<PAGE>
As filed with the Securities and Exchange Commission on January 19, 2000.
Registration No. 333-88629
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT No. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NET VALUE HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
7319
(Primary Standard Industrial Classification Code Number)
65-0867684
(I.R.S. Employer Identification Number)
1085 Mission Street
San Francisco, CA 94103
(415) 575-4755
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Andrew P. Panzo
Chief Executive Officer
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
(215) 564-9190
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
Michael C. Forman, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 South Broad Street
Philadelphia, PA 19102
(215) 568-6060
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| __________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ___________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
-----------------------------------
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Securities Amount To Be Offering Price Aggregate Registration
to be Registered Registered Per Share Offering Price Fee
=======================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 3,722,560 $4.375 $16,286,200 $4,527.56
=======================================================================================================================
</TABLE>
The registration fee calculated above was previously paid at the time
of the initial filing of this registration statement. This registration
statement registers the resale of 3,722,560 shares of common stock offered by
selling stockholders, as follows:
o 2,358,160 shares issuable upon conversion of 4,824 shares of our
Series B Convertible Preferred Stock;
o 295,040 shares issuable upon exercise of the warrants held by the
holders of shares of our Series B Convertible Preferred Stock;
and
o 1,069,360 shares of common stock presently held by three other
selling stockholders.
In addition to the number of shares set forth above, the amount to be
registered includes any shares of our common stock issued as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The Proposed Maximum Offering Price Per Share and the Proposed Maximum
Aggregate Offering Price in the table above are estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(c) promulgated under
the Securities Act of 1933. These estimates were calculated based on the average
of the bid and ask prices for our common stock on the NASDAQ Over-the-Counter
Bulletin Board Trading System on October 6, 1999.
We hereby amend this registration statement on such date or dates as
may be necessary to delay its effective date until we shall file a further
amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Dated January 19, 2000
SUBJECT TO COMPLETION
PROSPECTUS
3,722,560 SHARES
NET VALUE HOLDINGS, INC.
COMMON STOCK
The following stockholders are offering and selling up to 3,722,560
shares of our common stock:
Sven Behrendt
Juergen Jaekel
Gary E. Markman
Tonga Partners, LP
Yeoman Ventures, Ltd.
Lightline Limited
Little Wing LP
Little Wing Too LP
Tradewinds Fund, LLC
JDN Partners, LP
Bayhill Fund, Ltd.
RS Orphan Fund, LP
RS Orphan Offshore Fund, LP
The selling stockholders may offer the shares of common stock through
public or private transactions, on the NASDAQ Over-the-Counter Bulletin Board
Trading System, at prevailing market prices, or at privately negotiated prices.
We will not receive any proceeds from this offering. However, 295,040 of the
shares of common stock which we are registering are issuable upon exercise of
warrants. If all of the warrants are exercised, we will receive gross proceeds
of $1,507,470.
Our common stock is listed on the NASDAQ Over-the-Counter Bulletin
Board Trading System under the symbol "NETV." On January 7, 2000, the closing
sale price for our common stock, as quoted on the NASDAQ Over-the-Counter
Bulletin Board Trading System was $10.50 per share.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 11.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this Prospectus is January 19, 2000.
<PAGE>
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS.........................................................3
SUMMARY .....................................................................3
FORWARD-LOOKING STATEMENTS...................................................12
RISK FACTORS.................................................................12
USE OF PROCEEDS..............................................................32
MARKET PRICE AND DIVIDEND INFORMATION........................................33
CAPITALIZATION...............................................................33
SELECTED CONSOLIDATED FINANCIAL DATA.........................................37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................39
BUSINESS ....................................................................49
MANAGEMENT ..................................................................70
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK........76
SELLING STOCKHOLDERS.........................................................78
PLAN OF DISTRIBUTION.........................................................82
TRANSACTIONS WITH OFFICERS AND DIRECTORS
AND OTHER BUSINESS RELATIONSHIPS....................................83
DESCRIPTION OF CAPITAL STOCK.................................................87
SHARES ELIGIBLE FOR FUTURE SALE..............................................92
PRINCIPAL UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS.................94
EXPERTS ....................................................................97
LEGAL MATTERS................................................................97
WHERE YOU CAN FIND MORE INFORMATION..........................................97
INFORMATION NOT REQUIRED IN PROSPECTUS...................................II - 1
SIGNATURES...............................................................II - 9
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
2
<PAGE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by an independent accounting firm.
SUMMARY
This summary highlights material information regarding our company and
the offering contained in this prospectus. However, this summary is not complete
and may not contain all of the information that may be important to you. You
should read the entire prospectus carefully, including the financial data and
related notes, before making an investment decision. Unless otherwise
specifically stated, the information in this prospectus assumes that holders of
our securities have not exercised any options or warrants which are currently
outstanding.
