coolsavings,
may be significant.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market Price of the Registrant's Common Equity and Related Stockholder
Matters
As of the date of this Annual Report, our common stock is traded on the
NASDAQ Over-the-Counter Bulletin Board Trading System under the symbol "NETV."
The market for our common stock on the NASDAQ Over-the-Counter Bulletin Board
Trading System is sporadic and the quarterly average daily volume of shares
traded since inception ranged from a low of 31,539 shares to a high of 237,180
shares. The following table presents the range of the high and low bid and
average daily volume information for our common stock for the periods indicated,
which information was provided by NASDAQ Trading and Market Services. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Average Daily
High Low Volume (Shares)
---- --- ---------------
<S> <C> <C> <C>
Year Ended December 31, 1998
Fourth Quarter 5.7500 4.0000 31,539
Year Ended December 31, 1999
First Quarter 6.3750 4.7500 38,393
Second Quarter 7.6875 4.5000 55,695
Third Quarter 6.3125 3.8125 49,461
Fourth Quarter 13.4375 3.5625 120,817
Year Ending December 31, 2000
First Quarter 35.7500 7.1250 237,180
Second Quarter (through 17.7500 6.6250 160,515
April 30, 2000)
</TABLE>
Our common stock has only been traded on the NASDAQ Over-the-Counter
Bulletin Board Trading System since November 24, 1998. Records of our stock
transfer agent indicate that as of April 30, 2000, there were approximately 270
record holders of our common stock. We have not paid any cash dividends to date
and do not
29
<PAGE>
anticipate or contemplate paying cash dividends in the foreseeable future. We
plan to retain any earnings for use in the operation of our business and to fund
future growth.
Recent Sales of Unregistered Securities
In September 1998, we issued and sold an aggregate of 2,950,000 shares
of our common stock at an offering price of $.20 per share to the following
accredited investors pursuant to Rule 504: West Tropical Investments Corp.,
Azura Investment Corp., Thibault-Petite Capital Corp., Godwin Finance Ltd.,
Clifton Capital Ltd., Millworth Investments, Inc., 101 Investments, Inc., Westin
Investors Profit Sharing Trust, Harpings Management Limited, Euroswiss
Securities Limited, Deremie Enterprises Limited, Myderry Investments Company
Limited, Golden Claw Investments Company Limited, Benmad, Inc. and the Elanken
Family Trust. This offering generated gross proceeds of $590,000 of which we
paid an aggregate of $47,200 in commissions to registered broker-dealers.
In September 1998, we issued a promissory note in the principal amount
of $900,000 to Founders Equity Group, Inc. pursuant to Section 4(2) of the
Securities Act of 1933 in exchange for $900,000. This promissory note matured on
March 1, 1999 and on that date we issued four convertible promissory notes in
the aggregate principal amount of $900,000 to Founders Equity Group, Inc.,
Founders Mezzanine Investors III, LLC, George & Nancy Moorehead Charitable Trust
and Donald & Shelley Moorehead Charitable Trust, and paid $50,334 (representing
all accrued interest on the original promissory note through February 28, 1999)
in exchange for the lender's cancellation of the promissory note and its release
of our corporation and our present and future officers and directors from any
claims related to payment of principal and accrued interest pursuant to the
promissory note. The lenders are entitled to piggyback registration rights with
respect to all shares issuable upon any conversion of the convertible promissory
notes. As additional consideration for the lender's agreement to cancel the
original promissory note and accept convertible promissory notes in full
satisfaction of our obligations pursuant to the original promissory note, we
issued the lender a warrant to purchase 90,000 shares of our common stock at an
exercise price of $2.50 per share and a warrant to purchase 90,000 shares of our
common stock at an exercise price of $5.00 per share. The lender may exercise
each of these warrants at any time prior to February 28, 2002. The lenders are
not entitled to any registration rights with respect to any shares of our common
stock issued upon the exercise of either of these warrants. In July 1999, we
issued an aggregate total of 6,138 shares of our common stock to the lenders as
payment of accrued interest on the convertible promissory notes for the quarter
ended June 30, 1999. On February 4, 2000, the lenders converted their
convertible promissory notes into 400,000 shares of our common stock.
In October 1998 we issued 1,000,000 shares of our common stock and
500,000 shares of our Series A Preferred Stock to Rozel International Holdings
Limited pursuant to Rule 506 in exchange for 178,700 shares of Series A
Preferred Stock of BrightStreet.
In October 1998, November 1998 and December 1998, we issued 2,019,852
shares of our common stock and 2,019,852 shares of our Series A Preferred Stock
to the following accredited investors pursuant to Rule 506 in exchange for
8,079,408 shares of common stock of BrightStreet: Rozel International Holdings
Limited, Craig Barnett, American Maple Leaf Financial Corporation, Mark
Braunstein, Founders Partners IV, Capital Growth Trust, Hanover Associates,
Steve Rosner, Clifton Capital Ltd., Millworth Investments, Inc., Steven Rosner
Money Purchase Plan, HPC Corporate Services Ltd., The D.A.R. Group, Mark Dutton,
SPH Investments, Inc., SPH Equities, Inc., Bermuda Trust Company (Trustee for
the Elanken Family Trust), Burton Turk, Azurra Investments Corp. and Lenart
Haggegard.
In November 1998 and January 1999, we issued convertible debentures in
the aggregate principal amount of $1,642,500 pursuant to Rule 506 to the
following accredited investors: Brarrison, Inc., Fredric J. Mintz, Burton Turk,
Gary Rein, Lancer Partners, L.P., Lancer Offshore, Inc., Steven Rolfe, Taylor
Oil Products, Ltd., Salicor, Inc. and Edgar W. Allen. We issued these
convertible debentures in exchange for $1,642,500 of which we paid $112,000 in
commissions to registered broker-dealers. The principal amount of these
convertible debentures plus the accrued interest thereon is convertible by the
holders at any time and by us upon the completion of our merger with
BrightStreet at a conversion price of $2.00 per share. As of March 31, 2000, the
holders of the convertible debentures issued in this offering have converted all
of their debentures and the accrued interest thereon into 886,865 shares of our
common stock.
During the period from January 1999 through June 1999, we issued
convertible debentures in the aggregate principal amount of $6,215,000 pursuant
to Rule 506 to the following accredited investors: Gary Rein, Jeffrey & Jessica
Goldstein, Richard J. Bennett, 4WR-DG Limited Partnership, Gary Hollander,
Douglas Martin, Sven Behrendt, Juergen Jaekel, Straub Family Trust, Carmine
Adimando, Scott & Patricia Kane, Marc Roberts, Founders Equity Group, Balmore
Funds, S.A., Austost Apstalt Schaan, Amro International, S.A., CSL Associates,
L.P., Bridgewater Partners, L.P., Nottinghill Resources, Ltd., Gladstone
Equities Fund, L.P., Lori Tabatchnick, Peter T. Roselle, Joseph G. Ferrante,
Robert M. Crozer, Gary Hollander, Gary Scharf, Cary & Melissa Silverman, Roy
Roberts, Joseph Weiss, Gary Markman, Louis Borbas, Jr., Jeffrey & Jessica
Goldstein, IHN Partners, Vincent Adimado. We issued these
30
<PAGE>
convertible debentures in exchange for $6,215,000 of which we paid $410,100 in
commissions to registered broker-dealers. The principal amount of these
convertible debentures plus the accrued interest thereon is convertible by the
holders at any time and by us upon the completion of our merger with
BrightStreet at a conversion price of $2.50 per share. As of April 6, 2000, the
holders of the convertible debentures issued in this offering have converted all
of their debentures plus accrued interest thereon into 2,581,576 shares of our
common stock.
In April 1999, we issued convertible promissory notes in the aggregate
principal amount of $4,270,125 pursuant to Rule 506 to the following accredited
investors: Tyrone Adams, A. Arnold Agree, Robert M. Alloway, Emil P. Angel,
Gerald A. Benarcik, Michael J. Benenson, Ronald Berk, Frank J. Bauerlein, Yancey
R. Black, John L. & Jetha M. Black, Thomas E. Bonar, David W. Boydston, Vincent
Brandeis, Thomas Cannon, LG Trust, Howard Chang, Lynn Chidester, Allergy Medical
Group Profit Sharing Plan, Raymond C. Clabberbuck, Edward G. Cook, Christopher
W. Craven, Eugene D. Crittenden, Mark Curry, Saquaro Asset Holding I, Steven A.
Dawes, Epiphany Deluca, Dennis Desmond, Anand Dhanda, Ronald S. Dugan, David
Easton, Alan C. Espy, CKF Living Trust, Elliot H. Fishkin, Ronald F. Gagnon, Max
H. Ghezzi, Ray Haase, Neal B. Hambleton, John Hunter, Richard S. Incandela Trust
(DTD 9/15/91), Rhyaz Jinnah, Daniel Kane, Michael L. B. Kaplan, Bernard &
Rosemary Kayne, Gary D. Ditchell, John B. Kogut, Paul J. Kuehn, Lawrence B.
Lewis, Sigma Services, Gary E. Markman, Sheri Perl Migdol, David F. Miller,
Morton M. Mower, Giovanni Mucciacciaro, William A. Murphy, Arthur J. Notini,
Anthony J. Parkinson, Poul Pederson, Robert Perl, William D. Prevost, James R.
Ratliff, David & Barbara Rosen, Joseph Santomarco, James & Bernadette Schenk, C.
David Schenkel, Douglas K. Schwegel, Louis A. Shpritz, Fast Eddie's Investment
Club LLP, Edward Silberman, Thomas Sixsmith, Gary L. Smidt, Ilkar Sonmez, Henry
Styskal, Herme O. Sylora, Edmond Tennenhaus, James F. Van Middlesworth, Martin
C. Watz, Melvin E. Weinstein, Micro-Comp Industries and Kal Zeff. We issued
these convertible promissory notes in exchange for their cancellation of matured
promissory notes which were issued by Net Value, Inc. in October, November and
December 1997 and their agreement to release us, Net Value, Inc. and the present
and future officers and directors of each corporation from any claims related to
their Net Value, Inc. promissory notes. Each participant in this offering
received a convertible promissory note with a principal amount equal to the
principal amount of their Net Value, Inc. promissory note plus all accrued
interest thereon as of December 31, 1998. Each note holder may convert all or
any part of the outstanding principal amount of their convertible promissory
note, plus all accrued interest thereon through the date of conversion, into
shares of our common stock at any time at a conversion rate of $2.00 per share.
We may force the noteholders to convert the entire principal amount of their
convertible promissory notes, plus all accrued interest thereon at a conversion
price of $2.00 per share upon the trading of our common stock at a price per
share of at least $5.00 for 20 consecutive trading days and the registration of
the resale of all shares of our common stock issuable to the noteholders upon
such mandatory conversion of the convertible promissory notes with the
Securities and Exchange Commission. We are obligated to issue a warrant to
purchase one-half of one share of our common stock for each share of our common
stock issued to the noteholders upon any conversion of the convertible
promissory notes. These warrants are exercisable for a period of three years
from the date of issuance at an exercise price of $6.00 per share. As of April
30, 2000, holders of convertible promissory notes issued in this offering have
converted their promissory notes in the principal amount of $4,241,844, plus
accrued interest into 2,295,160 shares of our common stock and we issued
warrants to purchase 1,147,597 shares of our common stock to these holders.
In July 1999, we issued an aggregate of 601,029 vested shares of our
common stock, an aggregate of 6,923,599 unvested shares of our common stock, an
aggregate of 184,627 vested shares of our Series A Preferred Stock and an
aggregate of 2,126,833 unvested shares of our Series A Preferred Stock to Darr
Aley, Stephen George, Douglas Spink and Barry Uphoff pursuant to Rule 506 in
exchange for their tender of all of the issued and outstanding capital stock of
Strategicus Partners, Inc.
In August 1999, we issued an aggregate of 2,898,788 shares of our
common stock to the following stockholders: Darr Aley, Mary Lane Alvarino,
American Maple Leaf Financial Corp., Frank Astorino, Azurra Investments, Inc.,
Craig Barnett, Mark Berry & Nancy Berry (TEN COM), Mark Braunstein, Quinn
Brennan, John & Mary Burlingame, Ben Campagnuolo, Capital Growth Trust, Wayne
Churyk, Clifton Capital, Inc., Jose Costa, Neil Costa, The DAR Group, Inc., John
Dearden, Mark Dutton, Elanken Family Trust, Richard Elgart, Founders Partners
IV, LLC, Stephen George, Leonart Haggegard, Hanover Associates, Eleanor Harvey,
IHN Partners, Douglas Love, Russell Lucas & Christina Lucas (TEN COM), Henry
McCarl, Millworth Investments, Inc., Clayton Moran, Fred Moran & Joan Moran (TEN
COM), Frederick W. Moran, Kent Moran, Luke Moran, Andrew P. Panzo & Patricia
Panzo (TEN COM), Fernando Presser, Steven Rosner, Rozel International Holdings,
Ltd., Margaret Sellig, Robert Smith, Andrew Sorrentino, SPH Equities, Inc., SPH
Investments, Inc., Douglas Spink, Michael Stanley, William Steif, Steven B.
Rosner Money Purchase Plan, Charles L. Tinker & Mitch Tinker (TEN COM), Burton
Turk, Barry Uphoff and Dean Ward. These shares were issued pursuant to Rule 506
in exchange for their tender of an aggregate of 4,831,312 shares of our Series A
Preferred Stock and their agreement to release us and our present and future
officers and directors from any claims related to these rights and any shares of
common stock that were to be issuable upon conversion of these shares of Series
A Preferred Stock.
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<PAGE>
In September and October 1999, we issued an aggregate of 74,250 shares
of our common stock to Sven Behrendt, Juergen Jaekel, Golden Eagle Partners,
Laura D'Antona, Don Berman and Bruce Malinowski pursuant to Section 4(2) of the
Securities Act of 1933 in settlement of various debts and other obligations.
In September and October 1999, we issued an aggregate of 4,824 shares
of our Series B Preferred Stock and warrants to purchase 295,040 shares of our
common stock to Tonga Partners, L.P., Yeoman Ventures, Ltd., Lightline Limited,
Little Wing LP, Little Wing Too LP, Tradewinds Fund, LLC, JDN Partners, L.P.,
Bayhill, Ltd., RS Orphan Fund, L.P. and RS Orphan Offshore Fund, L.P., pursuant
to Rule 506 in exchange for $5,000,000, of which we paid $250,000 and warrants
to purchase 110,077 shares of our common stock in commissions to a registered
broker-dealer. In February and March 2000, the holders of our Series B Preferred
Stock converted all of our issued and outstanding shares of Series B Preferred
Stock into 1,180,180 of our common stock. In March and April 2000, the holders
exercised warrants to purchase 210,944 shares of our common stock.
In October 1999, we issued an aggregate of 676,374 shares of our common
stock to RS Orphan Fund, L.P. and RS Orphan Offshore Fund, L.P. pursuant to
Section 4(2) of the Securities Act of 1933 in exchange for $676,374.
In March 2000, we issued an aggregate of 4,166,667 shares of our Series
C Preferred Stock and warrants to purchase 416,667 shares of our common stock to
Brown Simpson Strategic Growth Fund, Ltd., Brown Simpson Strategic Growth Fund,
L.P., Catalyst Partners, L.P., TGT Capital Partners, LP, Narragansett I, LP,
Emergent Capital Investment Management, LLC, Gavleborgs Lansforsakingar, N.
Herrick Irrevocable Securities Trust (Howard Herrick, Trustee), Scout Capital
Partners, L.P., Asset Management Holding Co., Halifax Fund, LP, Fisher Partners
Fondkommission, AB, ACIE/NETVALUE, LLC, Montrose Investments, Ltd., Anegada
Fund, Ltd., Tonga Partners, LP, Aspen International Ltd., Gilston Corporation
Ltd., The Altar Rock Fund, L.P., Raptor Global Portfolio, Ltd., Martin H.
Garvey, Eric Hauser, Michael Lauer, Lancer Partners, LP, Lancer Offshore, Inc.,
Bridgewater Partners, L.P., CSL Associates, Gladstone Equity Funds, Inc., Ogden
Properties, Inc., Schottenfeld Associates, LP, Nicholas Stiassini and Suzanne
Stiassni Co., Trustees of the Stiassni Family Trust and BNY Capital Partners,
Inc., pursuant to Rule 506 in exchange for $50,000,000, of which we paid an
aggregate of $1,305,240 and issued an aggregate of 35,000 shares of Series C
Preferred Stock in commissions to two registered broker-dealers.
In May 2000, we purchased 563,000 shares of Series A Preferred Stock
and a warrant to purchase 170,000 shares of common stock of Webmodal, Inc. for
$5,000,000. We paid $4,000,000 of this purchase price in cash and $1,000,000 of
this purchase price by issuing 113,214 shares of our common stock to Webmodal,
Inc. We issued these shares of common stock pursuant to Section 4(2) of the
Securities Act of 1933.
32
<PAGE>
Item 6. Selected Consolidated Financial Data
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ $ -
Operating expenses
Stock based compensation 7,320,695 - - - -
General and administrative 3,719,497 140,484 - - -
------------- ------------- ------------ ------------ -----------
Total operating expenses 11,040,192 140,484 - - -
Interest income 60,526 - - - -
Interest expense 12,380,157 1,441,399 - - -
Financing fees 523,601 48,436 - - -
------------- ------------- ------------ ------------ -----------
Loss before equity in losses of Affiliate 23,883,424 1,630,319 - - -
Companies
Equity in losses of Affiliate Companies 79,559 - - - -
------------- ------------- ------------ ------------ -----------
Net loss from continuing operations 23,962,983 1,630,319 - - -
Discontinued operations
Loss from discontinued operations 6,370,776 11,106,826 11,235,237 3,314,094 764,702
Gain on disposal of discontinued operations 6,502,663 - - - -
------------- ------------- ------------ ------------ -----------
Net loss 23,831,096 12,737,145 11,235,237 3,314,094 764,702
------------- ------------- ------------ ------------ -----------
Preferred stock dividends
Continuing operations 6,605,261 - - - -
Discontinued operations - 15,250,500 1,181,250 - -
------------- ------------- ------------ ------------ -----------
Net loss to common shareholders $30,436,357 $ 27,987,645 $ 12,416,487 $ 3,314,094 $ 764,702
============= ============= ============ ============ ===========
Basic and diluted net (loss) per common share -
continuing operations $ (2.90) $ (0.35) $ - $ - N/A
============= ============= ============ ============ ===========
Basic and diluted net earnings (loss) per common share
- discontinued operations $ 0.01 $ (5.59) $ (6.88) $ (3.55) N/A
============= ============= ============ ============ ===========
Basic and diluted weighted average common shares
outstanding 10,557,953 4,711,351 1,804,700 934,810 N/A
============= ============= ============ ============ ===========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital deficit $ 4,212,869 $ 8,750,164 $ 3,427,635 $ 792,841 $ 306,910
Total assets 13,989,368 371,648 1,800,402 794,592 29,615
Total liabilities 7,839,258 9,121,812 4,227,058 1,099,684 309,317
Long-term debt, net of current
portion 67,302 - 4,227,058 - -
Series B redeemable convertible
preferred stock 4,448,872 - - - -
Stockholders' equity (deficit) 1,701,240 (8,750,164) (2,426,656) (305,092) (279,702)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth elsewhere in this Annual Report and the risks
discussed in our other SEC filings. The following discussion should be read in
conjunction with our audited Consolidated Financial Statements and related Notes
thereto included elsewhere in this Annual Report.
General
We were originally formed as a Florida corporation in 1991. We did not
have any operations until our change of domicile into Delaware in October 1998.
This occurred in conjunction with our acquisition of a controlling interest in
Net Value, Inc. which commenced in October 1998. Net Value, Inc. was engaged in
the development and distribution of online promotional campaigns.
We obtained control of Net Value, Inc. when we acquired 66% of its
outstanding common stock through share exchange transactions with 20 of its
largest stockholders. Since as a result of these transactions the former Net
Value, Inc. stockholders obtained a majority ownership interest of our company,
the transaction was accounted for as a recapitalization. Under a
recapitalization, the historical financial statements presented are those of the
company acquired, not those of the legal acquiror. Accordingly, the financial
information included in our financial statements prior to October 1998 is that
of Net Value, Inc.
We plan to complete a merger with Net Value, Inc. within three to six
months pursuant to which we intend to offer .4 shares of our common stock for
every share of Net Value, Inc. common stock tendered to us by the existing Net
Value, Inc. stockholders. This is being done in order to acquire the remaining
minority interest in Net Value, Inc. Additionally, we will issue common stock
purchase warrants and stock options to the holders of Net Value, Inc.'s common
stock purchase warrants and vested stock options at the same exchange ratio.
Since we already own a majority of Net Value, Inc.'s capital stock, we can
assure that the merger will be completed. Accordingly, our 1999 financial
statements reflect the results of our in-process merger with Net Value, Inc.
At December 31, 1999, we owned approximately 66% of the outstanding
common stock of Net Value, Inc. Because the total net assets of Net Value, Inc.
are negative and because it is unlikely that the minority shareholders of Net
Value, Inc. will make additional capital contributions to erase subsequent Net
Value, Inc. losses, no amount has been ascribed to the 34% minority interest.
Our financial statements also reflect the operations of Net Value, Inc.
as a discontinued operation. This was necessitated when, in November 1999, we
made the strategic decision to exit the development and distribution of online
promotional campaigns operations of Net Value, Inc. In December 1999, we sold
the business and assets of Net Value, Inc. to BrightStreet.com, Inc., a new
company formed by members of Net Value, Inc.'s then senior management team and a
group of third party investors. Through Net Value, Inc., we retained a 14%
interest in the common stock of BrightStreet.com.
34
<PAGE>
We have segregated the operating results of the discontinued operations
of Net Value, Inc. from continuing operations and have reported these operating
results as a separate line item on the statements of operations. Upon the
completion of our merger with Net Value, Inc., we will own all of Net Value,
Inc.'s assets and liabilities. This will not change our financial statement
presentations as these items are already reflected on our balance sheet.
Because we acquire significant interests in early stage companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. We do not know if
we will report net income in any period, and we expect that we will report net
losses in many quarters for the foreseeable future. While our affiliate
companies have consistently reported losses, we may have net income in certain
periods and may experience significant volatility from period to period due to
non-recurring transactions and other events incidental to our ownership
interests in and advances to affiliate companies. These transactions include
dispositions of, and changes to, our affiliate company ownership interests, and
impairment charges.
On a continuous basis, but no less frequently than at the end of each
reporting period, we evaluate:
o the carrying value of our ownership interest in and advances to
each of affiliate companies for possible impairment based on
achievement of business plan objectives and milestones;
o the value of each ownership interest in the affiliate company
relative to carrying value;
o the financial condition and prospects of the affiliate company; and
o other relevant factors.
The business plan objectives and milestones we consider include those
related to financial performance such as achievement of planned financial
results or completion of capital raising activities, and those that are not
primarily financial in nature such as the launching of an Internet website or
the hiring of key employees. The fair value of our ownership interests in and
advances to privately held affiliate companies is generally determined based on
the value at which independent third parties have or have committed to invest in
its affiliate companies. If impairment is determined, then the carrying value of
our ownership interest is adjusted to fair value.
Effect of Various Accounting Methods on our Results of Continuing Operations
Accounting for Stock Based Compensation.
Stock based compensation is a non-cash charge relating to the
amortization of deferred compensation. We record deferred compensation when we
make restricted stock awards or compensatory stock option grants to employees,
members of our Board of Directors, consultants or advisory board members. In the
case of stock option grants to employees, the amount of deferred compensation
initially recorded is the difference between the exercise price and fair market
value of our common stock on the date of grant. In the case of options granted
to consultants or advisory board members, the amount of deferred compensation
recorded is the fair value of the stock options on the grant date as determined
by the Black-Scholes option pricing model. We record deferred compensation as a
reduction to shareholders' equity and an offsetting increase to additional
paid-in capital. We then amortize deferred compensation into stock based
compensation over the performance period of the consultant or advisory board
member, which typically coincides with the vesting period of the stock based
award of 3 to 4 years.
Grants to Employees. All awards to employees are fixed awards. This
means that the number and exercise price of the stock options are known on the
date of grant. Under these fixed awards, the amount of deferred compensation
which we record is similarly fixed and represents the total amount of future
amortization to stock based compensation.
Grants to Consultants and Advisory Board. In accordance with the
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services, stock based awards to consultants and advisory board
members for future professional services are considered variable. This means
that the amount of deferred compensation is periodically adjusted to the current
fair value of the unvested awards as determined by the Black-Scholes option
pricing model. Similarly, the amortization to stock based compensation for
variable awards also fluctuates in direct proportion to the increase or decrease
in deferred compensation resulting from changes in fair value. These
fluctuations are largely dependent on the fair market value of our common stock
and therefore makes future prediction or estimate of the amortization charge to
stock based compensation extremely difficult.
35
<PAGE>
Accounting for Affiliate Company Ownership
The various interests that we acquire in our affiliate companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in an affiliate company.
Consolidation. Affiliate companies in which we directly or indirectly
own more than 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting. Under this method, an
affiliate company's financial statements are reflected within our Consolidated
Statements of Operations. None of our affiliated companies were consolidated as
of December 31, 1998. As of December 31 1999, metacat.com, Inc. is our only
consolidated affiliate company.
The effect of an affiliate company's net results of operations on our
net results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each of
these methods only our share of the earnings or losses of an affiliate company
is reflected in our results of operations in the Consolidated Statements of
Operations.
Equity Method. Affiliate companies whose results we do not consolidate,
but over whom we exercise significant influence, are generally accounted for
under the equity method of accounting. Whether or not we exercise significant
influence with respect to an affiliate company depends on an evaluation of
several factors including, among others, representation on the affiliate
company's board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the affiliate company, including voting
rights associated with our holdings in common, preferred and other convertible
instruments in the affiliate company. Under the equity method of accounting, an
affiliate company's results of operations are not reflected within our
consolidated statements of operations; however, our share of the earnings or
losses of the company is reflected in the caption "Equity in Losses of Affiliate
Companies" in the Consolidated Statements of Operations. As of December 31,
1999, we accounted for the following affiliate companies under this method:
o College 411.com, Inc.
o AssetExchange, Inc.
o Swapit.com, Inc.
In addition, we plan to account for our recent investments which we
made in 2000 in IndustrialVortex.com, Inc. and AlarmX.com under the equity
method of accounting. We have representation on the board of directors of all of
the above affiliate companies. Most of our equity method affiliate companies are
in a very early stage of development and have not generated any revenues. All of
our equity method affiliate companies commenced operations in 1999 or 2000 and
are expected to incur substantial losses in 2000.
Cost Method. Affiliate companies not accounted for under either the
consolidation or the equity methods of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our Consolidated Statements of
Operations. At December 31, 1999, we accounted for YesAsia, BrightStreet.com and
Webmodal, Inc. under the cost method of accounting. Our cost method affiliate
companies are in a very early stage of development and have not generated
significant revenues. In addition, our cost method affiliate companies have
incurred substantial losses and are expected to continue to incur substantial
losses in 2000.
Results of Operations
Twelve Months Ended December 31, 1999 Compared to the Twelve Months Ended
December 31, 1998
Continuing Operations
Stock Based Compensation. Stock based compensation relating to
continuing operations, a non-cash charge resulting from restricted stock awards
and compensatory option grants, totaled $7,320,695 for the year ended December
31, 1999. We did not incur a corresponding expense for the year ended December
31, 1998 due to the fact that our management team was not hired until 1999. The
following table shows the amount of deferred compensation, the related
amortization to stock based compensation included in operating expense, and the
resulting unamortized deferred compensation associated with our continuing
operations. Amortization of deferred compensation relating to Net Value, Inc.'s
discontinued operations for the year ended December 31, 1999 of $1,771,168 is
not reflected in the schedule below. In addition, the cancellation of stock
options held by former Net Value, Inc. employees resulted in a reduction of
deferred stock-based compensation of $1,487,984, which is not reflected below.
36
<PAGE>
<TABLE>
<CAPTION>
Amortization of Deferred Unamortized
Deferred Compensation to Stock Deferred
Compensation Based Compensation Compensation at
Recorded During 1999 During 1999 December 31, 1999
Employees
- ---------
<S> <C> <C> <C>
Andrew Panzo $ 6,252,600 $1,808,350 $ 4,444,250
Lee Hansen 3,204,000 560,700 2,643,300
Douglas Spink 1,406,648 1,406,648 -
Other Employees 52,800 2,750 50,050
---------------- ----------------- -------------
10,916,048 3,778,448 7,137,600
Consultants and Advisory
Board
- ------------------------
Darr Aley 6,998,382 415,371 6,583,011
Stephen George 6,998,382 415,371 6,583,011
Barry Uphoff 6,998,382 415,371 6,583,011
Advisory Board Members 437,949 6,810 431,139
---------------- ----------------- -------------
21,433,095 1,252,923 20,180,172
Total $32,349,143 $5,031,371 $27,317,772
================ ================= =============
</TABLE>
We also recorded stock-based compensation of $2,289,324 relating to
services provided by a member of our Advisory Board for assistance with locating
strategic investors and potential affiliate companies. The terms of the
consulting agreement allowed the Advisory Board member's investment company to
purchase 676,374 shares of common stock at a price of $1.00 per share, which was
less than the fair market value of our common stock on the date of the sale.
Accordingly, we recognized a non-cash charge to stock-based compensation for the
difference between the stock purchase price and the fair market value of our
common stock on the date of this sale. We entered into this consulting agreement
during the early stages of our operations and do not expect to enter into
similar agreements in the future.
Of the total unamortized deferred compensation relating to employees of
$7,137,600, we expect to amortize into stock based compensation $2,813,400,
$2,813,400, $1,500,350 and $10,450 during 2000, 2001, 2002 and 2003,
respectively. These amounts correspond to the vesting schedule of presently
issued and outstanding stock based awards. This amount will be increased by any
future compensatory grants and decreased by any cancellations. As discussed
above in "Effects of Various Accounting Methods on our Results of Continuing
Operations," stock based awards to consultants and advisory board members for
future professional services are considered variable. This means that the amount
of deferred compensation is periodically adjusted to the fair market value of
the unvested awards. Accordingly, due to the variability associated with these
awards, we cannot accurately predict the future amortization to stock based
compensation of the deferred compensation which we recorded in 1999. This amount
will generally increase and decrease with corresponding increases and decreases
in the market price of our common stock.
General and Administrative Expenses. Our general and administrative
expenses have increased significantly from $140,484 in 1998 to $3,719,497 in
1999 due to the execution of our operating plan and the expansion of our
operations. We anticipate that our general and administrative expenses will
continue to grow as we solidify our infrastructure and acquire additional
interests in affiliate companies. The following is a schedule of the significant
components that comprise general and administrative expenses:
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<PAGE>
Year Ended
December 31, December 31,
1999 1998
---- ----
Professional fees 1,150,315 129,878
Goodwill amortization 578,906 -
Salaries and benefits 387,828 -
Other general and administrative 1,602,448 10,606
---------- --------
Total $3,719,497 $140,484
========== ========
Professional fees consist primarily of legal and accounting fees
associated with our corporate transactions and audit services. We expect these
fees to increase as we expand our operations.
Goodwill amortization includes the amortization expense attributable to
our acquisition of Strategicus Partners, Inc. in July 1999. Total goodwill for
the Strategicus transaction was approximately $3.8 million which is being
amortized on a straight-line basis over three years.
The increase in salaries and benefits expense is due to our active
recruitment of executive personnel in 1999, resulting in the addition of seven
full-time employees. Salaries and benefits include employee cash compensation
and medical and dental coverage.
Other general and administrative consists primarily of general
operating expenses and travel-related expenses.
Interest Income and Expense. Interest income consists of the interest
earned on our cash and cash equivalents balances, with the change year over year
due to significant increases in our cash balances over 1998. Interest expense,
which was primarily a non-cash expense, increased as a result of the issuance of
our convertible promissory notes and convertible debentures in the fourth
quarter of 1998 and the first nine months of 1999. These non-cash charges are
the result of beneficial conversion features included in our convertible
promissory notes and convertible debentures that allowed the holders to convert
their notes and debentures into shares of our common stock at below market
rates. We expect to fund our future operations through the use of equity
financings and do not anticipate that we will incur these interest expense
charges in the future.
The following is a schedule of the significant components that comprise
interest expense:
Year Ended
December 31, December 31,
1999 1998
---- ----
Beneficial conversion features:
8% convertible debentures $6,449,020 $1,441,399
12% convertible promissory notes 4,270,625 -
10% convertible promissory note 445,500 -
Value of warrants related to the 10%
convertible promissory note 454,500 -
Interest expense based on stated interest rates
of convertible debentures and promissory notes 761,512 -
------------ ----------
Total $ 12,380,157 $1,441,399
============ ==========
Financing Fees. Amortization of financing fees increased to $523,601
during the year ended December 31, 1999. The increase in financing fees was
primarily due to the amortization of issuance costs paid in relation to the
issuance of the convertible promissory notes and convertible debentures we
issued in the fourth quarter of 1998 and the first nine months of 1999.
Equity in losses of affiliate companies. Equity in losses of affiliate
companies amounted to $79,559. This amount represents our proportionate share of
the losses of the affiliate companies and the amortization of the excess of the
cost of our investment over our equity interest in the net assets of the
affiliate companies accounted for under the
38
<PAGE>
equity method of accounting. For the year ended December 31, 1999,
College411.com, AssetExchange, Inc. and Swapit.com were accounted for under the
equity method of accounting. During the year ended December 31, 1998, we did not
account for any of our ownership interests in our affiliate companies under the
equity method. We expect these expenses to increase as we continue to purchase
equity interests in affiliate companies.
Discontinued Operations
In 1999 we incurred a loss from discontinued operations relating to Net
Value, Inc. of $6,370,776 compared to a loss of $11,106,826 in 1998. Net Value,
Inc. did not recognize any revenues in 1999. The decreased loss was primarily
due to decreased operating, consulting, and system development expenses incurred
by Net Value, Inc. following management's decision to sell its operations to
third party investors. Gain on disposal of discontinued operations relates to
the December 1999 sale of substantially all of the assets of Net Value, Inc. to
BrightStreet.com (f/k/a Promotions Acquisitions, Inc.), a newly formed
corporation formed by the former management team of Net Value, Inc. Net Value,
Inc. received $2 million in cash and 2,958,819 shares of common stock of
BrightStreet.com in exchange for substantially all of Net Value Inc's assets and
assumption by BrightStreet.com of approximately $1.6 million of liabilities. We
recognized a gain on the sale of $6,502,663, representing the excess of the fair
value of the stock and cash received over the carrying value of the assets sold
and liabilities assumed.
Net Loss From Continuing Operations
We have had a net loss from continuing operations for each period since
inception. This amount could fluctuate significantly from period to period,
depending on the operating results of our affiliate companies and other non-
recurring transactions. For the year ended December 31, 1999, our net loss from
continuing operations was $23,962,983. We are aggregating this amount into our
federal and state net loss carryforwards to offset future taxable income, if
any. These net loss carryforwards will start to expire in 2011. Because of the
uncertainty regarding reliability we have provided a full valuation allowance on
our deferred tax assets consisting primarily of net operating loss
carryforwards.
Twelve Months Ended December 31, 1998 Compared to the Twelve Months Ended
December 31, 1997
Continuing Operations
The only operations that existed during 1997 were from discontinued
operations.
We did not generate any operating revenues in 1998.
The results from continuing operations for the years ended December 31,
1998 and 1997 are not directly comparable as all operations during periods prior
to 1998 have been discontinued. We incurred a net loss from continuing
operations of $1,630,319 in 1998. Approximately $129,900 was paid for
professional fees related to our merger with Net Value, Inc. An additional
$11,000 was used for our normal operating expenditures in our attempts to
acquire interests in affiliate companies. The remaining $1,490,000 was primarily
related to interest expense and financing fees on convertible debentures issued
during the fourth quarter of 1998.
Discontinued Operations
We incurred a loss from discontinued operations of $11,106,826 in 1998
compared to a loss of $11,235,237 during 1997. The decrease of $128,411 was
primarily due to a decrease in research and development costs of $894,250, a
decrease in advertising costs of $545,118 and an increase in revenues of
$1,330,367, offset primarily by an increase in compensation and related expenses
of $483,444, an increase in professional fees of $611,006 and an increase in
interest and financing costs of $1,570,715. Revenues recognized in 1998 resulted
from a licensing agreement Net Value, Inc held with IQ Value. Net Value, Inc.
received $1,250,000 in licensing fees from IQ Value L.L.C. pursuant to the terms
of a Distribution and License Agreement which the parties entered into in April
1998. Net Value, Inc. used these funds to pay commercial accounts payable and to
fund continuing operations. In December 1998, the parties determined that it
would be in each of their best interests to terminate their relationship, and no
further revenues were generated from the licensing agreement.
Changes in Financial Position, Liquidity and Capital Resources
Our current operations do not generate sufficient operating funds to
meet our cash needs and, as a result, we have funded our operations with a
combination of equity and debt proceeds. We ultimately expect to fund our
operations from the cash flows of our affiliate companies. Currently however,
our affiliate companies do not generate sufficient
39
<PAGE>
earnings to pay dividends or otherwise distribute amounts which are sufficient
to cover our operating expenses. Furthermore, we do not expect to receive such
dividends within the next twelve months due to the fact that each of our
affiliate companies is in the developmental stage of operations. We may also
generate cash proceeds from the sale of interests in our affiliate companies.
Until we receive dividends from our affiliate companies or realize cash proceeds
from the sale of interests in our affiliate companies, if at all, we will remain
dependant on outside sources of capital to fund our operations. We are not
certain that such funds will be available on terms that are satisfactory to us
or at all.
During the period from January 1, 1998 through December 31, 1999, we
received proceeds of approximately $8.8 million from the sale of our equity
securities. In addition, during the period from January 1, 1998 through December
31, 1999, we received approximately $7.9 million from the sale of convertible
debentures. Accordingly, proceeds from the sale of debt and equity amounted to
approximately $16.7 million during the period from January 1, 1998 through
December 31, 1999.
In March 2000, we sold 4,166,667 shares of our Series C Preferred Stock
and warrants to purchase 416,667 shares of our common stock for net proceeds of
approximately $48.3 million after payment of offering costs.
Since inception through December 31, 1999, we used approximately $3.8
million to fund our general corporate expenses, including salaries and wages,
professional and consulting fees and interest expense and we advanced
approximately $7.3 million to Net Value, Inc. to fund its operations and
development stage activities. We continued to advance funds to Net Value, Inc.
through December 3, 1999, the date of the asset sale with BrightStreet.
In June 1999, pursuant to a loan agreement, we advanced an aggregate
total of $1,555,000 to Strategicus Partners, Inc. Strategicus used these funds
as follows:
o $1,000,000 to purchase an approximate 13% equity
interest in YesAsia, Inc.
o $100,000 to purchase an approximate 10% equity
interest in College 411.com, Inc.;
o $60,000 to extend a short term loan to Cowboys and
Robots, Inc.
o $85,000 for general corporate purposes; and
o $310,000 to extend a loan to Douglas Spink, the
president of Strategicus.
In June 1999, we also extended a loan in the principal amount of
$267,000 to Darr Aley, one of our directors, who was a stockholder of
Strategicus at the time of the loan. We extended these loans to Mr. Spink and
Darr Aley to induce them to enter into an employment agreement and consulting
agreement, respectively, with our company and to remain an employee and
consultant of our company throughout the terms of their respective agreements.
On July 30, 1999, we completed a merger with Strategicus. In connection with the
merger, we issued an aggregate of 601,029 vested shares of our common stock,
184,627 vested shares of our Series A Preferred Stock, 6,923,599 unvested shares
of our common stock and 2,126,833 unvested shares of our Series A Preferred
stock to Darr Aley, Stephen George, Douglas Spink and Barry Uphoff, the
stockholders of Strategicus, in exchange for 100% of the issued and outstanding
capital stock of Strategicus. The 5,282,289 unvested shares of our common stock
which were issued to Messrs. Uphoff, George and Darr Aley were scheduled to vest
pro rata on a monthly basis over a period of 48 months from the closing date of
the merger. However, on August 31, 1999, Messrs. Uphoff, George and Darr Aley
agreed to forfeit these unvested shares of common stock and we agreed to issue
them options to purchase an aggregate of 5,282,289 shares of our common stock.
These options have an exercise price of $1.00 per share and will have the same
vesting period as the unvested shares of common stock. Messrs. Uphoff, George
and Darr Aley have subsequently agreed to forfeit an aggregate of 4,785,041
stock options so that Messrs. Uphoff and Darr Aley each now own options to
purchase 332,416 shares of our common stock and Mr. George now owns options to
purchase 382,416 shares of our common stock. The 1,641,310 unvested shares of
our common stock which were issued to Mr. Spink were scheduled to vest pro rata
on a monthly basis over a period of 24 months from the closing date of the
merger. We have subsequently terminated Mr. Spink's employment agreement for
cause and it is our position that, as a result, Mr. Spink has forfeited
1,616,835 of his unvested shares of our common stock. Upon consummation of the
merger, each of the former Strategicus stockholders was appointed to our board
of directors. Our common stock and preferred stock exchanged for Strategicus
stock was ascribed a value of $6.06 per share and $3.06 per share, respectively.
The value of our stock issued in the transaction was recorded as goodwill
related to the acquisition of Strategicus.
As a result of the merger, we acquired Strategicus' investments in
YesAsia and College 411 and 100% of the capital stock of metacat.com, Inc. Since
Strategicus merged into us pursuant to the merger agreement, it is no longer a
legal entity and its obligations under the loan agreement with us have been
discharged. This merger provided us with three affiliate companies and marked
the beginning of the implementation of our business plan to act as an Internet
holding company. Since each of these affiliate companies are in the development
stage and Strategicus had no other operations, this merger did not have a
material effect on our results of operations. In connection with this merger, we
entered into an employment agreement with Mr. Spink and a consulting agreement
with Darr Aley. Pursuant to each of
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<PAGE>
these agreements, we agreed to forgive the repayment of each of Messrs. Spink's
and Aley's loans if they remain employed or engaged by us for certain periods of
time.
During the fourth quarter of 1999 we continued to actively pursue the
acquisition of additional equity interests in affiliate companies as follows:
o On October 6, 1999, we increased our ownership
percentage in College 411, Inc. to 29% of the issued
and outstanding common stock of College 411 through
our exercise of warrants to purchase 1,125,000 shares
of College 411's common stock.
o On October 10, 1999, we acquired a 20% interest in
AssetExchange, Inc. for $400,000.
o On October 11, 1999, we acquired a 12% interest in
Webmodal, Inc. for $350,000.
o On November 24, 1999, we acquired a 10% interest in
Swapit.com, Inc. for $500,000.
During the first quarter of 2000, we acquired equity ownership
interests in the following affiliate companies:
o On January 31, 2000, we acquired a 31% interest in
IndustrialVortex.com, Inc. for $1,000,000.
o On March 14, 2000, we acquired a 69% interest in
AlarmX.com, Inc. for $1,000,000.
None of the transactions consummated during the fourth quarter of 1999
or the first quarter of 2000 resulted in our acquisition of any business or
assets other than equity securities of these affiliate companies and did not
result in our assumption of any liabilities. These transactions resulted in our
acquisition of additional equity interests in affiliate companies and,
therefore, did not have any effect on the nature of our operations as a holding
company. In addition, since each of these affiliate companies is in the
development stage, these acquisitions did not have a material effect on our
results of operations.