History of Net Value Holdings, Inc.
We were formed as a Florida Corporation on December 20, 1991. In 1992,
we failed to file our annual report with the State of Florida and were
administratively dissolved on October 9, 1992. On June 15, 1998, we filed all
required reports and paid all deficient annual fees and penalties and were
reinstated as a corporation in the State of Florida. Accordingly, from October
9, 1992 through June 15, 1998, we had no operations and generated no revenues or
expenses. In October 1998, our stockholders approved our redomestication in the
State of Delaware and we are presently a Delaware corporation.
Pursuant to share exchange transactions completed during October 1998
through December 1998 with 20 Net Value, Inc. stockholders, we acquired
approximately 66% 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.
On July 30, 1999, we merged with Strategicus Partners, Inc., an Oregon
corporation. As a result of our merger with Strategicus, we acquired ownership
interests in metacat.com, Inc., AsiaCD, Inc. and College 411.com, Inc., each of
which was owned by Strategicus at the time of the merger. In addition, members
of Strategicus' management team became officers and directors of our
corporation.
In September 1999, we acquired our ownership interest in AssetExchange,
Inc.
In October 1999, we acquired our ownership interest in Webmodal, Inc.
In November 1999, we acquired our ownership interest in Swapit.com,
Inc.
In December 1999, Net Value, Inc. sold substantially all of its assets,
including the name BrightStreet.com, Inc., to Promotions Acquisition, Inc., a
Delaware corporation, in connection with a $17,000,000 investment in Promotions
Acquisition, Inc. by outside investors. Pursuant to this transaction, Net Value,
Inc. received $2,000,000 in cash, Promotions Acquisition, Inc.'s agreement to
assume approximately $1,600,000 in liabilities of Net Value, Inc., and 2,958,819
shares of common stock, representing a 12% ownership interest in Promotions
Acquisition, Inc. calculated on a fully diluted basis.
3
<PAGE>
Subsequent to this transaction, Promotions Acquisition, Inc. changed
its name to BrightStreet.com, Inc. As a result of this transaction, Net Value,
Inc. has no operations. Net Value, Inc. has loaned us the $2,000,000 which it
received pursuant to this transaction and we have agreed to satisfy Net Value,
Inc.'s remaining liabilities with these funds. We then intend to complete a
merger with Net Value, Inc. pursuant to which the remaining stockholders of Net
Value, Inc. will receive .4 shares of our common stock for every share of Net
Value, Inc. common stock which they tender to us in the merger. In addition,
holders of Net Value, Inc.'s common stock purchase warrants and vested stock
options will receive common stock purchase warrants and stock options based on
this same exchange ratio. Also as a result of this transaction, we no longer own
a majority interest in an operating company that is presently generating
revenues.
Our principal executive office is located at 1085 Mission Street, San
Francisco, California 94103. The phone number of our principal executive office
is (415) 575-4755. We also maintain an office at Two Penn Center Plaza, Suite
605, Philadelphia, Pennsylvania 19102 and our telephone number is (215)
564-9190. We maintain an Internet website at www.netvalueholdings.com. The
information on our Internet website is not part of this prospectus.
Recent Financial Results
In 1998, we experienced net losses of $2,889,386. For the nine months
ended September 30, 1999, we experienced net losses of $16,400,466 (unaudited).
Through September 30, 1999, we have
o experienced an accumulated deficit of $19,294,852 (unaudited);
o not generated any revenues from our operations; and
o have not received any dividends from our affiliate companies.
Our affiliate companies are development stage companies with limited
revenues. In addition, we face substantial competition from other providers of
capital and management services including publicly-traded Internet companies,
venture capital firms and large corporations. Many of these companies have
greater financial resources than we do. Accordingly, we expect that we will
continue to experience net losses for approximately the next 12 to 24 months,
until our majority-owned affiliate companies begin to generate profits and our
minority-owned affiliate companies develop their businesses sufficiently to pay
dividends. We plan to generate revenues from the operations of our
majority-owned affiliate companies as we consolidate the operations of these
affiliate companies with our operating results for financial reporting purposes,
and from dividends which we receive from our minority- owned affiliate
companies. However, we do not expect to be able to generate significant revenues
to meet our operational needs, nor do we expect our majority owned affiliate
company to generate revenues to meet our combined operational needs, over the
next twelve months. We also do not expect to receive dividends from our
affiliate companies over the next twelve months given the nature of development
stage companies.
We presently have sufficient capital resources to fund our operations
for the next six months, after which we expect to need additional funds for our
continuing operations. We plan to raise funds from the private sale of
securities prior to the end of the second quarter of 2000. We will use the
proceeds of these securities offerings to fund our operations and to acquire
interests in additional affiliate companies. However, we can give no assurance
that we will be successful in raising such funds. If we are unable to raise
sufficient funds to operate our business at that time, we will be forced to
cease operations and liquidate our assets. In such event, purchasers of our
common stock could lose all or a substantial portion of their investment.