We believe that our cash and cash equivalents as of April 30, 2000 will
be sufficient to meet our operating expenses and current investment requirements
through June 30, 2001. However, our future liquidity needs are dependant
primarily on the number of future acquisitions of equity interests in new
affiliate companies and the extent to which we participate in subsequent rounds
of financings of our existing affiliate companies. We may be required to curtail
or reduce the scope of our investment activities to satisfy our liquidity needs
through June 30, 2001. Thereafter, we will be required to seek additional funds
through the sale of our securities to outside sources of capital, which could
result in substantial dilution to stockholders. We are not certain that these
funds will be available on terms that are satisfactory to us, or at all. If we
are unable to obtain these funds, then we will be required to reduce our
acquisitions of equity interests in affiliate companies and reduce our operating
activities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to changes in interest
rates and the resulting impact on our invested cash. We place our cash with high
credit quality financial institutions and invest that cash in short term fixed
income investments with remaining maturities of less than 90 days. We are averse
to principal loss and ensure the safety and preservation of our invested funds
by investing in only highly rated investments and by limiting our exposure in
any one issuance. If market interest rates were to increase immediately and
uniformly by 10% from levels, at December 31, 1999 and 1998, the fair value of
our portfolio would decline by an immaterial amount. We do not invest in
derivative financial instruments.
Item 8. Financial Statements
Our financial statements for the years ended December 31, 1999, 1998
and 1997, respectively and footnotes related thereto are included within Item
14(a) of this Report and may be found at pages F-1 through F-26.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
LJ Soldinger Associates completed the audit of our consolidated
financial statements for the years ended December 31, 1997 and 1998. In February
2000, we dismissed LJ Soldinger Associates as our independent accounting firm
and we engaged KPMG LLP as our independent accounting firm. KPMG LLP completed
the audit of our
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<PAGE>
consolidated financial statements for the year ended December 31, 1999. LJ
Soldinger Associates has confirmed that they did not have any disputes or
disagreements with our management regarding accounting principles or practices,
financial disclosure or auditing scope of procedures.
For periods in which we were inactive prior to our acquisition of a
controlling interest in Net Value, Inc., Barry L. Friedman, P.C. completed
audits of our financial statements and was subsequently dismissed when we
engaged LJ Soldinger Associates in 1998. Barry L. Friedman, P.C. confirmed that
they did not have any disputes or disagreements with management regarding
accounting principles or practices, financial disclosure or auditing scope or
procedures.
PART III
Item 10. Directors and Executive Officers of the Registrant
Our directors and executive officers, their ages and positions are set
forth below:
Andrew P. Panzo 35 Chairman of the Board of Directors and
Chief Executive Officer
Lee C. Hansen 33 President and Director
Stephen M. Cohen 43 Senior Vice President, General Counsel
and Secretary
Thomas Aley 35 Executive Vice President, Business
Development
Darr Aley 35 Director
Barry Uphoff 33 Director
Stephen George 32 Director
The following is a brief summary of the business experience of our
executive officers and directors:
Andrew P. Panzo has served as our Chairman and Chief Executive Officer
since January 1999. From October 1993 to June 1999, Mr. Panzo was a managing
director at American Maple Leaf Financial Corporation, a boutique investment
banking firm located in Philadelphia, Pennsylvania. Mr. Panzo was one of the
original founders of Net Value, Inc. in September 1996. Mr. Panzo currently
serves on the Board of Directors of Net Value, Inc. and the Board of Directors
of metacat.com, Inc. Mr. Panzo received a Masters degree in International
Business and Finance from Temple University.
Lee C. Hansen has served as our President since October 1, 1999 and as
one of our directors since April 2000. Prior to joining our management team, Mr.
Hansen was Senior Vice President of Corporate Strategy and Development at Bank
of America Corporation from May 1997 to September 1999, where he managed
strategic projects and merger and acquisition activities. From July 1993 to
April 1997, Mr. Hansen served as a Vice President in the International Capital
Raising Group and an Associate in the Lease Finance, Private Placement and High
Yield Groups at Banc of America Securities. Mr. Hansen currently serves on the
Board of Directors of AssetExchange, Inc. and AlarmX.com, Inc. Mr. Hansen
received an MBA from the J.L. Kellogg Graduate School at Northwestern University
and a BSBA from Bucknell University.
Stephen M. Cohen has served as our Senior Vice President, General
Counsel and Secretary since April 2000. Since 1980, Mr. Cohen has been engaged
in the practice of law, having most recently been a partner of Buchanan
Ingersoll Professional Corporation from March 1996 to April 2000 and a partner
of Clark Ladner, Fortenbaugh & Young from March 1990 to March 1996. Mr. Cohen's
practice focused on corporate finance and federal securities matters. He
received a B.S. from the School of Commerce and Finance of Villanova University,
a J.D. from Temple University and a L.L.M. in Taxation from Villanova University
School of Law.
Thomas Aley has served as our Executive Vice President for Business
Development since November 22, 1999. Prior to joining our management team, Mr.
Aley was Executive Vice President of Marketing at Wild Wild Web, Inc. from June
1997 through November 1999 where he oversaw business development including
operations, marketing and sales for Wild Wild Web's online and television
divisions. In November 1998, Mr. Aley played an instrumental role in the sale of
Wild Wild Web to GT Interactive Software. From June 1995 to June 1997, Mr. Aley
was Director of Electronic Commerce at Ziff-Davis where he managed the Company's
Net Buyer initiatives and ZDNet service. From January 1994 to June 1995, Mr.
Aley was the Director of Marketing for Eliza Corporation, where he sold speech
recognition technology to cable and television companies in the interactive
television industry. From January 1992 to January 1994, Mr. Aley worked at
Ono-Sendai Corporation. From October 1990 to January
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<PAGE>
1992, Mr. Aley worked at Shiva Corporation. Mr. Aley currently serves on the
Board of Directors of Swapit.com, Inc. Mr. Aley received an MBA in High
Technology Marketing and Operations from Northeastern University.
Darr Aley has served as a member of our Board of Directors since July
1999. Mr. Aley is also the chief technology officer of Epylon.com, Inc. Prior to
joining our management team, Mr. Aley was Vice President of Corporate
Development at Lycos, Inc. from August 1998 to August 1999, where he was
responsible for developing Internet joint ventures and strategic alliances. From
December 1997 to August 1998, Mr. Aley worked at WhoWhere.com, a search engine
that enables users to locate a person's home and e-mail address. From December
1996 to December 1997, Mr. Aley worked at Zip Two, a venture capital firm. From
December 1994 to December 1996, Mr. Aley worked at Soft Bank, a venture capital
firm. Mr. Aley currently serves on the Board of Directors of College411.com,
Inc. Mr. Aley received a BA from the University of New Hampshire.
Barry Uphoff has served as a member of our Board of Directors since
July 1999. Mr. Uphoff is also a partner at Diamond Technology Partners, Inc., an
e-business consulting firm. Prior to joining Diamond Technology Partners in July
1994, Mr. Uphoff was a management consultant with Booz, Allen and Hamilton from
June 1991 to July 1994 where he provided strategic and technology consulting
services to a variety of clients. Mr. Uphoff received an MBA from the University
of Chicago.
Stephen George has served as a member of our Board of Directors since
July 1999. Mr. George is also the chief executive officer of Epylon.com, Inc., a
business to business San Francisco Bay-area e-commerce company. Prior to forming
Epylon.com, Inc., Mr. George was a Vice President in the San Francisco office of
Goldman Sachs & Co., from January 1996 to May 1999 where he provided a broad
range of financial services to emerging technology companies, entrepreneurs,
management teams and venture capitalists with a specialization in the Internet
industry. From April 1992 through January 1996, Mr. George worked as an
investment banker for Merrill Lynch, Pierce, Fenner & Smith, Inc. Mr. George
currently serves on the Board of Directors of YesAsia, Inc. Mr. George received
a BA in Government from Cornell University.
Advisory Board
Members of our Advisory Board provide us and our affiliate companies
with strategic guidance and networking assistance. The following is a brief
summary of the business experience of our Advisory Board members:
Paul Stephens. Paul Stephens was a founder, managing director and chief
investment officer of the former Robertson Stephens & Company and currently
serves as a managing director of RS Investment Management, which was purchased
from the Bank of America on February 28, 1999. Following nine years in
institutional sales (1969-78) with Smith Barney & Company and Robertson, Colman,
Siebel & Weisel, Mr. Stephens joined Sandy Robertson to found Robertson, Colman,
Stephens & Woodman in 1978. The organization changed its name to Robertson
Stephens & Company in 1989. Mr. Stephens led the firm's research and
institutional sales effort in the late 1970's and early 1980's and then
transitioned into its new business corporate finance department where he served
from 1982 to 1985. He then restructured the venture capital group, managing it
until 1990 when he formed The Robertson Stephens Orphan Fund, a limited
partnership focused on investing globally in undiscovered or neglected growth
companies. In June 1993, Mr. Stephens launched The Contrarian Fund, a public
mutual fund. He holds both a Bachelors degree and a Masters degree in Business
Administration from the Haas School of Business at U.C. Berkeley.
Warren Zide. Warren Zide is a movie producer and talent manager at
Zide/Perry Entertainment, a production and management company. In 1997, Mr. Zide
partnered with Craig Perry to form Zide/Perry Films, a division of Zide/Perry
Entertainment. Mr. Zide recently served as a producer on Universal's box office
success American Pie. He has also produced the action film, The Big Hit,
starring Mark Wahlberg and Christina Applegate. Zide/Perry Films' recent
projects include New Line Cinema's Final Destination, a supernatural thriller;
Sony's Providence, a teen romance; and the independent comedy, Return of the
World's Most Rotten Lover. The company also has numerous projects on its
development slate and currently has a two-year, first-look production deal with
Warner Bros. to develop and produce feature films. Mr. Zide serves as a literary
manager for Zide Management, where he has sold more than 80 spec scripts in less
than 60 months. Mr. Zide represents many young, rising screenwriters and
directors, including Ben Ramsey, screenwriter of The Big Hit, Josh Schwartz,
screenwriter of Providence and Stuart Gibbs, screenwriter of Return of the
World's Most Rotten Lover. He has earned many impressive press accolades,
including being selected for Fade-In Magazine's "One of the Top 100 People In
Hollywood You Need to Know," The Hollywood Reporter's "Next Generation's," and
he is the youngest manager to appear on Weekly Variety's "Top 10 Spec
Salesman's" list. Additionally, Mr. Zide is extending his entertainment presence
by launching InZide.com (www.InZide.com), an Internet website which has been
developed as a comprehensive industry resource and reference tool for aspiring
and established screenwriters. Mr. Zide graduated with a B.A. in finance from
Michigan State University.
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Michela O'Connor Abrams. Michela O'Connor Abrams is the president of
Imagine Media, Inc.'s Business Division. In this role, Ms. O'Connor Abrams
oversees all operations, including the flagship publication Business 2.0 and all
new brand extensions. Business 2.0 (www.business2.com) is an international
monthly publication with a current circulation rate base of approximately
210,000. Within its first year, Business 2.0 won seven top magazine awards:
three Maggie Awards, a Computer Press Award, two Ozzie Awards, and the Folio:
Editorial Excellence Award. Ms. O'Connor Abrams has over 16 years of experience
in publishing, trade show management, Internet strategies, online branding and
strategic business development. She has held executive positions at IDG,
Ziff-Davis and McGraw-Hill. Most recently, she served as president and CEO of
Computerworld. Prior to IDG, she was chief operating officer of ZD Events, which
produces industry-leading expositions and conferences such as Comdex, Seybold
and Networld +Interop. She also served several years as a publisher and group
vice president at McGraw-Hill. Ms. O'Connor Abrams sits on the board of
directors for Bow Street Software and Auctionnet.com. She holds a Bachelor of
Science degree in Journalism from California Polytechnic University at San Luis
Obispo.
Owen Van Natta. Owen Van Natta is a Senior Director, Business
Development at Amazon.com. Mr. Van Natta came to Amazon.com through the
PlanetAll acquisition in August 1998. As Senior Director of Business
Development, Mr. Van Natta manages the team responsible for all external
partnerships and strategic alliances at Amazon.com. At PlanetAll.com, Mr. Van
Natta oversaw all strategic partnerships and customer communications as the Vice
President of Business Development & Marketing. Prior to PlanetAll, Mr. Van Natta
was part of the management team at Zip2 Corporation where he successfully
developed local sales and marketing operations for newspaper companies like
Knight Ridder and The New York Times Company. Zip2 was ultimately sold to Compaq
Computer Corporation's AltaVista Division. Mr. Van Natta has held Director level
positions at high tech industry leaders such as Acer America, SoftBank, and
Ziff-Davis Publishing Company. Mr. Van Natta holds a BA in English and American
Literature from the University of California at Santa Cruz.
Douglas Boake. Douglas Boake is Vice President, Business Development at
Amazon.com. Mr. Boake came to Amazon.com through the Accept.com acquisition in
June 1999. As Vice President of Business Development, Mr. Boake oversees the
overall development of business opportunities. He implements high-level
marketing strategies, develops strategic alliances and expands Amazon.com's
customer relationships. At Accept.com, Mr. Boake directed all business
development efforts. In addition, he spearheaded efforts to form new alliances
and partnerships for the company. Before joining the Accept.com executive team,
Mr. Boake was Senior Vice President of sales at PointCast Inc. where he oversaw
strategic sales and affiliate development, advertising sales, and advertising
marketing for the PointCast Network. He also held the position of Vice
President, International at PointCast, and was President of PointCast Japan,
Inc. Mr. Boake previously worked for Radius Inc. as Vice President and General
Manager of the Pacific Rim region. He was also President of Radius' wholly-owned
Japanese subsidiary, Radius K.K. Prior to joining Radius, Mr. Boake served as
Managing Director, Pacific Rim, for the Claris Corporation and as President and
Representative Director for Claris Japan, Inc., the company's Japanese
subsidiary. Mr. Boake holds a BA in Managerial Science and Political Science
from Rice University.
Tom H. Rosenwald. Tom H. Rosenwald is a Partner at Heidrick &
Struggles. Based in the New York office, Mr. Rosenwald is a founding member of
the Consumer Practice, a Member of the E-Commerce Practice, and is Head of the
Advertising and Communications Practice, a subset of the Consumer Practice. Mr.
Rosenwald brings more than 30 years of experience in sales, marketing and
advertising in health care and consumer packaged goods to Heidrick & Struggles.
Before joining the firm, he spent ten years as Executive Vice President and
General Manager of MED Communications, an advertising agency specializing in
health care. Mr. Rosenwald concentrates on executive level search assignments,
specializing in consumer-packaged goods, advertising, and communications. Recent
clients he has served include American Express, Ammirati Puris Lintas,
Burson-Marsteller, Coca-Cola Company, Compaq Computer Corporation, DMB&B, Fleet
Financial Group, Gateway Inc., Grey Advertising, Hasbro, Omnicom Worldwide,
Resort Condominiums International (RCI), Schering-Plough, Solvay
Pharmaceuticals, TBWA/Chiat Day, The Hockey Company, True North Communications,
Inc., Wells Rich Greene, Wunderman Cato Johnson, and Young & Rubicam. During his
business career, Mr. Rosenwald has served in sales management positions at Wyeth
Laboratories, a division of American Home Products, and held product management
positions in the Post Division of General Foods. During his association with
Young & Rubicam, he was a member of senior account management and General Foods
was among his major clients. He also founded the firm's first health care
advertising division. Mr. Rosenwald received a BA from Dartmouth College and an
MBA from the Amos Tuck School of Business Administration.
Marc Meyer. Marc Meyer is a Professor of Management at Northeastern
University. Professor Meyer teaches and conducts research in the area of new
product development and technological entrepreneurship. A co-founder of several
software companies, Professor Meyer serves as a consultant to large corporations
in the area of new product development. He is also director of the College's
Center for Technology Management, helps run the College's Entrepreneurial Lab
and is a co-director of the HighTech MBA program. His most recent book is The
Power of Product Platforms (Free Press, 1997). Professor Meyer consults to
leading corporations in the development of next generation
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products, systems and services. Professor Meyer holds an AB from Harvard
University and MSc and PhD degrees from Massachusetts Institute of Technology.
Paul Thomas Cohen. Paul Thomas Cohen is an independent investment
advisor. Mr. Cohen has spent the past six years working as an investor banker
for, and consultant to, a variety of New York-based media companies, such as
Time Life, Time, Inc., The New York Times, The National Broadcasting Company
(NBC) and Rolling Stone Magazine, as well as a multitude of Internet-based
companies such as Yoyodyne, Tunes.com, E-Exchange and Medcast. Working with
Rolling Stone, Mr. Cohen aided in creating a new media/Internet strategy, in
addition to developing and consulting on CD-Rom projects and commercial on-line
ventures. Prior to his work in new media and the Internet, Mr. Cohen spent four
years acting as Chief Executive Officer of the New York-based brokerage firm
Herzfeld & Stern. Mr. Cohen received an MBA from Columbia University.
Eric Olander. Eric Olander is an Equity Analyst for Tudor Investment
Corporation specializing in small and mid-cap growth stocks. Previously, he was
an Analyst for Putnam's Specialty Growth Equities Group, focusing on emerging
small-cap growth stocks for the New Opportunities, OTC Emerging Growth and
Voyager Funds. He is a Chartered Financial Analyst and is currently completing
his Master of Business Administration at the Harvard Business School.
Vici Wayne. Vici Wayne is the Managing Director of the New Media
Practice at Christian & Timbers. Ms. Wayne joined Christian & Timbers to focus
nationally on finding top executives to lead the burgeoning number of media
companies including film, video, audio, broadcast, cable and print which are
currently taking their businesses to the Internet. For the five years prior to
joining Christian & Timbers, Ms. Wayne was a principal at Korn/Ferry
International where she established the firm's Multimedia Practice. Ms. Wayne is
an established search consultant with 12 years of recruiting experience,
including managing her own search firm which focused on telecommunications,
electronic entertainment, publishing and technology. Ms. Wayne received a B.S.
degree in Information Systems from the University of San Francisco and studied
in Switzerland and France. She has appeared as a speaker and a panelist at
multimedia and Internet conventions.
Compliance with Section 16(a) of the Exchange Act
Douglas Spink was a member of our Board of Directors until he resigned
from this position on March 8, 2000. Based solely upon our review of Forms 3
submitted to us pursuant to Rule 16a-3(e) promulgated under the Securities
Exchange Act of 1934, as amended, it is our belief that Mr. Spink has failed to
file on a timely basis a Form 3 with the Securities and Exchange Commission as
required by Section 16(a) of the Securities Exchange Act of 1934, as amended.
Item 11. Executive Compensation
The table below sets forth information concerning the compensation we
paid to our chief executive officer and each executive officer who was paid
compensation at an annual rate of greater than $100,000 in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
-------------------------- -------------------
Name and
Principal Position Salary Bonus Number of Options
------------------ ------ ----- -----------------
<S> <C> <C> <C>
Andrew P. Panzo, $87,500 0 1,020,000
Chairman and Chief Executive Officer
Lee C. Hansen, President $34,615 0 900,000
Thomas Aley, Executive Vice President $23,077 $50,000 0
</TABLE>
From September 4, 1998 through January 6, 1999, Alexis Christodoulou
served as our sole officer and director. During this period, Mr. Christodoulou
did not receive any compensation in exchange for his services.
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<PAGE>
The following table sets forth information regarding options granted in
1999 to the executive officers named in our Summary Compensation table above.
Amounts represent the hypothetical gains that could be achieved from the
respective options if exercised at the end of the option term. These gains are
based on assumed rates of stock appreciation of 0%, 5% and 10% compounded
annually from the date the respective options were granted to their expiration
date based upon the grant price.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-----------------
% of Total
Options Potential Realizable Value at
Granted to Market Assumed Annual Rates of Stock
Number of Employees Price Price Appreciation for Option Term
Options in Fiscal Exercise on Date ----------------------------------
Name Granted Year Price of Grant Expiration Date 0% 5% 10%
---- -------- ----- ----- -------- --------------- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew P. Panzo 120,000 5.5% $1.00 $7.13 June 1, 2004 $735,600 $971,987 $1,257,952
Andrew P. Panzo 300,000(1) 13.8% $1.00 $7.13 June 30, 2005 $1,839,000 $2,566,465 $3,489,369
Andrew P. Panzo 300,000(2) 13.8% $1.00 $7.13 June 30, 2006 $1,839,000 $2,709,788 $3,868,306
Andrew P. Panzo 300,000(3) 13.8% $1.00 $7.13 June 30, 2007 $1,839,000 $2,860,277 $4,285,136
Lee C. Hansen 90,000 4.1% $1.00 $4.56 October 1, 2004 $320,625 $434,073 $571,316
Lee C. Hansen 270,000(1) 12.4% $1.00 $4.56 October 31, 2005 $961,875 $1,380,830 $1,912,342
Lee C. Hansen 270,000(2) 12.4% $1.00 $4.56 October 31, 2006 $961,875 $1,463,372 $2,130,576
Lee C. Hansen 270,000(3) 12.4% $1.00 $4.56 October 31, 2007 $961,875 $1,550,040 $2,370,633
</TABLE>
(1) The options included in this grant vest pro rata on a monthly basis
throughout the twelve month period commencing on the date of grant.
(2) The options included in this grant vest pro rata during the 12 month
period commencing on the first anniversary of the date of grant.
(3) The options included in this grant vest pro rata during the 12 month
period commencing on the second anniversary of the date of grant.
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in our Summary
Compensation Table above. The value of unexercised in-the-money options is
calculated based on the closing bid price of our common stock on December 31,
1999 of $11.00.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
------------------ ------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew P. Panzo 300,000 720,000 $3,000,000 $7,200,000
Lee C. Hansen 157,500 742,500 $1,575,000 $7,425,000
</TABLE>
The table below sets forth the information concerning the compensation
which Net Value, Inc. paid to its chief executive officer and each executive
officer who was paid compensation greater than $100,000 in 1999.
46
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
Name and ------------------- -------------------
Principal Position Salary Bonus Number of Options
------------------ ------ ----- -----------------
<S> <C> <C> <C>
R. Scott Wills $182,185 $50,000 0
President and Chief Executive Officer
Gregory B. Roberts, $166,789 $25,000 0
Chief Technology Officer
Mark Lapolla, $92,847 $10,000 0
Vice President Engineering
Andrew P. Panzo, 0 0 60,000
President
</TABLE>
The following table sets forth information regarding options granted in
1999 to the executive officers named in the Net Value, Inc. Summary Compensation
Table above. Amounts represent the hypothetical gains that could be achieved
from the respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 0%, 5% and 10%
compounded annually from the date the respective options were granted to their
expiration date based upon the grant price.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
----------------- ---------------
% of Total
Options
Granted to Market
Number of Employees Price on
Options in Fiscal Exercise Date of Expiration
Name Granted Year Price Grant Date 0% 5% 10%
---- ------- ---- ----- ----- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew P. Panzo 60,000 100.00% $ 1.00 $2.85 December 4, $111,000 $157,980 $215,352
2004
</TABLE>
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in the Net Value, Inc.
Summary Compensation Table above. The value of unexercised in- the-money options
is calculated based on the closing bid price of our common stock on December 31,
1999 of $11.00. The fiscal year end option values for Mr. Panzo's options to
purchase 60,000 shares of Net Value, Inc.'s common stock were calculated
assuming that our merger with Net Value, Inc. was consummated as of December 31,
1999 and that Mr. Panzo's stock options were converted into options to purchase
24,000 shares of our common stock at an exercise price of $2.50 per share.
47
<PAGE>
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
------------------ ------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew P. Panzo 60,000 0 $204,000 $ 0
</TABLE>
Employment Agreements
In June 1999, we entered into a three year employment agreement with
Mr. Panzo. In addition to an annual salary of $150,000, Mr. Panzo's employment
agreement provides for bonus compensation at the discretion of our Board of
Directors. Pursuant to the employment agreement, Mr. Panzo is entitled to fringe
benefits including participation in pension, profit sharing and bonus plans, as
applicable, and life insurance, hospitalization, major medical, paid vacation
and expense reimbursement. Mr. Panzo's employment agreement provides he is
entitled to receive options to purchase 1,200,000 shares of our common stock.
Options to purchase 120,000 shares of common stock vested immediately and the
remainder of the options will vest pro rata on a monthly basis over a three year
period. Mr. Panzo may exercise these options for five years following their
vesting date at an exercise price of $1.00 per share. In September 1999, Mr.
Panzo agreed to reduce his option award and surrendered 180,000 options. Mr.
Panzo now holds options to purchase 1,020,000 shares of our common stock.
In September 1999, we entered into a three year employment agreement
with Lee Hansen pursuant to which Mr. Hansen will serve as our President. In
addition to an annual salary of $150,000, Mr. Hansen's employment agreement
provides for bonus compensation at the discretion of the Board of Directors.
Pursuant to his employment agreement, Mr. Hansen is entitled to fringe benefits
including participation in pension, profit sharing and bonus plans, as
applicable, and life insurance, hospitalization, major medical, paid vacation
and expense reimbursement. We have awarded Mr. Hansen options to purchase
900,000 shares of common stock. Options to purchase 90,000 shares of common
stock vested immediately and the remainder of the options will vest pro rata on
a monthly basis over a three year period. As long as he is our employee, Mr.
Hansen may exercise these options at an exercise price of $1.00 per share until
the later of:
o the fifth anniversary of their vesting date; or
o one year after the effective date of a registration
statement registering the resale of the shares of
common stock issuable upon exercise of the options.
If Mr. Hansen's employment is terminated, then the exercise period of
his options may be reduced.
In November 1999, we entered into a one-year employment agreement with
Thomas Aley pursuant to which he will serve as our Executive Vice President. In
addition to an annual salary of $150,000, Tom Aley's employment agreement
provides for bonus compensation at the discretion of the Board of Directors.
Pursuant to his employment agreement, Tom Aley is entitled to fringe benefits
including participation in pension, profit sharing and bonus plans, as
applicable, and life insurance, hospitalization, major medical, paid vacation
and expense reimbursement. In April 2000, we amended Tom Aley's employment
agreement to award him options to purchase 900,000 shares of common stock.
Options to purchase 150,000 shares of common stock vested immediately and the
remainder of the options will vest pro rata on a monthly basis over a three year
period. Tom Aley may exercise these options at an exercise price of $1.00 per
share until the later of:
o the fifth anniversary of their vesting date; or
o one year after the effective date of a registration
statement registering the resale of the shares of
common stock issuable upon exercise of the options.
48
<PAGE>
In April 2000, we entered into a three year employment agreement with
Stephen M. Cohen pursuant to which Mr. Cohen will serve as our Senior Vice
President, General Counsel. In addition to an annual salary of $150,000, Mr.
Cohen's employment agreement provides for bonus compensation at the discretion
of the Board of Directors. Pursuant to his employment agreement, Mr. Cohen is
entitled to fringe benefits including participation in pension, profit sharing
and bonus plans, as applicable, and life insurance, hospitalization, major
medical, paid vacation and expense reimbursement. We have awarded Mr. Cohen
options to purchase 300,000 shares of common stock at an exercise price of $6.75
per share. Options to purchase 50,000 shares of our common stock vested
immediately, options to purchase 62,500 shares of our common vest on April 17,
2001, and the remaining options to purchase 187,500 shares of our common stock
vest pro rata on a monthly basis from April 18, 2001 through April 17, 2004,
provided that if after the expiration of the initial term of the employment
agreement we elect not to extend Mr. Cohen's employment for an additional one
year for reasons other than a "for cause" termination as defined in the
employment agreement, then Mr. Cohen shall vest fully in all of his options at
the end of his initial term of employment as if he had remained our employee for
a full term of four years.
Pursuant to his employment agreement, we have agreed to provide Mr.
Cohen with a loan in the principal amount of $100,000 at the beginning of each
of the first two years of the term of his employment agreement. Each of the
loans shall accrue interest at the rate of 8% per annum and shall be due on
April 17, 2004 or such earlier date that Mr. Cohen shall have received aggregate
proceeds of $5,000,000 from the sale of his options or the shares of common
stock underlying his options. However, Mr. Cohen is not required to repay the
loans if by April 17, 2004, the sum of the proceeds which he has received from
the sale of his options or the shares of common stock underlying his options and
the remaining equity in the options as of April 17, 2004 does not equal or
exceed $5,000,000.
Consulting Agreements
We have entered into consulting agreements with each of Messrs. Uphoff,
Darr Aley and George. Pursuant to the terms of the consulting agreements, each
of Messrs. Uphoff, Aley and George will be paid a monthly retainer of $500. In
connection with our merger with Strategicus Partners and each of the consulting
agreements, we issued options to purchase an aggregate of 6,255,876 shares of
our common stock to Messrs. Uphoff, Darr Aley and George. Messrs. Uphoff, Darr
Aley and George have subsequently agreed to surrender a substantial portion of
these options. In May 2000, we finalized the terms of these options in warrant
agreements which we issued to each of Messrs. Uphoff, Darr Aley and George.
Pursuant to these warrant agreements, we issued to each of Messrs. Uphoff and
Darr Aley warrants to purchase 332,416 shares of our common stock, of which
warrants to purchase 192,275 shares vested immediately and warrants to purchase
140,141 shares remain subject to vesting provisions, and we issued Mr. George
warrants to purchase 382,416 shares of our common stock, of which warrants to
purchase 192,275 shares vested immediately and warrants to purchase 190,141
shares remain subject to vesting provisions. The unvested shares issued pursuant
to each of these warrant agreements will vest monthly on a pro rata basis over a
period of 36 months from the date of the warrant agreements. For a detailed
discussion of the issuance and status of these options, see "Item 13 -
TRANSACTIONS WITH OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPS." We
may terminate their consulting agreements at any time and for any reason.
Darr Aley's consulting agreement also provides for the forgiveness of a
loan in the principal amount of $267,000 which we have provided to Darr Aley. We
will forgive:
o one-third of the principal amount of this loan, plus
accrued interest thereon, if Darr Aley remains
engaged by us on the first anniversary of the
effective date of the merger with Strategicus
Partners;
o one-third of the principal amount of these loans,
plus accrued interest thereon, if Darr Aley remains
engaged by us on the second anniversary of the
effective date of the merger with Strategicus
Partners, Inc.; and
o one-third of the principal amount of this loan, plus
accrued interest thereon, if Darr Aley remains
engaged by us on the third anniversary of the
effective date of the merger with Strategicus
Partners, Inc.
On October 1, 1999 we entered into a consulting agreement with Paul H.
Stephens, a founder and formerly a principal of the investment banking firm of
Robertson Stephens & Company. Under the consulting agreement, Mr.
49
<PAGE>
Stephens has been appointed to our newly created Advisory Board. In this
capacity, Mr. Stephens will review and advise us regarding our business and
prospects and the business and prospects of our affiliate companies. He will
also assist us in completing acquisitions of and making investments in other
businesses and will assist us in obtaining additional rounds of financing. Mr.
Stephens led Robertson Stephens' research and institutional sales effort in the
late 1970's and early 1980's and then transitioned into its new business
corporate finance department where he worked until 1985. He then restructured
the firm's venture capital group, managing it until 1990, when he formed The RS
Orphan Fund, LP, a limited partnership focused on investing globally in
undiscovered or neglected growth companies. In June 1993, Mr. Stephens launched
The Contrarian Fund, a public mutual fund that also has a global focus on
developing companies.
In exchange for rendering these consulting services, we sold a total of
676,374 shares of our common stock to The RS Orphan Fund, LP and The RS Orphan
Offshore Fund, LP for a total purchase price of $676,374. These funds also
purchased a total of 1,324 shares of our Series B Preferred Stock and warrants
to purchase 80,976 shares of our common stock in our October 1999 private
placement offering. These funds are managed by Mr. Stephens. No additional
compensation will be paid to Mr. Stephens pursuant to the consulting agreement.
We will reimburse Mr. Stephens for reasonable business expenses which he incurs
in performing his duties pursuant to the consulting agreement. This consulting
agreement has a three year term and either we or Mr. Stephens may terminate this
agreement upon one month's notice to the other party.
Item 12. Security Ownership of Executive Officers, Directors and
Beneficial Owners of Greater Than 5% of Our Common Stock
The following table sets forth information with respect to the
beneficial ownership of our common stock owned, as of April 30, 2000, by:
o the holders of more than 5% of our common stock;
o each of our directors;
o our executive officers; and
o all directors and executive officers of our company
as a group.
As of April 30, 2000, an aggregate of 17,680,672 shares of our common
stock were issued and outstanding. For purposes of computing the percentages
under this table, it is assumed that all options and warrants to acquire our
common stock which have been issued to the directors, executive officers and the
holders of more than 5% of our common stock and are fully vested or will become
fully vested within 60 days of the date of this Annual Report have been
exercised by these individuals and the appropriate number of shares of our
common stock have been issued to these individuals. The number of shares
reflected as outstanding has also been determined on the basis that 1,610,835
shares of common stock that were issued to a former officer have effectively
been cancelled as a result of the termination for cause of the former officer.
This matter is currently the subject of a material legal proceeding discussed in
this Annual Report on page 28.
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
------------------------------------------
Amount and Nature of
Name of Beneficial Owner Position Beneficial Ownership (1) Percentage of Class
------------------------ -------- ------------------------ -------------------
<S> <C> <C>
Rozel International Holdings, Ltd. Beneficial 2,819,852 16.0
Whitehill House Owner
Newby Road, Industrial Estate
Hazel Grove, Stockport
Cheshire, United Kingdom
SK7 5DA
Andrew P. Panzo (2) Officer, 594,463 3.3
8 Pennsford Lane Director
Media, PA 19063
Barry Uphoff (3) Director 342,645 1.9
4080 Winberie Avenue
Naperville, IL 60564
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
-----------------------------------------
Amount and Nature of
Name of Beneficial Owner Position Beneficial Ownership (1) Percentage of Class
------------------------ -------- ------------------------ -------------------
<S> <C> <C>
Darr Aley (3) Director 342,645 1.9
615 Howard Avenue
Burlingame, CA 94010
Stephen George (4) Director 345,422 1.9
5 Morning Sun Avenue
Mill Valley, CA 94941
Lee C. Hansen (5) Officer, 292,500 1.6
1475 Vallejo Street, #3 Director
San Francisco, CA 94109
Thomas Aley (6) Officer 191,667 1.1
260 Elsinore Street
Concord, MA 01742
Stephen M. Cohen (7) Officer 50,000 *
1811 Fireside Court
Cherry Hill, NJ 08003
All directors and executive officers 2,159,342 11.2
as a group (7 people)
</TABLE>
- ------------------
* Less than one percent.
(1) Beneficial ownership has been determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934. Unless
otherwise noted, we believe that all persons named in the
table have sole voting and investment power with respect to
all shares of our common stock beneficially owned by them.
(2) Includes 450,000 shares of our common stock issuable upon
exercise of vested options. Does not include 570,000 shares of
common stock issuable pursuant to options not presently
exercisable and not exercisable within 60-days of the date of
this Report. Also includes 75,200 shares of our common stock
which Mr. Panzo owns with his spouse as joint tenants with the
right of survivorship.
(3) Includes 200,061 shares of our common stock issuable upon
exercise of vested options. Does not include 132,355 shares of
our common stock issuable pursuant to options not presently
exercisable and not exercisable within 60 days of the date of
this Annual Report.
(4) Includes 202,838 shares of our common stock issuable upon
exercise of vested options. Does not include 179,578 shares of
our common stock issuable pursuant to options not presently
exercisable and not exercisable within 60 days of this date of
this Annual Report.
(5) Includes 292,500 shares of our common stock issuable upon
exercise of vested options. Does not include 607,500 shares of
our common stock issuable pursuant to options not presently
exercisable and not exercisable within 60 days of the date of
this Annual Report.
(6) Includes 191,667 shares of our common stock issuable upon
exercise of vested options. Does not include 708,333 shares of
our common stock issuable pursuant to options not presently
exercisable and not exercisable within 60 days of the date of
this Annual Report.
(7) Includes 50,000 shares of our common stock issuable upon
exercise of vested options. Does not include 250,000 shares of
our common stock issuable pursuant to options not presently
exercisable within 60 days of the date of this Annual Report.
51
<PAGE>
Item 13. Transactions with Officers and Directors and Other Business
Relationships
Share Exchange Transactions with Rozel International Holdings, Ltd.
In October 1998, we completed a share exchange transaction with Rozel
International Holdings, Ltd. in which we issued 1,000,000 shares of our common
stock valued at $4,630,000 and 500,000 shares of our Series A Preferred Stock
valued at $40,000 in exchange for 178,700 shares of the Series A Preferred Stock
of Net Value, Inc. This represented 100% of the issued and outstanding shares of
Series A Preferred Stock.of Net Value, Inc. In October 1998, we also completed a
share exchange transaction with Rozel International Holdings, Ltd. in which we
issued 1,145,594 shares of our common stock valued at $4,628,200 and 1,145,594
shares of our Series A Preferred Stock valued at $91,648 in exchange for
4,582,377 shares of common stock of Net Value, Inc. Rozel International
Holdings, Ltd. is a beneficial owner of approximately 16.0% of our common stock.
Recapitalization of Securities Issued in Strategicus Merger.
We completed our merger with Strategicus Partners on July 30, 1999.
Subject to vesting provisions described in the merger agreement, we issued the
following shares of our capital stock to the stockholders of Strategicus
Partners:
<TABLE>
<CAPTION>
Vested Shares Unvested Shares of Vested Shares of Unvested Shares of
of Common Common Stock Series A Preferred Series A Preferred
Stock Stock Stock
------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Douglas Spink 239,847 1,641,310 73,678 504,187
Barry Uphoff 120,394 1,760,763 36,983 540,882
Darr Aley 120,394 1,760,763 36,983 540,882
Stephen George 120,394 1,760,763 36,983 540,882
------- --------- ------ -------
TOTAL 601,029 6,923,599 184,627 2,126,833
TOTAL VALUE $3,638,084 $21,458,719 $142,163 $1,637,661
</TABLE>
The unvested shares of our capital stock listed above were intended to
vest ratably on a monthly basis over periods ranging from 24 months to 48 months
based on the individual stockholder's continued employment or engagement as a
consultant with Net Value Holdings.
Following our merger with Strategicus, the securities issued in the
merger were recapitalized in several stages as follows:
1. In September 1999, we issued 2,898,788 shares of our common stock in
exchange for all 4,831,312 issued and outstanding shares of our Series A
Preferred Stock. Of this amount, Messrs. Spink, Uphoff, Aley and George received
a total of 1,386,876 shares of our common stock valued at $6,012,738 in exchange
for the cancellation of all of their 2,311,460 shares of our Series A Preferred
Stock.
2. On August 31, 1999, each of Messrs. Uphoff, Darr Aley and George
agreed to immediately cancel all of their 6,255,876 unvested shares of our
common stock valued at $37,927,669 (consisting of 5,282,289 unvested shares of
our common stock pursuant to our merger with Strategicus Partners, and 973,587
unvested shares of our common stock in the Series A Preferred Stock Exchange
described above) in exchange for options to purchase a total of 6,255,876 shares
of our common stock valued at $11,889,024. Each of these options has an exercise
price of $1.00 per share and will be subject to the same vesting provisions that
applied to the unvested shares of common stock as described in our merger
agreement with Strategicus Partners.
3. During September 1999, each of Messrs. Uphoff, Aley, George and
Panzo agreed to surrender options to purchase 180,000 shares of our common stock
valued at $646,884. On September 13, 1999, Mr. Spink agreed to cancel 180,000 of
his unvested shares of common stock valued at $1,148,727.
4. During January 2000, each of Messrs. Uphoff, Aley and George agreed
to surrender options to purchase 1,217,876 shares of our common stock valued at
$4,376,803.
5. During May 2000, each of Messrs. Uphoff and Aley agreed to surrender
options to purchase 355,000 shares of our common stock. During May 2000, Mr.
George agreed to surrender options to purchase 305,000 shares of our common
stock.
52
<PAGE>
Recapitalized as set forth above, the securities which we issued
pursuant to our merger with Strategicus Partners were issued and outstanding as
of May 10, 2000, as follows:
Options to
Vested Shares of Purchase Shares of
Common Stock Common Stock
---------------- ------------------
Douglas Spink 431,041 0
Barry Uphoff 142,584 332,416
Darr Aley 142,584 332,416
Stephen George 142,584 382,416
------- ----------
TOTAL 858,793 1,047,248
======= ==========
The table set forth above does not reflect 1,641,310 unvested shares of
our common stock which we believe are subject to surrender by Mr. Spink
following his termination "for cause."
Loans Made in Connection With Our Merger With Strategicus Partners, Inc.
In May 1999, Strategicus Partners made a loan to Mr. Spink in the
principal amount of $310,000. This amount was extended to Mr. Spink to provide
funds for expenses which he incurred in connection with the start-up of
metacat.com, Inc. This transaction was structured as a loan to induce Mr. Spink
to remain our employee for at least one year. The loan accrues interest at a
simple rate of 9% per annum. The repayment of the principal amount of this loan
plus all accrued interest was originally due on July 12, 1999 but was
subsequently extended to July 30, 1999. Upon the completion of our merger with
Strategicus Partners, we entered into an employment agreement with Mr. Spink in
which we agreed not to take any actions to demand repayment or to collect this
loan during the term of the employment agreement so long as we do not terminate
Mr. Spink's employment for "cause," death or disability (as such terms are
defined in the employment agreement) and we agreed to forgive the principal
amount plus all accrued interest related to this loan if Mr. Spink remained an
employee of our company on the first anniversary of his employment. On January
21, 2000, we sent Mr. Spink written notice terminating his employment agreement
for "cause", effective October 19, 1999. Accordingly, we intend to take legal
action to obtain repayment of the principal amount of this loan plus all accrued
interest thereon. In addition, in July 1999, Strategicus made an advance to Mr.
Spink in the principal amount of approximately $185,000. We intend to take legal
action to obtain repayment of this advance.
In June 1999, we extended a loan to Mr. Darr Aley in the principal
amount of $267,000. This amount was extended to Mr. Aley as an inducement for
him to leave his prior employment. This transaction was structured as a loan to
induce Mr. Aley to remain our consultant for the duration of his engagement. The
repayment of the principal amount of this loan plus all accrued interest was
originally due on July 12, 1999 but was subsequently extended to July 30, 1999.
Upon the completion of our merger with Strategicus Partners, we entered into a
consulting agreement with Mr. Aley in which we agreed not to take any actions to
demand repayment or to collect this loan during the term of the consulting
agreement. We also agreed to forgive Mr. Aley 's obligation to repay a portion
of this loan if he remains engaged as a consultant to our corporation on each of
the first three anniversaries of the date of his consulting agreement.
Personal Investments of Members of Our Management Team in Our Affiliate
Companies
Members of our management team have made personal investments in some
of our affiliate companies. As of April 30, 2000, members of our management team
either own or have in the past owned the following equity interests in our
affiliate companies:
<TABLE>
<CAPTION>
Affiliate company Equity Interest
----------------- ---------------
<S> <C>
Andrew P. Panzo YesAsia 12,000 shares of common stock
Barry Uphoff YesAsia 12,000 shares of common stock
Darr Aley YesAsia 12,000 shares of common stock
Darr Aley College 411 50,000 stock options
Stephen George YesAsia 12,000 shares of common stock
Stephen George College 411 37,500 stock options
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Thomas Aley Swapit.com 30,072 shares of common stock
Lee Hansen YesAsia 3,430 shares of Series B Preferred Stock
Douglas Spink (former director) YesAsia 12,000 shares of common stock
Douglas Spink (former director) WebModal 400 shares of common stock
</TABLE>
San Francisco Office Space
We shared office space in San Francisco, California with a corporation
owned by Mr. George, at no expense from October 1999 until March 2000.
Contribution of Shares of Swapit.com, Inc. Common Stock From Thomas Aley
In November 1999, we purchased a 10% equity ownership interest in
Swapit.com, Inc. for $500,000. Thomas Aley, our Executive Vice President,
Business Development, was a founder of this company and owned 1,140,000 shares
of its common stock as of the date we completed our purchase of this equity
ownership interest. In connection with this transaction, Mr. Aley has agreed to
contribute 1,109,928 of these shares of Swapit.com's common stock to our
company. Upon the completion of this transaction, we will own approximately 30%
of Swapit.com's issued and outstanding common stock.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Report of KPMG LLP...............................................F-1
Report of LJ Soldinger Associates................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.....F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997............................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997...........................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997...........................F-6
Notes to Consolidated Financial Statements.......................F-7
</TABLE>
2. Financial Statement Schedules
None.
3. Exhibits
The following exhibits are filed as part of this Form
10-K.
<TABLE>
<CAPTION>
Exhibit
Number Document
- ------ --------
<S> <C>
2.1(1) Merger Agreement and Plan of Reorganization dated as of June 21, 1999 among Net Value
Holdings, Inc. and Strategicus Partners Inc. and Douglas Spink
2.2(1) Amendment No. 1 to Merger Agreement and Plan of Reorganization
2.3(1) Amendment No. 2 to Merger Agreement and Plan of Reorganization
2.4(1) Fairness Opinion of Ferris Baker Watts, dated July 30, 1999, Regarding the Merger Between Net
Value Holdings, Inc. and Strategicus Partners Inc.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Bylaws
4.1(2) Specimen Certificate for Net Value Holdings, Inc.'s Common Stock
4.2(2) Form of Convertible Promissory Note of Net Value Holdings, Inc. convertible into shares of
common stock at a conversion price of $2.00 per share
4.3(2) Form of Convertible Promissory Note of Net Value Holdings, Inc. convertible into shares of
common stock at a conversion price of $2.50 per share
4.4(1) Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
4.5(1) Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock
4.6(6) Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock
4.7(6) Form of Net Value Holdings, Inc. Common Stock Purchase Warrant issued in connection with the
Series C Convertible Preferred Stock
4.8(6) Form of Compensation Warrant to be issued in connection with the Series C Convertible Preferred
Stock
5(4) Opinion of Klehr Harrison Harvey Branzburg & Ellers as to the legality of the shares of common
stock being registered
10.1(1) Employment Agreement with Andrew P. Panzo, dated June 1, 1999
10.2(1) Amended and Restated Employment Agreement with Douglas Spink, dated June 17, 1999
10.3(1) Employment Agreement with Lee Hansen, dated September 15, 1999
10.4(1) Consulting Agreement with Barry Uphoff, dated June 30, 1999
10.5(1) Consulting Agreement with Darr Aley, dated June 30, 1999
10.6(1) Consulting Agreement with Stephen George, dated June 21, 1999
10.7(1) Loan Agreement between Strategicus Partners Inc. and Net Value Holdings, Inc., dated as of May
28, 1999
10.8(1) Amendment No. 1 to the Loan Agreement between Strategicus Partners Inc. and Net Value
Holdings, Inc.
10.9(1) Amendment No. 2 to the Loan Agreement between Strategicus Partners Inc. and Net Value
Holdings, Inc.
10.10(1) Promissory Note in the amount of $310,000 issued by Douglas Spink in favor of Strategicus
Partners Inc., dated May 28, 1999
10.11(1) Promissory Note in the amount of $267,000 issued by Darr Aley in favor of Net Value Holdings,
Inc., dated June 16, 1999
10.12(1) Promissory Note issued by Net Value, Inc. in favor of SUNCL, Inc., dated October 1, 1998
10.13(1) Loan Agreement by and among Net Value, Inc., American Maple Leaf Financial Corporation and
the other signatories thereto, dated June 26, 1998
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14(1) Promissory Note issued by Net Value, Inc. in favor of American Maple Leaf Financial
Corporation, dated June 26, 1998
10.15(1) Stock Purchase Agreement By and Between YesAsia, Inc. and Strategicus Partners, Inc., dated
July 29, 1999
10.16(1) Common Stock Purchase Agreement By and Between College 411.com, Inc. and Strategicus
Partners, Inc., dated July 28, 1999
10.17(1) AssetExchange, Inc. Series A Preferred Stock Purchase Agreement, dated September 10, 1999
10.18(1) AssetExchange. Inc. Investor Rights Agreement, dated September 10, 1999
10.19(1) Series B Convertible Preferred Stock Purchase Agreement, dated as of September 17, 1999
10.20(1) Registration Rights Agreement
10.21(1) Form of Warrant
10.22(2) Employment Agreement with Tom Aley dated November 22, 1999
10.23(2) Amended and Restated Shareholders' Agreement by and between Merus Partners, Inc., Chris R.
Kravas, Net Value Holdings, Inc. and Webmodal, Inc. dated as of October 11, 1999
10.24(2) Stock Purchase Agreement between Merus Partners, Inc. and Net Value Holdings, Inc. dated as of
October 11, 1999
10.25(2) Stock Purchase Agreement between Net Value Holdings, Inc. and Webmodal, Inc. dated as of
October 11, 1999
10.26(2) Series A Convertible Preferred Stock Purchase Agreement by and between Swapit.com, Inc. and
Net Value Holdings, Inc. dated as of November 23, 1999
10.27(2) Investor Rights Agreement by and between Swapit.com, Inc. and Net Value Holdings, Inc. dated
as of November 23, 1999
10.28(2) Co-Sale Agreement by and among Net Value Holdings, Inc., Swapit.com, Inc. and the principal
stockholders of Swapit.com, Inc. dated as of November 23, 1999
10.29(2) Agreement for Purchase and Sale of Assets by and among Promotions Acquisitions, Inc.,
BrightStreet.com, Inc. and Net Value Holdings, Inc. dated as of December 3, 1999
10.30(2) Stockholders Agreement by and among Promotions Acquisitions, Inc. and certain stockholders
dated as of December 3, 1999.
10.31(2) Registration Rights Agreement dated as of December 3, 1999
10.32(2) Common Stock Purchase Agreement dated as of October 1, 1999
10.33(2) Consulting Agreement dated as of October 1, 1999
10.34(3) Series A Convertible Preferred Stock Purchase Agreement by and between IndustrialVortex.com,
Inc. and Net Value Holdings, Inc. dated as of January 31, 2000
10.35(3) Investor Rights Agreement by and between IndustrialVortex.com, Inc,. and Net Value Holdings,
Inc. dated as of January 31, 2000
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.36(3) Co-Sale Agreement by and among Net Value Holdings, Inc., IndustrialVortex.com, Inc. and the
principal stockholders of IndustrialVortex.com, Inc. dated as of January 31, 2000
10.37(6) Registration Rights Agreement, dated as of March 3, 2000, by and among Net Value Holdings,
Inc. and the Series C Investors
10.38(6) Series C Preferred Stock Agreement, dated as of March 3, 2000, among Net Value Holdings, Inc.
and The Altar Rock Fund, L.P., Raptor Global Portfolio, Ltd., Brown Simpson Strategic Growth
Fund, Ltd. and brown Simpson Strategic Growth Fund, L.P.
10.39(6) Series C Preferred Stock Purchase Agreement, dated as of March 3, 2000, among Net Value
Holdings, Inc. and the remaining Series C Investors
10.40 Series A Convertible Preferred Stock Purchase Agreement by and between AlarmX.com, Inc. and
Net Value Holdings, Inc., dated as of March 14, 2000
10.41 Investor Rights Agreement by and between AlarmX.com, Inc. and Net Value Holdings, Inc.,
dated as of March 14, 2000
10.42 Co-Sale Agreement by and among Net Value Holdings, Inc., AlarmX.com, Inc. and the principal
stockholders of AlarmX.com, Inc., dated as of March 14, 2000
10.43 Amended and Restated Employment Agreement by and between Net Value Holdings, Inc. and
Thomas Aley, dated as of April 17, 2000
10.44 Employment Agreement with Stephen Cohen dated April 17, 2000
10.45 Common Stock Purchase Warrant issued to Darr Aley on May 8, 2000
10.46 Common Stock Purchase Warrant issued to Stephen George on May 8, 2000
10.47 Common Stock Purchase Warrant issued to Barry Uphoff on May 8, 2000
11 Statement re: computation of per share earnings
16.1(2) Letter from Barry L. Friedman, PC dated November 23, 1999
16.2(5) Letter from LJ Soldinger Associates dated February 25, 2000
21.1(1) Subsidiaries of Net Value Holdings, Inc.
27 Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated by reference to Registrant's Registration
Statement on Form S-1 (Reg. No. 333- 88629) filed October 6,
1999
(2) Incorporated by reference to Registrant's Amendment No. 1 to
Registrant's Registration Statement on Form S-1 (Reg. No.
333-88629) filed December 17, 1999
(3) Incorporated by reference to Registrant's Amendment No. 3 to
Registrant's Registration Statement on Form S-1 (Reg. No.
333-88629) filed February 7, 2000
(4) Incorporated by reference to Registrant's Amendment No. 4 to
Registrant's Registration Statement on Form S-1 (Reg. No.
333-88629) filed February 14, 2000
(5) Incorporated by reference to Registrant's Current Report on
Form 8-K dated February 2, 2000
(6) Incorporated by reference to Registrant's Current Report on
Form 8-K dated March 3, 2000
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the fiscal quarter ended
December 31, 1999.
57
<PAGE>
NET VALUE HOLDINGS, INC.
Table of Contents
Page
Independent Auditors' Report KPMG F-1
Independent Auditors' Report LJ Soldinger Associates F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the three years
ended December 31, 1999 F-4
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1999 F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Net Value Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Net Value
Holdings, Inc. and subsidiaries (the Company) as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Net Value Holdings,
Inc. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
March 31, 2000
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Net Value Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Net Value
Holdings, Inc. as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Net Value Holdings,
Inc. as of December 31, 1998, and the results of its operations, stockholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's negative
working capital position, substantial losses incurred since inception, and
dependence on outside financing raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
April 30, 1999
F-2
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31
------------------------------------
Assets 1999 1998
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,127,232 $ 1,466
Interest receivable 28,176 --
Loans receivable 218,808 200,000
Capitalized financing fees, net 142,958 170,182
Prepaid expenses and other current assets 41,911 --
-------------- -------------
Total current assets 3,559,085 371,648
Ownership interests in and advances to Affiliate Companies 7,065,557 --
Goodwill, net of accumulated amortization of $578,906 in 1999 3,227,298 --
Furniture and equipment, net 70,082 --
Other assets 67,346 --
-------------- -------------
$ 13,989,368 $ 371,648
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 487,031 $ 107,022
Accrued expenses 315,171 41,399
Notes and loans payable 12,000 1,140,000
Convertible promissory notes 1,921,929 --
Convertible debentures 3,250,500 1,402,500
Long-term debt due within one year 11,732 --
Net liabilities of discontinued operations 1,773,591 6,430,891
-------------- -------------
Total current liabilities 7,771,954 9,121,812
-------------- -------------
Noncurrent liabilities:
Long-term debt, less amounts due within one year 67,302 --
-------------- -------------
Total noncurrent liabilities 67,302 --
-------------- -------------
Redeemable convertible preferred stock, Series B,
$.001 par value (4,824 shares authorized, issued and outstanding at
December 31, 1999), net of costs of issuance. Liquidation
preference: $4,824,000 at 1999 4,448,872 --
-------------- -------------
Stockholders' equity:
Convertible preferred stock, Series A , $.001
par value (0 and 2,519,852 shares authorized, issued and outstanding at
1999 and 1998, respectively), net of costs of issuance -- 2,520
Common stock, Net Value Inc. $.001 par value (49,000,000 shares authorized
at 1999 and 1998; 1,037,338 shares issued and outstanding at
1999 and 1998) 1,038 1,038
Common stock, $.001 par value (50,000,000 shares authorized at 1999
and 1998; 15,522,807 and 6,969,852 shares issued and outstanding at 1999
and 1998, respectively) 15,523 6,970
Additional paid-in capital 103,946,136 39,005,768
Deferred compensation (27,342,172) (3,283,532)
Accumulated deficit (74,919,285) (44,482,928)
-------------- -------------
Total stockholders' equity (deficit) 1,701,240 (8,750,164)
-------------- -------------
$ 13,989,368 $ 371,648
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
Operating expenses:
Stock-based compensation 7,320,695 -- --
General and administrative 3,719,497 140,484 --
------------ ----------- -----------
Total operating expenses 11,040,192 140,484 --
Interest income 60,526 -- --
Interest expense 12,380,157 1,441,399 --
Financing fees 523,601 48,436 --
------------ ----------- -----------
Loss before equity in losses of Affiliate Companies 23,883,424 1,630,319 --
Equity in losses of Affiliate Companies 79,559 -- --
------------ ----------- -----------
Net loss from continuing operations 23,962,983 1,630,319 --
------------ ----------- -----------
Discontinued operations:
Loss from discontinued operations 6,370,776 11,106,826 11,235,237
Gain on disposal of discontinued operations 6,502,663 -- --
------------ ----------- -----------
Net loss 23,831,096 12,737,145 11,235,237
------------ ----------- -----------
Preferred stock dividends
Continuing operations 6,605,261 -- --
Discontinued operations -- 15,250,500 1,181,250
------------ ----------- -----------
Net loss to common shareholders $30,436,357 $27,987,645 $12,416,487
============ =========== ===========
Basic and diluted net (loss) per common share - continuing operations $ (2.90) $ (0.35) $ --
============ =========== ===========
Basic and diluted net earnings (loss) per common
share - discontinued operations $ 0.01 $ (5.59) $ (6.88)
============ =========== ===========
Basic and diluted weighted average common shares outstanding: 10,557,953 4,711,351 1,804,700
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred stock
Net Value, Inc.
-----------------------------------
Shares Amount
------------- -------------
<S> <C> <C>
Balance at December 31, 1996 -- $ --
Issuance of preferred stock 22,500 23
Preferred stock dividend -- --
Issuance of common stock , net -- --
Earned common stock for consulting services -- --
Common stock issued as consideration for notes
and loans payable -- --
Common stock and warrants issued in connection
with short-term bridge financing, net -- --
Compensatory common stock options issued -- --
Amortization of deferred compensation -discontinued
operations -- --
Effects of common stock exchanged -- --
Net loss -- --
------------- -------------
Balances at December 31, 1997 22,500 23
Issuance of preferred stock 276,200 276
Preferred stock conversion (258,700) (259)
Preferred stock repurchase (40,000) (40)
Preferred stock dividend -- --
Issuance of warrants -- --
Issuance of common stock , net -- --
Common stock issued as consideration for satisfaction
of preferred stock purchase commitment -- --
Common stock issued as consideration for interest payable -- --
Issuance of common stock for consulting services -- --
Acquisition of assets of Holdings -- --
Compensatory common stock options issued -- --
Amortization of deferred compensation -discontinued
operations -- --
Net loss -- --
------------- -------------
Balances at December 31, 1998 -- --
Issuance of warrants -- --
Issuance of common stock , net -- --
Common stock issued in connection with conversion
of convertible debentures and interest -- --
Common stock issued in connection with conversion
of notes payable and interest -- --
Common and preferred stock issued in connection with
Strategicus merger -- --
Common stock issued for consulting services -- --
Contributed capital -- --
Beneficial conversion features on convertible notes
and debentures -- --
Series A preferred stock conversion -- --
Preferred stock dividend -- --
Compensatory common stock and common stock options
issued, net of cancellations -- --
Amortization of deferred stock based compensation
-continuing operations -- --
Amortization of deferred stock based compensation
-discontinued operations -- --
Net loss -- --
------------- -------------
Balances at December 31, 1999 -- $ --
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Preferred stock
-----------------------------------
Net Value Holdings, Inc.
-----------------------------------
Shares Amount
------------- -------------
<S> <C> <C>
Balance at December 31, 1996 1,567,607 $ 1,568
Issuance of preferred stock -- --
Preferred stock dividend -- --
Issuance of common stock , net -- --
Earned common stock for consulting services -- --
Common stock issued as consideration for notes
and loans payable -- --
Common stock and warrants issued in connection
with short-term bridge financing, net -- --
Compensatory common stock options issued -- --
Amortization of deferred compensation -discontinued
operations -- --
Effects of common stock exchanged 452,245 452
Net loss -- --
------------- -------------
Balances at December 31, 1997 2,019,852 2,020
Issuance of preferred stock -- --
Preferred stock conversion 500,000 500
Preferred stock repurchase -- --
Preferred stock dividend -- --
Issuance of warrants -- --
Issuance of common stock , net -- --
Common stock issued as consideration for satisfaction
of preferred stock purchase commitment -- --
Common stock issued as consideration for interest payable -- --
Issuance of common stock for consulting services -- --
Acquisition of assets of Holdings -- --
Compensatory common stock options issued -- --
Amortization of deferred compensation -discontinued
operations -- --
Net loss -- --
-------------- -------------
Balances at December 31, 1998 2,519,852 2,520
Issuance of warrants -- --
Issuance of common stock , net -- --
Common stock issued in connection with conversion
of convertible debentures and interest -- --
Common stock issued in connection with conversion
of notes payable and interest -- --
Common and preferred stock issued in connection with
Strategicus merger 184,627 185
Common stock issued for consulting services -- --
Contributed capital -- --
Beneficial conversion features on convertible notes
and debentures -- --
Series A preferred stock conversion (2,704,479) (2,705)
Preferred stock dividend -- --
Compensatory common stock and common stock options
issued, net of cancellations -- --
Amortization of deferred stock based compensation
-continuing operations -- --
Amortization of deferred stock based compensation
-discontinued operations -- --
Net loss -- --
-------------- -------------
Balances at December 31, 1999 -- $ --
============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common stock
-----------------------------------
Net Value, Inc.
-----------------------------------
Shares Amount
------------- -------------
<S> <C> <C>
Balance at December 31, 1996 -- $ --
Issuance of preferred stock -- --
Preferred stock dividend -- --
Issuance of common stock , net 73,750 74
Earned common stock for consulting services 43,750 44
Common stock issued as consideration for notes
and loans payable 885,770 886
Common stock and warrants issued in connection
with short-term bridge financing, net 100,625 101
Compensatory common stock options issued -- --
Amortization of deferred compensation -discontinued
operations -- --
Effects of common stock exchanged (452,245) (452)
Net loss -- --
------------- -------------
Balances at December 31, 1997 651,650 652
Issuance of preferred stock -- --
Preferred stock conversion 250,000 250
Preferred stock repurchase -- --
Preferred stock dividend -- --
Issuance of warrants -- --
Issuance of common stock , net 7,500 8
Common stock issued as consideration for satisfaction
of preferred stock purchase commitment 37,500 38
Common stock issued as consideration for interest payable 688 1
Issuance of common stock for consulting services 90,000 90
Acquisition of assets of Holdings -- --
Compensatory common stock options issued -- --
Amortization of deferred compensation -discontinued
operations -- --
Net loss -- --
------------- -------------
Balances at December 31, 1998 1,037,338 1,038
Issuance of warrants -- --
Issuance of common stock , net -- --
Common stock issued in connection with conversion
of convertible debentures and interest -- --
Common stock issued in connection with conversion
of notes payable and interest -- --
Common and preferred stock issued in connection with
Strategicus merger -- --
Common stock issued for consulting services -- --
Contributed capital -- --
Beneficial conversion features on convertible notes
and debentures -- --
Series A preferred stock conversion -- --
Preferred stock dividend -- --
Compensatory common stock and common stock options
issued, net of cancellations -- --
Amortization of deferred stock based compensation
-continuing operations -- --
Amortization of deferred stock based compensation
-discontinued operations -- --
Net loss -- --
------------- -------------
Balances at December 31, 1999 1,037,338 $ 1,038
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Net Value Holdings, Inc. Additional
----------------------------------- paid-in
Shares Amount capital
------------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 1,567,607 $ 1,568 $ 3,770,568
Issuance of preferred stock -- -- 224,978
Preferred stock dividend -- -- 1,181,250
Issuance of common stock , net -- -- 551,760
Earned common stock for consulting services -- -- 612,453
Common stock issued as consideration for notes
and loans payable -- -- 3,878,415
Common stock and warrants issued in connection
with short-term bridge financing, net -- -- 2,410,541
Compensatory common stock options issued -- -- 1,932,150
Amortization of deferred compensation -discontinued
operations -- -- --
Effects of common stock exchanged 452,245 452 (452)
Net loss -- -- --
------------- ------------- -------------
Balances at December 31, 1997 2,019,852 2,020 14,561,663
Issuance of preferred stock -- -- 2,761,724
Preferred stock conversion 1,000,000 1,000 (1,491)
Preferred stock repurchase -- -- (399,960)
Preferred stock dividend -- -- 15,250,500
Issuance of warrants -- -- 49,200
Issuance of common stock , net 2,950,000 2,950 2,151,473
Common stock issued as consideration for satisfaction
of preferred stock purchase commitment -- -- (38)
Common stock issued as consideration for interest payable -- -- 13,749
Issuance of common stock for consulting services -- -- 251,910
Acquisition of assets of Holdings 1,000,000 1,000 (1,000)
Compensatory common stock options issued -- -- 4,368,039
Amortization of deferred compensation -discontinued
operations -- -- --
Net loss -- -- --
------------- ------------- -------------
Balances at December 31, 1998 6,969,852 6,970 39,005,768
Issuance of warrants -- -- 454,000
Issuance of common stock , net 80,388 80 356,536
Common stock issued in connection with conversion
of convertible debentures and interest 2,076,589 2,077 4,774,444
Common stock issued in connection with conversion
of notes payable and interest 1,732,066 1,732 3,462,402
Common and preferred stock issued in connection with
Strategicus merger 601,029 601 3,637,298
Common stock issued for consulting services 676,374 676 2,965,698
Contributed capital -- -- 659,087
Beneficial conversion features on convertible notes
and debentures -- -- 11,165,145
Series A preferred stock conversion 1,622,687 1,623 1,082
Preferred stock dividend -- -- 6,605,261
Compensatory common stock and common stock options
issued, net of cancellations 1,763,822 1,764 30,859,415
Amortization of deferred stock based compensation
-continuing operations -- -- --
Amortization of deferred stock based compensation
-discontinued operations -- -- --
Net loss -- -- --
------------- ------------- -------------
Balances at December 31, 1999 15,522,807 $ 15,523 $103,946,136
============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred
Accumulated stock-based
deficit compensation Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (4,078,796) $ -- $ (305,093)
Issuance of preferred stock -- -- 225,001
Preferred stock dividend (1,181,250) -- --
Issuance of common stock , net -- -- 551,834
Earned common stock for consulting services -- -- 612,497
Common stock issued as consideration for notes
and loans payable -- -- 3,879,301
Common stock and warrants issued in connection
with short-term bridge financing, net -- -- 2,410,642
Compensatory common stock options issued -- (1,932,150) --
Amortization of deferred compensation -discontinued
operations -- 1,434,400 1,434,400
Effects of common stock exchanged -- -- --
Net loss (11,235,237) -- (11,235,237)
------------- ------------- -------------
Balances at December 31, 1997 (16,495,283) (497,750) (2,426,656)
Issuance of preferred stock -- 2,762,000
Preferred stock conversion -- -- --
Preferred stock repurchase -- -- (400,000)
Preferred stock dividend (15,250,500) -- --
Issuance of warrants -- -- 49,200
Issuance of common stock , net -- -- 2,154,430
Common stock issued as consideration for satisfaction
of preferred stock purchase commitment -- -- --
Common stock issued as consideration for interest payable -- -- 13,750
Issuance of common stock for consulting services -- -- 252,000
Acquisition of assets of Holdings -- -- --
Compensatory common stock options issued -- (4,368,039) --
Amortization of deferred compensation -discontinued
operations -- 1,582,257 1,582,257
Net loss (12,737,145) -- (12,737,145)
------------- ------------- -------------
Balances at December 31, 1998 (44,482,928) (3,283,532) (8,750,164)
Issuance of warrants -- -- 454,000
Issuance of common stock , net -- -- 356,616
Common stock issued in connection with conversion
of convertible debentures and interest -- -- 4,776,521
Common stock issued in connection with conversion
of notes payable and interest -- -- 3,464,134
Common and preferred stock issued in connection with
Strategicus merger -- -- 3,638,084
Common stock issued for consulting services -- -- 2,966,374
Contributed capital -- -- 659,087
Beneficial conversion features on convertible notes
and debentures -- -- 11,165,145
Series A preferred stock conversion -- -- --
Preferred stock dividend (6,605,261) -- --
Compensatory common stock and common stock options
issued, net of cancellations -- (30,861,179) --
Amortization of deferred stock based compensation
-continuing operations -- 5,031,371 5,031,371
Amortization of deferred stock based compensation
-discontinued operations -- 1,771,168 1,771,168
Net loss (23,831,096) -- (23,831,096)
------------- ------------- -------------
Balances at December 31, 1999 $(74,919,285) $(27,342,172) $ 1,701,240
============= ============= =============
</TABLE>
F-5
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(23,831,096) (12,737,145) (11,235,237)
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization 2,061,609 3,602,776 1,445,956
Amortization of deferred stock based compensation 6,802,539 1,582,257 1,434,400
Beneficial conversion features on convertible notes and debentures 11,165,145 1,400,000 --
Gain on sale of assets - discontinued operations (6,502,663) -- --
Common stock issued for consulting services 2,289,324 -- --
Interest paid with stock issuance 395,348 13,750 1,129,301
Equity in losses of Affiliate Companies 79,559 -- --
Changes in assets and liabilities
Interest receivable (28,176) -- --
Prepaid expenses (41,911) 774,197 (416,302)
Other noncurrent assets (67,346) (21,107) --
Accounts payable 380,009 15,708 1,344,949
Accrued expenses 273,772 -- (58,333)
------------- ------------ ------------
Net cash used in operating activities (7,023,887) (5,369,564) (6,355,266)
Cash flows from investing activities:
Disbursements of loans (1,164,000) (200,000) --
Collections on loans 767,000 -- --
Proceeds from sale of assets - discontinued operations 2,000,000 -- --
Acquisition of ownership interests in affiliated companies (2,500,000) -- --
Advances to affiliated companies (50,000) -- --
Purchases of furniture and equipment (74,977) (57,478) (544,618)
------------- ------------ ------------
Net cash used in investing activities (1,021,977) (257,478) (544,618)
Cash flows from financing activities:
Proceeds from notes payable 12,000 3,418,000 5,329,250
Repayments of notes payable (240,000) (1,495,000) (1,501,000)
Long-term debt borrowings 6,455,000 1,402,500 --
Long-term debt payments (35,675) (34,173) --
Issuance of common stock 1,032,910 529,430 3,112,474
Issuance of preferred stock 4,448,872 2,762,000 225,000
Repurchase of preferred stock -- (400,000) --
Payment of financing fees (501,477) (80,000) (140,919)
Registration costs -- (474,249) (124,921)
------------- ------------ ------------
Net cash provided by financing activities 11,171,630 5,628,508 6,899,884
Net increase in cash and cash equivalents 3,125,766 1,466 --
Cash and cash equivalents at beginning of year 1,466 -- --
------------- ------------ ------------
Cash and cash equivalents at end of year $ 3,127,232 1,466 --
============= ============ ============
Cash paid for interest $ 76,974 93,537 3,200
============= ============ ============
Cash paid for taxes $ -- -- --
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(1) Nature of Operations and Basis of Presentation
Net Value Holdings, Inc. ("Net Value" or the "Company") is actively engaged
in identifying, financing, and providing business development services for
a network of early-stage technology businesses that possess significant
growth potential. Net Value's operating strategy is to acquire a
significant equity interest in development stage technology companies,
which Net Value calls its "Affiliate Companies", and to provide financial,
management, and technical support to accelerate the achievement of the
Affiliate Companies' business goals and objectives. To date, Net Value has
focused on technology businesses with significant Internet features and
applications. As of December 31, 1999, Net Value owned interests in seven
Affiliate companies. Net Value is based in San Francisco with offices in
New York, Boston and Philadelphia.
Net Value was formed in December 1991 and had no operations until October
1998, when Net Value acquired a majority interest in an Internet software
developer named Net Value, Inc. (NV Inc.). This merger was accounted for
as a recapitalization of Net Value because NV Inc. shareholders acquired a
majority ownership in Net Value. Under a recapitialization, the historical
financial statements presented are those of the company acquired, not those
of the legal acquiror. Accordingly, the financial information included in
these financial statements prior to the merger in October 1998 is that of
NV Inc.
The 1999 financial statements of Net Value reflect the results of the
in-process merger with NV Inc. At December 31, 1999, Net Value owned 66% of
the outstanding common stock of NV Inc. Because it is unlikely that the
minority shareholders will make additional capital contributions to erase
subsequent NV Inc. losses, no amount has been ascribed to the 34% minority
interest. Net Value plans on acquiring the remaining shares that it does
not own by completing the merger in 2000 via a share exchange whereby NV
Inc. shareholders will receive .4 Net Value common shares for every one NV
Inc. share tendered. Additionally, we will issue common stock purchase
warrants and stock options to the holders of NV, Inc.'s common stock
purchase warrants and vested stock options at the same exchange ratio.
As further described in Note 14, in November 1999, the Board of Directors
approved a formal plan to sell substantially all the assets of NV Inc, and
to discontinue the operations of NV Inc's Internet software development
operations. Accordingly, the operating results of the discontinued Internet
software operations of NV Inc. have been segregated from continuing
operations and reported as a separate line item on the statements of
operations. The assets and liabilities of NV Inc's software development
operations have been recorded as net liabilities of discontinued operations
in the accompanying balance sheets.
Net Value has a limited operating history under its current business model
and was in the development stage prior to the commencement of its principal
business operations in 1999. Net Value's prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. In
addition, all of our current Affiliate Companies are early stage companies
that have limited operating histories and have generated very limited, if
any, revenues or earnings from operations since inception. Since Net
Value's inception, the Company has generated operating funds primarily
through the sale of equity and debt securities. Future capital requirements
depend on many factors including Net Value's ability to execute its
business plan. Failure by Net Value to raise additional funding when or if
needed could have a material adverse effect on its business, results of
operations and financial condition.
F-7
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in
money market funds. Net Value considers all highly liquid instruments
with a remaining maturity of 90 days or less at the time of purchase
to be cash equivalents.
Financial instruments that potentially subject Net Value to
concentrations of credit risk consist principally of cash deposits at
financial institutions. To mitigate this risk, Net Value places its
cash deposits only with high credit quality institutions.
(b) Principles of Consolidation and Ownership Interests in and advances to
Affiliate Companies
The consolidated financial statements of Net Value include its
wholly-owned subsidiary, metacat.com, and its majority owned
subsidiary, NV Inc. The various interests that Net Value acquires in
its Affiliate Companies are accounted for under three broad methods:
consolidation, equity method and cost method. The applicable
accounting method is generally determined based on Net Value's voting
interest in the Affiliate Company.
o Consolidation - Affiliate Companies in which Net Value directly or
indirectly owns more than 50% of the outstanding voting securities
are accounted for under the consolidation method of accounting.
Under this method, an Affiliate Company's results of operations are
reflected within Net Value's Consolidated Statements of Operations.
All significant intercompany accounts and transactions have been
eliminated.
o Equity Method - Affiliate Companies whose results are not
consolidated, but over whom Net Value exercises significant
influence, are accounted for under the equity method of accounting.
Whether or not Net Value exercises significant influence with
respect to the Affiliate Company depends on an evaluation of
several factors including, among others, representation on the
Affiliate Company's Board of Directors and Net Value's ownership
level, which is generally a 20% to 50% interest in the voting
securities of the Affiliate Company, including voting rights
associated with Net Value's holdings in common, preferred and other
convertible instruments in the Affiliate Company. Under the equity
method of accounting, Net Value's proportionate share of each
affiliate's net income or loss and amortization of Net Value's
excess investment cost over its equity in each affiliate's net
assets is included in "Equity in losses of affiliate companies" in
the Consolidated Statements of Operations. Amortization of the
excess investment is recorded on a straight-line basis over 3
years.
o Cost Method - All other investments for which Net Value does not
have the ability to exercise significant influence and for which
there is not a readily determinable market value, are accounted for
under the cost method of accounting. Under this method, Net Value's
share of each affiliate's net income or loss is not included in the
Consolidated Statements of Operations. Cost basis represents Net
Value's original acquisition cost less any impairment charges in
such companies.
F-8
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(2) Summary of Significant Accounting Policies (continued)
(b) Principles of Consolidation and Ownership Interests in and advances to
Affiliate Companies (continued)
o Advances to Affiliate Companies - In addition to the Company's
investments in voting and non-voting equity and debt securities, it
also periodically makes advances to its Affiliate Companies in the
form of promissory notes which are accounted for in accordance with
SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
o Evaluations of Interests in Affiliate Companies - Net Value
continually evaluates the carrying value of its ownership interests
in and advances to each of its Affiliate Companies for possible
impairment based on achievement of business plan objectives and
milestones, the value of each ownership interest in the Affiliate
Company relative to carrying value, the financial condition and
prospects of the Affiliate Company, and other relevant factors. The
business plan objectives and milestones considered by Net Value
include, among others, those related to financial performance such
as achievement of planned financial results or completion of
capital raising activities, and those that are not primarily
financial in nature such as the launching of an Internet web site
or the hiring of key employees. The fair value of Net Value's
ownership interests in and advances to privately held Affiliate
Companies is generally determined based on the value at which
independent third parties have or have committed to invest in its
Affiliate Companies. If impairment is determined, the carrying
value is adjusted to fair value.
(c) Capitalized Financing Fees
The Company capitalizes the direct costs incurred with the issuance of
long term debt as capitalized financing fees. Net Value amortizes
these fees using an effective interest method over the life of the
related debt. Upon conversion of the related debt into Net Value's
common shares, the related unamortized balance of capitalized
financing fees is eliminated against additional paid-in capital.
(d) Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the assets acquired less liabilities assumed of acquired
businesses. Net Value amortizes goodwill on a straight-line basis over
three-years. As more fully described in note 5, goodwill at December
31, 1999 of $3,227,298 net of accumulated amortization of $578,906,
was attributable to Net Value's acquisition of Strategicus Partners,
Inc.
(e) Furniture and Equipment
Furniture and equipment are carried at cost, less accumulated
depreciation computed on a straight-line basis over the estimated
useful lives of the respective assets. Depreciation is computed using
a four-year life for computer equipment and a five-year life for
furniture and office equipment.
F-9
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(2) Summary of Significant Accounting Policies (continued)
(f) Gain or Loss on Issuances of Stock By Affiliate Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time an
Affiliate Company accounted for under the consolidation or equity
method of accounting issues its common stock at a price per share
different from Net Value's per share carrying amount for that
Affiliate Company, then Net Value's share of the Affiliate Company's
net equity changes. If at that time, the Affiliate Company is not a
newly-formed, non-operating entity, nor a research and development,
start-up or development stage company, nor is there question as to the
company's ability to continue in existence, then Net Value records the
change in its share of the Affiliate Company's net equity as a gain or
loss in its Consolidated Statements of Operations.
(g) Income Taxes
Net Value uses the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of existing
differences between financial reporting and tax reporting basis of
assets and liabilities, as well as for operating losses and tax credit
carryforwards, using enacted tax laws and rates. Deferred tax expense
represents the net change in the deferred tax asset or liability
balance during the year. This amount, together with income taxes
currently payable or refundable for the current year, represents the
total income tax for the year.
(h) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (FAS 123) and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services". As permitted under
FAS 123, Net Value has continued to follow Accounting Principles Board
No. 25, Accounting for Stock Issued to Employees (APB 25) in
accounting for its stock-based compensation. Under APB 25, no
accounting recognition is given to stock options issued to employees
that are granted with exercise prices at fair market value. Stock
options issued to non-employees are recorded at fair value at the date
of grant and are subsequently remeasured as counterparty performance
is complete, which typically corresponds to the vesting period.
(i) Loss Per Share
Basic net loss per common share and diluted net loss per common share
are presented in accordance with Statement of Financial Accounting
Standards No. 128, Earnings Per Share (FAS 128), for all periods
presented. In accordance with FAS 128, basic and diluted net loss per
common share have been computed using the weighted-average number of
shares of common stock outstanding during the period. Shares
associated with stock options, convertible debt, stock warrants, and
convertible preferred stock are not included because their inclusion
would be antidilutive (i.e., reduce the net loss per share). The total
numbers of such shares excluded from diluted net loss per common share
are 9,276,476, 2,213,161, and 0 for the years ended December 31, 1999,
1998, and 1997, respectively. Such securities, had they been dilutive,
would have been included in the computations of diluted loss per share
using the treasury stock method.
F-10
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(2) Summary of Significant Accounting Policies (continued)
(j) Statements of Stockholders' Deficit
The 1998 recapitalization of Net Value described in note 1 resulted in
Net Value's equity accounts being restated whereby every four NV Inc.
shares are reflected as one Net Value common share and one Net Value
preferred share. This restatement had the effect of changing the
allocation of capital between par value and additional paid in
capital. There was no effect on aggregate stockholders deficit as a
result of this allocation.
(k) Segment Information
Financial Accounting Standards No. 131, "Disclosures About Segments of
an Enterprise and Related Information" establishes standards for the
way public companies report operating segments in annual financial
statements and interim reporting to shareholders. Net Value has
determined that it has one operating and reportable segment:
incubating development stage Internet companies as described in note
1. The chief operating decision maker evaluates performance and makes
decisions based on financial data consistent with the presentation in
the accompanying financial statements.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and the accompanying notes. These estimates are
based on information available as of the date of the consolidated
financial statements; therefore, actual results could differ from
those estimates. Certain amounts recorded to reflect our share of
losses of Affiliate Companies accounted for under the equity method
are based on unaudited results of operations of those affiliate
companies and may require adjustments in the future when audits of
these entities are made final.
(m) Recent Accounting Pronouncements
Net Value does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on it's results of
operations, financial position or cash flows.
(n) Reclassifications
Certain prior years' amounts have been reclassified to conform to the
1999 presentation. The impact of these changes did not affect net
loss.
F-11
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(3) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Net Value's ownership interests in and advances to
Affiliate Companies accounted for under the equity method and cost method
of accounting at December 31, 1999. All of the Affiliate Companies were
privately held companies as of December 31, 1999. Net Value had no
interests in or advances to Affiliate Companies at December 31, 1998.
<TABLE>
<CAPTION>
Excess of carrying
value over net Percentage of
Carrying value assets ownership
-------------- ------------------ -------------
<S> <C> <C> <C>
Equity method:
College 411.com $ 221,950 123,440 29%
AssetExchange, Inc. 366,192 285,698 20%
Swapit.com 473,922 421,481 11%(1)
------------ ------------
1,062,064 830,619
------------ ------------
Cost method:
Promotions Acquisitions (Note 14) 3,994,406 -- 14%
Webmodal, Inc. 1,009,087 -- 12%
YesAsia, Inc. 1,000,000 -- 11%
------------ ------------
6,003,493 --
------------ ------------
$ 7,065,557 830,619
============ ============
</TABLE>
(1) SwapIt is accounted for under the equity method due to an officer of
Net Value having a 16% ownership interest for which the officer has
assigned the voting rights to Net Value.
F-12
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(3) Ownership Interests in and Advances to Affiliate Companies (continued)
The following summarized financial information for Affiliate Companies
accounted for under the equity method of accounting at December 31, 1999
has been compiled from the financial statements of the respective
companies:
Balance sheets: December 31, 1999
--------------- -----------------
Current assets $ 1,629,349
Noncurrent assets 190,554
------------
Total assets 1,819,903
============
Current liabilities 249,860
Noncurrent liabilities --
Stockholders' equity 1,570,043
------------
Total liabilities and stockholders' equity $ 1,819,903
============
Year Ended
Results of operations: December 31, 1999
-----------------
Revenues $ 823
Net loss $ (653,538)
(4) Furniture and Equipment
Furniture and equipment consist of the following:
December 31, 1999
-----------------
Computer equipment $ 56,491
Furniture and office equipment 18,486
------------
74,977
Less accumulated depreciation (4,895)
------------
$ 70,082
============
(5) Acquisitions
On June 21, 1999, Net Value entered into a merger agreement pursuant to
which it acquired Strategicus Partners Inc. (Strategicus) in exchange for
$1,555,000 in cash and 601,029 shares of common stock and 184,627 shares of
Series A convertible preferred stock collectively valued at $3,638,084. In
connection with this transaction, Net Value also entered into consulting
agreements with the three principal stockholders and an employment
agreement with a principal officer of Strategicus (note 11).
F-13
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(5) Acquisitions (continued)
Strategicus was developing Internet operations through a wholly owned
subsidiary and was in the process of investing in two other Internet
companies which Net Value desired to acquire. Net Value accounted for this
acquisition as a purchase. The total purchase price was $5,364,423, of
which $1,100,000, $458,030, and $3,806,204 was allocated to ownership
interests in Affiliate Companies, various assets, and goodwill,
respectively. The goodwill represents the excess of the purchase price over
the fair value of the assets acquired less the liabilities assumed. The
results of the acquired company are included in Net Value's operations as
of the completion of the merger on July 30, 1999. Net Value evaluates the
carrying value of this goodwill based on achievement of business plan
objectives and milestones, the financial condition and prospects of the
acquired operations, and other relevant factors. If impairment exists, the
carrying amount of the goodwill will be reduced by the estimated shortfall
of discounted cash flows. Amortization of goodwill totaled $578,906 for the
year ended December 31, 1999 and is included in Selling, general and
administrative in the consolidated Statement of Operations.
The following unaudited pro forma financial information presents the
combined results of operations as if Net Value had owned Strategicus since
the beginning of its operations in 1999, after giving effect to the
amortization of goodwill. The unaudited pro forma financial information is
provided for informational purposes only and should not be construed to be
indicative of Net Value's consolidated results of operations had the
acquisitions been consummated on the dates assumed and do not project Net
Value's results of operations for any future period:
Year ended
December 31,
1999
------------
Revenue $ --
Pro forma net loss to common shareholders 30,671,504
===========
Pro forma net loss per common share $ 2.91
===========
F-14
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(6) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement carrying amounts of assets and liabilities
and the amounts used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions of Net
Value's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998
------------ -----------
<S> <C> <C>
Temporary differences:
Accruals and reserves $ 355,000 --
Amortization of financing fees -- 16,000
Deferred compensation and warrants 2,194,000 --
Temporary differences discontinued operations:
Vesting of nonqualified stock options -- 82,000
Accrued salaries and compensation -- 37,000
Amortization of discounts -- 132,000
Common stock and warrants issued -- 29,000
Depreciation -- (20,000)
------------ -----------
Total temporary differences 2,549,000 258,000
Carryforwards and credits:
Federal and state deferred tax benefits arising
from net operating loss carryforwards 6,004,000 66,000
Federal and state deferred tax benefits arising
from net operating loss carryforwards of
discontinued operations -- 6,692,000
Research and development credits from discontinued
operations -- 278,000
------------ -----------
8,553,000 7,294,000
Less valuation allowance (8,553,000) (7,294,000)
------------ -----------
$ -- --
============ ===========
</TABLE>
F-15
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(6) Income Taxes (continued)
The following table presents the principal reasons for the differences
between the amount computed by applying the U.S. federal statutory tax rate
of 35% to the net loss from continuing operations and the actual provision
for income taxes for the years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $(8,387,044) (571,000) --
State and local income tax expense (benefit) 2,375 (82,000) --
Nondeductible goodwill amortization 202,617 -- --
Other non-deductible expense 83,715 560,000 --
Loss from operations not benefited 8,100,712 93,000 --
------------ ------------ ------------
Total tax expense $ 2,375 -- --
============ ============ ============
</TABLE>
Prior to September 18, 1996, Net Value was a limited liability company, and
accordingly, losses were passed through to its members. For the year ended
December 31, 1999, Net Value had losses from continuing operations which
resulted in net operating loss carryforwards for federal and state income
tax purposes amounting to approximately $15,976,000 and $7,940,000,
respectively. The federal net operating loss carryforwards expire beginning
2018 through 2019. The state net operating loss carryforwards expire
beginning in 2004. However, these carryforwards may be significantly
limited due to changes in the ownership of Net Value as a result of future
equity offerings.
As of December 31, 1998, NV, Inc. had net operating loss carryforwards of
$16,730,000, of which a portion was utilized during 1999. As of December
31, 1998, Net Value, Inc. had generated research and development credits of
approximately $328,000. As of December 31, 1999, due to Federal tax law,
NV, Inc. no longer has net operating loss carryforwards and credits
available to utilize as a result of the company selling substantially all
of its assets in 1999.