4
<PAGE>
Affiliate Companies
We are an Internet holding company actively engaged in e-commerce
through our affiliate companies. We primarily engage in acquiring a controlling
interest in and providing financial, management and technical support to
development stage Internet businesses which we either participate in founding or
identify as meeting our criteria. All of our affiliate companies are currently
in the development stage. We currently have ownership interests in seven
affiliate companies. Our approximate ownership interest in each of our current
affiliate companies is as follows:
metacat.com, Inc. (www.metacat.com) 100%
College 411.com, Inc. (www.college411.com) 27%
AssetExchange.com, Inc. (www.AssetExchange.com) 20%
Net Value, Inc. N/A 66%
AsiaCD, Inc. (www.asiacd.com) 11%
Webmodal, Inc. (www.Webmodal.com) 10%
Swapit.com Inc. (www.swapit.com) 12%
metacat.com, Inc. is an Internet-based e-commerce superstore that
aggregates and searches the product offerings of catalog and mail order
businesses and will allow consumers to purchase these products through its
Internet website. metacat launched its Internet website in December 1999. As of
September 30, 1999, metacat had not recognized any revenues, had minimal assets
and had an accumulated deficit of approximately $120,000 (unaudited). metacat's
net losses for the nine months ended September 30, 1999 were approximately
$120,000 (unaudited).
College 411.com, Inc. is an online community for college students
featuring functional academic resources, comparison shopping for student items,
as well as social features such as chat rooms, message centers and customized
news and information sites. College 411's Internet website became fully
functional in January 2000. As of September 30, 1999, College 411 had not
generated any revenues, had assets of $92,278, net losses of $100,017
(unaudited) for the nine months ended September 30, 1999 and had an accumulated
deficit of $100,017 (unaudited).
AssetExchange, Inc. provides banks and other financial institutions
with an Internet-based listing service which allows them to more efficiently
trade loan portfolio assets. AssetExchange launched its Internet website in
August 1999. As of September 30, 1999, AssetExchange had not generated any
revenues, had assets of $439,233, net losses of $48,529 (unaudited) for the nine
months ended September 30, 1999 and had an accumulated deficit of $48,529
(unaudited).
Net Value, Inc. was the historical owner of the technology and assets
which are presently used in BrightStreet.com, Inc.'s operations. In December
1999, Net Value, Inc. sold substantially all of its assets to BrightStreet.com,
Inc. Net Value, Inc. no longer has any operations and holds a 12% ownership
interest in BrightStreet.com, Inc. We plan to complete a merger with Net Value,
Inc. in the next three to six months. BrightStreet.com, Inc. has developed
technology that enables retailers, manufacturers and operators of Internet
websites that publish non-product related information for consumers to deliver
Internet-based promotions to consumers. BrightStreet licenses its technology
directly to customers' Internet websites, providing them with the capability to
distribute branded promotions with consumer targeting, lower cost, and real-time
monitoring of the effectiveness of such promotions. BrightStreet has created a
network of affiliated Internet websites. This network offers customers who want
a wider distribution of their promotions the ability to place their promotions
on the Internet websites of companies with whom BrightStreet has a relationship.
As of September 30, 1999, BrightStreet had assets of approximately $34,000
(unaudited), had not generated any revenues, had no net losses or income
(unaudited) for the nine months ended September 30, 1999 and had an accumulated
deficit of $0 (unaudited).
5
<PAGE>
AsiaCD, Inc. is a 24-hour online music and video store targeted to
individuals of Asian descent living throughout the world and individuals who
enjoy Asian popular culture. AsiaCD provides these individuals with easy access
to a broad range of media titles at competitive prices which include local
rather than international shipping costs. AsiaCD's Internet website is fully
functional and through September 30, 1999 it has generated approximately
$1,473,845 (unaudited) in revenues. AsiaCD's net losses for the nine months
ended September 30, 1999 were approximately $271,478 (unaudited). As of
September 30, 1999, AsiaCD's accumulated deficit was approximately $380,789
(unaudited).
Webmodal, Inc. 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. Webmodal
plans to launch its Internet website in 2000. As of September 30, 1999, Webmodal
had not recognized any revenues, had assets of approximately $220,000
(unaudited), net losses of approximately $70,000 (unaudited) for the nine months
ended September 30, 1999 and had an accumulated deficit of approximately $70,000
(unaudited).
Swapit.com, Inc. is designing a consumer-driven electronic barter
exchange on the Internet. Swapit.com, Inc. believes that this service will allow
the swap and sale of consumer goods between individuals. Swapit.com, Inc. plans
to launch its Internet website in April 2000. As of November 30, 1999,
Swapit.com had not generated any revenues, had assets of $479,048 and had an
accumulated deficit of $78,016.
Description of Selling Stockholders
In this registration statement we are registering the resale of up to
3,722,560 shares of our common stock by thirteen of our stockholders. These
stockholders acquired their shares of our common stock which they are offering
for resale as follows:
On February 4, 1999, Sven Behrendt purchased a convertible promissory
note in the principal amount of $2,000,000 from us. We received $2,000,000 as
consideration for the issuance of the convertible promissory note. On March 19,
1999, pursuant to the terms of the convertible promissory note, Mr. Behrendt
converted the principal amount of the convertible promissory note plus all
accrued interest thereon into 807,644 shares of the Company's common stock.
On February 20, 1999, Juergen Jaekel purchased a convertible promissory
note in the principal amount of $500,000 from us. We received $500,000 as
consideration for the issuance of the convertible promissory note. On April 18,
1999, pursuant to the terms of the convertible promissory note, Mr. Jaekel
converted the principal amount of the convertible promissory note plus all
accrued interest thereon into 202,533 shares of the Company's common stock.
On January 1, 1999, Gary Markman purchased a convertible promissory
note in the principal amount of $113,125 from us. As consideration for the
issuance of the convertible promissory note, Mr. Markman agreed to cancel a Net
Value, Inc. promissory note in the principal amount of $100,000 which he owned
and to release us, Net Value, Inc. and the present and future officers and
directors of each corporation from any claims related to this Net Value, Inc.
promissory note. On June 16, 1999, pursuant to the terms of the convertible
promissory note, Mr. Markman converted the principal amount of the convertible
promissory note plus all accrued interest thereon into 59,183 shares of the
Company's common stock.
In two transactions which closed on September 17, 1999 and October 1,
1999, respectively, we sold the following number of shares of our Series B
Preferred Stock, which are convertible into the following number of shares of
our common stock at the lowest possible conversion price of $2.50 per share, and
issued common stock purchase warrants to the following entities:
6
<PAGE>
<TABLE>
<CAPTION>
Selling Stockholder Series B Preferred Common Stock Warrants Consideration
------------------- ------------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Tonga Partners, L.P. 1,500 600,000 91,744 $1,500,000
Yeoman Ventures, Ltd. 250 100,000 15,288 $250,000
Lightline Limited 250 100,000 15,288 $250,000
Little Wing LP 450 180,000 27,520 $450,000
Little Wing Too, LP 150 60,000 9,176 $150,000
Tradewinds Fund LLC 150 60,000 9,176 $150,000
JDN Partners, L.P. 675 270,000 41,288 $675,000
Bayhill Fund, Ltd. 75 30,000 4,584 $75,000
RS Orphan Fund, LP 927 370,800 56,696 $927,000
RS Orphan Offshore Fund, LP 397 158,800 24,280 $397,000
------- ------- ------ -------
TOTAL 4,824 1,929,600 295,040 $4,824,000
===== ========= ======= =========
</TABLE>
We are registering 2,653,200 shares of our common stock with respect to
the Series B Preferred Stock and the warrants as required in the registration
rights agreement which we entered into with the holders of the Series B
Preferred Stock. The difference between the number of shares issuable upon
conversion of the Series B Preferred Stock and the warrants and the total number
of shares which we are registering is being allocated among the holders of the
Series B Preferred Stock on a pro rata basis based on the ownership of shares of
Series B Preferred Stock.
Summary of Consolidated Financial Data
The following summary of historical and pro forma consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our audited
Consolidated Financial Statements and related Notes thereto included elsewhere
in this prospectus. We have presented this pro forma information for comparative
purposes only. The summary pro forma data does not purport to represent what our
results would have been if the events described below had occurred at the dates
indicated. The Pro Forma Consolidated Balance Sheet Data reflect the following
as if they had occurred as of September 30, 1999:
o We received net proceeds of 2,582,000 in October 1999
from the sale of 2,824 shares of our Series B
Preferred Stock.
o In the fourth quarter of 1999 and during January
2000, holders of our convertible debentures converted
principal and accrued interest of $1,898,913 into
900,922 shares of our common stock.
o In the fourth quarter of 1999 and during January
2000, holders of our convertible promissory notes
converted principal and accrued interest of
$1,214,145 into 607,073 shares of our common stock.
o We completed our investment in Webmodal in October
1999, whereby we acquired 12% of the issued and
outstanding shares of common stock of Webmodal for
$350,000 in cash. Our equity interest in this company
will be accounted for under the cost method of
accounting.