Recognition of the benefits of the net deferred tax assets and liabilities
will require that Net Value generate future taxable income. It is more
likely than not that Net Value will not generate sufficient taxable income
during the 15-year carryforward period. Therefore, Net Value has
established valuation allowances for deferred tax assets (net of
liabilities) of $8,553,000 as of December 31, 1999. The net change in the
total valuation allowance for the year ended December 31, 1999, 1998 and
1997 was an increase of $1,259,000, $3,016,000, and $3,511,000,
respectively.
F-16
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(7) Borrowing Arrangements
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
8% Convertible debentures $ 3,250,500 $ 1,402,500
12% Convertible promissory notes 1,021,929 --
Convertible promissory note, bearing interest at 10% 900,000 --
Installment loan payable, bearing interest at 7.76% 79,034 --
Promissory note, bearing interest at 10% -- 900,000
Loan payable to related party, bearing interest at 0% -- 200,000
Loan payable, bearing interest at 10% -- 40,000
Other 12,000 --
------------ ------------
5,263,463 2,542,500
Less amount due within one year 5,196,161 2,542,500
------------ ------------
Noncurrent portion $ 67,302 $ --
============ ============
</TABLE>
(a) 8% Convertible Debentures
Net Value issued 8% Convertible Debentures (Debentures) in the
aggregate amount of $7,857,000 in a private placement offering. These
debentures were issued in two separate tranches with the first tranche
totaling $1,642,500 and the second tranche totaling $6,215,000. The
first and second tranches of debentures together with accrued interest
thereon were convertible into Net Value's common stock at any time by
the holders at a conversion price of $2.00 and $2.50 per share,
respectively. The Debentures mature at the earlier of (i) the date on
which the holder elects to convert into shares of common stock; (ii)
the date upon which Net Value elects to cause a mandatory conversion;
or (iii) two years from the date of the issuance of the Debentures.
Net Value recorded $6,457,500 and $1,400,000 as additional paid in
capital in 1999 and 1998, respectively, for the discount deemed
related to imputed interest for the preferential conversion features
on the Debentures. In accordance with the Emerging Issues Task Force
Issue No. 98-5 "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios"
(EITF 98-5), these discounts were limited to the principal amount of
the Debentures and were charged immediately to interest expense as the
holders had the right to convert upon issuance. Net Value issued
2,076,589 shares of common stock during fiscal 1999 in connection with
conversion requests from holders of outstanding Debenture principal
and accrued interest.
F-17
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(7) Borrowing Arrangements (continued)
(b) 12% Convertible Promissory Notes
On January 7, 1999, Net Value issued $4,270,125 Convertible Promissory
Notes (Convertible Notes) with interest payable at 12% per annum in
exchange for the outstanding promissory notes plus accrued interest of
NV Inc. The noteholders are entitled at any time to convert the
outstanding principal plus accrued interest thereon into Net Value's
common stock at a conversion rate of $2.00 per share. The Convertible
Notes mature at the earlier of (i) the date on which either the holder
or Net Value exercise their respective conversion rights under the
Convertible Notes; or (ii) the one-year anniversary of the closing of
the pending merger between Net Value and NV Inc. (see note 1).
Additionally, the terms of conversion obligate Net Value to issue a
warrant to purchase one-half of one share of Net Value's common stock
for each share purchased through conversion. These warrants are
exercisable over a three year period from the date of issuance at a $6
per share exercise price.
The Company recorded $4,270,125 as additional paid in capital in
fiscal 1999 for the discount deemed related to imputed interest for
the preferential conversion features on the Convertible Notes. In
accordance with EITF 98-5, these discounts were limited to the
principal amount of the Convertible Notes and were charged immediately
to interest expense as the holders had the right to convert upon
issuance. Net Value issued 1,732,066 shares of common stock during
fiscal 1999 in connection with conversion requests from holders of
outstanding Convertible Notes principal and accrued interest.
(c) Convertible Promissory Note
On March 1, 1999, in exchange for the outstanding promissory note
described below, Net Value issued a $900,000 convertible promissory
note (Convertible Note) with interest payable quarterly in cash or in
shares of Net Value's common stock at the election of the lender. The
Convertible Note, as amended, is convertible at any time by the
noteholder into Net Value's common stock at a conversion rate of $2.25
per share. Net Value also issued to the lender immediately exercisable
warrants to purchase 180,000 shares of Net Value's common stock in
connection with the Convertible Note issuance. The warrants have
exercise prices ranging from $2.50 to $5.00 per share and expire on
February 28, 2002.
The Company recorded $446,000 as additional paid in capital for the
discount deemed related to imputed interest for the preferential
conversion feature on the Convertible Note and recorded $454,000 as
additional paid in capital for the discount deemed related to the
detachable warrants as determined by an independent valuation. In
accordance with EITF 98-5, these discounts were limited to the
principal amount of the Convertible Note and were charged immediately
to interest expense as the holder had the right to convert upon
issuance and the warrants were immediately exercisable.
(d) Promissory Note
In September 1998, Net Value issued a $900,000 promissory note with
interest payable at 10% per annum. On the scheduled maturity date of
March 1, 1999, Net Value issued the Convertible Note as payment in
full on the $900,000 promissory note.
F-18
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(8) Accrued Expenses
Accrued expenses consist of the following:
December 31,
--------------------------
1999 1998
---------- ----------
Accrued interest $ 301,077 41,399
Accrued salaries and benefits 14,094 --
---------- ----------
$ 315,171 41,399
========== ==========
(9) Commitments and Contingencies
Net Value shares office space for its principal executive offices in San
Francisco, California with a related party at no expense. The rental value
of the shared space is not material. Net Value also subleases office space
in New York, Boston, and Philadelphia on a month to month basis at a rate
of $2,000 per month.
Net Value and subsidiaries are defendants in various legal proceedings
including an action alleging patent infringement and an action brought by a
former officer and director of Net Value alleging breach of an employment
contract. Net Value filed its answer to the patent infringement action on
November 23, 1999 seeking a declaratory judgment of invalidity and
noninfringement of the patent. Promotions Acquisitions has agreed to assume
all liabilities related to this lawsuit, including all legal expenses
incurred in defending against these claims, as part of their purchase of
substantially all of the assets of NV Inc. (Note 14). Accordingly, Net
Value does not believe that the resolution of this action will have a
material adverse effect on its financial position. With respect its former
officer and director, Net Value intends to vigorously defend itself against
all claims made and to assert counterclaims and make additional claims
against this individual. The litigation will center around the number of
shares of Net Value common stock to which the former officer and director
is entitled, if any. Because of the preliminary nature of this matter and
as the parties have not commenced discovery, it is not possible at this
time to quantify the number of shares, if any, that the former employee
will be entitled.
(10) Stockholders' Equity
The Company's has two classes of authorized stock: common stock and
preferred stock.
(a) Common Stock
Net Value is authorized to issue 50,000,000 shares of common stock,
par value $.001 per share. The holders of common stock are entitled to
one vote per share and are entitled to dividends as declared.
Dividends may be restricted by the inability to liquidate ownership
interests in Affiliate Companies to fund cash dividends and are
subject to the preferential rights of the holders of Net Value's
preferred stock. We have never declared dividends nor do we intend to
for the foreseeable future. Certain shareholders have registration
rights and piggy-back rights that require Net Value to register the
underlying shares with the Securities and Exchange Commission.
F-19
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(10) Stockholders' Equity (continued)
(a) Common Stock (continued)
Common stock is reserved for issuances as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Conversion of convertible debentures and notes 2,370,960
Conversion of preferred stock, series B 1,180,180
Completion of in-process merger with NV Inc. (see Note 1) 1,659,740
Exercise of outstanding warrants 1,448,088
Exercise of outstanding options 4,277,248
----------
10,936,216
==========
</TABLE>
(b) Preferred Stock
Net Value is authorized to issue 10,000,000 shares of undesignated
preferred stock, par value $.001 per share. Net Value may establish
one or more classes or series of preferred stock having such number of
shares and relative voting rights, designation, dividend rates,
liquidation rights and preferences as may be fixed by them without
further shareholder approval. The holders of preferred stock may be
entitled to preferences over common stockholders with respect to
dividends, liquidation, or dissolution in such amounts as established
by Net Value's board of directors.
Preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Shares Shares
outstanding Amount (1) outstanding Amount (1)
------------ ------------ ------------ ------------
Series A -- $ -- 2,519,852 $ 2,520
Series B 4,824 4,448,872 -- --
------------ ------------ ------------ ------------
4,824 $ 4,448,872 2,519,852 $ 2,520
============ ============ ============ ============
</TABLE>
(1) Amount is net of issuance costs.
F-20
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(10) Stockholders' Equity (continued)
(b) Preferred Stock (continued)
The Company's Series A Preferred Stock (Series A Shares) was
convertible up to one share of Net Value's common stock upon Net
Value's achievement of specified performance objectives. In fiscal
1999, pursuant to a private offering, Net Value issued 1,622,687
shares of common stock in exchange for all issued and outstanding
Series A Shares based on a negotiated exchange ratio of .6 share of
common stock for every one Series A Share. Net Value recorded a
preferred stock dividend of $5,955,261 representing the excess of the
fair value of the common stock issued over the fair value of the
Series A Shares redeemed. Accordingly, at December 31, 1999 there were
no longer any issued and outstanding Series A Shares.
In September 1999, Net Value issued 4,824 shares of Series B Preferred
Stock (Series B Shares) for aggregate proceeds of $4,824,000. These
Series B Shares were subsequently converted into 1,180,180 shares of
common stock in February 2000 pursuant to the original terms of the
issuance. The Series B Shares had a liquidation preference of $1,000,
bore a noncumulative dividend rate of 5%, and were redeemable at
$1,250 per share in the event Net Value failed to achieve certain
performance objectives.
Net Value issued warrants to purchase 295,040 shares of common stock
(Series B Warrants) in connection with the issuance of the Series B
Shares. The Series B Warrants are exercisable at prices equivalent to
a range between 110% to 140% of the conversion price of the Series B
Shares. Net Value allocated $650,000 to the cost of the Series B
Warrants based on an independent valuation which was recorded as a
preferred stock dividend and offsetting increase to additional paid in
capital.
(11) Stock Options and Warrants
(a) Stock Options
Under the stock option plan that Net Value expects to be adopted by
the Board of Directors, options to purchase shares of Net Value common
stock may be granted to officers, directors, employees, consultants
and independent contractors. Options granted under this plan will
expire no more than ten years following the date of vesting, will have
limited transferability, and will be subject to various vesting
provisions. The Board of Directors or a committee thereof will
determine the exercise price of options granted under this plan. The
Board anticipates having the ability to amend, suspend or terminate
this plan at any time, subject to restrictions imposed by applicable
law.
As part of the in-process merger with NV Inc. discussed in note 1, Net
Value plans on converting the outstanding options under the existing
NV Inc. stock option plan into options to purchase Net Value common
stock using a conversion ratio of .4 Net Value options for every 1 NV
Inc option. On an as converted basis, NV Inc. had 558,500 options
outstanding at December 31, 1999 with exercise prices ranging from
$.25 to $2.80. Metacat.com, Net Value's wholly owned consolidated
subsidiary, maintains a separate stock option plan for which 27,025
options to purchase metacat.com Series A preferred stock were
outstanding at December 31, 1999. Affiliate Companies maintain their
own stock plans.
F-21
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(11) Stock Options and Warrants (continued)
(a) Stock Options (continued)
The following summarizes Net Value's stock option activity and related
information during the year ended December 31, 1999:
<TABLE>
<CAPTION>
Range of exercise Weighted average
Shares prices exercise price
--------------- ----------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1998 -- -- --
Granted 8,650,876 $ 1.00 - 10.13 $ 1.14
Cancelled (4,373,628) $ 1.00 $ 1.00
--------------- --------------- ---------------
Outstanding at December 31, 1999 4,277,248 $ 1.00 - 10.13 $ 1.28
---------------
Options contractually exercisable at end
of period 886,384
</TABLE>
Exercise prices for stock options outstanding as of December 31, 1999
and the weighted average remaining contractual life are as follows:
<TABLE>
<CAPTION>
Weighted
average
remaining Number Weighted Average
Exercise prices Shares Outstanding contractual life exercisable Exercise Price
--------------- ------------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$1.00 2,782,248 9.41 years 886,384 $ 1.00
$3.75 - $10.13 1,495,000 9.74 years -- $ 5.12
--------- ---------
$1.00 - $10.13 4,277,248 9.53 years 886,384
========= =========
</TABLE>
As discussed in Note 2, Net Value has elected to follow APB 25 in
accounting for its employee and director stock-based awards. Under APB
25, Net Value does not recognize compensation expense with respect to
such awards if the exercise price equals or exceeds the fair value of
the underlying security on the date of grant and other terms are
fixed. The fair values of these awards for the purpose of the
alternative fair value disclosures required by FAS 123 were estimated
as of the date of the grant using a Black Scholes option-pricing
model. For purposes of Net Value's pro forma disclosures, the fair
value of options granted during the year ended December 31, 1999, was
determined using a Black Scholes option pricing model with a
volatility of 87%, a risk-free interest rate of approximately 6.3%, an
expected life of 5 years, and a dividend yield of zero.
F-22
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(11) Stock Options and Warrants (continued)
(a) Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Net
Value's pro forma information follows:
Year ended: December 31, 1999
-----------------
Net loss to common shareholders:
As reported $ 30,436,357
Pro forma $ 32,149,155
Basic and diluted net loss per
common share:
As reported $ 2.90
Pro forma $ 3.05
Future pro forma results may be materially different from actual
amounts reported. The weighted average fair value of employee options
granted during 1999 was $5.17. Net Value issued no options in 1998 or
1997.
(b) Deferred Stock Based Compensation
In connection with certain stock option grants to employees during the
year ended December 31, 1999, Net Value recorded deferred compensation
of $9,509,400 representing the difference between the exercise price
and the fair market value of Net Value's common stock on the date such
options were granted. Such amount is included as a reduction of
shareholders' equity and is being amortized as charges to stock based
compensation on a straight line basis over the corresponding vesting
period of each option grant, generally three years. For the year ended
December 31, 1999, Net Value recorded amortization to stock based
compensation of $2,371,800 in connection with these awards.
In connection with Net Value's acquisition of Strategicus Partners
Inc. (more fully described in note 5), three Strategicus shareholders
signed consulting agreements with Net Value. The consulting
agreements, as amended, provided for the grant to each of the three
Strategicus shareholders of 687,416 options to purchase shares of Net
Value's common stock at an exercise price of $1.00 per share. At
December 31, 1999, Net Value had deferred compensation of $19,749,033
in connection with these option awards representing the deemed fair
value of the options as determined by the Black Scholes option-pricing
model. Such amount is included as a reduction of shareholders' equity
and is being amortized by charges to stock based compensation over the
terms of the consulting agreements of 48 months, which totaled
$1,246,113 during the year ended December 31, 1999. In accordance with
EITF 96-18, Net Value remeasures the fair value of the remaining
unvested options as counterparty performance is complete, which
typically corresponds to the vesting period. Such changes in fair
values are recorded as an adjustment to the remaining unamortized
deferred compensation balance.
F-23
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(11) Stock Options and Warrants (continued)
(b) Deferred Compensation (continued)
Also, in connection with Net Value's acquisition of Strategicus
Partners Inc., a principal officer of Strategicus signed an employment
agreement with Net Value, which, as amended, provided for the grant of
1,763,822 unvested shares of Net Value common stock. Such shares were
to vest monthly over the 24 month term of the agreement. The employee
was subsequently terminated effective October 1999 causing his
remaining unvested shares to cease vesting. Net Value recorded
deferred compensation of $1,406,648 for the vested shares earned by
the employee during the year ended December 31, 1999, which was
calculated as the difference between the exercise price and the fair
market value of Net Value's common stock on the date the stock was
granted. This amount was fully amortized at December 31, 1999 through
charges to stock based compensation.
During the year ended December 31, 1999, Net Value also recorded
deferred compensation of $437,949 for various common stock options
granted to Advisory Board members. The options' fair value was
determined using the Black Scholes option pricing model and is
accounted for in accordance with EITF 96-18.
(c) Warrants
The Company had outstanding the following warrants to purchase its
securities:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------
Number of Exercise price
Description of series warrants issued per share
------------------------------------------ ------------------- -------------------
<S> <C> <C>
Common Stock 1,448,088 $2.50 - $6.00
=================== ===================
</TABLE>
As described further in Notes 7 and 9, these warrants were issued in
connection with Net Value's borrowing arrangements and Series B
Preferred Stock issuances. Net Value recorded interest expense on
warrants issued in connection with borrowing arrangements equal to the
warrants then fair value as determined by independent valuations. Net
Value recorded a preferred stock dividend on warrants issued in
connection with the Series B Preferred Stock issuance equal to the
warrants then fair value as determined by independent valuations.
As part of the in-process merger with NV Inc. discussed in note 1, Net
Value plans on converting the outstanding NV Inc. warrants into
warrants to purchase Net Value common stock using a conversion ratio
of .4 Net Value warrants for every 1 NV Inc. warrant. On an as
converted basis, NV Inc. had 585,089 warrants outstanding at December
31, 1999 with exercise prices ranging from $6.00 to $8.64.
F-24
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(12) Fair Value of Financial Instruments
As of December 31, 1999 and 1998, the respective carrying values of Net
Value's financial instruments approximated their fair values. These
financial instruments include cash and cash equivalents, loans receivable,
accounts payable, accrued expenses, notes and loans payable, convertible
promissory notes, and convertible debentures.
Carrying values for cash and cash equivalents, loans receivable, accounts
payable, accrued expenses, and notes and loans payable were estimated to
approximate fair values for these financial instruments as they are short
term in nature and are generally receivable or payable on demand. The fair
value of Net Values' convertible promissory notes and convertible
debentures were estimated assuming full conversion into common shares and
using the closing the price of Net Value common stock on December 31, 1999.
The resulting fair value computes to $26,080,560, which exceeds the
carrying value of the convertible promissory notes and debentures of
$5,172,429.
(13) Related Party Transactions
Net Value provides strategic and operational support to its Affiliate
Companies in the normal course of its business. These services are
generally provided by Net Value's employees, members of its Advisory Board
and Board of Directors and outside consultants. Net Value pays the costs
related to employees. Members of Net Value's Advisory Board and Board of
Directors are generally compensated with stock options in Net Value which
are accounted for in accordance with FAS 123 and EITF 96-18. The costs of
outside consultants are generally paid directly by the Affiliate Company.
In June 1999, Net Value entered into a consulting agreement with and loaned
$267,000 to an officer of a company that Net Value acquired (see Note 5).
The loan is forgiven in 33% increments on the first, second and third year
anniversary dates of the consulting agreement. For accounting purposes, Net
Value amortizes the loan to consulting expense evenly over the three year
loan period and recorded $51,917 during the year ended December 31, 1999 in
connection with such loan amortization. The unamortized loan balance at
December 31, 1999 was $215,083.
In October 1999, Net Value entered into a consulting agreement with an
Advisory Board member. Under the terms of the consulting agreement, an
affiliated company of the Advisory Board member was granted and exercised
the right to purchase 676,374 shares of Net Value common stock at a
discount to its then fair market value. Net Value recorded consulting
expense of $2,289,324 equal to the discount of the exercise price to the
closing stock price on the date of grant.
In October 1999, a former officer and director of Net Value agreed to sell
his shares of an affiliate company to Net Value at a price which was less
than the then deemed fair value of the stock. Accordingly, Net Value
recorded contributed capital of $659,087 for the difference.
In December 1998, Net Value made a non-interest bearing, unsecured loan of
$200,000 to a stockholder which was subsequently repaid during March and
April of 1999.
F-25
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
(14) Discontinued Operations
In November 1999, Net Value made the strategic decision to exit the online
software development operations of NV Inc. and on December 3, 1999
completed a sale of substantially all of the assets of the discontinued
operations to Promotions Acquisitions, Inc. (Promotions), a corporation
formed by the former management team of NV Inc. in connection with a $17
million investment in Promotions by outside investors. Net Value received
$2 million in cash and 2,958,819 shares of Promotions' common stock in
exchange for substantially all of NV Inc.'s assets and assumption by
Promotions of approximately $1.6 million of liabilities. The value ascribed
to the Promotions common stock was based on the value of the shares issued
to outside investors. Furthermore, the majority of stock options held by
former NV Inc. employees were cancelled resulting in a reduction of
$1,487,964 to deferred stock-based compensation. Net Value recognized a
gain on the sale of the assets of the discontinued operations of $6,502,663
representing the excess of the fair value of the Promotions stock and cash
received over the carrying value of the assets sold and liabilities
assumed. The loss from operations during between the decision to exit the
online software development operations and the sale of these operations was
not material. At December 31, 1999, the remaining liabilities of the
discontinued software development operations that were not assumed by
Promotions consist of payables to several vendors and professional service
providers used throughout fiscal 1999 and are included in net liabilities
of discontinued operations on the consolidated balance sheet.
(15) Subsequent Events
(a) Extinguishments of Borrowing Arrangements
Net Value repaid substantially all the 8% Convertible Debentures,
12% Convertible Promissory Notes and 10% Convertible Promissory Note
at various dates through March 2000 through payments of cash or the
issuance of common stock pursuant to the original conversion terms.
(b) Conversion of Mandatorily Redeemable Preferred Stock, Series B
On March 1, 2000, Net Value converted all the issued and outstanding
shares of the Series B Preferred Stock into 1,180,180 shares of common
stock pursuant to the original conversion terms.
(c) Issuance of Convertible Redeemable Preferred Stock, Series C
On March 6, 2000, Net Value completed a $50,000,000 private placement
offering in exchange for 4,166,667 shares of Convertible Redeemable
Preferred Stock, Series C and warrants to purchase 416,667 shares of
common stock.
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Philadelphia, Commonwealth of Pennsylvania, on May 11, 2000.
NET VALUE HOLDINGS, INC.
BY: /s/ Andrew P. Panzo
----------------------------------------
Andrew P. Panzo
Chairman of the Board of Directors, Chief
Executive Officer and Chief Financial Officer
BY: /s/ Jay Elwell
----------------------------------------
Jay Elwell (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed by the following
persons in the capacities indicated:
SIGNATURE TITLE
- --------- -----
/s/ Andrew P. Panzo Chairman of the Board of Directors,
- ---------------------- Chief Executive Officer and Chief
Andrew P. Panzo Financial Officer
/s/ Lee C. Hansen President and Director
- ----------------------
Lee C. Hansen
/s/ Barry Uphoff Director
- ----------------------
Barry Uphoff
/s/ Darr Aley Director
- ----------------------
Darr Aley
/s/ Stephen George Director
- ----------------------
Stephen George
<PAGE>
Exhibit 10.40
SERIES A CONVERTIBLE PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
(this "Agreement") is made and entered into as of March 14, 2000, by and between
ALARMX.COM. INC., a Delaware corporation (the "Company") and NET VALUE HOLDINGS,
INC., a Delaware corporation (the "Investor").
RECITALS
The Company desires to sell to the Investor, and the Investor desires
to purchase from the Company, shares of the Company's Series A Convertible
Preferred Stock on the terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. AGREEMENT TO PURCHASE AND SELL STOCK.
1.1 Authorization. As of the Closing (as defined below), the
Company will have authorized the issuance, pursuant to the terms and conditions
of this Agreement, of up to Four Million (4,000,000) shares of the Company's
Series A Convertible Preferred Stock, $.25 par value per share (the "Series A
Stock") having the rights, preferences, privileges and restrictions set forth in
the Certificate of Designation designating the Series A Stock of the Company
attached to this Agreement as Exhibit A (the "Series A Certificate").
1.2 Agreement to Purchase and Sell. The Company agrees to sell
to the Investor at the Closing, and the Investor agrees to purchase from the
Company at the Closing, 4,000,000 shares of Series A Stock which shall equal 40%
of the Company's Common Stock on a post-investment fully diluted basis at a
price of $0.40 per share, or an aggregate price of $1,000,000 as part of the
first round of the Company's financing, which round shall end on or before March
6, 2000 (the "First Round Offering"). The shares of Series A Stock purchased and
sold pursuant to this Agreement will be collectively referred to as the
"Purchased Shares" and the shares of Common Stock issuable upon conversion of
the Purchased Shares will be collectively referred to as the "Conversion
Shares".
2. CLOSING. The purchase and sale of the Purchased Shares will take
place at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP,
counsel to the Investor, at 260 S. Broad Street, Philadelphia, Pennsylvania
19102 at 9:00 a.m. Eastern Time, on March 14, 2000, or at such other time and
place as the Company and the Investor mutually agree upon (which time and
1
<PAGE>
place are referred to in this Agreement as the "Closing"). At the Closing, the
Company will deliver to the Investor certificates representing the Purchased
Shares against delivery to the Company by the Investor of the full purchase
price of the Purchased Shares, paid by (i) a wire transfer of funds to the
Company or (ii) certified bank check.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investor that the statements in the following
paragraphs of this Section 3 are all true and correct:
3.1 Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own its properties and assets and to carry on its business as now
conducted and as presently proposed to be conducted. The Company is duly
qualified and in good standing to do business as a foreign corporation in each
jurisdiction where failure to be so qualified would have a material adverse
effect on its financial condition, business, prospects or operations.
3.2 Capitalization. Upon filing the Series A Certificate,
immediately prior to the Closing, the capitalization of the Company will consist
of the following:
(a) Preferred Stock. A total of Four Million
(4,000,000) authorized shares of preferred stock, $.001 par value per share, of
which Four Million (4,000,000) shares are designated as Series A Stock, none of
which will be issued and outstanding. The rights, preferences and privileges of
the Series A Stock will be as stated in the Series A Certificate and as provided
by law.
(b) Common Stock. A total of Six Million (6,000,000)
authorized shares of common stock, $.001 par value per share (the "Common
Stock"), of which One Million Eight Hundred Thousand (1,800,000) shares are
issued and outstanding.
(c) Options, Warrants, Reserved Shares. Except as set
forth on Schedule 3.2(c), there are not outstanding any options, warrants,
rights (including conversion or preemptive rights) or agreements for the
purchase or acquisition from the Company of any shares of its capital stock or
any securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company's capital stock. Except as set forth on Schedule
3.2(c), no shares of the Company's outstanding capital stock, or stock issuable
upon exercise or exchange of any outstanding options, warrants or rights, or
other stock issuable by the Company, are subject to any rights of first refusal
or other rights to purchase such stock (whether in favor of the Company or any
other person), pursuant to any agreement or commitment of the Company.
(d) Outstanding Security Holders. Attached to this
Agreement as Schedule 3.2(d) is a complete list of all outstanding stockholders,
option holders, warrant holders, convertible note holders and other security
holders of the Company as of immediately prior to the
2
<PAGE>
Closing, which schedule lists the type of instruments, certificate numbers in
sequential order (if applicable), the dates of issuance, the names of holders
and the number of Shares held or to be held upon exercise of such instrument.
3.3 Subsidiaries. Except as set forth on Schedule 3.3, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, trust, joint venture, association, or
other entity.
3.4 Due Authorization. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery of, and the performance of all obligations of
the Company under, this Agreement, the Investor Rights Agreement (as defined in
Section 5.14) and the Co-Sale Agreement (as defined in Section 5.15), and the
Employment Agreements (as defined in Section 5.9), (collectively, the "Related
Agreements") and the authorization, issuance, reservation for issuance and
delivery of all of the Purchased Shares being sold under this Agreement and of
the Conversion Shares has been taken or will be taken prior to the Closing, and
this Agreement constitutes, and the Related Agreements, when executed, will
constitute, valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except as may be limited by (i)
applicable bankruptcy, insolvency, reorganization or others laws of general
application relating to or affecting the enforcement of creditors' rights
generally and (ii) the effect of rules of law governing the availability of
equitable remedies.
3.5 Valid Issuance of Stock.
(a) The Purchased Shares, when issued, sold and
delivered in accordance with the terms of this Agreement for the consideration
provided for herein, will be duly and validly issued, fully paid and
nonassessable. The Conversion Shares have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Series A
Certificate, will be duly and validly issued, fully paid and nonassessable.
(b) Based in part on the representations made by the
Investor in Section 4 hereof, the Purchased Shares and (assuming no change in
applicable law and no unlawful distribution of Purchased Shares by the Investor
or other parties) the Conversion Shares will be issued in full compliance with
the registration and prospectus delivery requirements of the U.S. Securities Act
of 1933, as amended (the "1933 Act") and the registration and qualification
requirements of all applicable state securities laws; provided that, with
respect to the Conversion Shares, no commission or other remuneration is paid or
given, directly or indirectly, for soliciting the issuance of Conversion Shares
upon the conversion of the Purchased Shares and no additional consideration is
paid for the Conversion Shares other than surrender of the applicable Purchased
Shares upon conversion thereof in accordance with the Series A Certificate.
3
<PAGE>
(c) The outstanding shares of the capital stock of
the Company are duly and validly issued, fully paid and nonassessable, and such
shares of capital stock, and all outstanding options, warrants, convertible
notes and other securities of the Company, have been issued in full compliance
with the registration and prospectus delivery requirements of the 1933 Act or in
compliance with applicable exemptions therefrom, the registration and
qualification requirements of all applicable securities laws of states of the
United States and all other provisions of applicable securities laws of States
of the United States, including, without limitation, anti-fraud provisions.
3.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement and the Related Agreements, except for such
qualifications or filings under the 1933 Act and the regulations thereunder and
all other applicable securities laws of states of the United States as may be
required in connection with the transactions contemplated by this Agreement. All
such qualifications and filings will, in the case of qualifications, be
effective on the Closing and will, in the case of filings, be made within the
time prescribed by law.
3.7 Litigation. Except as set forth on Schedule 3.7, there is
no action, suit, proceeding, claim, arbitration or investigation ("Action")
pending or, to the best of the Company's Knowledge (as defined below), currently
threatened against the Company, its activities, properties or assets or, to the
best of the Company's Knowledge, against any officer, director or employee of
the Company in connection with such officer's, director's or employee's
relationship with, or actions taken on behalf of, the Company. Except as set
forth on Schedule 3.7, to the best of the Company's Knowledge, there is no
factual or legal basis for any such Action that might result, individually or in
the aggregate, in any material adverse change in the business, properties,
assets, financial condition, affairs or prospects of the Company. By way of
example but not by way of limitation, there are no Actions pending or, to the
best of the Company's Knowledge, threatened (or any basis therefor known to the
Company) relating to the prior employment of any of the Company's employees or
consultants, their use in connection with the Company's business of any
information, technology or techniques allegedly proprietary to any of their
former employers, clients or other parties, or their obligations under any
agreements with prior employers, clients or other parties. The Company is not a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality and there is no
Action by the Company currently pending or which the Company intends to
initiate. For the purposes of this Agreement, "Knowledge" means (i) the actual
knowledge of such party's partners, officers, directors, principals, affiliates
or agents; and (ii) the knowledge that a prudent business person would have
obtained in the conduct of his or her business after making reasonable inquiry
and exercising reasonable diligence with respect to the particular matter in
question.
3.8 Ownership and Nondisclosure Agreement. Each employee,
officer, consultant and contractor of the Company identified on Schedule 3.8 has
entered into and executed an Ownership and Nondisclosure Agreement in the form
attached to this Agreement as Exhibit B or an employment or consulting agreement
containing substantially similar terms.
4
<PAGE>
3.9 Status of Proprietary Assets.
(a) Ownership. Except as set forth on Schedule
3.9(a), the Company has full title and ownership of, or has license to, all
patents, patent applications, trademarks, service marks, trade names,
copyrights, moral rights, mask works, trade secrets, confidential and
proprietary information, compositions of matter, formulas, designs, proprietary
rights, know-how and processes (all of the foregoing collectively referred to as
the "Proprietary Assets") necessary to enable it to carry on its business as now
conducted and as presently proposed to be conducted, without any conflict with
or infringement of the rights of others. A complete list of all the Company's
Proprietary Assets is set forth on Schedule 3.9(a) to this Agreement. To the
best of the Company's Knowledge, no third party has any ownership right, title,
interest, claim in or lien on any of the Company's Proprietary Assets and the
Company has taken, and in the future the Company will use its best efforts to
take, all steps reasonably necessary to preserve its legal rights in, and the
secrecy of, all its Proprietary Assets, except those for which disclosure is
required for legitimate business or legal reasons.
(b) Licenses; Other Agreements. Except as set forth
on Schedule 3.9(b), the Company has not granted, and, there are not outstanding,
any options, licenses or agreements of any kind relating to any Proprietary
Asset of the Company, nor is the Company bound by or a party to any option,
license or agreement of any kind with respect to any of its Proprietary Assets.
The Company is not obligated to pay any royalties or other payments to third
parties with respect to the marketing, sale, distribution, manufacture, license
or use of any Proprietary Asset or any other property or rights.
(c) No Infringement. To the best of the Company's
Knowledge, the Company has not violated or infringed, and is not currently
violating or infringing, and the Company has not received any communications
alleging that the Company (or any of its employees or consultants) has violated
or infringed or, by conducting its business as proposed, would violate or
infringe, any Proprietary Asset of any other person or entity.
(d) No Breach by Employee. The Company is not aware
that any employee or consultant of the Company is obligated under any agreement
(including licenses, covenants or commitments of any nature) or subject to any
judgment, decree or order of any court or administrative agency, or any other
restriction that would interfere with the use of his or her best efforts to
carry out his or her duties for the Company or to promote the interests of the
Company or that would conflict with the Company's business as proposed to be
conducted. The carrying on of the Company's business by the employees and
contractors of the Company and the conduct of the Company business as presently
proposed, will not, to the best of the Company's Knowledge, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any of such
employees or contractors or the Company is now obligated. The Company does not
believe it is or will be necessary to utilize any inventions of any employees of
the Company (or persons the Company currently intends to hire) made prior to
their employment by the Company which have not otherwise become property of the
Company. At no time during the conception of or reduction of any of the
5
<PAGE>
Proprietary Assets to practice was any developer, inventor or other contributor
to such patents operating under any grants from any governmental entity or
agency or private source, performing research sponsored by any governmental
entity or agency or private source or subject to any employment agreement or
invention assignment or nondisclosure agreement or other obligation with any
third party that could adversely affect the Company's rights in such Proprietary
Assets.
3.10 Compliance with Law and Charter Documents. The Company is
not in violation or default of any provisions of its Certificate of
Incorporation or Bylaws, both as amended, and to the best of the Company's
Knowledge, the Company is in compliance with all applicable statutes, laws,
regulations and executive orders of the United States of America and all states,
foreign countries or other governmental bodies and agencies having jurisdiction
over the Company's business or properties. The Company has not received any
notice of any violation of such statutes, laws, regulations or orders which has
not been remedied prior to the date hereof. The execution, delivery and
performance of this Agreement and the Related Agreements and the consummation of
the transactions contemplated hereby or thereby will not result in any such
violation or default, or be in conflict with or constitute, with or without the
passage of time or the giving of notice or both, either a default under the
Company's Certificate of Incorporation or Bylaws, or any agreement or contract
of the Company, or, to the best of the Company's Knowledge, a violation of any
statutes, laws, regulations or orders, or an event which results in the creation
of any lien, charge or encumbrance upon any asset of the Company.
3.11 Material Agreements.
(a) List of Material Agreements. Attached to this
Agreement as Schedule 3.11 is a complete list of all agreements, contracts,
leases, licenses, instruments and commitments (oral or written) to which the
Company is a party or is bound that, individually or in the aggregate, are
material to the business, properties, financial condition, results of operation,
affairs or prospects of the Company ("Material Agreements"); provided that for
purposes of this Section 3.11 only, no agreement under which the only remaining
obligation of the Company is to make a payment of money in the amount of $5,000
or less will be deemed to be material to its business, properties, financial
condition or results of operations if the failure to make such payment will not
result in the loss by the Company of any rights that are material to the conduct
of its business.
(b) No Breach. The Company has not breached, nor does
the Company have any Knowledge of any claim or threat that the Company has
breached, any term or condition of (i) any Material Agreement set forth in
Schedule 3.11 or (ii) any other agreement, contract, lease, license, instrument
or commitment that, individually or in the aggregate, would have a material
adverse effect on the business, properties, financial condition, results of
operations or affairs or prospects of the Company. Each Material Agreement set
forth in Schedule 3.11 is in full force and effect and, to the Company's
Knowledge, no other party to such Material Agreement is in default
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thereunder. The Company is not a party to any agreement that restricts its
ability to market or sell any of its products (whether by territorial
restriction or otherwise).
3.12 Registration Rights. Except as provided in the Investor
Rights Agreement, the Company has not granted or agreed to grant to any person
or entity any rights (including piggyback registration rights) to have any
securities of the Company registered with the United States Securities and
Exchange Commission ("SEC") or any other governmental authority.
3.13 Charter Documents; Minutes. The Certificate of
Incorporation and the Bylaws of the Company are in the form previously provided
to the Investor. The minute books of the Company provided to the Investor
contain a complete summary of all meetings, consents and actions of the board of
directors and the stockholders of the Company since the time of its
incorporation, accurately reflecting all transactions referred to in such
minutes in all material respects.
3.14 Title to Property and Assets. The Company owns its
properties and assets free and clear of all mortgages, deeds of trust, liens,
encumbrances, security interests and claims except for statutory liens for the
payment of current taxes that are not yet delinquent and liens, encumbrances and
security interests which arise in the ordinary course of business and which do
not affect material properties and assets of the Company. With respect to the
property and assets it leases, the Company is in compliance with such leases
and, to the best of the Company's Knowledge, the Company holds valid leasehold
interests in such assets free of any liens, encumbrances, security interests or
claims of any party other than the lessors of such property and assets.
3.15 Omitted.
3.16 Certain Actions. Except as set forth on Schedule 3.16,
the Company has not: (a) declared or paid any dividends, or authorized or made
any distribution upon or with respect to any class or series of its capital
stock; (b) incurred any indebtedness for money borrowed or incurred any other
liabilities individually in excess of $5,000 or in excess of $10,000 in the
aggregate; (c) made any loans or advances to any person, other than ordinary
advances for travel expenses; (d) sold, exchanged or otherwise disposed of any
material assets or rights other than the sale of inventory in the ordinary
course of its business; or (d) entered into any transactions with any of its
officers, directors or employees or any entity controlled by any of such
individuals.
3.17 Certain Activities. Except as set forth on Schedule 3.17,
the Company has not:
(a) formed or acquired or disposed of any interest in
any corporation, partnership, joint venture, or other entity;
(b) written up, written down, or written off the book
value of any amount of assets;
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(c) declared, paid, or set aside for payment any
dividend or distribution with respect to its capital stock;
(d) redeemed, purchased, or otherwise acquired, or
sold, granted, or otherwise disposed of, directly or indirectly, any of its
capital stock or securities or any rights to acquire such capital stock or
securities, or agreed to changes in the terms and conditions of any such rights;
(e) increased the compensation of or paid or accrued
any bonus to any employee or contributed or accrued or contributed to any
employee benefit plan, other than in accordance with policies, practices, or
requirements established and in effect on the Balance Sheet Date;
(f) entered into any employment, compensation,
consulting or collective bargaining agreement with any person or group;
(g) entered into, adopted, or materially amended any
employee benefit plan; or
(h) entered into any other material commitment or
transaction not disclosed elsewhere herein.
In addition to the foregoing, there has not been:
(i) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the assets, properties,
financial condition, operating results, prospects or business of the Company (as
presently conducted and as presently proposed to be conducted);
(j) any waiver by the Company of a valuable right or
of a material debt owed to it;
(k) any satisfaction or discharge of any lien, claim
or encumbrance or payment of any obligation by the Company, except such a
satisfaction, discharge or payment made in the ordinary course of business that
is not material to the assets, properties, financial condition, operating
results or business of the Company;
(l) any material change or amendment to a material
agreement or arrangement by which the Company or any of its assets or properties
is bound or subject, except for changes or amendments which are expressly
provided for or disclosed in this Agreement; or
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(m) to the Company's Knowledge, any other event or
condition of any character which would materially and adversely affect the
assets, properties, financial condition, operating results or business of the
Company.
3.18 ERISA Plans. Schedule 3.18 identifies all employee
benefit plans or arrangements applicable to the employees of the Company, and
all material fixed or contingent liabilities or obligations of the Company with
respect to any person now or formerly employed by the Company, including pension
or thrift plans, individual or supplemental pension or accrued compensation
arrangements, contributions to hospitalization or other health or life insurance
programs, incentive plans, bonus arrangements, and vacation, sick leave,
disability, and termination arrangements or policies, including workers'
compensation policies. The Company shall furnish or make available to the
Investor true and complete copies of all written documents or information with
respect to employee matters and arrangements, including without limitation all
employee handbooks, rules, policies, plan documents, trust agreements,
employment agreements, summary plan descriptions, and descriptions of any
unwritten plans identified in Schedule 3.18. Any employee benefits and welfare
plans or arrangements identified in Schedule 3.18 were established and have been
executed, managed, and administered without material exception in accordance
with all applicable requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), and the Employee Retirement Income Security Act of 1974,
as amended, and other applicable laws. There is no governmental audit or
examination of any of such plans or arrangements pending, nor, to the Knowledge
of the Company, threatened. There exists no action, suit, or claim (other than
routine claims for benefits) with respect to any of such plans or arrangements
pending, or, to the Knowledge of the Company, threatened, against any of such
plans or arrangements, and the Company knows of no facts which could give rise
to any such action, suit, or claim.
3.19 Insurance. The Company intends to obtain and maintain in
full force and effect fire and casualty insurance policies as is customary for
the type of business engaged in by the Company, with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow it to replace
any of its properties that might be damaged or destroyed. True and complete
copies of all such insurance policies have previously been furnished to the
Investor and notice of any termination or threatened termination of such
policies has been made known to the Investor.
3.20 Tax Returns and Payments. Neither the Company, nor any
entity to whose liabilities the Company has succeeded or assumed, has filed or
been included in a consolidated, unitary, or combined tax return with another
person. Except as set forth on Schedule 3.20, the Company represents and
warrants that: (a) the Company has filed all tax returns and reports required to
have been filed by or for it; including but not limited to those with respect to
income, payroll, property, employee withholding, social security, unemployment,
franchise, excise, use, and sales taxes, and has either paid in full all taxes
that have become due as reflected on any such return or report (including any
interest and penalties with respect thereto shown to be due) or has fully
accrued on its books or has established adequate reserves for all taxes payable
but not yet due; (b) all material information set forth in such returns or
reports is accurate and complete; (c) the Company has paid or made adequate
provision for all taxes, additions to tax, penalties, and interest payable by
the Company; (d) to the best of the Company's Knowledge, no unpaid tax
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deficiency has been asserted against or with respect to the Company by any
taxing authority, and the Company has not received written notice of any such
assertion; (e) the Company has collected or withheld all amounts required to be
collected or withheld by it for any taxes, and to the extent required by law,
all such amounts have been paid to the appropriate governmental agencies or set
aside in appropriate accounts for future payment when due; (f) the Company is in
compliance with, and its records contain all information and documents necessary
to comply with, all applicable information reporting and tax withholding
requirements; (g) the balance sheets contained in the Company Financial
Statements fully and properly reflect, as of the dates thereof, the liabilities
of the Company for all accrued taxes, additions to tax, penalties, and interest;
(h) for periods ending after the date of the most recent Financial Statements,
the books and records of the Company fully and properly reflect its liability
for all accrued taxes, additions to tax, penalties, and interest; (i) the
Company has not granted, nor is it subject to, any waiver of the period of
limitations for the assessment of tax for any currently open taxable period; (j)
the Company has not made or entered into, and holds no asset subject to, a
consent filed pursuant to Section 341(f) of the Code and the regulations
thereunder or a "safe harbor lease" subject to former Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended before the Tax Reform Act of 1986, and
the regulations thereunder; (k) the Company is not required to include in income
any amount for an adjustment pursuant to Section 481 of the Code or the
regulations thereunder; and (l) the Company is not a party to, or obligated
under, any agreement or other arrangement providing for the payment of any
amount that would be an "excess parachute payment" under Section 280G of the
Code.