7
<PAGE>
o We completed our investment in Swapit.com in November
1999, whereby we acquired shares of Series A
Preferred Stock which is convertible into 10% of the
issued and outstanding shares of common stock of
Swapit.com for $500,000. Our equity interest in this
company will be accounted for under the cost method
of accounting.
o We exercised warrants to purchase 1,125,000 shares of
college 411.com, Inc.'s common stock for $75,000 in
October 1999. This increased our total ownership of
the common stock of College 411.com, Inc. to 29%. Our
equity interest in this company will continue to be
accounted for under the equity method of accounting.
o On October 1, 1999 we paid $250,000 in satisfaction
of the stock subscription payable to AssetExchange,
Inc. Our equity interest in this company will
accounted for under the equity method of accounting.
o We issued 676,374 shares of our common stock in a
private placement with the RS Orphan Fund, LP and the
RS Orphan Offshore Fund, LP in October 1999 pursuant
to which we received gross proceeds of $676,374.
o We sold Net Value, Inc.'s assets to Promotions
Acquisition, Inc. for $2,000,000, an approximate 14%
equity interest in Promotions Acquisition, Inc. and
the assumption by Promotions Acquisition, Inc. of
approximately $1,600,000 of Net Value, Inc.'s
liabilities. We have assumed approximately $2,000,000
of Net Value, Inc.'s liabilities.
8
<PAGE>
<TABLE>
<CAPTION>
Summary of Selected Consolidated Financial Data
December 16,
Nine Months Ended 1994 (Inception)
Year Ended Year Ended Year Ended September 30, through
December 31, December 31, December 31, (Unaudited) September
1996 1997 1998 1998 1999 30, 1999
------------- ------------ -------------- ------------- -------------- --------------
(Unaudited)
Statement of Operations Data
<S> <C> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses -- -- 140,484 1,120 2,436,663 2,577,147
------------- ------------ -------------- ------------- -------------- --------------
Loss from operations -- -- (140,484) (1,120) (2,436,663) (2,577,147)
Other income (expense) -- -- (130,518) (4,685) (5,710,410) (5,840,928)
------------- ------------ -------------- ------------- -------------- --------------
Loss from continuing operations -- -- (271,002) (5,805) (8,147,073) (8,418,075)
------------- ------------ -------------- ------------- -------------- --------------
Loss from discontinued
operations (3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,068,553) (31,489,412)
------------- ------------ -------------- ------------- -------------- --------------
Net Loss (3,314,094) (11,235,237) (11,377,828) (10,201,148) (13,215,626) (39,907,487)
============= =========== ============= ============ ============= =============
Preferred stock dividend-
discontinued operations (1,181,250) (15,250,000) (15,250,000) -- (16,431,750)
------------ -------------- ------------- -------------- --------------
Net loss to common
stockholders (12,416,487) (26,628,328) (25,451,648) (13,215,626) (56,339,237)
============ ============== ============= ============== ==============
Net loss per common share
outstanding, Basic and Diluted,
continuing operations -- -- (0.06) -- (0.94)
============= =========== ============= ============ =============
Net loss per common share
outstanding, Basic and Diluted,
discontinued operations
(3.55) (6.88) (5.59) (6.70) (0.59)
============= ============ ============== ============= ==============
Weighted average shares
outstanding, Basic and Diluted
934,810 1,804,700 4,711,351 3,796,197 8,647,063
============= ============ ============== ============= ==============
<CAPTION>
September 30, 1999 (Unaudited)
------------------------------
Actual Pro Forma As Adjusted
------ --------- -----------
Balance Sheet Data
<S> <C> <C> <C>
Cash and cash equivalents $1,051,931 $5,135,305 $5,135,305
Ownership interest in affiliated
companies 3,647,035 8,641,611 8,641,611
Total assets 7,027,378 15,122,671 15,122,671
Current portion of long-term debt and
accrued interest 1,884,577 2,201,976 2,201,976
Long-term debt, net of discounts and
current portion 4,777,599 1,918,142 1,918,142
Total liabilities 9,965,120 5,683,748 5,683,748
Series B mandatory redeemable preferred
stock 1,732,000 4,177,584 4,177,584
Stockholders' equity (deficit) (4,669,742) 5,261,339 5,261,339
Total liabilities and stockholders'
equity (deficit) 7,027,378 15,122,671 15,122,671
Working capital (deficit) (2,627,800) 2,373,981 2,373,981
</TABLE>
9
<PAGE>
As of December 3, 1999, we will no longer fund the operations of Net
Value, Inc. that were sold to Promotions Acquisition, Inc. We have agreed to
satisfy approximately $2,000,000 of Net Value, Inc.'s existing liabilities as of
December 3, 1999 and will not assume any additional obligations of Net Value,
Inc.
10
<PAGE>
Summary of Selected Consolidated Financial Data
Pro Forma Transactions
<TABLE>
<CAPTION>
Conversion of Conversion of
September 30, Sale of Series B Convertible Convertible
1999 (unaudited) Preferred Stock Debentures Promissory Notes
-------------------- -------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents 1,051,931 2,582,000 -- --
Ownership interest in affiliated
companies 3,647,035 -- -- --
Total assets 7,027,378 2,582,000 -- --
Current portion of long-term
debt and accrued interest 1,884,577 -- (131,913) (121,688)
Long-term debt, net of discounts
and current portion 4,777,599 -- (1,767,000) (1,092,458)
Total liabilities 9,965,120 -- (1,898,913) (1,214,146)
Series B mandatory redeemable
preferred stock 1,732,000 2,445,584 -- --
Stockholders' equity (deficit) (4,669,742) 136,416 1,898,913 1,214,146
Total liabilities and
stockholders' equity (deficit) 7,027,378 2,582,000 -- --
Working capital (deficit) (2,627,800) 2,582,000 131,913 121,688
Exercise of
Equity Interest Equity Interest College411 Equity Interest in
In Webmodal in Swapit.com Warrants AssetExchange
-------------------- -------------------- ----------------------- ---------------------
Cash and cash equivalents (350,000) (500,000) (75,000) (250,000)
Ownership interest in affiliated
companies 350,000 500,000 75,000 --
Total assets -- -- -- (250,000)
Current portion of long-term
debt and accrued interest -- -- -- (250,000)
Long-term debt, net of discounts
and current portion -- -- -- --
Total liabilities -- -- -- (250,000)
Series B mandatory redeemable
preferred stock -- -- -- --
Stockholders' equity (deficit) -- -- -- --
Total liabilities and
stockholders' equity (deficit) -- -- -- (250,000)
Working capital (deficit) (350,000) (500,000) (75,000) --
Sale of
Sale of NetValue, Inc. Pro Forma
Common Stock Assets Balance
-------------------- -------------------- ---------------------
Cash and cash equivalents 676,374 2,000,000 5,135,305
Ownership interest in affiliated
companies -- 4,069,576 8,641,611
Total assets 676,374 5,086,919 15,122,671
Current portion of long-term
debt and accrued interest -- 821,000 2,201,976
Long-term debt, net of discounts
and current portion -- -- 1,918,142
Total liabilities -- (918,314) 5,683,748
Series B mandatory redeemable
preferred stock -- -- 4,177,584
Stockholders' equity (deficit) 676,374 6,005,233 5,261,339
Total liabilities and
stockholders' equity (deficit) 676,374 5,086,919 15,122,671
Working capital (deficit) 676,374 2,414,806 2,373,981
</TABLE>
11
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us and about our affiliate companies,
including, among other things:
o development of an e-commerce market;
o our ability to identify trends in our markets and the
markets of our partners companies and to offer new
solutions that address the changing needs of these
markets;
o our ability to successfully execute our business model;
o the ability of each of our affiliate companies to
compete successfully against direct and indirect
competitors;
o our ability to acquire interests in additional
companies;
o growth in demand for Internet products and services;
and
o adoption of the Internet as an advertising medium.
In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur.
RISK FACTORS
The shares of common stock which are the subject of this registration
statement involve a high degree of risk and represent a highly speculative
investment. You should not purchase these shares of common stock if you cannot
afford the loss of your entire investment. In addition to the other information
contained in this prospectus, you should carefully consider the following risk
factors in evaluating our corporation, our business prospects and an investment
in the shares of common stock.
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 development 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.
12
<PAGE>
Our auditors have raised substantial doubt about our ability to continue as a
going concern and we will not receive any proceeds from this offering.
Due to our dependence on outside financing and the losses we have
incurred since inception, our auditors have raised substantial doubt about our
ability to continue as a going concern. Notwithstanding that doubt, this
offering relates solely to the resale of shares of our common stock by existing
shareholders and we will not receive any proceeds from sales of these shares of
common stock by these shareholders.
We no longer own our primary source of historical revenues and may not be able
to create or obtain additional sources of revenues.
Our primary source of revenues to date has been our operation of Net
Value, Inc. Specifically, Net Value, Inc. derived revenues from an agreement
between Net Value, Inc. and IQ Value LLC pursuant to which IQ licensed Net
Value's technology for commercial use. During the period from inception through
June 30, 1999, this agreement provided approximately $1,250,000 or 90% of our
consolidated revenues. This agreement, as amended, lapsed pursuant to its terms
on June 30, 1999. During the quarter ended September 30, 1999, we did not
generate any revenues. On December 3, 1999, Net Value, Inc. sold substantially
all of its assets. Although we own 100% of metacat.com, Inc., it is in the
development stage and will only generate minimal revenues during 2000.
Accordingly, we no longer own a majority interest in an operating company that
is presently generating revenues. Although we intend to devote our resources to
expanding metacat.com's operations, to developing additional majority-owned
affiliate companies whose operations will generate revenues and to developing
our minority-owned affiliate companies, if we are unable to do so, then we may
be forced to go out of business.