3.21 Employee Matters.
(a) The Company is not bound by or subject to any
contract, commitment or arrangement with any labor union, and to the Company's
Knowledge, no labor union has requested, sought or attempted to represent any
employees, representatives or agents of the Company. There is no strike or other
labor dispute involving the Company pending nor, to the Company's Knowledge,
threatened, nor is the Company aware of any labor organization activity
involving its employees.
(b) The Company is not aware that any officer or
employee intends to terminate his or her employment with the Company, nor does
the Company have any present intention to terminate the employment of any of its
officers or employees. Schedule 3.21(b) identifies all employees and consultants
of the Company and the title, term (if other than at will) and compensation of
each.
(c) After due inquiry, to the Company's Knowledge,
the Company (i) is in full compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment, and
wages and hours; (ii) is in full compliance with all of its obligations under
applicable workers compensation laws, rules, and regulations; and (iii) is not
engaged in any unfair labor practice.
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(d) To the Company's Knowledge, no current employee,
director or officer has been indicted or convicted of a felony or misdemeanor
(other than traffic violations).
3.22 Environmental Matters.
(a) During the period that the Company has leased or
owned its properties or owned or operated any facilities, there have been no
disposals, releases or threatened releases of Hazardous Materials (as defined
below) on, from or under such properties or facilities. The Company has no
Knowledge of any presence, disposals, releases or threatened releases of
Hazardous Materials on, from or under any of such properties or facilities,
which may have occurred prior to the Company having taken possession of any of
such properties or facilities. For purposes of this Agreement, the terms
"disposal", "release", and "threatened release" shall have the definitions
assigned thereto by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. ss. 9601 et seq., as amended ("CERCLA"). For
the purposes of this Section, "Hazardous Materials" shall mean any hazardous or
toxic substance, material or waste which is or becomes prior to the Closing
regulated under, or defined as a "hazardous substance", "pollutant",
"contaminant", "toxic chemical", "hazardous material", "toxic substance", or
"hazardous chemical" under (i) CERCLA; (ii) the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001 et seq.; (iii) the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; (iv) the Toxic
Substances Control Act, 15 U.S.C. Section 2601 et seq.; (v) the Occupational
Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq.; (vi) regulations
promulgated under any of the above statutes; or (vii) any applicable state or
local statute, ordinance, rule, or regulation that has a scope or purpose
similar to those statutes identified above.
(b) None of the Company's properties or facilities is
in material violation of any federal, state, or local law, ordinance,
regulation, or order relating to industrial hygiene or to the environmental
conditions on, under or about such properties or facilities, including, but not
limited to, soil and ground water condition. During the time that the Company
has owned or leased its properties and facilities, neither the Company nor, to
the Company's Knowledge, any third party, has used, generated, manufactured or
stored on, under or about such properties or facilities or transported to or
from such properties or facilities any Hazardous Materials.
(c) During the time that the Company has owned or
leased its properties and facilities, there has been no litigation brought or
threatened against the Company, or any settlement reached by the Company with,
any party or parties alleging the presence, disposal, release or threatened
release of any Hazardous Materials on, from or under any of such properties or
facilities.
(d) During the period that the Company has owned or
leased its properties and facilities, no Hazardous Materials have been
transported from such properties or facilities to any site or facility now
listed or proposed for listing on the National Priorities List, at 40 C.F.R.
Part 300, or any list with a similar scope or purpose published by any state
authority.
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3.23 Interested Party Transactions. To the Company's
Knowledge,
(a) no officer, employee or director of the Company
or any "affiliate" or "associate" (as those terms are defined in Rule 405 of the
1933 Act) has had, either directly or indirectly, a material interest in: (i)
any person or entity which purchases from or sells, licenses or furnishes to the
Company any goods, property, technology, intellectual or other property rights
or services; or (ii) any contract or agreement to which the Company is a party
or by which it may be bound or affected.
(b) the Company has no indebtedness to or with an
officer, employee, director, affiliate or associate.
3.24 Use of Proceeds. The Company shall use the proceeds from
the sale of the Purchased Shares for the purposes identified on Schedule 3.24.
3.25 Disclosure. This Agreement and the Schedules and Exhibits
hereto (when read together) do not contain any untrue statement of a material
fact and do not omit to state a material fact necessary to make the statements
therein or herein not misleading. To the Company's Knowledge, the financial
projections contained in the Business Plan, attached hereto as Schedule 3.25 (as
supplemented through the date hereof, the "Business Plan"), fairly present its
management's good faith estimates as of the date of the Business Plan and as of
the date of this Agreement.
3.26 Real Property Holding Corporation Status. Since its
inception, the Company has not been a "United States real property holding
corporation", as defined in Section 897(c)(2) of the Code, and in Section
1.897-2(b) of the Treasury Regulations issued thereunder (the "Regulations"),
and the Company has filed with the Internal Revenue Service all statements, if
any, with its United States income tax returns which are required under Section
1.897- 2(h) of the Regulations.
3.27 Tax Elections. The Company has not elected pursuant to
the Code, to be treated as an "S" corporation or a collapsible corporation
pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any
other elections pursuant to the Code (other than elections which relate solely
to matters of accounting, depreciation or amortization) which would have a
material affect on the Company, its financial condition, its business as
presently conducted or presently properties or material assets.
3.28 No Material Undisclosed Liabilities.
(a) There is no liability or obligation of the
Company of any nature, whether absolute, accrued, contingent, or otherwise, in
the amount of $5,000 or more individually, or $10,000 or more in the aggregate,
other than:
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(i) the liabilities and obligations that are
fully reflected, accrued or reserved against on the balance sheets of the
Financial Statements, for which the reserves are appropriate and reasonable, or
incurred in the ordinary course of business and consistent with past practices;
(ii) the contractual obligations disclosed
on Schedules 3.11; and
(iii) the litigation and claims described on
Schedule 3.7.
(b) The Company is not signatory to, and is not in
any manner a guarantor, endorser, assumptor or otherwise primarily or
secondarily liable for or responsible for the payment of, any notes payable or
other obligations other than those set forth in the Financial Statements.
3.29 Accounts Receivable. The accounts receivable of the
Company reflected on the Financial Statements or otherwise arising in the
ordinary course of business after the date hereof reflect valid sales of
products and services made on or before such date.
3.30 Non-Disclosure and Non-Compete Agreements. Each employee,
officer, consultant and contractor of the Company identified on Schedule 3.30
has entered into and executed a Non-Disclosure and Non-Compete Agreement in the
form attached to this Agreement as Exhibit B or an employment or consulting
agreement containing substantially similar terms.
3.31 Employment Agreements. Each founder of the Company
identified on Schedule 3.31 has entered into and executed an Employment
Agreement in the form attached to this Agreement as Exhibit D or an employment
or consulting agreement containing substantially similar terms.
4. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF
INVESTOR. The Investor hereby represents and warrants to, and agree with, the
Company that:
4.1 Authorization. This Agreement constitutes the Investor's
valid and legally binding obligation, enforceable in accordance with its terms
except as may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting the
enforcement of creditors' rights generally and (ii) the effect of rules of law
governing the availability of equitable remedies. The Investor represents that
it has full power and authority to enter into this Agreement and the Related
Agreements.
4.2 Purchase for Own Account. The Purchased Shares to be
purchased by the Investor hereunder will be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
public resale or distribution thereof within the meaning of the Act, and the
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. The Investor also represents that it has not
been formed for the specific purpose of acquiring the Purchased Shares.
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4.3 Disclosure of Information. The Investor has received or
has had full access to all the information it considers necessary or appropriate
to make an informed investment decision with respect to the Purchased Shares to
be purchased by the Investor under this Agreement. The Investor further has had
an opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering of the Purchased Shares and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify any
information furnished to the Investor or to which the Investor had access. The
foregoing, however, does not in any way limit or modify the representations and
warranties made by the Company in Section 3.
4.4 Accredited Investor Status. The Investor is an "accredited
investor" within the meaning of Regulation D promulgated under the Act.
4.5 Investment Experience. The Investor understands that the
acquisition of the Purchased Shares involves substantial risk. The Investor: (i)
has experience as an investor in securities of companies in the development
stage and acknowledges that it is able to fend for itself, can bear the economic
risk of its acquisition of the Purchased Shares and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of this acquisition of the Purchased Shares and protecting its
own interests in connection with this acquisition and/or (ii) has a preexisting
personal or business relationship with the Company and certain of its officers,
directors or controlling persons of a nature and duration that enables the
Investor to be aware of the character, business acumen and financial
circumstances of such persons.
4.6 Restricted Securities. The Investor understands that the
Purchased Shares are characterized as "restricted securities" under the Act
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under the Act and applicable rules and
regulations thereunder such securities may be resold without registration under
the Act only in certain limited circumstances. In this connection, the Investor
represents that it is familiar with Rule 144 of the rules and regulations
promulgated under the Act ("Rule 144"), as presently in effect, and understands
the resale limitations imposed thereby and by the Act. The Investor understands
that the Company is under no obligation to register any of the securities sold
hereunder except as provided in the Investor Rights Agreement. The Investor
understands that no public market now exists for any of the Purchased Shares and
that it is uncertain whether a public market will ever exist for the Purchased
Shares or the Conversion Shares.
4.7 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, the Investor further agrees not to
make any disposition of all or any portion of the Purchased Shares or the
Conversion Shares unless and until:
(a) there is then in effect a registration statement
under the 1933 Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
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(b) (i) the Investor shall have notified the Company
of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition, and (ii)
the Investor shall have furnished the Company, at the expense of the Investor or
its transferees, with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such securities
under the Act.
Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be required:
(i) for any transfer of any Purchased Shares or Conversion Shares in compliance
with Rule 144 or Rule 144A; or (ii) for any transfer of any Purchased Shares or
Conversion Shares by the Investor to (A) a partner or member of such Investor,
(B) a retired partner of such Investor who retires after the date hereof, or (C)
the estate of any such partner or member; provided that in each of the foregoing
cases the transferee agrees in writing to be subject to the terms of this
Section 4 (other than Section 4.4) to the same extent as if the transferee were
an original Investor hereunder.
4.8 Legends. It is understood that the certificates evidencing
the Purchased Shares and the Conversion Shares will bear the legends set forth
below:
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER
THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
(b) Any legend required by state securities laws,
including a legend substantially in the form of the following:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE: (1) ARE
CONVERTIBLE INTO SHARES OF COMMON STOCK OF THE COMPANY AT
THE OPTION OF THE HOLDER AT ANY TIME PRIOR TO AUTOMATIC
CONVERSION THEREOF; AND (2) AUTOMATICALLY CONVERT INTO
COMMON STOCK OF THE COMPANY IN THE EVENT OF A PUBLIC
OFFERING MEETING CERTAIN REQUIREMENTS OR UPON CERTAIN
CONSENTS OF THE HOLDERS OF THE COMPANY'S PREFERRED STOCK
ALL PURSUANT TO AND UPON THE TERMS AND CONDITIONS SPECIFIED
IN THE COMPANY'S CERTIFICATE OF DESIGNATION. A COPY OF SUCH
CERTIFICATE OF DESIGNATION MAY BE OBTAINED, WITHOUT CHARGE,
AT THE COMPANY'S PRINCIPAL OFFICE.
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The legend set forth in (a) above shall be removed by the Company from
any certificate evidencing Purchased Shares or Conversion Shares upon delivery
to the Company of an opinion by counsel, reasonably satisfactory to the Company,
that a registration statement under the Act is at that time in effect with
respect to the legended security or that such security can be freely transferred
in a public sale without such a registration statement being in effect and that
such transfer will not jeopardize the exemption or exemptions from registration
pursuant to which the Company issued the Purchased Shares or Conversion Shares.
5. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of
the Investor to the Company under this Agreement are subject to the fulfillment
or waiver, on or before the Closing, of each of the following conditions, the
waiver of which shall not be effective against the Investor if the Investor does
not consent to such waiver, which consent may be given by written communication
to the Company or its counsel:
5.1 Representations and Warranties True. Each of the
representations and warranties of the Company contained in Section 3 shall be
true and correct on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the date of the
Closing.
5.2 Due Diligence. The Investor shall have completed, to its
sole satisfaction, its due diligence of the Company.
5.3 Ownership and Nondisclosure Agreement. As provided in
Section 3.8 above, the Company shall have furnished the Investor with copies of
the Ownership and Nondisclosure Agreement signed by each employee, officer,
consultant or contractor of the Company identified on Schedule 3.8.
5.4 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing and
shall have obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
5.5 Series A Certificate. The Series A Certificate shall have
been duly adopted by the Company by all necessary corporate action of its Board
of Directors and stockholders, and shall have been duly filed with and accepted
by the Delaware Secretary of State.
5.6 Omitted.
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5.7 Securities Exemptions. The offer and sale of the Purchased
Shares to the Investor pursuant to this Agreement shall be exempt from the
registration requirements of the Act and the registration and/or qualification
requirements of all other applicable state securities laws.
5.8 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor and to the counsel for the Investor, and they shall
each have received all such counterpart originals and certified or other copies
of such documents as they may reasonably request. Such documents shall include
(but not be limited to) the following:
(a) Certified Charter Documents. A copy of the
Certificate of Incorporation, Series A Certificate and Bylaws of the Company (as
amended through the date of the Closing), certified by the Secretary of the
Company as true and correct copies thereof as of the Closing.
(b) Corporate Actions. A copy of the resolutions of
the Board of Directors and the stockholders of the Company evidencing the
approval of the Series A Certificate, the approval of this Agreement, the
Related Agreements, the issuance of the Purchased Shares and the other matters
contemplated hereby, certified by the Secretary of the Company to be true,
complete and correct.
5.9 Ownership of Technology. The Investor shall have received
from the Company all documents and other materials requested by the Investor in
writing for the purpose of examining and determining the Company's rights in and
to any technology, product and Proprietary Assets now used, proposed to be used
in, or necessary to, the Company's business as now conducted and proposed to be
conducted, and the status of the Company's ownership rights in and to all such
technology, products and Proprietary Assets shall be reasonably satisfactory to
the Investor.
5.10 Board of Directors. All appropriate action shall be taken
to ensure that the Company's Board of Directors consists of: G. Mark Miller,
Allison Stollmeyer, Lee C. Hansen and two additional members to be determined
following the Closing.
5.11 Officers' Certificates. The Company shall deliver to the
Investor certificates executed by each of its officers and directors in which
each of them represents that he or she (i) has not made a personal filing or
been an officer or director, partner or member of an entity that has filed an
action seeking protection under the Bankruptcy Code of the United States of
America or analogous law of any jurisdiction not subject to the laws of the
United States of America during the past seven (7) years and (ii) has never been
convicted of any action that is defined as a crime that would adversely affect
the company or its public image or would be required to be disclosed under
Paragraph 401(f) of Regulation 5-K under the Act.
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5.12 No Material Change. There shall have been no material
adverse change in the business, affairs, prospects, operations, properties,
assets or condition of the Company.
5.13 Omitted.
5.14 Investor Rights Agreement. The Company and the Investor
shall have executed and delivered the Investor Rights Agreement in the form
attached to this Agreement as Exhibit D (the "Investor Rights Agreement").
5.15 Co-Sale Agreement. The Company, the stockholders of the
Company named therein and the Investor shall have executed and delivered the
Co-Sale Agreement in the form attached as Exhibit E (the "Co-Sale Agreement").
5.16 Strategic Plan. The Company and the Investor shall have
commenced mutually developing a Strategic Plan for the Company. The Company
covenants and agrees to continue mutual development of the strategic Plan
following Closing. The Strategic Plan shall be inserted in the Company's minute
books for reference and be updated on an annual basis.
5.17 Payment of Expenses. The Company shall have paid the
commissions, fees, costs and expenses identified in Section 7.10 of this
Agreement.
5.18 Employment Agreements. The Company shall have executed
with each of the individuals set forth on Schedule 5.18 (the "Founders")
employment agreements, and stock restriction agreements, in form satisfactory to
the Investor (collectively, the "Employment Agreements").
5.19 Omitted.
5.20 Year 2000 Budget. The Company shall provide the Investor
with operating and capital budgets for the calendar year 2000 which are
acceptable to the Investor.
5.21 D&O Insurance. The Company shall procure and maintain at
all times Directors and Officers Liability Insurance with industry standard
coverage limits for companies that are similar to the Company, but in no event
less than $2,000,000 per occurrence.
5.22 Due Diligence. The Investor shall have completed its due
diligence to its satisfaction as determined in its sole discretion.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations
of the Company to the Investor under this Agreement are subject to the
fulfillment or waiver, on or before the Closing, of each of the following
conditions, the waiver of which shall not be effective against the Company if
the Company does not consent to such waiver, which consent may be given by
written communication to the Investor or its counsel:
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6.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 5 shall be true and correct on
the date of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
6.2 Payment of Purchase Price. The Investor shall have
delivered to the Company one million dollars ($1,000,000) in accordance with the
provisions of Section 2.
6.3 Series A Certificate. The Series A Certificate shall have
been duly adopted by the Company by all necessary corporate action of its Board
of Directors and stockholders, and shall have been duly filed with and accepted
by the Delaware Secretary of State.
6.4 Securities Exemptions. The offer and sale of the Purchased
Shares to the Investor pursuant to this Agreement shall be exempt from the
registration requirements of the Act and the registration and/or qualification
requirements of all other applicable state securities laws.
6.5 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Company and to the Company's legal counsel, and the Company
shall have received all such counterpart originals and certified or other copies
of such documents as it may reasonably request.
6.6 Investor Rights Agreement. The Company and the Investor
shall have executed and delivered the Investor Rights Agreement.
6.7 Co-Sale Agreement. The Company, the stockholders of the
Company named therein and the Investor shall have executed and delivered the
Co-Sale Agreement.
7. MISCELLANEOUS.
7.1 Survival of Warranties. The representations, warranties
and covenants of the Company and the Investor contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investor, its counsel or the Company,
as the case may be.
7.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties.
7.3 Governing Law; Venue; Waiver of Jury Trial. This Agreement
and the Related Agreements shall be governed by and construed under the internal
laws of the State of Delaware, without reference to principles of conflict of
laws or choice of laws. The venue for any claim, controversy or dispute which
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arises between the parties hereto (with respect to this Agreement or any Related
Agreement) shall be the United States District Court for the District of
Delaware (or state court if federal jurisdiction does not apply) and the parties
hereby consent to the jurisdiction of such courts and waive any objection to
such venue. THE PARTIES TO THIS AGREEMENT HEREBY WAIVE THEIR RIGHT TO A TRIAL BY
JURY WITH RESPECT TO DISPUTES ARISING UNDER THIS AGREEMENT AND THE RELATED
AGREEMENTS AND CONSENT TO A BENCH TRIAL WITH THE APPROPRIATE JUDGE ACTING AS THE
FINDER OF FACT.
7.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Headings. The headings and captions used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement. All references in this Agreement to sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.
7.6 Notices. Any notice, request or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or if deposited in the U.S. mail by
registered or certified mail, return receipt requested, postage prepaid, as
follows:
<TABLE>
<CAPTION>
<S> <C>
If to the Investor: Net Value Holdings, Inc.
2 Penn Center Plaza
Suite 605
Philadelphia, PA 19103
Attention: Chairman
with a copy (which shall not constitute notice hereunder) to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, Pennsylvania 19102
Attention: Michael C. Forman, Esq.
If to the Company: AlarmX.com, Inc.
1085 Mission
San Francisco, CA 94103
Attention: President
</TABLE>
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Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the mail in the manner set forth above.
7.8 No Finder's Fees. Neither the Investor, the Company, or
any officer, director, or employee of the Investor or the Company (i) employed
any broker or finder, or (ii) incurred any liability whatsoever, for any
brokerage fees, commissions, or finders' fees in connection with the
transactions contemplated hereby. The Investor agrees to indemnify and to hold
harmless the Company from any liability for any commission or compensation in
the nature of a finders' or broker's fee (and any asserted liability) for which
the Investor or any of its officers, partners, employees, or representatives is
responsible. The Company agrees to indemnify and hold harmless the Investor from
any liability for any commission or compensation in the nature of a finder's or
broker's fee (and any asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
7.9 Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the Related
Agreements or the Series A Certificate, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
7.10 Costs, Expenses. The Company shall pay, or reimburse the
Investor, for all costs and out-of pocket expenses of the Investor incurred in
connection with (i) the Investor's due diligence performed in connection with
its proposed investment in the Company; and (ii) the negotiation, preparation,
execution and delivery of this Agreement, the Related Agreements and the Series
A Certificate (including without limitation, the fees and expenses of counsel to
the Investor), such fees and expenses not to exceed $10,000. The Company shall
also pay its own legal and accounting expenses in connection with the investment
up to a maximum of $5,000.
7.11 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
Any amendment or waiver effected in accordance with this Section 8.10 shall be
binding upon each holder of any Purchased Shares and/or Conversion Shares at the
time outstanding, each future holder of such securities, and the Company.
7.12 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision(s) shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
7.13 Entire Agreement. This Agreement, together with all
exhibits and schedules hereto, constitutes the entire agreement and
understanding of the parties with respect to the subject
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matter hereof and supersedes any and all prior negotiations, correspondence,
agreements, understandings duties or obligations between the parties with
respect to the subject matter hereof.
7.14 Further Assurances. From and after the date of this
Agreement, upon the request of the Investor or the Company, the Company and the
Investor shall execute and deliver such instruments, documents or other writings
as may be reasonably necessary or desirable to confirm and carry out and to
effectuate fully the intent and purposes of this Agreement.
7.15 Mutual Drafting. This Agreement is the result of the
joint efforts of the Company and the Investor, and each provision hereof has
been subject to the mutual consultation, negotiation and agreement of the
parties and there shall be no construction against any party based on any
presumption of the party's involvement in the drafting thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Series A
Convertible Preferred Stock Purchase Agreement as of the date first above
written.
THE COMPANY:
ALARMX.COM, INC.,
a Delaware corporation
By:
----------------------------------
Allison Stollmeyer, President
THE INVESTOR:
NET VALUE HOLDINGS, INC.,
a Delaware corporation
By:
----------------------------------
Andrew P. Panzo, Chairman
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LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
Schedule 3.2(c) Outstanding Warrants, Options and Reserved Shares
Schedule 3.2(d) Outstanding Security Holders
Schedule 3.7 Litigation
Schedule 3.8 Key Employees
Schedule 3.9(a) Ownership of Proprietary Assets
Schedule 3.9(b) Licenses, Other Agreements relating to Proprietary Assets
Schedule 3.11 List of Material Contracts
Schedule 3.15A Year End Financial Statements
Schedule 3.15B Interim Financial Statements
Schedule 3.16 Certain Actions
Schedule 3.17 Activities Since Balance Sheet Date
Schedule 3.18 ERISA Plans
Schedule 3.20 Tax Matters
Schedule 3.21(b) Employee Matters
Schedule 3.24 Use of Proceeds
Schedule 3.25 Business Plan
Schedule 3.30 Employees, Officers, Consultants
Schedule 3.31 Founders
EXHIBITS
Exhibit A Series A Certificate
Exhibit B Form of Ownership and Nondisclosure Agreement
Exhibit C Form of Employment Agreement
Exhibit D Form of Investor Rights Agreement
Exhibit E Form of Co-Sale Agreement
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Exhibit 10.41
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (this "Agreement ") is made and entered
into as of this 14th day of March, 2000, by and between ALARMX.COM, INC., a
Delaware corporation (the "Company") and NET VALUE HOLDINGS, INC., a Delaware
corporation (the "Investor").
RECITALS
A. The Investor has agreed to purchase from the Company, and the
Company has agreed to sell to the Investor, Four Million (4,000,000) shares of
the Company's Series A Convertible Preferred Stock, par value $0.001 per share
(the "Series A Stock"), on the terms and conditions set forth in that certain
Series A Convertible Preferred Stock Purchase Agreement, of even date herewith,
by and between the Company and the Investor (the "Series A Agreement").
Capitalized terms used herein but not otherwise defined shall have the meaning
given such terms in the Series A Agreement.
B. The Series A Agreement provides that the Investor shall be granted
certain information, registration rights and rights of first refusal, all as
more fully set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. INFORMATION RIGHTS.
1.1. Financial Information. The Company covenants and agrees that,
commencing on the date of this Agreement, for so long as the Investor holds any
shares of Series A Preferred Stock and/or shares of Common Stock of the Company
issued upon the conversion of such shares of Series A Preferred Stock, the
Company will:
(a) Annual Reports. Furnish to the Investor, as soon as
practicable and in any event within sixty (60) days after the end of each fiscal
year of the Company, a Balance Sheet as of the end of such fiscal year, a
Statement of Income and a Statement of Cash Flows of the Company for such year,
setting forth in each case in comparative form the figures from the Company's
previous fiscal year (if any), all prepared in accordance with generally
accepted accounting principles and practices and audited by an independent
certified public accountant selected by the Company and acceptable to the
Investor. Draft copies of the annual Balance Sheet, Statement of Income and
Statement of Cash Flows, if any, shall be furnished to the Investor immediately
following their receipt by the Company.
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(b) Quarterly Reports. Furnish to the Investor as soon as
practicable, and in any case within thirty (30) days of the end of each fiscal
quarter of the Company (except the last quarter of the Company's fiscal year),
quarterly and year-to-date unaudited financial statements, including an
unaudited Balance Sheet, an unaudited Statement of Income and an unaudited
Statement of Cash Flows, together with a management report thereon. Management
reports shall include a budget variance analysis and a discussion and analysis
of the related financial statements.
(c) Monthly Reports. Furnish to the Investor within twenty
(20) days of the end of each calendar month, monthly and year-to-date unaudited
financial statements, including an unaudited Balance Sheet, an unaudited
Statement of Income and an unaudited Statement of Cash Flows, together with an
unaudited management report thereon (including a budget variance analysis and
management's discussion and analysis).
(d) Annual Budget and Management Reports . Furnish to the
Investor, as soon as practicable and in any event no later than forty-five (45)
days before the close of each fiscal year of the Company, a management report
and an annual operating plan and budget, prepared on a quarterly basis, for the
next immediate fiscal year, and on a basis consistent with prior periods
(including, among other items, appropriate reserves, accruals and provisions for
income taxes). The Company shall also furnish to the Investor, within a
reasonable time of its preparation, any amendments to the annual budget that
have been prepared at the discretion of or for presentation to the Board. Such
budget shall include underlying assumptions and a qualitative description of the
Company's plan by the Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer or Controller in support of that budget.
(e) Material Events. The Company will notify the Investor, as
soon as possible and in any event within ten (10) days, of (i) the existence and
status of any litigation, pending or threatened, which could, in the event of an
unfavorable outcome, have a material adverse effect upon the financial condition
or results of operations of the Company considered in the aggregate, (ii) any
material change in any material fact or circumstance represented or warranted in
this Agreement and (iii) a default or any event or occurrence which with lapse
of time or notice or both could become a default under the Series A Agreement.
Such notice shall contain a reasonably detailed statement outlining such default
or event, and the Company's proposed response.
(f) Confidentiality. The Investor agrees to hold all
information received pursuant to this Agreement in confidence, and not to use or
disclose any of such information to any third party, except to the extent such
information may be made publicly available by the Company; provided, however,
that the Investor may, in the ordinary course of business, provide the financial
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results of the Company to third parties in the same manner such information is
provided by the Investor with respect to its portfolio companies.
(g) Substitute Financials. In the event the Company fails to
provide the reports required by Section 1.1, the Investor may give the Company
notice requesting immediate delivery of such reports. If the Company fails to
deliver such reports within a two-week period after receipt of such notice from
the Investor, then the Investor, shall have the right and authority, at the
Company's sole expense, to retain the services of attorneys and/or a nationally
recognized accounting firm of its choice (the expense of which shall not exceed
the usual and customary expenses associated with such an audit), to make any
require filings such that the reports are produced to the satisfaction of the
Investor. All fees and costs associated with such actions by Investor shall be
the sole expense of the Company.
(h) Other Information. The Company shall provide such other
financial data and operational information as may reasonably be requested in
writing by the Investor within twenty (20) days after the later of (i) the close
of each calendar month and (ii) the date of the Investor's request. The Company
shall provide to the Investor, promptly upon request, such other information as
the Investor shall reasonably request in order for the preparation of annual,
quarterly and other reports filed by the Investor under the Securities Act of
1933 and the Securities Exchange Act of 1934.
(i) Variance Reports; Certifications. Each of the financial
statements and other reports described in this Section 1.1 shall be accompanied
by a report of the Chief Financial Officer, Chief Accounting Officer or
Controller of the Company explaining any material variances in such financial
statement or report from the Company's operating plan and budget for the quarter
covered and stating that such financial statement or report fairly presents the
financial position and financial results of the Company for the period covered.
(j) Company's Failure to Comply. In the event that the Company
fails to provide any information required by this Section 1.1, it shall
reimburse the Investor for all fees and expenses of attorneys and accountants
incurred in the preparation of such financial statement and management reports
necessary for the Investor to comply with its reporting requirements.
1.2. Inspection Rights. The Company shall permit a designated
representative of the Investor, at the Investor's expense, to visit and inspect
the Company's properties, to examine its books of account, operational records,
and reports and to discuss the business, operations, and financial affairs of
the Company with its respective officers, all at such reasonable times as may be
requested by the Investor. The Company will provide the Investor's
representatives with any additional information, opinions, certifications, and
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documents, in addition to those herein mentioned, relating to the operation of
the Company as may be reasonably requested.
1.3. Termination of Certain Rights. The Company's obligations under
Sections 1.1 and 1.2 above will terminate upon (a) the consummation of a
Qualifying IPO (as defined in Section 5(b) of the Company's Series A
Certificate) or (b) a consolidation or merger of the Company with or into any
other corporation in which the holders of record of the Company's outstanding
shares of stock immediately before such consolidation or merger hold (by virtue
of securities issued as consideration in such transaction or otherwise) less
than a majority of the voting power of the surviving corporation of such
consolidation or merger, or the sale of all or substantially all of the assets
of the Company (a "Change of Control Event"). After a Qualifying IPO, the
Company shall provide the Investor with all reports normally provided to its
shareholders.
1.4. Rule 144A Information, PORTAL. At all times during which the
Company is neither subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), nor
exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, provide
in written form, upon the written request of the Investor, or a prospective
purchaser of securities of the Company from the Investor, all information
required by Rule 144A(d)(4)(i) of the Rules and Regulations promulgated under
the Securities Act (the "144A Information"); the Company further agrees, upon
written request, to cooperate with and assist the Investor or any member of the
National Association of Securities Dealers, Inc. system for Private Offerings
Resales and Trading through Automated Linkages ("PORTAL") in applying to
designate and thereafter maintaining the eligibility of the Company's securities
for trading through PORTAL. With respect to each, the Company's obligations
under this Section 1.4 shall at all times be contingent upon the Investor's
obtaining from a prospective purchaser an agreement to use its commercially
reasonable efforts to safeguard the 144A Information from disclosure to anyone
other than employees of the prospective purchaser who require access to the 144A
Information for the sole purpose of evaluating its purchase of the Company's
securities.
2. REGISTRATION RIGHTS.
2.1. Definitions. For purposes of this Section 2.1:
(a) Registration. The terms "register", "registered", and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.
(b) Registrable Securities. The term "Registrable Securities"
means: (i) all the shares of Common Stock of the Company issued or issuable upon
the conversion of any shares of Series A Stock issued under the Series A
Agreement that are now owned or may hereafter be acquired by the Investor or the
Investor's permitted successors and assigns; and (ii) any shares of Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, all such
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shares of Common Stock described in clause (i) of this Section 2.1(b), excluding
in all cases, however, any Registrable Securities sold by a person in a
transaction in which rights under this Section 2.1 are not assigned in
accordance with this Agreement or any Registrable Securities sold to the public
or sold pursuant to Rule 144 promulgated under the Securities Act.
(c) Registrable Securities Then Outstanding. The number of
shares of "Registrable Securities Then Outstanding" shall mean the number of
shares of Common Stock which are Registrable Securities and are then (i) issued
and outstanding or (ii) issuable pursuant to the exercise or conversion of then
outstanding and then exercisable options, warrants or convertible securities.
(d) Holder. The term "Holder" means any person owning of
record Registrable Securities that have not been sold to the public or pursuant
to Rule 144 promulgated under the Securities Act or any assignee of record of
such Registrable Securities to whom rights under this Section 2 have been duly
assigned in accordance with this Agreement; provided, however, that for purposes
of this Agreement, a record holder of shares of Series A Stock convertible into
such Registrable Securities shall be deemed to be the Holder of such Registrable
Securities; provided, further, that the Company shall in no event be obligated
to register shares of Series A Stock, and that Holders of Registrable Securities
will not be required to convert their shares of Series A Stock into Common Stock
in order to exercise the registration rights granted hereunder, until
immediately before the closing of the offering to which the registration
relates.
(e) Form S-3. The term "Form S-3" means such form under the
Securities Act as is in effect on the date hereof or any successor registration
form under the Securities Act subsequently adopted by the SEC which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
(f) Securities Act. The term "Securities Act" means the
Securities Act of 1933, as amended.
(g) SEC. The term "SEC" or "Commission" means the U.S.
Securities and Exchange Commission.
2.2. Demand Registration.
(a) Request by Holders. If the Company shall receive at any
time after ninety (90) days after the effective date of the Company's initial
public offering of its securities pursuant to a registration filed under the
Securities Act, a written request from the Holders of at least a majority of the
Registrable Securities Then Outstanding that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities pursuant to this Section 2.2 then the Company shall, within ten (10)
business days of the receipt of such written request, give written notice of
such request ("Request Notice") to all Holders, and effect, as soon as
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practicable, the registration under the Securities Act of all Registrable
Securities which Holders request to be registered and included in such
registration by written notice given such Holders to the Company within twenty
(20) days after receipt of the Request Notice, subject only to the limitations
of this Section 2.2.
(b) Underwriting. If the Holders initiating the registration
request under this Section 2.2 ("Initiating Holders"), intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
then they shall so advise the Company as a part of their request made pursuant
to this Section 2.2 and the Company shall include such information in the
written notice referred to in Section 2.2(a). In such event, the right of any
Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the managing underwriter or
underwriters selected for such underwriting by the Company and a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
Section 2.2 to the contrary, if the underwriter(s) advise(s) the Company in
writing that marketing factors require a limitation of the number of securities
to be underwritten then the Company shall so advise all Holders of Registrable
Securities which would otherwise be registered and underwritten pursuant hereto,
and the number of Registrable Securities that may be included in the
underwriting shall be reduced as required by the underwriter(s) and allocated
among the Holders of Registrable Securities on a pro rata basis according to the
number of Registrable Securities Then Outstanding held by each Holder requesting
registration (including the Initiating Holders); provided, however, that the
number of shares of Registrable Securities to be included in such underwriting
and registration shall not be reduced unless all other securities of the Company
are first entirely excluded from the underwriting and registration. Any
Registrable Securities excluded and withdrawn from such underwriting shall be
withdrawn from the registration.
(c) Maximum Number of Demand Registrations. The Company is
obligated to effect only two (2) Demand Registration pursuant to this Section
2.2.
(d) Deferral. Notwithstanding anything to the contrary
contained in the preceding subsection (c), if the Company shall furnish to
Holders requesting the filing of a registration statement pursuant to this
Section 2.2, a certificate signed by the President or Chief Executive Officer of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
stockholders for such registration statement to be filed and it is, therefore,
essential to defer the filing of such registration statement, then the Company
shall have the right to defer such filing for a period of not more than 120 days
after receipt of the request of the Initiating Holders; provided, however, that
the Company may not utilize this right more than once in any twelve (12) month
period.
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(e) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 2.2, including without limitation all
registration and qualification fees, printers' and accounting fees, fees and
disbursements of counsel for the Company and the reasonable fees and
disbursements of one counsel for the selling Holders (excluding underwriters'
discounts and commissions), shall be borne by the Company. Each Holder
participating in a registration pursuant to this Section 2.2 shall bear such
Holder's proportionate share (based on the total number of shares sold in such
registration other than for the account of the Company), of all discounts,
commissions or other amounts payable to underwriters or brokers in connection
with such offering. Notwithstanding the foregoing, the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to this Section 2.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities requested to
be registered; provided however, that if at the time of such withdrawal, the
Holders have learned of a material adverse change in the condition, business, or
prospects of the Company not known to the Holders at the time of their request
for such registration and have withdrawn their request for registration with
reasonable promptness after learning of such material adverse change, then the
Holders shall not be required to pay any of such expenses and shall retain their
rights pursuant to this Section 2.2.
2.3. Piggyback Registrations.
(a) Registration Rights. The Company shall notify all Holders
of Registrable Securities in writing at least thirty (30) days prior to filing
any registration statement under the Securities Act for purposes of effecting a
public offering of securities of the Company, including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but specifically excluding registration statements relating to: (i) any
registration under Section 2.2 or Section 2.4 of this Agreement; or (ii) any
employee benefit plan, corporate reorganization or acquisition or other
transactions under Rule 145 of the Securities Act of 1933, and will afford each
such Holder an opportunity to include in such registration statement all or any
part of the Registrable Securities then held by such Holder. Each Holder
desiring to include in any such registration statement all or any part of the
Registrable Securities held by such Holder shall, within twenty (20) days after
receipt of the above-described notice from the Company, so notify the Company in
writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(b) Underwriting. If a registration statement under which the
Company gives notice under this Section 2.3 is for an underwritten offering,
then the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
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Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determines in good faith that marketing factors require a limitation
of the number of shares to be underwritten, then the managing underwriter may
exclude shares (including Registrable Securities) from the registration and the
underwriting, and the number of shares that may be included in the registration
and the underwriting shall be allocated, first, to any holders of registration
rights who exercised such rights to cause the Company to file the registration
statement; second, to the Company, and third, to each of the Holders and any
other holders of similar "piggyback" registration rights ("Other Holders")
requesting inclusion of their Registrable Securities in such registration
statement on a pro rata basis based on the total number of Registrable
Securities then held by each such Holder and Other Holders; provided, however,
that the right of the underwriters to exclude shares (including Registrable
Securities) from the registration and underwriting as described above shall be
restricted so that (i) the number of Registrable Securities included in any such
registration is not reduced below ten percent (10%) of the shares included in
the registration, except for a registration relating to the Company's initial
public offering from which all Registrable Securities shall be excluded; and
(ii) all shares that are not Registrable Securities and are held by persons who
are employees or directors of the Company (or any subsidiary of the Company)
shall first be excluded from such registration and underwriting before any
Registrable Securities are so excluded. If any Holder disapproves of the terms
of any such underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company and the underwriter, delivered at least ten (10) business
days prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration. For any Holder which is a partnership or
corporation, the partners, retired partners and stockholders of such Holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "Holder", and any pro rata reduction with respect to such "Holder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such "Holder", as defined in this
sentence.
(c) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 2.3 (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and ""blue
sky"" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company and reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company.
2.4. Form S-3 Registration. In case the Company shall receive from any
Holder or Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, then the Company will:
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(a) Notice. Promptly give written notice of the proposed
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable Securities; and
(b) Registration. As soon as practicable, effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within twenty (20) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance pursuant
to this Section 2.4:
(i) if Form S-3 is not available for such offering by
the Holders; or
(ii) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) Expenses. Subject to the foregoing, the Company shall file
a Form S-3 registration statement covering the Registrable Securities and other
securities so requested to be registered pursuant to this Section 2.4 as soon as
practicable after receipt of the request or requests of the Holders for such
registration. The Company shall pay all expenses incurred in connection with
each registration requested pursuant to this Section 2.4, (excluding
underwriters' or brokers' discounts and commissions), including without
limitation all filing, registration and qualification, printers' and accounting
fees and the reasonable fees and disbursements of one counsel for the selling
Holder or Holders and counsel for the Company.
(d) Not Demand Registration. Form S-3 registrations shall not
be deemed to be a demand registration as described in Section 2.2 above.
2.5. Obligations of the Company. Whenever required, upon request in
accordance with this Section 2.5, to effect the registration of any Registrable
Securities under this Agreement, the Company shall, as expeditiously and as
reasonably as possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its reasonable efforts to
cause such registration statement to become effective, and, upon the request of
the Holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
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provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration.
(d) Use its reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
"blue sky" laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated as of such date, of
the counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities and (ii) a
"comfort" letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
2.6. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2.2, 2.3 or
2.4 that the selling Holders shall furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and
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the intended method of disposition of such securities as shall be required to
timely effect the registration of their Registrable Securities.
2.7. Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 2.
2.8. Indemnification. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) By the Company. To the extent permitted by law, the
Company will indemnify and hold harmless each Holder, the partners, officers and
directors of each Holder, any underwriter (as defined in the Securities Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended, (the "1934 Act"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement
of a material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto;
(ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading, or
(iii) any violation or alleged violation by the
Company of the Securities Act, the 1934 Act, any federal or state securities law
or any rule or regulation promulgated under the Securities Act, the 1934 Act or
any federal or state securities law in connection with the offering covered by
such registration statement; and the Company will reimburse each such Holder,
partner, officer or director, underwriter or controlling person for any legal or
other expenses reasonably incurred by them, as incurred, in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 2.8(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Holder, partner,
officer, director, underwriter or controlling person of such Holder, including
without limitation, any information furnished by any Holder of the Company
pursuant to Section 2.6 hereof.
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(b) By Selling Holders . To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the Securities
Act, any underwriter and any other Holder selling securities under such
registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder within the meaning of the
Securities Act or the 1934 Act (collectively "Company Indemnitee"), against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such Company Indemnitee may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will reimburse any legal or other expenses reasonably
incurred by the Company or any such Company Indemnitee in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 2.8(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; and provided, further,
that the total amounts payable in indemnity by a Holder under this Section
2.8(b) in respect of any Violation shall not exceed the gross proceeds received
by such Holder in the registered offering out of which such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party
under this Section 2.8 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 2.8,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 2.8, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 2.8.
(d) Defect Eliminated in Final Prospectus. The foregoing
indemnity agreement of the Holders is subject to the conditions that, insofar as
it relates to: (i) any Violation made in a prospectus in which the Company is
selling securities; and (ii) any Violation made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
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Prospectus"), such indemnity agreement shall not inure to the benefit of the
Company if a copy of the Final Prospectus was furnished to the Holders and was
not furnished by the Company to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to this
Section 2.8, but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding the fact that this Section 2.8
provides for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any such selling Holder or any
such controlling person in circumstances for which indemnification is provided
under this Section 2.8; then, and in each such case, the Company and such Holder
will contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so that
such Holder is responsible for the portion represented by the percentage that
the public offering price of its Registrable Securities offered by and sold
under the registration statement bears to the public offering price of all
securities offered by and sold under such registration statement, and the
Company and other selling Holders are responsible for the remaining portion;
provided, however, that, in any such case, (a) no such Holder will be required
to contribute any amount in excess of the public offering price of all such
Registrable Securities offered and sold by such Holder pursuant to such
registration statement; and (b) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
(f) Survival. The obligations of the Company and Holders under
this Section 2.8 shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.
2.9. "Lock-up" Agreement. Each Holder hereby agrees that it shall not,
to the extent requested by the Company or an underwriter of securities of the
Company, sell or otherwise transfer or dispose of any Registrable Securities or
other shares of stock of the Company then owned by such Holder (other than to
donees or partners of the Holder who agree to be similarly bound) for up to one
hundred eighty (180) days following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however,
that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers securities to be sold on its
behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
(b) all officers, directors then holding Common Stock and all
holders of more than one percent (1%) of the outstanding capital stock of the
Company enter into similar agreements.
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In order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
2.10. Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date of the first registration under the Securities Act
filed by the Company for an offering of its securities to the general public;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the 1934 Act (at any time after it has become subject to such
reporting requirements); and
(c) So long as a Holder owns any Registrable Securities,
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the 1934 Act (at any time after it has become
subject to the reporting requirements of the 1934 Act), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company as a Holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing a Holder to sell any such
securities without registration (at any time after the Company has become
subject to the reporting requirements of the 1934 Act).