We have had a history of losses and expect continued losses in the foreseeable
future.
For the nine months ended September 30, 1999, we realized a net loss of
$13,215,626 (unaudited). For the year ended December 31, 1998, we realized a net
loss of $26,628,328 (unaudited). From our inception through September 30, 1999,
we have realized a cumulative net loss of $56,339,237 (unaudited). 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 up to ten additional
employees by December 31, 2000. We will hire these employees to manage both our
operations and the operations of our majority-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.
There is substantial doubt regarding our ability to continue as a going concern
and we may go out of business.
Since our inception, we have generated our operating funds primarily
through the sale of our equity and debt securities. Our dependence on outside
financing and the losses which we have incurred since our inception raise
substantial doubt about our ability to continue as a going concern. This
offering relates to the resale of shares of our common stock owned by or
issuable to our existing stockholders upon conversion of shares of our Series B
Preferred Stock and exercise of warrants. Accordingly, although we will receive
proceeds from the exercise of the warrants, we will not receive any of the
proceeds of this offering and it will not have any effect on our financial
condition. Our financial condition may have a negative effect on our ability to
enter into relationships with or to start-up and develop additional affiliate
companies. We are not certain that we will be able to, and we currently have no
specific plans to, sell additional debt or equity securities to generate the
necessary proceeds to continue to finance our operations. In the second quarter
of 2000, we may attempt to sell additional securities to raise funds for working
capital purposes. If we fail to raise sufficient proceeds to finance our
operations through the sale of additional securities, then we will not have
sufficient cash to meet the basic requirements of our business plan and will
cease to continue as a going concern. If we cease to continue as a going
concern, then we may go out of business and investors in our common stock will
lose all or a substantial portion of their investment in our common stock.
13
<PAGE>
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.
Some of our Officers and Directors personally own interests or rights
to purchase interests in some of our affiliate companies as follows:
Officer/Director Affiliate Company
---------------- -----------------
Darr Aley AsiaCD, Inc., College 411.com, Inc.
Thomas Aley Swapit.com, Inc.
Stephen George AsiaCD, Inc., College 411.com, Inc.
Andrew P. Panzo AsiaCD, Inc.
Douglas Spink AsiaCD, Webmodal, Inc.
Barry Uphoff AsiaCD, Inc.
This may cause the interests of these individuals to conflict with our
stockholders' best interests. For example, if the operations of one of these
affiliate companies is 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.
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 of the
date of this prospectus, none of our affiliate companies which we have
identified have generated material revenues. Although we intend to internally
develop business concepts into operating affiliate companies, as of the date of
this prospectus, our only internally-developed affiliate companies, metacat.com,
Inc. and BrightStreet.com, Inc., have not generated material revenues.
Accordingly, we do not have an established history of selecting and developing
successful affiliate companies. Economic, governmental, 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 are a holding company and we rely on our affiliate companies to fund our
operations.
We operate as an Internet holding company. As an Internet holding
company without significant income from operations, we expect to ultimately
derive the cash flow necessary to fund our operations from our affiliate
companies. In order to have sufficient cash flow to pay dividends, our affiliate
companies must generate earnings.
14
<PAGE>
If our affiliate companies do not generate sufficient earnings to pay
dividends or otherwise distribute amounts to us which are sufficient to cover
our operating expenses, then we may not be able to pay our expenses, even if, on
a consolidated basis, our operating subsidiaries are profitable.
There is a scarcity of and competition for acquisition opportunities and
business combinations.
Although we expect a substantial number of our affiliate companies to
be entities founded by us, there are a limited number of Internet-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 mergers or
business relationships with, and acquisitions of, small private and public
entities. A large number of established and well-financed entities, including
venture capital firms, are active in mergers and acquisitions with and 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 business combinations with regard to 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 one of our 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 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
businesses whose operations are focused in the Internet industry and meet the
following criteria:
o development stage entity;
o seeking $250,000 to $1,000,000 in capital;
o management that is experienced in the Internet industry
and in the substantive industry in which the affiliate
company will operate; and
o established branded products.
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. Once you purchase our securities, you 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
15
<PAGE>
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
ideas. These companies may operate in industries in which members of our
management team have little or no prior experience.
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 interests in our affiliate companies
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 recordkeeping, 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 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 be 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 may 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 again meet the foregoing
45% tests. We intend to meet the tests as the result of our ownership interests
in companies which we will primarily control. However, because five 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.
16
<PAGE>
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 access the capital markets. We are
therefore dependent on the success of the market for Internet- related companies
in general and for initial public offerings of those companies in particular. To
date, there has been a substantial number of Internet-related initial public
offerings and additional offerings are expected to be made in the future. If the
market for Internet-related companies and initial public offerings were to
weaken for an extended period of time, then the ability of our affiliate
companies to grow and access the capital markets will be impaired and we may
need to provide additional capital to our affiliate companies in order to
protect our equity holdings. If we are unable to provide additional capital to
our affiliate companies in these circumstances, then our affiliate companies'
operations may suffer, we will not successfully implement our business plan and
the value of our common stock may decrease.