2.11. Termination of the Company's Obligations. The Company shall have
no obligations pursuant to Sections 2.2 through 2.4 with respect to: (a) any
request or requests for registration made by any Holder on a date more than five
(5) years after the closing date of a Qualifying IPO; (b) any Registrable
Securities proposed to be sold by a Holder in a registration pursuant to Section
2.2, 2.3 or 2.4 if, in the opinion of counsel to the Company, all such
Registrable Securities proposed to be sold by a Holder may be sold in a three
(3) month period without registration under the Securities Act pursuant to Rule
144 under the Securities Act, or under any replacement rule promulgated by the
SEC permitting the resale of restricted securities without the necessity of a
registration statement; or (c), in connection with any particular registration
undertaken by the Company, any Holder who fails to provide promptly the Company
such information as the Company may reasonably request at any time to enable the
Company to comply with any applicable law or regulation or to facilitate
preparation and filing of said registration.
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2.12. Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of at least sixty-six and two-thirds percent (66-2/3%) of the
Registrable Securities Then Outstanding, enter into any agreement with any
holder or prospective holder of any securities of the Company which would allow
such holder or prospective holder (a) to include such securities in any
registration filed under Section 2.2 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Registrable Securities of the Holders which is
included, or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the earlier of either
of the dates set forth in Section 2.2(a), or within one hundred twenty (120)
days of the effective date of any registration effected pursuant to Section 2.2.
3. PREEMPTIVE RIGHT.
3.1. General. Each Holder and any party to whom such Holder's rights
under this Section 3.1 have been duly assigned in accordance with Section 4.1(b)
(each such Holder or assignee being hereinafter referred to as a "Rights
Holder") shall have the right of first refusal to purchase such Rights Holder's
Pro Rata Share (as defined below), of all (or any part) of any "New Securities"
(as defined in Section 3.2) that the Company may from time to time issue after
the date of this Agreement. A Rights Holder's "Pro Rata Share" for purposes of
this right of first refusal shall mean a fraction, the numerator of which is (a)
the number of Registrable Securities as to which such Rights Holder is the
Holder (or is deemed to be the Holder under Section 2.1(d)), and the denominator
of which is (b) the number of shares of common stock of the Company equal to the
sum of (i) the total number of shares of common stock of the Company then
outstanding plus (ii) the total number of shares of common stock of the Company
into which all then outstanding shares of Series A Stock of the Company are then
convertible plus (iii) the total number of shares of common stock of the Company
issuable upon the conversion of any other capital stock of the Company then
convertible and upon the exercise of any outstanding options, warrants or rights
issued by the Company.
3.2. New Securities. "New Securities" shall mean any common stock or
preferred stock of the Company, whether now authorized or not, and rights,
options or warrants to purchase such common stock or preferred stock, and
securities of any type whatsoever that are, or may become, convertible or
exchangeable into such common stock or preferred Stock; provided, however, that
the term "New Securities" does not include:
(a) up to 4,200,000 shares of the Company's Common Stock (or
options or warrants therefore) issued to employees, officers, directors,
contractors, advisors or consultants of the Company pursuant to incentive
agreements or plans approved by the Board of Directors of the Company, and
including in such number all Warrant Securities (as defined below);
(b) any shares of Series A Stock issued under the Series A
Agreement, as such agreement may be amended;
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(c) any securities issuable upon conversion of or with respect
to any then outstanding shares of Series A Stock of the Company or Common Stock
or other securities issuable upon conversion thereof;
(d) any securities issuable upon exercise of any options,
warrants or rights to purchase any securities of the Company outstanding on the
date of this Agreement ("Warrant Securities"), and any securities issuable upon
the conversion of any Warrant Securities;
(e) shares of the Company's Common Stock or Series A Stock
issued in connection with any stock split or stock dividend or similar event;
(f) securities offered by the Company to the public pursuant
to a registration statement filed under the Securities Act; or
(g) securities issued pursuant to the acquisition of another
corporation or entity by the Company by consolidation, merger, purchase of all
or substantially all of the assets, or other reorganization in which the Company
acquires, in a single transaction or series of related transactions, all or
substantially all of the assets of such other corporation or entity or fifty-one
percent (51%), or more of the voting power of such other corporation or entity
or fifty-one percent (51%), or more of the equity ownership of such other
entity, provided that, such acquisition was approved by (i) the Company's
Series A Director (as defined below) or (ii) by holders of a majority of the
outstanding shares of Series A Stock.
3.3. Procedures. In the event that the Company proposes to undertake an
issuance of New Securities, it shall give to each Rights Holder written notice
of its intention to issue New Securities (the "Notice"), describing the type of
New Securities and the price and the general terms upon which the Company
proposes to issue such New Securities. Each Rights Holder shall have ten (10)
days from the date of mailing of any such Notice to agree in writing to purchase
such Rights Holder's Pro Rata Share of such New Securities for the price and
upon the general terms specified in the Notice by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased (not
to exceed such Rights Holder's Pro Rata Share). If any Rights Holder fails to so
agree in writing within such ten (10) day period to purchase such Rights
Holder's full Pro Rata Share of an offering of New Securities (a "Nonpurchasing
Holder"), then such Nonpurchasing Holder shall forfeit the right hereunder to
purchase that part of his Pro Rata Share of such New Securities that he did not
so agree to purchase and the Company shall promptly give each Rights Holder who
has timely agreed to purchase his full Pro Rata Share of such offering of New
Securities (a "Purchasing Holder") written notice of the failure of any
Nonpurchasing Holder to purchase such Nonpurchasing Rights Holder's full Pro
Rata Share of such offering of New Securities (the "Overallotment Notice"). Each
Purchasing Holder shall have a right of overallotment such that such Purchasing
Holder may agree to purchase a portion of the Nonpurchasing Holders' unpurchased
Pro Rata Shares of such offering on a pro rata basis according to the relative
Pro Rata Shares of the Purchasing Rights Holders, at any time within five (5)
days after receiving the Overallotment Notice.
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3.4. Failure to Exercise. To the extent that the Rights Holders fail to
exercise in full the right of first refusal within such ten (10) plus five (5)
day period, then the Company shall have 120 days thereafter to sell the New
Securities with respect to which the Rights Holders' rights of first refusal
hereunder were not exercised, at a price and upon general terms not materially
more favorable to the purchasers thereof than specified in the Company's Notice
to the Rights Holders. In the event that the Company has not issued and sold the
New Securities within such 120 day period, then the Company shall not thereafter
issue or sell any New Securities without again first offering such New
Securities to the Rights Holders pursuant to this Section 3.4. If any Rights
Holder fails to exercise its right of first refusal with respect to any New
Securities in full (but not including any right of overallotment), and such New
Securities are either purchased by other Rights Holders or issued and sold in
full by the Company under the terms of this Section, such Rights Holder shall
have no further right of first refusal with respect to New Securities.
3.5. Termination. This right of first refusal shall terminate (a) upon
consummation of a Qualifying IPO, or (b) upon a merger, consolidation or sale of
the stock or substantially all of the assets of the Company in which the
shareholders of the Company immediately prior to such transaction do not retain
a majority of voting power in the surviving entity( a "Change of Control
Event").
4. ASSIGNMENT AND AMENDMENT.
4.1. Assignment. Notwithstanding anything herein to the contrary:
(a) Information Rights. The rights of the Investor under
Section 1 hereof may be assigned only to (i) a Related Party (as defined below)
or (ii) a party who acquires from the Investor (or the Investor's permitted
assigns) at least ten percent (10%) of the Series A Stock or the equivalent
number (on an as-converted basis) of shares of Common Stock of the Company
issued upon the conversion of such shares of Series A Stock.
(b) Registration Rights; Preemptive Rights. The registration
rights of a Holder under Section 2 hereof and the preemptive rights of a Rights
Holder under Section 3 hereof may be assigned only to a party who acquires at
least ten percent (10%), of the Series A Stock or an equivalent number (on an
as-converted basis) of Registrable Securities issued upon conversion thereof;
provided, however, that no party may be assigned any of rights under Section 4.1
unless the Company is given written notice by the assigning party at the time of
such assignment stating the name and address of the assignee and identifying the
securities of the Company as to which the rights in question are being assigned;
and provided, further that any such assignee shall receive such assigned rights
subject to all the terms and conditions of this Agreement, including without
limitation the provisions of this Section 4.1.
4.2. Amendment of Rights. Any provision of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Holders holding shares of Series A Stock or
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Conversion Stock representing or convertible into a majority of all the
Investor's Shares (as defined below) as of the date of any proposed amendment.
As used herein, the term "Investor's Shares" shall mean the shares of Common
Stock then issuable upon conversion of all then outstanding shares of Series A
Stock issued under the Series A Agreement plus all then outstanding shares of
Conversion Stock that were issued upon the conversion of any shares of Series A
Stock issued under the Series A Agreement. Any amendment or waiver effected in
accordance with this Section 4.2 shall be binding upon the Investor, each
Holder, each permitted successor or assignee of the Investor or Holder and the
Company.
4.3. Related Party. As used herein, the term "Related Party" with
respect to any Holder means (i) any person or entity that, directly or
indirectly, through one or more intermediaries, has voting control of, or is
under common voting control with, such Holder; or (ii) a trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners or owners
or persons or entities holding controlling interest of which consist of any
Holder and/or such other persons or entities referred to in the immediately
preceding clause (i); and (iii) any Holders' current partners, stockholders or
members as the case may be, pro rata in accordance with the current distribution
provision of such entities charter documents.
5. COVENANTS OF THE COMPANY.
5.1. Board of Directors; Meetings.
(a) So long as the Investor or its assignee holds shares of
Series A Preferred Stock, the Company will use its best efforts to cause
promptly the election to its Board of Directors and maintenance in office two
(2) person designated by the Investor (the "Investor Director"). The Company
shall cause the Board of Directors to meet at least once every fiscal quarter.
(b) Special Voting Rights. The Company shall not, without the
approval, by vote or written consent, of the Investor Directors:
(i) amend its Certificate of Incorporation in any
manner that would alter or change any of the rights, preferences, privileges or
restrictions of the Series A Preferred Stock;
(ii) reclassify any outstanding shares of securities
of the Company into shares having rights, preferences or privileges senior to or
on parity with the Series A Preferred Stock;
(iii) authorize or issue any additional shares of
capital stock;
(iv) merge or consolidate with or into any
corporation;
(v) sell all or substantially all the Company's
assets in a single transaction or series of related transactions;
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(vi) liquidate or dissolve;
(vii) declare or pay any dividends (other than
dividends payable solely in shares of Common Stock) on or declare or make any
other distribution (other than Permitted Repurchases), directly or indirectly,
on account of any shares of Common Stock now or hereafter outstanding;
(viii) redeem or repurchase any outstanding shares of
the Company's capital stock (other than Permitted Repurchases);
(ix) adopt any annual operating or capital budget or
approve any material modifications thereto;
(x) pay any bonuses to officers, directors or
employees of the Company not contemplated in an approved annual operating and
budgets;
(xi) award stock options, stock appreciation rights
or similar employee benefits or determine vesting schedules, exercise prices or
similar features; provided that the Company shall have the right to issue or
grant such stock options, stock appreciation rights or similar employee benefits
convertible into up to an aggregate of forty two percent (42%) of the shares of
Common Stock as of the date hereof (including the shares subject to such awards)
on a fully diluted basis;
(xii) pledge its assets or guarantee the obligations
of any other individual or entity;
(xiii) incur indebtedness (other than trade payables)
in excess of $1,000,000 in the aggregate, including (A) the execution of any
promissory note, loan agreement or other agreement evidencing indebtedness, (B)
drawing upon a line of credit or similar credit facility, or (C) causing a
letter of credit to be issued in the Company's name;
(xiv) amend the Company's Bylaws to alter any rights
of the Investor Director or the holders of the Series A Preferred Stock or to
increase the size of the Board to more than five (5) directors;
(xv) hire, retain or amend the compensation
arrangements with new executive officers of the Company or modify or extend any
existing arrangement with current executive officers of the Company; or
(xvi) enter into a new line of business unrelated to
its contemplated core business as of the date hereof.
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<PAGE>
5.2. Minutes. The Company will deliver to the Investor copies of the
complete minutes of all meetings of the Company's Board of Directors (including
all committees thereof) and stockholders no later than the earlier of: (i)
thirty (30) days after any such meeting; or (ii) the next successive board or
stockholder meeting, as applicable.
5.3. Additional Board Members. Any appointment or nomination of
additional directors, whether outside industry representatives or as a condition
of securing additional financing, must be acceptable to the Investor, such
approval not to be unreasonably withheld.
5.4. Board Committees. The Investor shall have one (1) Investor
Director appointed to the audit and executive committees of the Board of
Directors.
5.5. Bylaws. The Company shall at all times cause its By-laws to
provide that, (a) unless otherwise required by the laws of the State of
Delaware, the holders of at least fifty percent (50%) of the Series A Stock then
outstanding shall be entitled to call a special meeting of the Board of
Directors or stockholders of the Company and (b) the number of directors fixed
in accordance therewith shall in no event conflict with any of the terms or
provisions of the Series A Stock as set forth in the Series A Certificate. The
Company shall at all times maintain provisions in its Bylaws or Certificate of
Incorporation indemnifying all directors against liability and absolving all
directors from liability to the Company and its stockholders to the maximum
extent permitted under the laws of the State of Delaware. To the extent that
such coverage is available on commercially reasonable terms, the Company shall
purchase, and at all times maintain, directors and officers liability insurance
with coverage limits customary for similarly situated companies, but in no event
less than $2,000,000 per occurrence.
5.6. Investor's Expenses. Following the Closing, any reasonable
expenses incurred by the Investor or its representatives on behalf of the
Company, including reasonable expenses associated with attendance at meetings of
the Board of Directors (other than observer expenses if the Investor no longer
has a representative elected to the Board), trade shows or similar meetings or
events, shall be borne by the Company.
5.7. Subsidiaries or Joint Ventures. The Company will not, without the
prior approval of the Board of Directors, establish or invest in any subsidiary
or joint venture.
5.8. Conduct of Business. The Company will duly observe and conform to
or cause to be observed or conformed to all valid requirements of all
governmental authorities relative to the conduct of the business of the Company
or to its properties or assets, the failure to observe or conform to which would
have a materially adverse effect on the business of the Company, and will
maintain and keep in full force and effect all licenses and permits necessary to
the proper conduct of the business of the Company.
5.9. Preservation of Corporate Existence. The Company shall preserve
and maintain its respective corporate existence, rights, franchises and
privileges in its jurisdiction of incorporation,
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and will qualify and remain qualified as a foreign corporation in every
jurisdiction in which such qualification is necessary in view of the business
and operations of the Company or the ownership of their respective properties.
5.10. Performance Under Other Documents. The Company will promptly pay
or perform or cause to be performed all payments and obligations required of it
under the terms, agreements and covenants of the Series A Agreement, the Related
Agreements and the Series A Certificate.
5.11. Performance of Obligations. The Company will promptly perform or
cause to be performed every commitment, undertaking, agreement or covenant of
the Company with any third person whether or not specifically referred to in
this Agreement, the non-performance of which could cause the acceleration of
indebtedness of the Company; provided, however, that (unless and until
foreclosure, sale or similar proceedings have been commenced) the Company shall
have the right in good faith to contest the obligation to perform any such
commitment, undertaking, agreement or covenant.
5.12. Payment of Taxes and Accounts. The Company will pay or cause to
be paid all taxes, assessments, and governmental charges or levies imposed upon
the Company or upon its respective income, profits, or properties before the
same shall become delinquent; provided, however, that (unless and until
foreclosure, sale or similar proceedings have been commended) nothing herein
shall require the Company to pay or cause to be paid any such tax, assessment,
charge, levy or account so long as the validity thereof shall be contested in
good faith by appropriate proceedings and the Company has set aside on its books
and maintained adequate reserves with respect thereto.
5.13. Maintenance of Property. The Company will maintain or cause to be
maintained the real and personal property which is required for the business of
the Company in good repair, working order and condition, and from time to time
will make or cause to be made all repairs, renewals, and replacements that are
necessary and proper.
5.14. Insurance on Properties. Within a reasonable time from the date
hereof, the Company shall obtain and maintain or cause to be maintained
insurance with reputable insurance companies on such of the properties of the
Company in such amounts and against such risks as is deemed sufficient by the
Company's management and as is satisfactory to the Investor. The Company will
furnish to the Investor, upon request, certificates signed by the President or
the Chief Financial Officer of the Company setting forth a list of all insurance
in force on the properties of the Company and containing a general schedule of
property insured, risks insured against and amount of insurance then in force.
5.15. Authorized Capital Stock. The Company covenants that it shall at
all times reserve and keep available out of its authorized but unissued Common
Stock, solely for the purpose of effecting the exercise of the Series A Stock,
such number of shares of Common Stock as shall from time to time be issuable
upon the exercise of all of the Series A Stock, as the case may be.
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5.16. Taxes and Costs. The Company shall pay all taxes which may be
imposed with respect to the issuance and delivery of shares of Common Stock upon
conversion of the Series A Stock; provided, however, that the Company shall not
be required, in any event, to pay any transfer or other taxes by reason of
issuance of such shares of Common Stock in a name or names other than the name
of the holder of the Series A Stock surrendered for exchange.
5.17. Proprietary Assets. The Company shall take all steps reasonably
necessary to preserve and protect all of its intellectual property, including
without limitation all patents, copyrights, trade secrets, trademarks,
tradenames, and servicemarks used in its business.
5.18. Guarantees. The Company shall not, without the prior approval of
the Board of Directors (including all Series A Directors) at any time become a
guarantor or surety of or pledge its credit on any undertaking of a third party.
5.19 Liquidation and Dissolution. The Company will take no action to
place the Company or any subsidiary in dissolution, liquidation, or
receivership.
5.20. New Businesses. The Company will not, without the prior approval
of the Board of Directors (including the Investor Director), directly or
indirectly, engage in any business other than the business in which it is
presently engaged.
5.21. Fiscal Year and Accounting Methods. The Company will not change
its fiscal year or method of accounting (other than immaterial changes in
methods), except to the extent necessary to comply with generally accepted
accounting principles.
5.22. Loans, Advances and Investments. The Company will not, without
the prior approval of the Board of Directors (including the Investor Director),
directly or indirectly, make any loan or advance to, or invest in, any person
who is a stockholder, director, or officer (or a relative of any such person) of
the Company, other than advances to employees for travel and other expenses
incurred in the ordinary course of business.
5.23. Pension Reform Act. The Company will not permit (a) the funding
requirements under ERISA with respect to any employee benefit plan established
or maintained by the Company or any subsidiary to be less than the minimum
required by ERISA or the regulations thereunder, or (b) any employee benefit
plan established or maintained by the Company to be subject to involuntary
termination proceedings.
5.24. Restrictive Assignments. The Company will not, without the prior
approval of the Board of Directors (including the Investor Director), enter into
or become obligated under any agreement or contract, including (without
limitation) any loan agreement, promissory note (or other evidence of
indebtedness), mortgage, security agreement, or lease, which either (a)
precludes or prevents the Investor from curing (on behalf of the Company)
defaults, breaches or failures to perform, or (b) by its terms prevents or
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restricts the Company from performing its obligations under the Series A
Agreement.
5.25. Termination. The covenants in this Section 5 shall terminate (a)
upon consummation of a Qualifying IPO, or (b) Change of Control Event.
5.26. Professional Advisors. The Investor shall have the right to
approve (which shall not be unreasonably withheld or delayed) all of the
Company's professional advisors, including but not limited to, the Company's
accountants, attorneys, investment bankers and public relations consultants. The
Company agrees that KPMG Peat Marwick is hereby approved to provide any and all
accounting services.
6. GENERAL PROVISIONS.
6.1. Notices. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if deposited in the U.S. mail by registered or
certified mail, return receipt requested, postage prepaid, as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(a) if to the Investor, at: Net Value Holdings, Inc.
2 Penn Center Plaza
Suite 605
Philadelphia, PA 19103
Attention: President
with a copy (which shall not constitute notice hereunder) to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attention: Michael C. Forman, Esquire
(b) if to the Company, at: AlarmX.com, Inc.
1085 Mission
San Francisco, CA 94103
Attention: President
</TABLE>
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the manner set forth above.
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6.2. Entire Agreement. This Agreement, together with all the Exhibits
hereto, constitutes and contains the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the subject matter hereof.
6.3. Governing Law; Jurisdiction. This Agreement shall be governed by a
construed exclusively in accordance with the internal laws of the State of
Delaware, excluding that body of law relating to conflict of laws and choice of
law. The parties consent to the exclusive jurisdiction of either Delaware and
California in which to bring a cause of action.
6.4. Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, then such provision(s) shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
6.5. Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
6.6. Successors and Assigns. Subject to the provisions of Section 4.1,
the provisions of this Agreement shall inure to the benefit of, and shall be
binding upon, the successors and permitted assigns of the parties hereto.
6.7. Captions. The captions to sections of this Agreement have been
inserted for identification and reference purposes only and shall not be used to
construe or interpret this Agreement.
6.8. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original, but both of which together shall
constitute one and the same instrument.
6.9. Costs and Attorneys' Fees. In the event that any action, suit or
other proceeding is instituted concerning or arising out of this Agreement or
any transaction contemplated hereunder, the prevailing party shall recover all
of such party's costs and attorneys' fees incurred in each such action, suit or
other proceeding, including any and all appeals or petitions therefrom.
6.10. Adjustments for Stock Splits, Etc. Wherever in this Agreement
there is a reference to a specific number of shares of Common Stock or Series A
Stock of the Company of any class or series, then, upon the occurrence of any
subdivision, combination or stock dividend of such class or series of stock, the
specific number of shares so referenced in this Agreement shall automatically be
proportionally adjusted to reflect the affect on the outstanding shares of such
class or series of stock by such subdivision, combination or stock dividend.
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<PAGE>
6.11. Aggregation of Stock. All shares held or acquired by affiliated
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Investor
Rights Agreement as of the date and year first above written.
THE COMPANY: THE INVESTOR:
- ----------- ------------
ALARMX.COM, INC. NET VALUE HOLDINGS, INC.,
Delaware corporation
By: By:
-------------------------------- ------------------------------
Allison Stollmeyer, President Andrew P. Panzo, Chairman
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Exhibit 10.42
CO-SALE AGREEMENT
THIS CO-SALE AGREEMENT (this "Agreement") is made this 14th day of
March, 2000, by and among NET VALUE HOLDINGS, INC., a Delaware corporation (the
"Investor"), the individuals and entities identified as Principal Stockholders
on Schedule A hereto (each, a "Principal Stockholder," and collectively, the
"Principal Stockholders") and ALARMX.COM, INC., a Delaware corporation (the
"Company").
RECITALS
A. Concurrently with the execution hereof, the Company and the Investor
have entered into that certain Series A Convertible Preferred Stock Purchase
Agreement (the "Series A Agreement"), pursuant to which the Investor will
purchase 4,000,000 shares of Series A Convertible Preferred Stock of the Company
(the "Series A Preferred Stock"). Capitalized terms used herein, but not
otherwise defined, shall have the meaning given such terms in the Series A
Agreement.
B. The Principal Stockholders are presently the legal or beneficial
owners of 1,800,000 shares of the outstanding Common Stock of the Company
(including shares issuable upon exercise of warrants).
C. To induce the Investor to make the proposed investment, the
Principal Stockholders have agreed to grant the Investor the opportunity to
participate upon the terms and conditions set forth in this Agreement, in
subsequent sales of the Common Stock by the Principal Stockholders.
AGREEMENT
NOW, THEREFORE, for and in consideration of the premises, covenants and
obligations contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
1. SALES BY PRINCIPAL STOCKHOLDERS
1.1 Notice of Purchase Offers. Should any of the Principal
Stockholders propose to accept one or more bona fide offers (collectively, a
"Purchase Offer"), from any persons to purchase shares of the Company's Common
Stock from such Principal Stockholder (a "Purchase Offeror"), then the Principal
Stockholder or Principal Stockholders shall promptly notify the Investor in
writing of the terms and conditions of such Purchase Offer.
1.2 Right to Participate. The Investor shall have the right,
exercisable upon written notice to such selling Principal Stockholder or
Principal Stockholders within thirty (30) business days after receipt of the
notice of the Purchase Offer, to participate in the Principal Stockholder's or
Principal Stockholders' sale of Common Stock on the same terms and conditions.
To the extent the Investor exercises such right of participation, the number of
shares of Common Stock which the Principal Stockholder or Principal Stockholders
may sell pursuant to the Purchase
<PAGE>
Offer shall be correspondingly reduced. The right of participation of the
Investor shall be subject to the following terms and conditions:
(a) The Investor may sell up to that number of shares
of Common Stock equal to the product obtained by multiplying (i) the aggregate
number of shares of Common Stock covered by the Purchase Offer, by (ii) a
fraction, the numerator of which is the number of shares of Common Stock of the
Company at the time owned by the Investor together with all shares of Common
Stock then issuable to the Investor upon the exercise of vested rights, options
or convertible securities other than the Series A Preferred Stock, and the
denominator of which is the sum of (a) the combined number of shares of Common
Stock of the Company at the time owned by all the selling Principal Stockholders
(including shares transferred to Permitted Transferees as defined below) and the
Investor, and (b) the number of shares of Common Stock then issuable to the
Investor and the Selling Principal Stockholders upon the exercise of vested
rights, options and convertible securities other than Series A Preferred Stock.
For the purposes of making such computation, the Investor shall be deemed to own
the number of shares of Common Stock into which the Series A Preferred Stock
held by the Investor is at the time convertible.
(b) The Investor may participate in the sale by
delivering to the Principal Stockholder at the time of the sale for transfer to
the Purchase Offeror one or more certificates, properly endorsed for transfer,
which represent:
(i) the number of shares of Common Stock
which the Investor elects to sell pursuant to this Section 1.2; or
(ii) the number of shares of Series A
Preferred Stock, which is at such time is convertible into the number of shares
of Common Stock that the Investor elects to sell pursuant to this Section 1.2;
together with written notice of the Investor's election to convert such shares
into shares of Common Stock. Such certificates and written notice shall be
forwarded to the Company, and the Company shall deliver to the Principal
Stockholder certificates representing that number of shares of Common Stock
which the Investor has elected to sell.
1.3 Consummation of Sale. The stock certificate or
certificates which the Investor delivers to the selling Principal Stockholder or
Principal Stockholders pursuant to Section 1.2 shall be transferred by the
selling Principal Stockholder or Principal Stockholders to the Purchase Offeror
in consummation of the sale of the Common Stock pursuant to the terms and
conditions specified in the Section 1.1 notice to the Investor, and the selling
Principal Stockholder or Principal Stockholders shall promptly thereafter remit
to the Investor that portion of the sale proceeds to which the Investor is
entitled by reason of its participation in such sale, net of a pro rata share of
all expenses incurred in connection with such sale. To the extent that any
Purchase Offeror prevents such assignment or otherwise refuses to purchase
shares from the Investor, the Principal Stockholder(s) shall not sell to such
Purchase Offeror unless and until, simultaneously with such sale, the Principal
Stockholder shall purchase such shares from the participating Investor.
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<PAGE>
1.4 Ongoing Rights. The exercise or non-exercise of the rights
of the Investor hereunder to participate in one or more sales of Common Stock
made by a Principal Stockholder shall not adversely affect its right to
participate in subsequent Common Stock sales by a Principal Stockholder pursuant
to Section 1.1 hereof.
1.5 Permitted Exemptions. The participation rights of the
Investor shall not apply to (a) any pledge of Common Stock made by a Principal
Stockholder pursuant to a bona fide loan transaction which creates a mere
security interest, (b) any transfer of Common Stock to the Company pursuant to a
written agreement between the Company and a Principal Stockholder providing for
the right of such repurchase or to the Principal Stockholder's ancestors or
descendants or spouse or to a trustee for their benefit, (c) any bona fide gift
of Common Stock; provided, that (i) the Principal Stockholder shall inform the
Investor of such pledge, transfer or gift prior to effecting it and (ii) the
pledgee, transferee or donee (collectively, the "Permitted Transferees"), shall
furnish the Investor with a written agreement to be bound by and comply with all
provisions of this Agreement applicable to the Principal Stockholders, or (d)
any transfer between parties to this Agreement. Such transferred shares shall
remain subject to this Agreement and the Permitted Transferees shall be treated
as "Principal Stockholders" for purposes of this Agreement.
2. PROHIBITED TRANSFERS
2.1 Treatment of Prohibited Transfers. In the event a
Principal Stockholder should sell any Common Stock in contravention of the
participation rights of the Investor under this Agreement (a "Prohibited
Transfer"), the Investor, in addition to such other remedies as may be available
at law, in equity or hereunder, shall have the put option provided in Section
2.2 below, and a Principal Stockholder shall be bound by the applicable
provisions of such put option.
2.2 Put Option. In the event of a Prohibited Transfer, the
Investor shall have the right to sell to the selling Principal Stockholder(s) a
number of shares of Common Stock (either directly or through delivery of
convertible Preferred Stock) equal to the number of shares the Investor would
have been entitled to transfer to the Purchase Offeror in the Prohibited
Transfer pursuant to the terms hereof. Such sale shall be made on the following
terms and conditions:
(a) The price per share at which the shares are to be
sold to the selling Principal Stockholder or Principal Stockholders shall be
equal to the price per share paid by the purchaser to the selling Principal
Stockholder or Principal Stockholders in the Prohibited Transfer. The selling
Principal Stockholder or Principal Stockholders shall also reimburse the selling
Investor for any and all fees and expenses, including legal fees and expenses,
incurred pursuant to the exercise or the attempted exercise of such Investor's
rights under this Section 2.
(b) Within sixty (60) days after the later of the
dates on which the Investor (i) receives notice from a Principal Stockholder of
the Prohibited Transfer, or (ii) otherwise becomes aware of the Prohibited
Transfer, the Investor shall, if exercising the put option created hereby,
deliver to the selling Principal Stockholder or Principal Stockholders the
certificate or certificates representing shares to be sold, each certificate to
be properly endorsed for transfer, together with notice of and documentation for
reimbursable expenses.
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<PAGE>
(c) The selling Principal Stockholder(s) shall, upon
receipt of the certificate or certificates for the shares to be sold by the
Investor, pursuant to Section 2.2(b), pay the aggregate purchase price therefor
and the amount of reimbursable fees and expenses, as specified in Section
2.2(a), by certified check or bank draft made payable to the order of the
Investor.
3. LEGENDED CERTIFICATES
3.1 Legend. Each certificate representing shares of the Common
Stock of the Company now or hereafter owned by a Principal Stockholder or issued
to any Permitted Transferee pursuant to Section 1.5 shall be endorsed with the
following legend:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND
BETWEEN THE STOCKHOLDERS, THE CORPORATION AND CERTAIN HOLDERS OF PREFERRED STOCK
OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN
REQUEST TO THE SECRETARY OF THE CORPORATION."
Each Principal Stockholder agrees that the Company may instruct its
transfer agent to impose transfer restrictions on the shares represented by
certificates bearing this legend to enforce the provisions of this Agreement and
the Company agrees to promptly do so.
3.2 Legend Removal. The Section 3.1 legend shall be removed
upon termination of this Agreement in accordance with the provisions of Section
4.1.
4. MISCELLANEOUS PROVISIONS
4.1 Termination of Co-Sale Rights. The rights of the Investor
under this Agreement and the obligations of a Principal Stockholder with respect
to the Investor shall terminate at such time as the Investor shall no longer be
the owner of any shares of capital stock of the Company. Unless sooner
terminated in accordance with the preceding sentence, this Agreement shall
terminate upon the occurrence of any one of the following events:
(a) the consummation of a Qualifying IPO (as defined
in Section 5(b)(1) of the Series A Certificate);
(b) the fifth-year anniversary of the date of this
Agreement; or
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<PAGE>
(c) the closing of a merger, consolidation or sale of
the stock or substantially all of the assets of the Company in which the
shareholders of the Company immediately prior to such transaction do not retain
a majority of voting power in the surviving entity.
4.2 Notices. Any notice required or permitted to be given to a
party pursuant to the provisions of this Agreement shall be in writing and shall
be effective upon facsimile delivery, personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified as
set forth below such party's signature or at such other address as such party
may designate by ten (10) days' advance written notice to the other parties
hereto.
4.3 Successors and Assigns. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
The Investor shall be entitled to assign its rights under this Agreement to any
Related Party. As used herein, the term "Related Party" shall mean (i) any
person or entity that, directly or indirectly, through one or more
intermediaries, has voting control of, or is under common voting control with,
the Investor; or (ii) a trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, or owners, or persons or entities holding
controlling interest of which consist of the Investor and/or such other persons
or entities referred to in the immediately preceding clause (i); and (iii) the
Investor's current partners, stockholders or members, pro rata in accordance
with the current distribution provision of such entities' charter documents.
4.4 Severability. In the event one or more of the provisions
of this Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
4.5 Adjustments for Stock Splits, Etc. Wherever in this
Agreement there is a reference to a specific number of shares of Common Stock or
Series A Preferred Stock of the Company of any class or series, then, upon the
occurrence of any subdivision, combination or stock dividend of such class or
series of stock, the specific number of shares so referenced in this Agreement
shall automatically be proportionally adjusted to reflect the effect on the
outstanding shares of such class or series of stock by such subdivision,
combination or stock dividend.
4.6 Aggregation of Stock. All shares held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
4.7 Amendments. Any amendment or modification of this
Agreement shall be effective only if evidenced by a written instrument executed
by duly authorized representatives of the parties hereto. Any waiver by a party
of its rights hereunder shall be effective only if evidenced by a written
instrument executed by a duly authorized representative of such party. In no
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<PAGE>
event shall such waiver of any rights hereunder constitute the waiver of such
rights in any future instance unless the waiver so specifies in writing.
4.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware, without
regard to that body of law relating to conflict of law or choice of law.
4.9 Other Obligations of Company. The Company agrees to use
its best efforts to enforce the terms of this Agreement, to inform the Investor
of any breach hereof and to assist the Investor in the exercise of its rights
and performance of its obligations under Section 2 hereof.
4.10 Attorney Fees. In the event that any dispute among the
parties to this Agreement should result in litigation, the prevailing party in
such dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including without limitation, such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
4.11 Ownership. Each Principal Stockholder represents and
warrants that such Principal Stockholder is the sole legal and beneficial owner
of the shares of stock subject to this Agreement and that no other person has
any interest (other than a community property interest, if the law of a
community property state is applicable) in such shares.
4.12 Entire Agreement. This Agreement constitutes the entire
agreement between the parties relative to the specific subject matter hereof. To
the extent this Agreement conflicts with any previous agreement among the
parties relative to the specific subject matter hereof, this Agreement shall
control.
4.13 Mutual Drafting. This Agreement is the result of the
joint efforts of the Company, the Investor and the Principal Stockholders and
each provision hereof has been subject to the mutual consultation, negotiation
and agreement of the parties and there shall be no construction against any
party based on any presumption of the party's involvement in the drafting
thereof.
[SIGNATURE PAGES FOLLOWS]
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Co-Sale Agreement on
the day and year indicated above.
THE COMPANY:
ALARMX.COM, INC.,
a Delaware corporation
By:______________________________
Allison Stollmeyer, President
Address: 1085 Mission
San Francisco, CA 94103
THE PRINCIPAL STOCKHOLDERS:
__________________________________
G. Mark Miller
Address: 410B Canyon Wood Place
San Ramon, CA 94583
__________________________________
Evan Gilbert
Address: 620 Lexington Avenue, Apt C
El Cerrito, CA 94530
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THE INVESTOR:
NET VALUE HOLDINGS, INC.,
a Delaware corporation
By:_______________________________
Name: Andrew P. Panzo
Title: Chairman
Address: Two Penn Center
Philadelphia, PA 19102
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SCHEDULE A
PRINCIPAL STOCKHOLDERS
NAME NUMBER OF SHARES PERCENTAGE OF OWNERSHIP
G. Mark Miller 1,500,000 25.86%
Evan Gilbert 300,000 5.17%
TOTAL
SERIES A PREFERRED STOCK
Net Value Holdings 4,000,000 69.97%
<PAGE>
Exhibit 10.43
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
made as of April 17, 2000 by NET VALUE HOLDINGS, INC., a Delaware corporation
(the "Employer"), and THOMAS ALEY an individual resident in the State of
Massachusetts (the "Executive").
BACKGROUND
The Employer wishes to employ the Executive and the Executive wishes to
enter into the employ of the Employer on the terms and conditions contained in
this Agreement.
NOW THEREFORE, in consideration of the facts, mutual promises and
covenants contained herein and intending to be legally bound hereby, the
Employer and the Executive agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this Section 1:
"Agreement" means this Employment Agreement, as amended from time to
time.
"Benefits" is defined in Section 3.1(b).
"Board of Directors" means the board of directors of Employer.
"cause" is defined in Section 6.3.
"Change of Control" shall mean the occurrence of any one of the
following events: (a) any "person" as such term is used in Section 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")(other than a subsidiary or other affiliate of Employer), becomes a
"beneficial owner," as such term is used in Rule 13d-3 promulgated under the
Exchange Act, of 50% or more of any class of Employer's issued and outstanding
common or preferred stock, which interest in such stock comprises 50% or more of
all issued and outstanding voting shares; (b) the majority of Employer's board
of directors consists of individuals other than Incumbent Directors, which term
means the members of Employer's Board of Directors on the Effective Date of this
Agreement, provided that any person becoming a director subsequent to such date
whose election or nomination for election was supported by at least one half of
the directors who then comprised the Incumbent Directors shall be considered to
be an Incumbent Director; or (c) the occurrence of any event which would be
required to be reported by Employer pursuant to Items 1 or 2 of Form 8-K under
the Exchange Act, which shall be determined without regard to whether Employer
is actually required to file a Form 8-K in relation to such transaction or
event.
"Disability" is defined in Section 6.2.
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"Effective Date" means April 17, 2000.
"Employment Period" means the term of the Executive's employment under
this Agreement as defined in Section 2.2.
"good reason" means: (a) the Employer's material breach of this
Agreement, which is not cured within ten (10) days after written notice to
Employer.
"person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or governmental body.
"Registration Statement Availability Date" means, with respect to any
Options, the date both (a) such Options have vested and (b) a registration
statement of the Employer under the Securities Act of 1933, as amended, covering
the resale of the common stock of the Employer underlying such Options is
effective.
"Salary" is defined in Section 3.1(a).
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT
Effective on the Effective Date, Employer hereby employs the Executive,
and the Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.
2.2 TERM
Subject to the provisions of Section 6, the Employment Period for the
Executive's employment under this Agreement will be one year, beginning on the
Effective Date, and shall be automatically renewed for consecutive one-year
renewal terms thereafter, unless, not less than sixty (60) days prior to the end
of the original term or any renewal term, either party gives the other party
written notice of termination of employment which termination shall be effective
as of the end of such original term or renewal term.
2.3 DUTIES
The Executive shall serve the Employer generally as Executive Vice
President and shall have such authority and responsibilities as the Employer may
determine from time to time consistent with Executive's skills and abilities.
Employer shall perform any other duties reasonably required by the Employer and,
if requested by the Employer, shall serve as an officer or director of the
Employer or any subsidiary of the Employer without additional compensation. The
Executive agrees to perform in good faith and to the best of his ability all
services which may be required of him
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hereunder and will devote his best efforts and such business time, skill,
attention and energies as are reasonably necessary to perform his duties and
responsibilities under this Agreement and to promote the success of the
Employer's business. The Executive shall be employed on a full-time basis by
Employer. Executive may continue to engage in the following activities: (a)
attending board of directors' or like meetings of other companies in which
Executive or an affiliate has invested or in which Executive has been elected to
serve, and (b) managing his personal investments, provided that such activities
set forth in (a) and (b) (individually or collectively) do not materially and
adversely interfere or conflict with the performance of Executive's duties or
responsibilities under this Agreement.
3. COMPENSATION
3.1 BASIC COMPENSATION
(a) Salary. The Executive will be paid an annual
salary of $150,000, subject to adjustment as provided below (the "Salary"),
which will be payable in equal periodic installments according to the Employer's
customary payroll practices, but no less frequently than monthly. The
Executive's Salary will be reviewed by Employer's Board of Directors not less
frequently than annually, and may be adjusted upward or downward by Employer,
but in no event will the Salary be less than $150,000 per year.
(b) Benefits. The Executive will, during the
Employment Period, be permitted to participate in such pension, profit sharing,
bonus (subject to the provisions of Section 3.2), life insurance,
hospitalization, major medical, and other employee benefit plans of the Employer
that may be in effect from time to time, to the extent the Executive is eligible
under the terms of those plans (collectively, the "benefits").
(c) Indemnification. The Employer shall, to the full
extent permitted by Section 146 of the Delaware General Corporation Law, as
amended, and in accordance with Article VII of the By-laws of the Employer (a
copy of which is attached as Exhibit A hereto) indemnify the Executive as an
officer of the Employer. The Employer agrees that it shall not amend its By-laws
in any manner that will materially adversely affect the Executive's rights to
indemnification thereunder.
3.2 BONUS COMPENSATION
Executive shall be eligible to receive annual bonus
compensation at the discretion of Employer's Board of Directors and in
accordance with Employer's executive bonus or incentive compensation plan that
may be in effect from time to time.
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3.3 OPTIONS
(a) Executive will receive an award of options to purchase
900,000 shares of the Employer's common stock (the "Options") at an exercise
price of $1.00 per share pursuant to the stock option plan to be implemented by
Employer. 150,000 of the Options shall immediately vest upon issuance. The
remaining Options will vest pro rata each month over a period of three years
from the Effective Date so long as the Executive remains employed by the
Employer. No Options shall vest after the Executive's employment by the Employer
is terminated for any reason.
(b) Exercise Period. While the Executive is employed by the
Employer, the Executive may exercise any Options from the date such Options vest
until the later of (i) five years after the vesting date of such Options or (ii)
one year after the Registration Statement Availability Date with respect to such
Options (the "Employment Exercise Period"). In the event the Employer terminates
the Executive's employment without cause, the Executive resigns for good reason,
or the employment of the Executive is terminated due to the Executive's death or
Disability, the Executive (or the Executive's estate) may exercise those Options
that have vested as of the date the Executive's employment was terminated until
the later of (i) one year after the date of such termination or (ii) one year
after the first Registration Statement Availability Date on or after the date of
such termination. In the event the Employer terminates the Executive's
employment for cause, or the Executive resigns without good reason, the
Executive may exercise those Options that have vested as of the date the
Executive's employment was terminated until the later of (i) six months after
the date of such termination or (ii) six months after the first Registration
Statement Availability Date on or after the date of such termination.
Notwithstanding the foregoing, no Option shall be exercisable with respect to
any termination of the Executive's employment hereunder that occurs after the
Employment Exercise Period with respect to such Option.
4. EXPENSE REIMBURSEMENT
The Employer will pay the Executive's dues in such trade and
professional organizations as Employer deems appropriate, and will pay on behalf
of the Executive (or reimburse the Executive for) reasonable expenses incurred
by the Executive at the request of, or on behalf of, the Employer in the
performance of the Executive's duties pursuant to this Agreement, and in
accordance with the Employer's employment policies, including without limitation
reasonable expenses incurred by the Executive in attending conventions,
seminars, other business meetings and for promotional expenses, provided that
any such activities must be related to Employer's business and all individual
expenses (or those aggregated for a single convention, seminar or other business
trip) greater than $2,500 must be approved by Employer's Chief Executive
Officer. The Executive must file expense reports with respect to such expenses
in accordance with the Employer's policies.
5. VACATIONS AND HOLIDAYS
The Executive will be entitled to three (3) weeks' paid vacation each
calendar year in accordance with the vacation policies of the Employer in effect
for its executive officers from time to time. The Executive will also be
entitled to the paid holidays and other paid leave set forth in the Employer's
policies. Vacation days during any calendar year that are not used by the
Executive
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during such calendar year may be used in any subsequent calendar year; provided,
however, that no more than six weeks' paid vacation may be accrued or carried
forward.
6. TERMINATION
6.1 EVENTS OF TERMINATION
The Executive's employment pursuant to this Agreement may be terminated
by Employer only on the following grounds:
(a) upon the death of the Executive;
(b) upon the disability of the Executive (as defined
in Section 6.2) immediately upon notice from either party to the other; and
(c) for cause (as defined in Section 6.3),
immediately upon notice from the Employer to the Executive, or at such later
time as such notice may specify.
The Executive may terminate his employment only on the following
grounds:
(d) without any cause whatsoever, provided that
Executive gives Employer at least 60 days' prior written notice of his
termination of employment;
(e) for any material breach of this Agreement by
Employer, which is not cured within ten (10) days after written notice to
Employer;
(f) the occurrence of a Change in Control, provided
that Executive gives Employer at least 60 days' prior written notice of his
termination of employment.
6.2 DEFINITION OF DISABILITY
For purposes of Section 6.1, the Executive will be deemed to have a
"Disability" if, for physical or mental reasons, the Executive is unable to
perform the essential functions of the Executive's duties with reasonable
accommodation under this Agreement for 120 consecutive days, or 120 days during
any twelve-month period, as determined in accordance with this Section 6.2. The
Disability of the Executive will be determined by a medical doctor selected by
written agreement of the Employer and the Executive upon the request of either
party by notice to the other. If the Employer and the Executive cannot agree on
the selection of a medical doctor, each of them will select a medical doctor and
the two medical doctors will select a third medical doctor who will determine
whether the Executive has a Disability. The determination of the medical doctor
selected under this Section 6.2 will be binding on both parties. The Executive
must submit to a reasonable number of examinations by the medical doctor making
the determination of disability under this Section 6.2, and the Executive hereby
authorizes the disclosure and release to the Employer of such determination and
all supporting medical records. If the Executive is not legally competent, the
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Executive's legal guardian or duly authorized attorney-in-fact will act in the
Executive's stead, under this Section 6.2, for the purposes of submitting the
Executive to the examinations, and providing the authorization of disclosure,
required under this Section 6.2.
6.3 DEFINITION OF "FOR CAUSE"
For purposes of Section 6.1, the phrase "for cause" means: (a) the
Executive's material breach of this Agreement, which is not cured within ten
(10) days after written notice to Executive; (b) theft, fraud, or
misappropriation (or attempted misappropriation) of any of the Employer's funds
or property; or (c) a conviction or entry of a guilty plea or plea of no contest
with respect to a felony or other crime involving moral turpitude for which
imprisonment is a possible punishment.
6.4 TERMINATION PAY
Effective upon the termination of this Agreement, the Employer will be
obligated to pay the Executive (or, in the event of his death, his designated
beneficiary as defined below) the compensation provided in this Section 6.4:
(a) Termination by the Employer for Cause or
Termination by Executive Without Cause. If the Employer terminates this
Agreement for cause or Executive terminates his employment without good reason,
the Executive will be entitled to receive his Salary only through the date such
termination is effective, but will not be entitled to any bonus compensation for
the calendar year during which such termination occurs.
(b) Termination upon Disability. If this Agreement is
terminated by either party as a result of the Executive's Disability, as
determined under Section 6.2, the Employer will pay the Executive his Salary
through the remainder of the calendar month during which such termination is
effective and for the lesser of (i) three consecutive months thereafter, or (ii)
the period until disability insurance benefits commence under the disability
insurance coverage furnished by the Employer to the Executive. Executive shall
also be entitled to receive that part of the Executive's bonus compensation, if
any, for the calendar year during which his Disability occurs, prorated through
the end of the calendar month during which his termination is effective.
(c) Termination upon Death. If this Agreement is
terminated because of the Executive's death, the Executive will be entitled to
receive his Salary through the end of the calendar month in which his death
occurs, and that part of the Executive's bonus compensation, if any, for the
calendar year during which his death occurs, prorated through the end of the
calendar month during which his death occurs.
(d) Termination by Executive Due to Material Breach
by Employer or Termination by Employer Without Cause. If this Agreement is
terminated by Executive due to a material breach of this Agreement by Employer
or by Employer without cause, then Employer shall continue to pay to Executive
his monthly Salary and bonus, based upon the average annual bonus paid
previously to Executive prior to termination of this Agreement, for the lesser
of one year from the date of termination or the remaining Employment Period.
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(e) Termination by Executive Due to a Change of
Control. If this Agreement is terminated by Executive due to a Change of
Control, then Employer shall continue to pay to Executive his monthly Salary and
bonus, based upon the average annual bonus paid previously to Executive prior to
termination of this Agreement, for the lesser of one year from the date of
termination or the remaining Employment Period.
(f) Benefits. The Executive's accrual of, or
participation in plans providing for, the Benefits will cease at the effective
date of the termination of this Agreement, and the Executive will be entitled to
accrued Benefits pursuant to such plans only as provided in such plans.
7. NON-DISCLOSURE COVENANT
Employer and the Executive acknowledge that the services to be
performed by the Executive under this Agreement are unique and valuable and
that, as a result of the Executive's employment, the Executive will be in a
relationship of confidence and trust with Employer and will come into possession
of "Confidential Information" (i) owned or controlled by Employer and its
subsidiaries and affiliates; (ii) in the possession of Employer and its
subsidiaries and affiliates and belonging to third parties; or (iii) conceived,
originated, discovered or developed, in whole or in part, by the Executive. As
used herein "Confidential Information" means trade secrets and other
confidential or proprietary business, technical, personnel or financial
information of Employer, whether or not the Executive's work product, in
written, graphic, oral or other tangible or intangible forms, including but not
limited to specifications, samples, records, data, computer programs, drawings,
diagrams, models, consumer names, ID's or e-mail addresses, business or
marketing plans, studies, analyses, projections and reports, communications by
or to attorneys (including attorney-client privileged communications), memos and
other materials prepared by attorneys or under their direction (including
attorney work product), and software systems and processes that are not readily
available to the public, even if it is not specifically marked as a trade secret
or confidential, unless Employer advises the Executive otherwise in writing or
unless the information has been shared by Employer with entities not bound by
non-disclosure agreements. In consideration of the compensation and benefits to
be paid or provided to the Executive by the Employer under this Agreement, the
Executive agrees not to directly or indirectly use or disclose to anyone, either
during the Employment Period or after the termination of this Agreement, except
in the performance of his duties of his employment with Employer or with
Employer's prior written consent, any Confidential Information of Employer. This
non-disclosure covenant does not apply to information that is disclosed or
becomes public through another source; which Executive is required to disclose
pursuant to court order, subpoena or applicable law (provided that Executive
will use reasonable efforts to provide Employer with prompt notice of any such
requests or requirement so that Employer may seek an appropriate protective
order); or which is disclosed in any proceeding to enforce or interpret this
Agreement. The Executive agrees that in the event of the termination of the
Executive's employment for any reason, the Executive will deliver to Employer,
upon request, all property belonging to Employer, including all documents and
materials of any nature pertaining to the Executive's work with Employer and
will not take with him any documents or materials of any
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description, or any reproduction thereof of any description, containing or
pertaining to any Confidential Information.
8. NON-COMPETITION
During the term of this Agreement and for a one-year period after
termination of this Agreement by Employer for cause or by Executive without any
cause whatsoever, as set forth in Sections 6.1(c) and (d), the Executive agrees
that he shall not (a) work for or be interested in any business which serves as
a holding company of Internet businesses ("Internet Businesses"), (b) engage or
be interested in or receive any compensation from any business in which the
services to be rendered by the Executive to such business directly relates to
services or products which are directly competitive with any "primary" services
or products offered by the Employer or a subsidiary or affiliate of Employer
during the Employment Period and during the period ending six months subsequent
to the Executive's termination date; or (c) induce or attempt to induce any
employee, agent or customer of Employer or any of its subsidiaries or affiliates
to terminate or reduce the scope of his, her or its relationship with Employer.
A product or service shall be deemed "primary" only if such service or product
constitutes a primary component of the core business of Employer or its
majority-owned subsidiaries and affiliates on Executive's termination date. For
the purposes of this Agreement, the term "work for or be interested in" a
business means that the Executive is a stockholder, director, officer, employee,
partner, individual proprietor, lender or consultant with that business, but not
if (i) his interest is limited solely to the passive ownership of five percent
(5%) or less of any class of the equity or debt securities of a corporation
whose shares are listed for trading on a national securities exchange or traded
in the over-the-counter market, or (ii) he is interested in a company listed on
Schedule 8 hereto, or after termination hereof, works for such company; provided
however, that so long as this non-competition agreement is in effect, Executive
shall not work for a company listed on Schedule 8 if such company serves as a
holding company primarily for the purpose of acquiring Internet Businesses. In
the event that any part of this Section 8 is adjudged invalid or unenforceable
by any court of record, board of arbitration or judicial or quasi judicial
entity having jurisdiction thereof by reason of length of time, geographical
coverage, activities covered, or for any other reason, then the invalid or
unenforceable provisions of this covenant shall be deemed reformed and amended
to the maximum extent permissible under applicable law and shall be enforced and
enforceable as so amended in accordance with the intention of the parties as
expressed herein.
9. GENERAL PROVISIONS
9.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Executive acknowledges that the injury that would be suffered by
the Employer as a result of a breach of the provisions of any provision of
Sections 7 and 8 of this Agreement would be irreparable and that an award of
monetary damages to the Employer for such a breach would be an inadequate
remedy. Consequently Employer will have the right, in addition to any other
rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to
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specifically enforce any provisions of Sections 7 and 8 of this Agreement, and
the Employer will not be obligated to post bond or other security in seeking
such relief.
9.2 WAIVER
The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by either party in
exercising any right, power, or privilege under this Agreement will operate as a
waiver of such right, power, or privilege, and no single or partial exercise of
any such right, power, or privilege will preclude any other or further exercise
of such right, power, or privilege or the exercise of any other right, power, or
privilege.
9.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand, (b) sent by facsimile (with written confirmation of receipt),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by a nationally recognized overnight
delivery service (receipt requested), in each case to the appropriate addresses
and facsimile numbers set forth below (or to such other addresses and facsimile
numbers as a party may designate by notice to the other parties):
If to Employer: Net Value Holdings, Inc.
Two Penn Center, Suite 605
Philadelphia, PA 19102
Facsimile No.: (215) 564-3133
With a copy to: Klehr, Harrison, Harvey, Branzburg & Ellers
260 South Broad Street
Philadelphia, PA 19102
Attention: Michael C. Forman
Facsimile No.: (215) 568-6603
If to Executive: Thomas Aley
206 Elsinore Street
Concord, MA 01742
Facsimile No.:
9.4 ENTIRE AGREEMENT; AMENDMENTS
This Agreement and the documents referenced herein, contain the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof. This Agreement may not
be amended orally, but only by an agreement in writing signed by the parties
hereto.
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9.5 GOVERNING LAW
This Agreement will be governed by the laws of the State of Delaware
without regard to conflicts of laws principles.
9.6 JURISDICTION
Any action or proceeding seeking to enforce any provision of, or based
on any right arising out of, this Agreement may be brought against either of the
parties in the courts of the State of Delaware, or, if it has or can acquire
jurisdiction, in the United States District Court for the District of Delaware
and each of the parties consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding and waives any
objection to venue laid therein. Process in any action or proceeding referred to
in the preceding sentence may be served on either party anywhere in the world.
9.7 ASSIGNABILITY, BINDING NATURE
This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Executive under this Agreement may
be assigned or transferred by the Executive other than his rights to
compensation and benefits, which may be transferred only by will or operation of
law.
9.8 SURVIVAL
The respective rights and obligations of the parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.
9.9 PRIOR AGREEMENTS
The Executive represents and warrants to Employer that his execution
and performance of this Agreement shall not constitute a breach of any contract,
agreement or understanding, whether oral or written, to which he is a party or
by which he is bound.
9.10 ACKNOWLEDGMENT
The Executive hereby acknowledges and certifies that he has read the
terms of this Agreement, that he has been informed by Employer that he should
discuss it with an attorney of his choice, and that he understands its terms and
effects. The Executive further acknowledges that based on his training and
experience, he has the capacity to earn a livelihood by performing services as
an employee or otherwise in a business that does not violate the provisions of
Section 8.
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9.11 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement unless otherwise specified. All words used in this Agreement will be
construed to be of such gender or number as the circumstances require. Unless
otherwise expressly provided, the word "including" does not limit the preceding
words or terms.
9.12 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
9.13 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of which,
when taken together, will be deemed to constitute one and the same agreement.
This Agreement (and all other agreements, documents, instruments and
certificates executed and/or delivered in connection herewith) may be executed
by facsimile signatures, each of which shall be deemed an original copy of this
Agreement (or other such agreement, document, instrument and certificate).
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
EMPLOYER:
NET VALUE HOLDINGS, INC.
By: /s/ Andrew P. Panzo
---------------------------------
Andrew P. Panzo
Chief Executive Officer
EMPLOYEE:
By: /s/ Thomas Aley
---------------------------------
Thomas Aley, individually
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SCHEDULE 8
EMPLOYMENT AGREEMENT
None
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EXHIBIT A
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. The Corporation shall indemnify any person who was or is a
party, or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
Corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 3. To the extent that a director, officer, employee or agent of
the Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 or 2 of this Article, or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
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Section 4. Any indemnification under sections 1 or 2 of this Article
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in such section. Such determination
shall be made:
(a) By the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or
(b) If such a quorum is not obtainable, or, even if obtainable
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or
(c) By the stockholders.
Section 5. Expenses (including attorneys' fees) incurred by an officer
or director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
Section 6. The indemnification and advancement of expenses provided by,
or granted pursuant to the other sections of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
Section 7. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another Corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article.
Section 8. For purposes of this Article, references to "the
Corporation" shall include, in addition to the resulting Corporation, any
constituent Corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer employee or
agent of such constituent Corporation, or is or was serving at the request of
such constituent Corporation as a director, officer, employee or agent of
another Corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this Article with respect to the
resulting or surviving Corporation
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as he would have with respect to such constituent Corporation of its separate
existence had continued.
Section 9. For purposes of this Article, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article.
Section 10. The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 11. No director or officer of the Corporation shall be
personally liable to the Corporation or to any stockholder of the Corporation
for monetary damages for breach of fiduciary duty as a director or officer,
provided that this provision shall not limit the liability of a director or
officer (i) for any breach of the director's or the officer's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for
any transaction from which the director or officer derived an improper personal
benefit.
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Exhibit 10.44
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made as of April 17,
2000 by NET VALUE HOLDINGS, INC., a Delaware corporation (the "Employer"), and
STEPHEN M. COHEN, an individual resident in the State of New Jersey (the
"Executive").
RECITALS
WHEREAS, the Employer considers it essential and in the best interests
of its stockholders to foster the employment of key management personnel and
desires to engage the services of the Executive on the terms and conditions
hereinafter set forth; and
WHEREAS, Executive desires to render services to the Employer on the
terms and conditions provided in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have
the meanings specified or referred to in this Section 1:
"Agreement" means this Employment Agreement, as amended from
time to time.
"Benefits" is defined in Section 3.1(b).
"Board of Directors" means the board of directors of Employer.
"Change of Control" shall mean the occurrence of any one of
the following events: (a) any "person" as such term is used in Section 3(a)(9)
and 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") other than a subsidiary or other affiliate of Employer), becomes a
"beneficial owner," as such term is used in Rule 13d3 promulgated under the
Exchange Act, of 50% or more of any class of Employer's issued and outstanding
common or preferred stock, which interest in such stock comprises 50% or more of
all issued and outstanding voting shares; (b) the majority of Employer's board
of directors consists of individuals other than Incumbent Directors, which term
means the members of Employer's Board of Directors on the Effective Date of this
Agreement; provided, that any person becoming a director subsequent to such date
whose election or nomination for election was supported by at least one-half of
the directors who then comprised the Incumbent Directors shall be considered to
be an Incumbent Director; or (c) the occurrence of any event which would be
required to be reported by Employer pursuant to Items 1 or 2 of Form 8K under
the Exchange Act, which shall be determined without regard to whether Employer
is actually required file a Form 8K in relation to such transaction or event.
"Disability" is defined in Section 6.2.
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"Effective Date" means April 17, 2000.
"Employment Period" means the term of the Executive's
employment under this Agreement as defined in Section 2.2.
"for cause" is defined in Section 6.3.
"person" means any individual, corporation (including any
nonprofit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or
governmental body.
"Salary" is defined in Section 3.1(a).
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT
Effective on the Effective Date, Employer hereby
employs the Executive, and the Executive hereby accepts employment by the
Employer, upon the terms and conditions set forth in this Agreement.
2.2 TERM
Subject to the provisions of Section 6, the
Employment Period for the Executive's employment under this Agreement will be
three years, beginning on the Effective Date, and shall be automatically renewed
for consecutive one year renewal terms thereafter, unless, not less than sixty
(60) days prior to the end of the original term or any renewal term, either
party gives the other party written notice of termination of employment which
termination shall be effective as of the end of such original term or renewal
term.
2.3 DUTIES
The Executive will have such duties as are assigned
or delegated to the Executive by the Board of Directors, and will initially
serve as the Vice-President and General Counsel of Employer. The Executive
agrees to perform in good faith and to the best of his ability all services
which may be required of him hereunder and will devote his best efforts and such
business time, skill, attention and energies as are reasonably necessary to
perform his duties and responsibilities under this Agreement and to promote the
success of the Employer's business. The Executive shall be employed on a
full-time basis by Employer and shall be located at Employer's office within the
metropolitan Philadelphia area, however, acknowledges that he will be required
to travel periodically to other Employer locations and in connection with his
job functions hereunder, generally not to exceed fifty percent 50% of reasonable
business hours. Executive may continue to engage in the following activities:
(a) attending board of directors' or like meetings of other companies in which
Executive or an affiliate has invested or in which Executive has been elected to
serve, and (b) managing his personal investments, provided that such activities
set forth
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in (a) and (b) (individually or collectively) do not materially and adversely
interfere or conflict with the performance of Executive's duties or
responsibilities under this Agreement.
3. COMPENSATION
3.1 BASIC COMPENSATION
(a) Salary. The Executive will be paid an annual
salary of $150,000, subject to adjustment as provided below (the "Salary"),
which will be payable in equal periodic installments according to the Employer's
customary payroll practices, but no less frequently than monthly. The
Executive's Salary will be reviewed by Employer's Board of Directors not less
frequently than annually, and may be adjusted upward or downward by Employer,
but in no event will the Salary be less than $150,000 per year.
(b) Benefits. The Executive will, during the
Employment Period, be permitted to participate in such pension, profit sharing,
bonus (subject to the provisions of Section 3.2), life insurance,
hospitalization, major medical, and other employee benefit plans of the Employer
that may be in effect from time to time, to the extent the Executive is eligible
under the terms of those plans (collectively, the "Benefits").
(c) Options. Employer shall grant Executive options
to purchase 300,000 shares at an exercise price, subject to adjustment, of $6.75
per share (the "Options"). Options to purchase 50,000 shares of Employer's
common stock shall vest immediately; Options to purchase 62,500 shares of
Employer's common stock shall vest immediately after the first year of
employment; and the remaining 187,500 Options shall vest pro rata on a monthly
basis (i.e., 5,208.33 per month) throughout the following three (3) year period
so that upon the end of the fourth year of employment, all of the Options shall
have vested in full. The Options will be subject to the terms and conditions of
a stock option plan to be adopted by the Employer covering options of other
executives of the Employer; however, any such plan shall contain standard and
customary protections against dilution (such as stock splits, stock dividends,
recapitalizations, reorganizations and the like), and shall permit cashless
exercise upon standard and customary terms. If after the expiration of the
initial term of employment, Employer elects not to extend the term of employment
for an additional one year for other than "for cause", then, and in that event,
Executive shall vest fully in all of his Options at the end of his initial term
of employment as if Executive had remained employed by Employer for a full term
of four years.
The Options shall be covered by a Registration
Statement on Form S-8 to be filed with the Securities and Exchange Commission as
promptly following the Effective Date as is practicable.
Executive shall be entitled to registration rights
with respect to the shares of Employer's common stock issuable upon exercise of
the Options in the following manner: (i) Employer shall be obligated at its sole
cost and expense to include resale of the shares issuable upon exercise of the
Options in any registration statement filed with the Securities and Exchange
Commission following the date hereof to the extent that the registration
statement includes the resale
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of shares of common stock on behalf of any other executive officer of Employer;
and (ii) in the event registration pursuant to subparagraph (i) has not occurred
on or before the second anniversary of the Effective Date, the Employer shall be
obligated to include resale of the shares issuable upon the exercise of the
Options in a registration statement to be filed with the Securities and Exchange
Commission and declared effective by no later than the second anniversary of the
Effective Date at the Employer's sole cost and expense.
(d) Interim Loan. Employer agrees to provide
Executive with a loan of $100,000 at the beginning of each of his first two (2)
years of employment (the "Loan"). The Loan shall be due together with simple
interest at the rate of eight percent (8%) per annum on April 17, 2004 (the
"Maturity Date"), or on such earlier date that Executive shall have received
aggregate proceeds of $5,000,000 from the sale of his Options or shares
underlying the Options; provided, however, that the Executive shall not be
required to repay the Loan if by the Maturity Date the sum of the proceeds
received by Executive from the sale of his Options or underlying shares through
the Maturity Date plus the remaining equity in the Options as of the Maturity
Date, shall not equal or exceed $5,000,000.
3.2 BONUS COMPENSATION
Executive shall be eligible to receive annual bonus
compensation at the discretion of Employer's Board of Directors and in
accordance with Employer's executive bonus or incentive compensation plan that
may be in effect from time to time.
4. EXPENSE REIMBURSEMENT
The Employer will pay the Executive's dues in such trade and
professional organizations as Employer deems appropriate, and will pay on behalf
of the Executive (or reimburse the Executive for) reasonable expenses incurred
by the Executive at the request of, or on behalf of, the Employer in the
performance of the Executive's duties pursuant to this Agreement, and in
accordance with the Employer's employment policies, including without limitation
reasonable expenses incurred by the Executive in attending conventions,
seminars, other business meetings and for promotional expenses, provided that
any such activities must be related to Employer's business and all individual
expenses (or those aggregated for a single convention, seminar or other business
trip) greater than $5,000 must be approved by Employer's board of directors. The
Executive must file expense reports with respect to such expenses in accordance
with the Employer's policies.
5. VACATIONS AND HOLIDAYS
The Executive will be entitled to three (3) weeks' paid
vacation each calendar year in accordance with the vacation policies of the
Employer in effect for its executive officers from time to time. The Executive
will also be entitled to the paid holidays and other paid leave set forth in the
Employer's policies. Vacation days during any calendar year that are not used by
the Executive during such calendar year may be used in any subsequent calendar
year; provided, however, that no more than six weeks' paid vacation may be
accrued or carried forward.
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6. TERMINATION
6.1 EVENTS OF TERMINATION
The Executive's employment pursuant to this Agreement
may be terminated by Employer only on the following grounds:
(a) upon the death of the Executive;
(b) upon the disability of the Executive (as defined
in Section 6.2) immediately upon notice from either party to the other; and
(c) for cause (as defined in Section 6.3),
immediately upon notice from the Employer to the Executive, or at such later
time as such notice may specify.
The Executive may terminate his employment only on the
following grounds:
(d) without any cause whatsoever, provided that
Executive gives Employer at least sixty (60) days' prior written notice of his
termination of employment;
(e) for any material breach of this Agreement by
Employer, which is not cured within ten (10) days after written notice to
Employer; or
(f) the occurrence of a Change in Control, provided
that Executive gives Employer at least sixty (60) days' prior written notice of
his termination of employment.
6.2 DEFINITION OF DISABILITY
For purposes of Section 6.1, the Executive will be
deemed to have a "Disability" if, for physical or mental reasons, the Executive
is unable to perform the essential functions of the Executive's duties with
reasonable accommodation under this Agreement for 120 consecutive days, or 120
days during any twelvemonth period, as determined in accordance with this
Section 6.2. The Disability of the Executive will be determined by a medical
doctor selected by written agreement of the Employer and the Executive upon the
request of either party by notice to the other. If the Employer and the
Executive cannot agree on the selection of a medical doctor, each of them will
select a medical doctor and the two medical doctors will select a third medical
doctor who will determine whether the Executive has a Disability. The
determination of the medical doctor selected under this Section 6.2 will be
binding on both parties. The Executive must submit to a reasonable number of
examinations by the medical doctor making the determination of disability under
this Section 6.2, and the Executive hereby authorizes the disclosure and release
to the Employer of such determination and all supporting medical records. If the
Executive is not legally competent, the Executive's legal guardian or duly
authorized attorney-in-fact will act in the Executive's stead, under this
Section 6.2, for the purposes of submitting the Executive to the examinations,
and providing the authorization of disclosure, required under this Section 6.2.
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6.3 DEFINITION OF "FOR CAUSE"
For purposes of Section 6.1, the phrase "for cause"
means: (a) the Executive's material breach of this Agreement, which is not cured
within ten (10) days after written notice to Executive; (b) theft, fraud, or
misappropriation (or attempted misappropriation) of any of the Employer's funds
or property; or (c) a conviction or entry of a guilty plea or plea of no contest
with respect to a felony or other crime involving moral turpitude for which
imprisonment is a possible punishment.
6.4 TERMINATION PAY
Effective upon the termination of this Agreement, the
Employer will be obligated to pay the Executive (or, in the event of his death,
his designated beneficiary as defined below) the compensation provided in this
Section 6.4:
(a) Termination by the Employer for Cause or
Termination by Executive Without Cause. If the Employer terminates this
Agreement for cause or Executive terminates his employment without cause, the
Executive will be entitled to receive his Salary only through the date such
termination is effective, but will not be entitled to any bonus compensation for
the calendar year during which such termination occurs.
(b) Termination upon Disability. If this
Agreement is terminated by either party as a result of the Executive's
Disability, as determined under Section 6.2, the Employer will pay the Executive
his Salary through the remainder of the calendar month during which such
termination is effective and for the lesser of (i) three consecutive months
thereafter, or (ii) the period until disability insurance benefits commence
under the disability insurance coverage furnished by the Employer to the
Executive. Executive shall also be entitled to receive that part of the
Executive's bonus compensation, if any, for the calendar year during which his
Disability occurs, prorated through the end of the calendar month during which
his termination is effective.
(c) Termination upon Death. If this
Agreement is terminated because of the Executive's death, the Executive will be
entitled to receive his Salary through the end of the calendar month in which
his death occurs, and that part of the Executive's bonus compensation, if any,
for the calendar year during which his death occurs, prorated through the end of
the calendar month during which his death occurs.
(d) Termination by Executive Due to Breach
by Employer or Termination by Employer Without Cause. If this Agreement is
terminated by Executive due to a breach of this Agreement by Employer, or if
this Agreement is terminated by Employer for other than "for cause" then (i)
Employer shall continue to pay to Executive his monthly Salary and bonus, based
upon the average annual bonus paid previously to Executive prior to termination
of this Agreement, for the lesser of one (1) year from the date of termination
or the remaining term under this Employment Agreement; and (ii) the Options plus
all other stock, options or other equity rights in Employer which Executive
received in connection with his employment by Employer shall become immediately
vested to the extent such Options or other securities would have become vested
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had Executive remained employed by Employer for the earlier of one (1) year from
the date of termination or the remaining term under this Employment Agreement.
(e) Termination by Executive Due to a Change
of Control. If this Agreement is terminated by Executive due to a Change of
Control that occurs after September 21, 2000, then (i) Employer shall continue
to pay to Executive his monthly Salary and bonus, based upon the average annual
bonus paid previously to Executive prior to termination of this Agreement, for
the greater of one year from the date of termination or the remaining original
three year Employment Period; and (ii) all Options plus all other stock, options
or other equity rights in Employer which Executive received in connection with
his employment by Employer shall become immediately vested and Employer shall
promptly deliver to Executive stock certificates therefor, if applicable.
(f) Benefits. The Executive's accrual of, or
participation in plans providing for, the Benefits will cease at the effective
date of the termination of this Agreement, and the Executive will be entitled to
accrued Benefits pursuant to such plans only as provided in such plans.
7. NONDISCLOSURE COVENANT
Employer and the Executive acknowledge that the services to be
performed by the Executive under this Agreement are unique and valuable and
that, as a result of the Executive's employment, the Executive will be in a
relationship of confidence and trust with Employer and will come into possession
of "Confidential Information" (i) owned or controlled by Employer and its
subsidiaries and affiliates; (ii) in the possession of Employer and its
subsidiaries and affiliates and belonging to third parties; or (iii) conceived,
originated, discovered or developed, in whole or in part, by the Executive. As
used herein "Confidential Information" means trade secrets and other
confidential or proprietary business, technical, personnel or financial
information of Employer, whether or not the Executive's work product, in
written, graphic, oral or other tangible or intangible forms, including but not
limited to specifications, samples, records, data, computer programs, drawings,
diagrams, models, consumer names, ID's or email addresses, business or marketing
plans, studies, analyses, projections and reports, communications by or to
attorneys (including attorney-client privileged communications), memos and
other materials prepared by attorneys or under their direction (including
attorney work product), and software systems and processes that are not readily
available to the public, even it is not specifically marked as a trade secret or
confidential, unless Employer advises the Executive otherwise in writing or
unless the information has been shared by Employer with entities not bound by
nondisclosure agreements. In consideration of the compensation and benefits to
be paid or provided to the Executive by the Employer under this Agreement, the
Executive agrees not to directly or indirectly use or disclose to anyone, either
during the Employment Period or after the termination of this Agreement, except
in the performance of his duties of his employment with Employer or with
Employer's prior written consent, any Confidential Information of Employer. This
nondisclosure covenant does not apply to information that is disclosed or
becomes public through another source; which Executive is required to disclose
pursuant to court order, subpoena or applicable law (provided that Executive
will use reasonable efforts to provide Employer with prompt notice of any such
requests or requirement so that
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Employer may seek an appropriate protective order); or which is disclosed in any
proceeding to enforce or interpret this Agreement. The Executive agrees that in
the event of the termination of the Executive's employment for any reason, the
Executive will deliver to Employer, upon request, all property belonging to
Employer, including all documents and materials of any nature pertaining to the
Executive's work with Employer and will not take with him any documents or
materials of any description, or any reproduction thereof of any description,
containing or pertaining to any Confidential Information.
8. NONCOMPETITION
During the term of this Agreement and for a one year period
after termination of this Agreement by Employer for cause or by Executive
without any cause whatsoever (i.e., not as a result of termination by Executive
under Sections 6.1(e), or 6.1(f)), as set forth in Sections 6.1(c) and (d), the
Executive agrees that he shall not (a) work for or be interested in any business
which serves as a holding company primarily for the purpose of acquiring
entities whose products and services are delivered to consumers over the
Internet ("Internet Entities"), (b) engage or be interested in or receive any
compensation from any business in which the services to be rendered by the
Executive to such business directly relates to services or products which are
directly competitive with "primary" services or products offered by the Employer
or a subsidiary or affiliate of Employer at the Executive's termination date; or
(c) induce or attempt to induce any employee, agent or customer of Employer or
any of its subsidiaries or affiliates to terminate or reduce the scope of his,
her or its relationship with Employer. A product or service shall be deemed
"primary" only if such service or product constitutes a primary component of the
core business of Employer or its majority owned subsidiaries and affiliates on
Executive's termination date. For the purposes of this Agreement, the term "work
for or be interested in any business" means that the Executive is a stockholder,
director, officer, employee, partner, individual proprietor, lender or
consultant with that business, but not if (i) his interest is limited solely to
the passive ownership of five percent (5%) or less of any class of the equity or
debt securities of a corporation whose shares are listed for trading on a
national securities exchange or traded in the over-the-counter market, or (ii)
he is interested in a company listed on Schedule 8 hereto, or after termination
hereof, works for such company; provided however, that so long as this
noncompetition agreement is in effect, Executive shall not work for a company
listed on Schedule 8 if such company serves as a holding company primarily for
the purpose of acquiring Internet Entities. In the event that any part of this
Section 8 is adjudged invalid or unenforceable by any court of record, board of
arbitration or judicial or quasi judicial entity having jurisdiction thereof by
reason of length of time, geographical coverage, activities covered, or for any
other reason, then the invalid or unenforceable provisions of this covenant
shall be deemed reformed and amended to the maximum extent permissible under
applicable law and shall be enforced and enforceable as so amended in accordance
with the intention of the parties as expressed herein.
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9. GENERAL PROVISIONS
9.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Executive acknowledges that the injury that would
be suffered by the Employer as a result of a breach of the provisions of any
provision of Sections 7 and 8 of this Agreement would be irreparable and that an
award of monetary damages to the Employer for such a breach would be an
inadequate remedy. Consequently Employer will have the right, in addition to any
other rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provisions of
Sections 7 and 8 of this Agreement, and the Employer will not be obligated to
post bond or other security in seeking such relief.
9.2 WAIVER
The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any delay
by either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege, and no
single or partial exercise of any such right, power, or privilege will preclude
any other or further exercise of such right, power, or privilege or the exercise
of any other right, power, or privilege.
9.3 NOTICES
All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand, (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
each case to the appropriate addresses and facsimile numbers set forth below (or
to such other addresses and facsimile numbers as a party may designate by notice
to the other parties):
If to Employer: Net Value Holdings, Inc.
Two Penn Center, Suite 605
Philadelphia, PA 19102
Facsimile No.: (215) 5643133
With a copy to: Klehr, Harrison, Harvey, Branzburg Ellers
260 South Broad Street
Philadelphia, PA 19102
Attention: Michael C. Forman
Facsimile No.: (215) 568 6603
If to Executive: Stephen M. Cohen
1811 Fireside Court
Cherry Hill, NJ 08003
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9.4 ENTIRE AGREEMENT; AMENDMENTS
This Agreement and the documents referenced herein,
contain the entire agreement between the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, between the parties hereto with respect to the subject matter hereof.
This Agreement may not be amended orally, but only by an agreement in writing
signed by the parties hereto.
9.5 GOVERNING LAW
This Agreement will be governed by the laws of the
State of Delaware without regard to conflicts of laws principles.
9.6 JURISDICTION
Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Delaware,
or, if it has or can acquire jurisdiction, in the United States District Court
for the District of Delaware, and each of the parties consents to the
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on either party anywhere in the world.
9.7 ASSIGNABILITY, BINDING NATURE
This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors, heirs (in the case of
the Executive) and assigns. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law.
9.8 SURVIVAL
The respective rights and obligations of the parties
hereunder shall survive any termination of the Executive's employment to the
extent necessary to the intended preservation of such rights and obligations.
9.9 PRIOR AGREEMENTS
The Executive represents and warrants to Employer
that his execution and performance of this Agreement shall not constitute a
breach of any contract, agreement or understanding, whether oral or written, to
which he is a party or by which he is bound.
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9.10 ACKNOWLEDGMENT
The Executive hereby acknowledges and certifies that
he has read the terms of this Agreement, that he has been informed by Employer
that he should discuss it with an attorney of his choice, and that he
understands its terms and effects. The Executive further acknowledges that based
on his training and experience, he has the capacity to earn a livelihood by
performing services as an employee or otherwise in a business that does not
violate the provisions of Section 8. Employer acknowledges that the terms of
this Agreement have been reviewed and approved by its Board of Directors.
9.11 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are
provided for convenience only and will not affect its construction or
interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
9.12 SEVERABILITY
If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
9.13 COUNTERPARTS
This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement. This Agreement (and all other agreements, documents,
instruments and certificates executed and/or delivered in connection herewith)
may be executed by facsimile signatures, each of which shall be deemed an
original copy of this Agreement (or other such agreement, document, instrument
and certificate).
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IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the date first written above.
EMPLOYER:
NET VALUE HOLDINGS, INC.
By:_____________________________________
Andrew Panzo, Chief Executive Officer
and Chairman of the Board of Directors
EMPLOYEE:
---------------------------
Stephen M. Cohen
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THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. THIS
WARRANT AND SUCH SECURITIES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THIS WARRANT.
May 8, 2000
NET VALUE HOLDINGS, INC.
COMMON STOCK PURCHASE WARRANT
NET VALUE HOLDINGS, INC., a Delaware corporation (the "Company"), for
value received, hereby certifies that Darr Aley (the "Holder") is entitled to
purchase from the Company, at any time or from time to time during the period
specified in Section 2 hereof, 332,416 fully paid and nonassessable shares of
Common Stock, par value $.001, of the Company (the "Common Stock"), at an
exercise price equal to $1.00 per share, subject to adjustment hereunder (the
"Exercise Price"), and subject to the other terms herein. As used herein, the
term "Warrant Shares" means the shares of Common Stock issuable upon exercise of
this Common Stock Purchase Warrant (the "Warrant").
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the Holder,
in whole or in part, by the surrender of this Warrant, together with a completed
exercise agreement in the form attached hereto (the "Exercise Agreement"), to
the Company during normal business hours on any business day at the Company's
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the Holder hereof), and upon payment to the Company
in cash, by certified or official bank check or by wire transfer to an account
specified by the Company of the Exercise Price for the Warrant Shares specified
in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be
issued to the Holder as of the close of business on the date on which this
Warrant shall have been surrendered, the completed Exercise Agreement shall have
been delivered, and payment shall have been made for such shares as set forth
above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the Holder hereof within five business days after this Warrant
shall have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the Holder hereof and shall be registered
in the name of Holder or such other name as Holder may designate subject to the
transfer restrictions herein and upon payment by Holder of any applicable
transfer taxes. In the event this Warrant is exercised in part, the Company
shall also deliver a new Warrant to the Holder hereof, which Warrant shall be
identical to this Warrant, except that the number of Warrant Shares exercisable
therefor shall be decreased by the number of Warrant Shares so purchased.
<PAGE>
2. Vesting and Period of Exercise. This Warrant shall vest immediately
as to 192,275 shares of Common Stock and vest pro rata on a monthly basis over
36 months commencing on the date of this Warrant as to the remaining 140,141
shares of Common Stock, provided that, the Holder hereof shall forfeit and
thereafter be unable to exercise any unvested portion of this Warrant following
a breach by Holder of the provisions of Sections 3 or 4 of this Warrant. This
Warrant is exercisable at any time or from time to time on or after the vesting
dates listed above, and before 5:00 p.m., eastern time on the fifth anniversary
of the date of this Warrant (the "Exercise Period").
3. Non-Disclosure Covenant. The Company and Holder acknowledge that by
virtue of consulting services performed and to be performed by Holder, and by
virtue of Holder's position as a director of the Company, Holder has been and
will continue to be in a relationship of confidence and trust with the Company
and will come into possession of "Confidential Information" (i) owned or
controlled by the Company and its subsidiaries and affiliate companies (as such
term is defined from time to time in periodic reports which the Company files
with the Securities and Exchange Commission); (ii) in the possession of the
Company and its subsidiaries and affiliate companies and belonging to third
parties; or (iii) conceived, originated, discovered or developed, in whole or in
part, by Holder. As used herein "Confidential Information" means trade secrets
and other confidential or proprietary business, technical, personnel or
financial information of the Company, whether or not Holder's work product, in
written, graphic, oral or other tangible or intangible forms, including but not
limited to specifications, samples, records, data, computer programs, drawings,
diagrams, models, consumer names, ID's or e-mail addresses, business or
marketing plans, studies, analyses, projections and reports, communications by
or to attorneys (including attorney-client privileged communications), memos and
other materials prepared by attorneys or under their direction (including
attorney work product), and software systems and processes that are not readily
available to the public, even such items not specifically marked as a trade
secret or confidential, unless the Company advises Holder otherwise in writing
or unless the information has been shared by the Company with entities not bound
by non-disclosure agreements. In consideration of the fees paid, to be paid or
provided to Holder, including the grant of this Warrant, Holder agrees not to
directly or indirectly use or disclose to anyone, either during the term of his
engagement as a consultant to the Company or after the termination of such
engagement, except in the performance of his duties or with the Company's prior
written consent, any Confidential Information of the Company. This
non-disclosure covenant does not apply to information (i) that is disclosed or
becomes public through another source; or (ii) which Holder is required to
disclose pursuant to court order, subpoena or applicable law (provided that
Holder will use reasonable efforts to provide the Company with prompt notice of
any such requests or requirement so that the Company may seek an appropriate
protective order). Holder agrees that in the event of the termination of his
engagement as a consultant to the Company for any reason, Holder will deliver to
the Company, upon request, all property belonging to the Company, including all
documents and materials of any nature pertaining to Holder's engagement with the
Company and will not take with him any documents or materials of any
description, or any reproduction thereof of any description, containing or
pertaining to any Confidential Information.
4. Non-Competition. During the period commencing on the date of this
Warrant and ending on the date which is the later of one year after the
termination of Holder's engagement as a consultant to the Company or 36 months
after the date of this Warrant (the "Non-Competition Lapse Date"), Holder agrees
that he shall not (a) work for or be interested in any business which serves as
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a holding company primarily for the purpose of acquiring entities whose products
and services are delivered to consumers over the Internet ("Internet Entities"),
(b) engage or be interested in or receive any compensation from any business in
which the services to be rendered by Holder to such business directly relates to
services or products which are directly competitive with "primary" services or
products offered by the Company or a subsidiary or affiliate company of the
Company at the Non-Competition Lapse Date or (c) induce or attempt to induce
any employee, agent or customer of the Company or any of its subsidiaries or
affiliate companies to terminate or reduce the scope of his, her or its
relationship with the Company. A product or service shall be deemed "primary"
only if such service or product constitutes a primary component of the core
business of the Company, its majority-owned subsidiaries or its affiliate
companies on the Non-Competition Lapse Date. For the purposes of this Agreement,
the term "work for or be interested in" a business means that Holder is a
stockholder, director, officer, employee, partner, individual proprietor, lender
or consultant with that business, but not if his interest is limited solely to
the passive ownership of five percent (5%) or less of any class of the equity or
debt securities of a corporation whose shares are listed for trading on a
national securities exchange or traded in the over-the-counter market. In the
event that any part of this Section 4 is adjudged invalid or unenforceable by
any court of record, board of arbitration or judicial or quasi judicial entity
having jurisdiction thereof by reason of length of time, geographical coverage,
activities covered, or for any other reason, then the invalid or unenforceable
provisions of this covenant shall be deemed reformed and amended to the maximum
extent permissible under applicable law and shall be enforced and enforceable as
so amended in accordance with the intention of the parties as expressed herein.
5. Certain Agreements of the Company. The Company covenants as follows:
a. Shares to be Fully Paid. All Warrant Shares shall, upon issuance
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
b. Reservation of Shares. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
c. Certain Actions Prohibited. The Company shall not, by amendment
of its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed by it hereunder, but shall at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such action as may reasonably be requested by
the Holder of this Warrant in order to protect the exercise privilege of the
Holder of this Warrant against impairment, consistent with the tenor and purpose
of this Warrant. Without limiting the generality of the foregoing, the Company
shall take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
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<PAGE>
d. Successors and Assigns. This Warrant shall be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.
6. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 6.
a. Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the Common Stock into a greater
number of shares, then, after the record date for effecting such subdivision,
the Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced and the number of Warrant Shares shall be
proportionately increased. If the Company at any time combines (by reverse stock
split, recapitalization, reorganization, reclassification or otherwise) the
Common Stock into a smaller number of shares, then, after the record date for
effecting such combination, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased and the number of Warrant
Shares shall be proportionately decreased.
b. Consolidation, Merger or Sale. In case the Company after the date
hereof (a) shall consolidate with or merge into any other entity and shall not
be the continuing or surviving corporation of such consolidation or merger, (b)
shall permit any other entity to consolidate with or merge into the Company and
the Company shall be the continuing or surviving entity but, in connection with
such consolidation or merger, all outstanding shares of Common Stock shall be
changed into or exchanged for stock or other securities of any other entity or
cash or any other property, (c) shall transfer all or substantially all of its
properties or assets to any other person or entity, or (d) shall effect a
capital reorganization or reclassification of the Common Stock (other than a
capital reorganization or reclassification for which adjustment in the Exercise
Price is provided in Section 6(a)), then, and in the case of each such
transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the Holder, upon the exercise
hereof at any time after the consummation of such transaction, shall be entitled
to receive (at the aggregate Exercise Price in effect at the time of such
consummation for all Common Stock issuable upon such exercise immediately prior
to such consummation), in lieu of the Common Stock issuable upon such exercise
immediately prior to such consummation, the highest amount of securities, cash
or other property to which Holder would have been entitled as a shareholder upon
such consummation if Holder had exercised this Warrant immediately prior
thereto, subject to adjustments (subsequent to such consummation) as nearly
equivalent as possible to the adjustments provided for in this Section 6. The
Company shall not effect any such consolidation, merger, or sale of assets, or
capital reorganization or reclassification unless prior to the consummation
thereof, the continuing or surviving corporation (if other than the Company)
assumes by written instrument the obligations under this Section 6 and the
obligations to deliver to the Holder of this Warrant such securities, cash or
other property as, in accordance with the foregoing provisions, the Holder may
be entitled to acquire.
c. Distribution of Assets. In case the Company shall declare or make
any distribution of its assets to all Holders of Common Stock as a partial
liquidating dividend, by way
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<PAGE>
of return of capital or otherwise, other than a dividend payable in shares of
Common Stock or in cash out of earnings of the Company, the Holder shall be
entitled upon exercise of this Warrant to receive the amount of cash, securities
or other property that would have been payable to the Holder had Holder been the
Holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
d. Notice of Adjustment. Upon the occurrence of any event that
requires any adjustment of the Exercise Price, the Company shall give notice
thereof to the Holder, which notice shall state the Exercise Price resulting
from such adjustment and the increase or decrease, if any, in the number of
Warrant Shares, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
e. Adjustment of Exercise Price. No adjustment of the Exercise Price
shall be made in an amount less than 1% of the Exercise Price in effect at the
time such adjustment is otherwise required to be made, but any such lesser
adjustment shall be carried forward and shall be made at the time and together
with the next subsequent adjustment which, together with any adjustments so
carried forward, shall amount to not less than 1% of such Exercise Price. In the
event that any adjustment of the Exercise Price as required herein results in a
fraction of a cent, such Exercise Price shall be rounded up to the nearest cent.
f. No Fractional Shares If any exercise of this Warrant would result
in the issuance of a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares of Common Stock issuable upon such
exercise shall be the nearest whole number of shares.
g. Other Notices. In case at any time:
i. the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution (other
than dividends or distributions payable in cash out of retained earnings) to the
holders of the Common Stock;
ii. the Company shall offer for subscription pro rata to all
holders of the Common Stock any additional shares of stock of any class or other
rights;
iii. there shall be any capital reorganization of the Company, or
reclassification of the Common Stock or sale of all or substantially all its
assets to another entity; or
iv. there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder notice of (a) the
date on which the books of the Company shall close or a record shall be taken
for determining the holders of Common Stock entitled to receive any such
dividend, distribution or subscription rights, or for determining the holders of
Common Stock entitled to vote in respect of any such transaction, and (b) the
date (or, if not then known, a reasonable approximation thereof by the Company)
when such transaction shall occur. Such notice shall also specify the date on
which the holders of Common Stock shall be
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<PAGE>
entitled to receive such dividend, distribution or subscription rights or to
exchange their Common Stock for stock or other securities or property
deliverable upon consummation of such transaction. Such notice shall be given at
least 30 days prior to the record date or the date on which the Company's books
are closed in respect thereto. Failure to give any such notice or any defect
therein shall not affect the validity of any action referred to in clauses (i),
(ii), (iii) and (iv) above.
h. Certain Events. In case any event shall occur as to which
paragraphs (a), (b) or (c) of this Section 6 are not strictly applicable but the
failure to make any adjustment would not fairly protect the rights represented
by this Warrant in accordance with the essential intent of such provisions, the
Company shall give notice of such event as provided in Section 6(d) and shall
make an appropriate adjustment in the Exercise Price and the number of Warrant
Shares to preserve, without dilution, the rights represented by this Warrant.
7. Tax Obligations. The issuance of certificates for Warrant Shares
upon the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax or other costs in respect thereof; provided that the Holder
shall pay all transfer taxes owed upon the issuance of such shares in the name
of any person or entity designed by the Holder. Upon exercise of the Warrant,
the Company shall have the right to require the Holder to remit to the Company
an amount sufficient to satisfy federal, state and local tax withholding
requirements prior to the delivery of any certificate for shares of Common Stock
purchased pursuant to the Warrant, if in the opinion of counsel to the Company,
such withholding is required under applicable tax laws. If the Holder is
obligated to pay the Company an amount required to be withheld under applicable
tax withholding requirements, then he may pay such amount (i) in cash; (ii) in
the discretion of the Compensation Committee of the Board of Directors, through
the delivery to the Company of previously-owned shares of Common Stock having an
aggregate fair market value equal to the tax obligation, provided that the
previously owned shares delivered in satisfaction of the withholding obligations
must have been held by the Holder for at least six (6) months; (iii) in the
discretion of the Compensation Committee of the Board of Directors, through the
withholding of shares of Common Stock otherwise issuable to the Holder in
connection with the Warrant exercise; or (iv) in the discretion of the
Compensation Committee of the Board of Directors, through a combination of the
procedures set forth in subsections (i), (ii) and (iii) above.
8. No Rights as a Stockholder. Prior to the exercise of this Warrant,
the Holder hereof, as such, shall not be entitled to any rights of a stockholder
of the Company by virtue of his ownership of this Warrant, including, without
limitation, the right to vote, to consent, to exercise any preemptive right, to
receive any notice of meetings of stockholders for the election of directors of
the Company or any other matter or to receive any notice of any proceedings of
the Company, except as may be specifically provided for herein.
9. Transfer, Exchange, and Replacement of Warrant.
a. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
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cancellation of this Warrant, the Company, at its expense, shall execute and
deliver, in lieu thereof, a new Warrant of like tenor.
b. Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer or replacement as provided in this
Section 9, this Warrant shall be promptly canceled by the Company. The Company
shall pay all taxes and all other expenses (other than legal expenses, if any,
incurred by the Holder) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 9.
c. Register. The Company shall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.
d. Exercise or Transfer Without Registration. If, at the time of
the surrender of this Warrant in connection with any exercise or transfer of
this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares), shall not be registered under the Securities Act and under applicable
state securities or blue sky laws, the Company may require, as a condition of
allowing such exercise or transfer, that the Holder furnish to the Company a
written opinion of counsel, which opinion and counsel are acceptable to the
Company, to the effect that such exercise or transfer may be made without
registration under the Securities Act and applicable state securities or blue
sky laws.
e. Restrictions on Transfer of Shares of Common Stock. The Holder
hereby agrees not to pledge, encumber, sell, assign or transfer (collectively,
"Transfer") the shares of Common Stock which the Holder owns as of the date of
this Warrant until such time as the Board of Directors, in consultation with an
investment banking firm engaged by the Company, determines that any such
Transfer would not have an adverse effect on the public trading market for the
Common Stock, provided that these restrictions on transfer shall lapse 18 months
after the date of this Warrant. The Company may place a restrictive legend
setting forth these restrictions on transfer on any stock certificates
representing these shares of Common Stock. The Company may also place stop
transfer orders on these stock certificates with its transfer agent as long as
these restrictions on transfer remain effective.
10. Notices. All notices, requests, and other communications required
or permitted to be given or delivered hereunder to the Holder shall be in
writing, and shall be personally delivered, or shall be sent by certified or
registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to the Holder at the address shown for the Holder on the books of the
Company, or at such other address as the Holder shall have furnished to the
Company. All notices, requests and other communications required or permitted to
be given or delivered hereunder to the Company shall be in writing, and shall be
personally delivered, or shall be sent by certified or registered mail or by
recognized overnight mail courier, postage prepaid and addressed, to Net Value
Holdings, Inc., Two Penn Center, Suite 605, Philadelphia, PA 19102, Attention:
Chief Executive Officer, Fax: (215) 564-3133, or to such other address as the
Company shall have furnished to the Holder. Any such notice, request or other
communication may be sent by facsimile, but shall in such case be subsequently
confirmed by a writing personally delivered or sent by certified or
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registered mail or by recognized overnight mail courier as provided above. All
notices, requests and other communications shall be deemed to have been given
either at the time of the receipt thereof at the address specified in this
Section 10 or, if mailed by registered or certified mail or with a recognized
overnight mail courier, upon deposit with the United States Post Office or such
overnight mail courier, postage prepaid and properly addressed.
11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO ITS OR ANY OTHER JURISDICTION'S CONFLICTS OF LAW.
12. Miscellaneous.
a. Amendments. This Warrant may only be amended by an instrument in
writing signed by the Company and the Holder.
b. Headings. The headings of the sections and paragraphs of this
Warrant are for reference purposes only, and shall not affect the meaning or
construction of any of the provisions hereof.
c. Entire Agreement. This Warrant contains the entire agreement
between the parties with respect to the grant or award of securities by the
Company to the Holder, and the vesting and exercise periods of these securities,
and supersedes all prior agreements and understandings, oral or written, between
the parties hereto regarding such subject matter including, but not limited to,
Amendment No. 2 to Merger Agreement and Plan of Reorganization dated as of July
22, 1999, and letter agreements between the parties dated August 31, 1999,
September 13, 1999 and January 23, 2000.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
NET VALUE HOLDINGS, INC.
By: ________________________________
Andrew P. Panzo
Chief Executive Officer
AGREED TO AND ACCEPTED:
________________________________
Darr Aley
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FORM OF EXERCISE AGREEMENT
Dated: ________, ____.
To:_____________________________
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of $_________. Please issue a certificate or certificates for such shares
of Common Stock in the name of and pay any cash for any fractional share to:
Name:____________________________________
Signature:_______________________________
Address:_________________________________
_________________________________
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
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THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. THIS
WARRANT AND SUCH SECURITIES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THIS WARRANT.
May 8, 2000
NET VALUE HOLDINGS, INC.
COMMON STOCK PURCHASE WARRANT
NET VALUE HOLDINGS, INC., a Delaware corporation (the "Company"), for
value received, hereby certifies that Stephen George (the "Holder") is entitled
to purchase from the Company, at any time or from time to time during the period
specified in Section 2 hereof, 382,416 fully paid and nonassessable shares of
Common Stock, par value $.001, of the Company (the "Common Stock"), at an
exercise price equal to $1.00 per share, subject to adjustment hereunder (the
"Exercise Price"), and subject to the other terms herein. As used herein, the
term "Warrant Shares" means the shares of Common Stock issuable upon exercise of
this Common Stock Purchase Warrant (the "Warrant").
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the Holder,
in whole or in part, by the surrender of this Warrant, together with a completed
exercise agreement in the form attached hereto (the "Exercise Agreement"), to
the Company during normal business hours on any business day at the Company's
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the Holder hereof), and upon payment to the Company
in cash, by certified or official bank check or by wire transfer to an account
specified by the Company of the Exercise Price for the Warrant Shares specified
in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be
issued to the Holder as of the close of business on the date on which this
Warrant shall have been surrendered, the completed Exercise Agreement shall have
been delivered, and payment shall have been made for such shares as set forth
above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the Holder hereof within five business days after this Warrant
shall have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the Holder hereof and shall be registered
in the name of Holder or such other name as Holder may designate subject to the
transfer restrictions herein and upon payment by Holder of any applicable
transfer taxes. In the event this Warrant is exercised in part, the Company
shall also deliver a new Warrant to the Holder hereof, which Warrant shall be
identical to this Warrant, except that the number of Warrant Shares exercisable
therefor shall be decreased by the number of Warrant Shares so purchased.
<PAGE>
2. Vesting and Period of Exercise. This Warrant shall vest immediately
as to 192,275 shares of Common Stock and vest pro rata on a monthly basis over
36 months commencing on the date of this Warrant as to the remaining 190,141
shares of Common Stock, provided that, the Holder hereof shall forfeit and
thereafter be unable to exercise any unvested portion of this Warrant following
a breach by Holder of the provisions of Sections 3 or 4 of this Warrant. This
Warrant is exercisable at any time or from time to time on or after the vesting
dates listed above, and before 5:00 p.m., eastern time on the fifth anniversary
of the date of this Warrant (the "Exercise Period").
3. Non-Disclosure Covenant. The Company and Holder acknowledge that by
virtue of consulting services performed and to be performed by Holder, and by
virtue of Holder's position as a director of the Company, Holder has been and
will continue to be in a relationship of confidence and trust with the Company
and will come into possession of "Confidential Information" (i) owned or
controlled by the Company and its subsidiaries and affiliate companies (as such
term is defined from time to time in periodic reports which the Company files
with the Securities and Exchange Commission); (ii) in the possession of the
Company and its subsidiaries and affiliate companies and belonging to third
parties; or (iii) conceived, originated, discovered or developed, in whole or in
part, by Holder. As used herein "Confidential Information" means trade secrets
and other confidential or proprietary business, technical, personnel or
financial information of the Company, whether or not Holder's work product, in
written, graphic, oral or other tangible or intangible forms, including but not
limited to specifications, samples, records, data, computer programs, drawings,
diagrams, models, consumer names, ID's or e-mail addresses, business or
marketing plans, studies, analyses, projections and reports, communications by
or to attorneys (including attorney-client privileged communications), memos and
other materials prepared by attorneys or under their direction (including
attorney work product), and software systems and processes that are not readily
available to the public, even such items not specifically marked as a trade
secret or confidential, unless the Company advises Holder otherwise in writing
or unless the information has been shared by the Company with entities not bound
by non-disclosure agreements. In consideration of the fees paid, to be paid or
provided to Holder, including the grant of this Warrant, Holder agrees not to
directly or indirectly use or disclose to anyone, either during the term of his
engagement as a consultant to the Company or after the termination of such
engagement, except in the performance of his duties or with the Company's prior
written consent, any Confidential Information of the Company. This
non-disclosure covenant does not apply to information (i) that is disclosed or
becomes public through another source; or (ii) which Holder is required to
disclose pursuant to court order, subpoena or applicable law (provided that
Holder will use reasonable efforts to provide the Company with prompt notice of
any such requests or requirement so that the Company may seek an appropriate
protective order). Holder agrees that in the event of the termination of his
engagement as a consultant to the Company for any reason, Holder will deliver to
the Company, upon request, all property belonging to the Company, including all
documents and materials of any nature pertaining to Holder's engagement with the
Company and will not take with him any documents or materials of any
description, or any reproduction thereof of any description, containing or
pertaining to any Confidential Information.
4. Non-Competition. During the period commencing on the date of this
Warrant and ending on the date which is the later of one year after the
termination of Holder's engagement as a consultant to the Company or 36 months
after the date of this Warrant (the "Non-Competition Lapse Date"), Holder agrees
that he shall not (a) work for or be interested in any business which serves as
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a holding company primarily for the purpose of acquiring entities whose products
and services are delivered to consumers over the Internet ("Internet Entities"),
(b) engage or be interested in or receive any compensation from any business in
which the services to be rendered by Holder to such business directly relates to
services or products which are directly competitive with "primary" services or
products offered by the Company or a subsidiary or affiliate company of the
Company at the Non-Competition Lapse Date or (c) induce or attempt to induce
any employee, agent or customer of the Company or any of its subsidiaries or
affiliate companies to terminate or reduce the scope of his, her or its
relationship with the Company. A product or service shall be deemed "primary"
only if such service or product constitutes a primary component of the core
business of the Company, its majority-owned subsidiaries or its affiliate
companies on the Non-Competition Lapse Date. For the purposes of this Agreement,
the term "work for or be interested in" a business means that Holder is a
stockholder, director, officer, employee, partner, individual proprietor, lender
or consultant with that business, but not if his interest is limited solely to
the passive ownership of five percent (5%) or less of any class of the equity or
debt securities of a corporation whose shares are listed for trading on a
national securities exchange or traded in the over-the-counter market. In the
event that any part of this Section 4 is adjudged invalid or unenforceable by
any court of record, board of arbitration or judicial or quasi judicial entity
having jurisdiction thereof by reason of length of time, geographical coverage,
activities covered, or for any other reason, then the invalid or unenforceable
provisions of this covenant shall be deemed reformed and amended to the maximum
extent permissible under applicable law and shall be enforced and enforceable as
so amended in accordance with the intention of the parties as expressed herein.
5. Certain Agreements of the Company. The Company covenants as follows:
a. Shares to be Fully Paid. All Warrant Shares shall, upon issuance
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
b. Reservation of Shares. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
c. Certain Actions Prohibited. The Company shall not, by amendment
of its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed by it hereunder, but shall at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such action as may reasonably be requested by
the Holder of this Warrant in order to protect the exercise privilege of the
Holder of this Warrant against impairment, consistent with the tenor and purpose
of this Warrant. Without limiting the generality of the foregoing, the Company
shall take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
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d. Successors and Assigns. This Warrant shall be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.
6. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 6.
a. Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the Common Stock into a greater
number of shares, then, after the record date for effecting such subdivision,
the Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced and the number of Warrant Shares shall be
proportionately increased. If the Company at any time combines (by reverse stock
split, recapitalization, reorganization, reclassification or otherwise) the
Common Stock into a smaller number of shares, then, after the record date for
effecting such combination, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased and the number of Warrant
Shares shall be proportionately decreased.
b. Consolidation, Merger or Sale. In case the Company after the date
hereof (a) shall consolidate with or merge into any other entity and shall not
be the continuing or surviving corporation of such consolidation or merger, (b)
shall permit any other entity to consolidate with or merge into the Company and
the Company shall be the continuing or surviving entity but, in connection with
such consolidation or merger, all outstanding shares of Common Stock shall be
changed into or exchanged for stock or other securities of any other entity or
cash or any other property, (c) shall transfer all or substantially all of its
properties or assets to any other person or entity, or (d) shall effect a
capital reorganization or reclassification of the Common Stock (other than a
capital reorganization or reclassification for which adjustment in the Exercise
Price is provided in Section 6(a)), then, and in the case of each such
transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the Holder, upon the exercise
hereof at any time after the consummation of such transaction, shall be entitled
to receive (at the aggregate Exercise Price in effect at the time of such
consummation for all Common Stock issuable upon such exercise immediately prior
to such consummation), in lieu of the Common Stock issuable upon such exercise
immediately prior to such consummation, the highest amount of securities, cash
or other property to which Holder would have been entitled as a shareholder upon
such consummation if Holder had exercised this Warrant immediately prior
thereto, subject to adjustments (subsequent to such consummation) as nearly
equivalent as possible to the adjustments provided for in this Section 6. The
Company shall not effect any such consolidation, merger, or sale of assets, or
capital reorganization or reclassification unless prior to the consummation
thereof, the continuing or surviving corporation (if other than the Company)
assumes by written instrument the obligations under this Section 6 and the
obligations to deliver to the Holder of this Warrant such securities, cash or
other property as, in accordance with the foregoing provisions, the Holder may
be entitled to acquire.
c. Distribution of Assets. In case the Company shall declare or make
any distribution of its assets to all Holders of Common Stock as a partial
liquidating dividend, by way
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of return of capital or otherwise, other than a dividend payable in shares of
Common Stock or in cash out of earnings of the Company, the Holder shall be
entitled upon exercise of this Warrant to receive the amount of cash, securities
or other property that would have been payable to the Holder had Holder been the
Holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
d. Notice of Adjustment. Upon the occurrence of any event that
requires any adjustment of the Exercise Price, the Company shall give notice
thereof to the Holder, which notice shall state the Exercise Price resulting
from such adjustment and the increase or decrease, if any, in the number of
Warrant Shares, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
e. Adjustment of Exercise Price. No adjustment of the Exercise Price
shall be made in an amount less than 1% of the Exercise Price in effect at the
time such adjustment is otherwise required to be made, but any such lesser
adjustment shall be carried forward and shall be made at the time and together
with the next subsequent adjustment which, together with any adjustments so
carried forward, shall amount to not less than 1% of such Exercise Price. In the
event that any adjustment of the Exercise Price as required herein results in a
fraction of a cent, such Exercise Price shall be rounded up to the nearest cent.
f. No Fractional Shares If any exercise of this Warrant would result
in the issuance of a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares of Common Stock issuable upon such
exercise shall be the nearest whole number of shares.
g. Other Notices. In case at any time:
i. the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution (other
than dividends or distributions payable in cash out of retained earnings) to the
holders of the Common Stock;
ii. the Company shall offer for subscription pro rata to all
holders of the Common Stock any additional shares of stock of any class or other
rights;
iii. there shall be any capital reorganization of the Company, or
reclassification of the Common Stock or sale of all or substantially all its
assets to another entity; or
iv. there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder notice of (a) the
date on which the books of the Company shall close or a record shall be taken
for determining the holders of Common Stock entitled to receive any such
dividend, distribution or subscription rights, or for determining the holders of
Common Stock entitled to vote in respect of any such transaction, and (b) the
date (or, if not then known, a reasonable approximation thereof by the Company)
when such transaction shall occur. Such notice shall also specify the date on
which the holders of Common Stock shall be
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entitled to receive such dividend, distribution or subscription rights or to
exchange their Common Stock for stock or other securities or property
deliverable upon consummation of such transaction. Such notice shall be given at
least 30 days prior to the record date or the date on which the Company's books
are closed in respect thereto. Failure to give any such notice or any defect
therein shall not affect the validity of any action referred to in clauses (i),
(ii), (iii) and (iv) above.
h. Certain Events. In case any event shall occur as to which
paragraphs (a), (b) or (c) of this Section 6 are not strictly applicable but the
failure to make any adjustment would not fairly protect the rights represented
by this Warrant in accordance with the essential intent of such provisions, the
Company shall give notice of such event as provided in Section 6(d) and shall
make an appropriate adjustment in the Exercise Price and the number of Warrant
Shares to preserve, without dilution, the rights represented by this Warrant.
7. Tax Obligations. The issuance of certificates for Warrant Shares
upon the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax or other costs in respect thereof; provided that the Holder
shall pay all transfer taxes owed upon the issuance of such shares in the name
of any person or entity designed by the Holder. Upon exercise of the Warrant,
the Company shall have the right to require the Holder to remit to the Company
an amount sufficient to satisfy federal, state and local tax withholding
requirements prior to the delivery of any certificate for shares of Common Stock
purchased pursuant to the Warrant, if in the opinion of counsel to the Company,
such withholding is required under applicable tax laws. If the Holder is
obligated to pay the Company an amount required to be withheld under applicable
tax withholding requirements, then he may pay such amount (i) in cash; (ii) in
the discretion of the Compensation Committee of the Board of Directors, through
the delivery to the Company of previously-owned shares of Common Stock having an
aggregate fair market value equal to the tax obligation, provided that the
previously owned shares delivered in satisfaction of the withholding obligations
must have been held by the Holder for at least six (6) months; (iii) in the
discretion of the Compensation Committee of the Board of Directors, through the
withholding of shares of Common Stock otherwise issuable to the Holder in
connection with the Warrant exercise; or (iv) in the discretion of the
Compensation Committee of the Board of Directors, through a combination of the
procedures set forth in subsections (i), (ii) and (iii) above.
8. No Rights as a Stockholder. Prior to the exercise of this Warrant,
the Holder hereof, as such, shall not be entitled to any rights of a stockholder
of the Company by virtue of his ownership of this Warrant, including, without
limitation, the right to vote, to consent, to exercise any preemptive right, to
receive any notice of meetings of stockholders for the election of directors of
the Company or any other matter or to receive any notice of any proceedings of
the Company, except as may be specifically provided for herein.
9. Transfer, Exchange, and Replacement of Warrant.
a. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
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cancellation of this Warrant, the Company, at its expense, shall execute and
deliver, in lieu thereof, a new Warrant of like tenor.
b. Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer or replacement as provided in this
Section 9, this Warrant shall be promptly canceled by the Company. The Company
shall pay all taxes and all other expenses (other than legal expenses, if any,
incurred by the Holder) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 9.
c. Register. The Company shall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.
d. Exercise or Transfer Without Registration. If, at the time of
the surrender of this Warrant in connection with any exercise or transfer of
this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares), shall not be registered under the Securities Act and under applicable
state securities or blue sky laws, the Company may require, as a condition of
allowing such exercise or transfer, that the Holder furnish to the Company a
written opinion of counsel, which opinion and counsel are acceptable to the
Company, to the effect that such exercise or transfer may be made without
registration under the Securities Act and applicable state securities or blue
sky laws.
e. Restrictions on Transfer of Shares of Common Stock. The Holder
hereby agrees not to pledge, encumber, sell, assign or transfer (collectively,
"Transfer") the shares of Common Stock which the Holder owns as of the date of
this Warrant until such time as the Board of Directors, in consultation with an
investment banking firm engaged by the Company, determines that any such
Transfer would not have an adverse effect on the public trading market for the
Common Stock, provided that these restrictions on transfer shall lapse 18 months
after the date of this Warrant. The Company may place a restrictive legend
setting forth these restrictions on transfer on any stock certificates
representing these shares of Common Stock. The Company may also place stop
transfer orders on these stock certificates with its transfer agent as long as
these restrictions on transfer remain effective.
10. Notices. All notices, requests, and other communications required
or permitted to be given or delivered hereunder to the Holder shall be in
writing, and shall be personally delivered, or shall be sent by certified or
registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to the Holder at the address shown for the Holder on the books of the
Company, or at such other address as the Holder shall have furnished to the
Company. All notices, requests and other communications required or permitted to
be given or delivered hereunder to the Company shall be in writing, and shall be
personally delivered, or shall be sent by certified or registered mail or by
recognized overnight mail courier, postage prepaid and addressed, to Net Value
Holdings, Inc., Two Penn Center, Suite 605, Philadelphia, PA 19102, Attention:
Chief Executive Officer, Fax: (215) 564-3133, or to such other address as the
Company shall have furnished to the Holder. Any such notice, request or other
communication may be sent by facsimile, but shall in such case be subsequently
confirmed by a writing personally delivered or sent by certified or
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registered mail or by recognized overnight mail courier as provided above. All
notices, requests and other communications shall be deemed to have been given
either at the time of the receipt thereof at the address specified in this
Section 10 or, if mailed by registered or certified mail or with a recognized
overnight mail courier, upon deposit with the United States Post Office or such
overnight mail courier, postage prepaid and properly addressed.
11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO ITS OR ANY OTHER JURISDICTION'S CONFLICTS OF LAW.
12. Miscellaneous.
a. Amendments. This Warrant may only be amended by an instrument in
writing signed by the Company and the Holder.
b. Headings. The headings of the sections and paragraphs of this
Warrant are for reference purposes only, and shall not affect the meaning or
construction of any of the provisions hereof.
c. Entire Agreement. This Warrant contains the entire agreement
between the parties with respect to the grant or award of securities by the
Company to the Holder, and the vesting and exercise periods of these securities,
and supersedes all prior agreements and understandings, oral or written, between
the parties hereto regarding such subject matter including, but not limited to,
Amendment No. 2 to Merger Agreement and Plan of Reorganization dated as of July
22, 1999, and letter agreements between the parties dated August 31, 1999,
September 13, 1999 and January 23, 2000.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
NET VALUE HOLDINGS, INC.
By: ________________________________
Andrew P. Panzo
Chief Executive Officer
AGREED TO AND ACCEPTED:
_______________________________
Stephen George
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FORM OF EXERCISE AGREEMENT
Dated: ________, ____.
To:_____________________________
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of $_________. Please issue a certificate or certificates for such shares
of Common Stock in the name of and pay any cash for any fractional share to:
Name:____________________________________
Signature:_______________________________
Address:_________________________________
_________________________________
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
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THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. THIS
WARRANT AND SUCH SECURITIES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THIS WARRANT.
May 8, 2000
NET VALUE HOLDINGS, INC.
COMMON STOCK PURCHASE WARRANT
NET VALUE HOLDINGS, INC., a Delaware corporation (the "Company"), for
value received, hereby certifies that Barry Uphoff (the "Holder") is entitled to
purchase from the Company, at any time or from time to time during the period
specified in Section 2 hereof, 332,416 fully paid and nonassessable shares of
Common Stock, par value $.001, of the Company (the "Common Stock"), at an
exercise price equal to $1.00 per share, subject to adjustment hereunder (the
"Exercise Price"), and subject to the other terms herein. As used herein, the
term "Warrant Shares" means the shares of Common Stock issuable upon exercise of
this Common Stock Purchase Warrant (the "Warrant").
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the Holder,
in whole or in part, by the surrender of this Warrant, together with a completed
exercise agreement in the form attached hereto (the "Exercise Agreement"), to
the Company during normal business hours on any business day at the Company's
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the Holder hereof), and upon payment to the Company
in cash, by certified or official bank check or by wire transfer to an account
specified by the Company of the Exercise Price for the Warrant Shares specified
in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be
issued to the Holder as of the close of business on the date on which this
Warrant shall have been surrendered, the completed Exercise Agreement shall have
been delivered, and payment shall have been made for such shares as set forth
above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the Holder hereof within five business days after this Warrant
shall have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the Holder hereof and shall be registered
in the name of Holder or such other name as Holder may designate subject to the
transfer restrictions herein and upon payment by Holder of any applicable
transfer taxes. In the event this Warrant is exercised in part, the Company
shall also deliver a new Warrant to the Holder hereof, which Warrant shall be
identical to this Warrant, except that the number of Warrant Shares exercisable
therefor shall be decreased by the number of Warrant Shares so purchased.
<PAGE>
2. Vesting and Period of Exercise. This Warrant shall vest immediately
as to 192,275 shares of Common Stock and vest pro rata on a monthly basis over
36 months commencing on the date of this Warrant as to the remaining 140,141
shares of Common Stock, provided that, the Holder hereof shall forfeit and
thereafter be unable to exercise any unvested portion of this Warrant following
a breach by Holder of the provisions of Section 3 of this Warrant. This Warrant
is exercisable at any time or from time to time on or after the vesting dates
listed above, and before 5:00 p.m., eastern time on the fifth anniversary of the
date of this Warrant (the "Exercise Period").
3. Non-Disclosure Covenant. The Company and Holder acknowledge that by
virtue of consulting services performed and to be performed by Holder, and by
virtue of Holder's position as a director of the Company, Holder has been and
will continue to be in a relationship of confidence and trust with the Company
and will come into possession of "Confidential Information" (i) owned or
controlled by the Company and its subsidiaries and affiliate companies (as such
term is defined from time to time in periodic reports which the Company files
with the Securities and Exchange Commission); (ii) in the possession of the
Company and its subsidiaries and affiliate companies and belonging to third
parties; or (iii) conceived, originated, discovered or developed, in whole or in
part, by Holder. As used herein "Confidential Information" means trade secrets
and other confidential or proprietary business, technical, personnel or
financial information of the Company, whether or not Holder's work product, in
written, graphic, oral or other tangible or intangible forms, including but not
limited to specifications, samples, records, data, computer programs, drawings,
diagrams, models, consumer names, ID's or e-mail addresses, business or
marketing plans, studies, analyses, projections and reports, communications by
or to attorneys (including attorney-client privileged communications), memos and
other materials prepared by attorneys or under their direction (including
attorney work product), and software systems and processes that are not readily
available to the public, even such items not specifically marked as a trade
secret or confidential, unless the Company advises Holder otherwise in writing
or unless the information has been shared by the Company with entities not bound
by non-disclosure agreements. In consideration of the fees paid, to be paid or
provided to Holder, including the grant of this Warrant, Holder agrees not to
directly or indirectly use or disclose to anyone, either during the term of his
engagement as a consultant to the Company or after the termination of such
engagement, except in the performance of his duties or with the Company's prior
written consent, any Confidential Information of the Company. This
non-disclosure covenant does not apply to information (i) that is disclosed or
becomes public through another source; or (ii) which Holder is required to
disclose pursuant to court order, subpoena or applicable law (provided that
Holder will use reasonable efforts to provide the Company with prompt notice of
any such requests or requirement so that the Company may seek an appropriate
protective order). Holder agrees that in the event of the termination of his
engagement as a consultant to the Company for any reason, Holder will deliver to
the Company, upon request, all property belonging to the Company, including all
documents and materials of any nature pertaining to Holder's engagement with the
Company and will not take with him any documents or materials of any
description, or any reproduction thereof of any description, containing or
pertaining to any Confidential Information.
4. Intentionally Omitted.
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5. Certain Agreements of the Company. The Company covenants as follows:
a. Shares to be Fully Paid. All Warrant Shares shall, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, and charges with respect
to the issue thereof.
b. Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
c. Certain Actions Prohibited. The Company shall not, by
amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed by it hereunder,
but shall at all times in good faith assist in the carrying out of all the
provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the Holder of this Warrant in order to protect the
exercise privilege of the Holder of this Warrant against impairment, consistent
with the tenor and purpose of this Warrant. Without limiting the generality of
the foregoing, the Company shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant.
d. Successors and Assigns. This Warrant shall be binding upon
any entity succeeding to the Company by merger, consolidation, or acquisition of
all or substantially all the Company's assets.
6. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 6.
a. Subdivision or Combination of Common Stock. If the Company
at any time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the Common Stock into a greater
number of shares, then, after the record date for effecting such subdivision,
the Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced and the number of Warrant Shares shall be
proportionately increased. If the Company at any time combines (by reverse stock
split, recapitalization, reorganization, reclassification or otherwise) the
Common Stock into a smaller number of shares, then, after the record date for
effecting such combination, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased and the number of Warrant
Shares shall be proportionately decreased.
b. Consolidation, Merger or Sale. In case the Company after
the date hereof (a) shall consolidate with or merge into any other entity and
shall not be the continuing or surviving corporation of such consolidation or
merger, (b) shall permit any other entity to consolidate with or merge into the
Company and the Company shall be the continuing or surviving entity but, in
connection with such consolidation or merger, all outstanding shares of Common
Stock shall be
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<PAGE>
changed into or exchanged for stock or other securities of any other entity or
cash or any other property, (c) shall transfer all or substantially all of its
properties or assets to any other person or entity, or (d) shall effect a
capital reorganization or reclassification of the Common Stock (other than a
capital reorganization or reclassification for which adjustment in the Exercise
Price is provided in Section 6(a)), then, and in the case of each such
transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Warrant, the Holder, upon the exercise
hereof at any time after the consummation of such transaction, shall be entitled
to receive (at the aggregate Exercise Price in effect at the time of such
consummation for all Common Stock issuable upon such exercise immediately prior
to such consummation), in lieu of the Common Stock issuable upon such exercise
immediately prior to such consummation, the highest amount of securities, cash
or other property to which Holder would have been entitled as a shareholder upon
such consummation if Holder had exercised this Warrant immediately prior
thereto, subject to adjustments (subsequent to such consummation) as nearly
equivalent as possible to the adjustments provided for in this Section 6. The
Company shall not effect any such consolidation, merger, or sale of assets, or
capital reorganization or reclassification unless prior to the consummation
thereof, the continuing or surviving corporation (if other than the Company)
assumes by written instrument the obligations under this Section 6 and the
obligations to deliver to the Holder of this Warrant such securities, cash or
other property as, in accordance with the foregoing provisions, the Holder may
be entitled to acquire.
c. Distribution of Assets. In case the Company shall declare
or make any distribution of its assets to all Holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise, other
than a dividend payable in shares of Common Stock or in cash out of earnings of
the Company, the Holder shall be entitled upon exercise of this Warrant to
receive the amount of cash, securities or other property that would have been
payable to the Holder had Holder been the Holder of such shares of Common Stock
on the record date for the determination of stockholders entitled to such
distribution.
d. Notice of Adjustment. Upon the occurrence of any event that
requires any adjustment of the Exercise Price, the Company shall give notice
thereof to the Holder, which notice shall state the Exercise Price resulting
from such adjustment and the increase or decrease, if any, in the number of
Warrant Shares, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
e. Adjustment of Exercise Price. No adjustment of the Exercise
Price shall be made in an amount less than 1% of the Exercise Price in effect at
the time such adjustment is otherwise required to be made, but any such lesser
adjustment shall be carried forward and shall be made at the time and together
with the next subsequent adjustment which, together with any adjustments so
carried forward, shall amount to not less than 1% of such Exercise Price. In the
event that any adjustment of the Exercise Price as required herein results in a
fraction of a cent, such Exercise Price shall be rounded up to the nearest cent.
f. No Fractional Shares If any exercise of this Warrant would
result in the issuance of a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares of Common Stock issuable
upon such exercise shall be the nearest whole number of shares.
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<PAGE>
g. Other Notices. In case at any time:
i. the Company shall declare any dividend upon the
Common Stock payable in shares of stock of any class or make any other
distribution (other than dividends or distributions payable in cash out of
retained earnings) to the holders of the Common Stock;
ii. the Company shall offer for subscription pro rata
to all holders of the Common Stock any additional shares of stock of any class
or other rights;
iii. there shall be any capital reorganization of the
Company, or reclassification of the Common Stock or sale of all or substantially
all its assets to another entity; or
iv. there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder notice of (a) the
date on which the books of the Company shall close or a record shall be taken
for determining the holders of Common Stock entitled to receive any such
dividend, distribution or subscription rights, or for determining the holders of
Common Stock entitled to vote in respect of any such transaction, and (b) the
date (or, if not then known, a reasonable approximation thereof by the Company)
when such transaction shall occur. Such notice shall also specify the date on
which the holders of Common Stock shall be entitled to receive such dividend,
distribution or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon consummation of such
transaction. Such notice shall be given at least 30 days prior to the record
date or the date on which the Company's books are closed in respect thereto.
Failure to give any such notice or any defect therein shall not affect the
validity of any action referred to in clauses (i), (ii), (iii) and (iv) above.
h. Certain Events. In case any event shall occur as to which
paragraphs (a), (b) or (c) of this Section 6 are not strictly applicable but the
failure to make any adjustment would not fairly protect the rights represented
by this Warrant in accordance with the essential intent of such provisions, the
Company shall give notice of such event as provided in Section 6(d) and shall
make an appropriate adjustment in the Exercise Price and the number of Warrant
Shares to preserve, without dilution, the rights represented by this Warrant.
7. Tax Obligations. The issuance of certificates for Warrant Shares
upon the exercise of this Warrant shall be made without charge to the Holder for
any issuance tax or other costs in respect thereof; provided that the Holder
shall pay all transfer taxes owed upon the issuance of such shares in the name
of any person or entity designed by the Holder. Upon exercise of the Warrant,
the Company shall have the right to require the Holder to remit to the Company
an amount sufficient to satisfy federal, state and local tax withholding
requirements prior to the delivery of any certificate for shares of Common Stock
purchased pursuant to the Warrant, if in the opinion of counsel to the Company,
such withholding is required under applicable tax laws. If the Holder is
obligated to pay the Company an amount required to be withheld under applicable
tax withholding requirements, then he may pay such amount (i) in cash; (ii) in
the discretion of the Compensation Committee of the Board of Directors, through
the delivery to the Company of previously-owned shares of Common Stock having an
aggregate fair market value equal to the tax obligation, provided that the
previously
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<PAGE>
owned shares delivered in satisfaction of the withholding obligations must have
been held by the Holder for at least six (6) months; (iii) in the discretion of
the Compensation Committee of the Board of Directors, through the withholding of
shares of Common Stock otherwise issuable to the Holder in connection with the
Warrant exercise; or (iv) in the discretion of the Compensation Committee of the
Board of Directors, through a combination of the procedures set forth in
subsections (i), (ii) and (iii) above.
8. No Rights as a Stockholder. Prior to the exercise of this Warrant,
the Holder hereof, as such, shall not be entitled to any rights of a stockholder
of the Company by virtue of his ownership of this Warrant, including, without
limitation, the right to vote, to consent, to exercise any preemptive right, to
receive any notice of meetings of stockholders for the election of directors of
the Company or any other matter or to receive any notice of any proceedings of
the Company, except as may be specifically provided for herein.
9. Transfer, Exchange, and Replacement of Warrant.
a. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, shall execute and
deliver, in lieu thereof, a new Warrant of like tenor.
b. Cancellation; Payment of Expenses. Upon the surrender of
this Warrant in connection with any transfer or replacement as provided in this
Section 9, this Warrant shall be promptly canceled by the Company. The Company
shall pay all taxes and all other expenses (other than legal expenses, if any,
incurred by the Holder) and charges payable in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 9.
c. Register. The Company shall maintain, at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the Holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
d. Exercise or Transfer Without Registration. If, at the time
of the surrender of this Warrant in connection with any exercise or transfer of
this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares), shall not be registered under the Securities Act and under applicable
state securities or blue sky laws, the Company may require, as a condition of
allowing such exercise or transfer, that the Holder furnish to the Company a
written opinion of counsel, which opinion and counsel are acceptable to the
Company, to the effect that such exercise or transfer may be made without
registration under the Securities Act and applicable state securities or blue
sky laws.
e. Restrictions on Transfer of Shares of Common Stock. The
Holder hereby agrees not to pledge, encumber, sell, assign or transfer
(collectively, "Transfer") the shares of Common Stock which the Holder owns as
of the date of this Warrant until such time as the Board
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<PAGE>
of Directors, in consultation with an investment banking firm engaged by the
Company, determines that any such Transfer would not have an adverse effect on
the public trading market for the Common Stock, provided that these restrictions
on transfer shall lapse 18 months after the date of this Warrant. The Company
may place a restrictive legend setting forth these restrictions on transfer on
any stock certificates representing these shares of Common Stock. The Company
may also place stop transfer orders on these stock certificates with its
transfer agent as long as these restrictions on transfer remain effective.
10. Notices. All notices, requests, and other communications required
or permitted to be given or delivered hereunder to the Holder shall be in
writing, and shall be personally delivered, or shall be sent by certified or
registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to the Holder at the address shown for the Holder on the books of the
Company, or at such other address as the Holder shall have furnished to the
Company. All notices, requests and other communications required or permitted to
\be given or delivered hereunder to the Company shall be in writing, and shall
be personally delivered, or shall be sent by certified or registered mail or by
recognized overnight mail courier, postage prepaid and addressed, to Net Value
Holdings, Inc., Two Penn Center, Suite 605, Philadelphia, PA 19102, Attention:
Chief Executive Officer, Fax: (215) 564-3133, or to such other address as the
Company shall have furnished to the Holder. Any such notice, request or other
communication may be sent by facsimile, but shall in such case be subsequently
confirmed by a writing personally delivered or sent by certified or registered
mail or by recognized overnight mail courier as provided above. All notices,
requests and other communications shall be deemed to have been given either at
the time of the receipt thereof at the address specified in this Section 10 or,
if mailed by registered or certified mail or with a recognized overnight mail
courier, upon deposit with the United States Post Office or such overnight mail
courier, postage prepaid and properly addressed.
11. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO ITS OR ANY OTHER JURISDICTION'S CONFLICTS OF LAW.
12. Miscellaneous.
a. Amendments. This Warrant may only be amended by an
instrument in writing signed by the Company and the Holder.
b. Headings. The headings of the sections and paragraphs of
this Warrant are for reference purposes only, and shall not affect the meaning
or construction of any of the provisions hereof.
c. Entire Agreement. This Warrant contains the entire
agreement between the parties with respect to the grant or award of securities
by the Company to the Holder, and the vesting and exercise periods of these
securities, and supersedes all prior agreements and understandings, oral or
written, between the parties hereto regarding such subject matter including, but
not limited to, Amendment No. 2 to Merger Agreement and Plan of Reorganization
dated as of July 22, 1999, and
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<PAGE>
letter agreements between the parties dated August 31, 1999, September 13, 1999
and January 23, 2000.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
NET VALUE HOLDINGS, INC.
By: ________________________________
Andrew P. Panzo
Chief Executive Officer
AGREED TO AND ACCEPTED:
__________________________
Barry Uphoff
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<PAGE>
FORM OF EXERCISE AGREEMENT
Dated: ________, ____.
To:_____________________________
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of $_________. Please issue a certificate or certificates for such shares
of Common Stock in the name of and pay any cash for any fractional share to:
Name:________________________________
Signature:___________________________
Address:_____________________________
_____________________________
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
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