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, 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 resources and our ability to manage newly acquired or developed affiliate
companies may be strained as we acquire interests in and develop additional
Internet companies.
We have acquired or developed interests in Internet companies that
complement our business strategy. We plan to acquire or develop additional
affiliate companies that also complement our business strategy. In the future,
we may also acquire larger percentages or larger interests in companies than we
have in the past. These relationships may place a significantly greater strain
on our resources, our ability to manage such companies and our ability to
integrate them into our collaborative network.
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 development stage companies. As of
January 7, 2000, we had approximately $2,925,000 of cash and cash equivalents on
hand. We currently anticipate using an average of approximately $225,000 per
month over the next twelve months to satisfy our operating expenses. In
addition, on March 1, 2000, we will be required to repay convertible debentures
in the aggregate principal amount of $900,000 if the holders of these
convertible debentures do not exercise their conversion rights prior to this
date. Accordingly, we estimate that we presently have approximately $675,000
available for use in developing or purchasing interests in new affiliate
companies through June 30, 2000. Our estimated average cost of developing and
purchasing interests in affiliated companies is approximately $500,000. This
means that with our cash on hand as of January 7, 2000, if we develop or
purchase interests in more than one additional affiliate company, then we will
not have sufficient cash to satisfy our operating expenses through June 30,
2000. However, we have agreed to satisfy Net Value, Inc.'s remaining liabilities
of $1,712,420 as directed by Net Value, Inc. If Net Value, Inc. directs us to
satisfy greater than $675,000 of these liabilities prior to June 30, 2000, then
we will not have sufficient cash to develop or acquire equity interests in any
new affiliate companies. While these funds may be sufficient to satisfy our
short term financing needs, we will need significant additional funding in order
to be able to continue to develop our network of companies. If we are unable to
secure additional financing on acceptable terms, then we will not be able to
fully implement our business plan.
17
<PAGE>
Our success is dependent on our continued employment of Andrew Panzo, Lee Hansen
and Thomas Aley and the continued employment by our affiliate companies of their
key personnel, including, for example, Joshua Lau of AsiaCD, Inc. and Chris
Kravas of Webmodal, Inc, 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.
As of January 7, 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 Hansen, our chief operating
officer who joined us on October 1, 1999 and Thomas Aley, our Executive Vice
President-Business Development, who joined us on November 22, 1999, the
remainder of our management team, including Darr Aley, Stephen George and Barry
Uphoff, joined our company in July 1999 in connection with our merger with
Strategicus Partners, Inc. Our efficiency may be limited while these employees
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.
The success of some of our affiliate companies also depends on their
having highly trained technical and marketing personnel, including:
Neal Wozniak metacat.com, Inc.
Travis Bowie College 411.com, Inc.
Willie Koo AssetExchange.com, Inc.
R. Scott Wills BrightStreet.com, Inc.
Joshua Lau AsiaCD, Inc.
Chris Kravas Webmodal, Inc.
Kevin Wells Swapit.com, Inc.
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 owe approximately $6,050,000 to third parties; if we are unable to satisfy
this indebtedness, our business will be adversely affected.
As of January 7, 2000, we had indebtedness to third parties in the
aggregate amount of approximately $6,050,000 (unaudited). Convertible promissory
notes in the aggregate principal amount of $900,000 will mature on March 1, 2000
if they are not previously converted into shares of our common stock.
Convertible debentures in the aggregate principal amount of $102,500 will mature
prior to January 15, 2001 if they are not previously converted into shares of
our common stock. However, a significant portion of our remaining third party
indebtedness consists of convertible debentures and convertible promissory notes
which are not current liabilities:
Approximate Amount of Indebtedness, Projected Maturity Date
Excluding Accrued Interest If Not Previously Converted
946,510 March 31, 2001
3,148,000 Various Dates-February 1, 2001
through June 21, 2001
18
<PAGE>
In addition, if we acquire at least 80% of Net Value, Inc.'s common stock, then
we can automatically convert convertible debentures with maturity dates in 2001
in the aggregate principal amount of $3,250,500 into shares of our common stock
at conversion prices ranging from $2.00 to $2.50 per share. The holders of all
of our convertible debentures may elect at any time to convert the principal
amount of their convertible debentures plus all accrued interest thereon into
shares of our common stock at conversion prices ranging from $2.00 to $2.50 per
share. If such convertible debentures are converted into shares of our common
stock, then we will no longer have a cash liability related to these convertible
debentures. However, the presence of this indebtedness may have a negative
effect on our ability to obtain additional financing. In addition, if we do not
have adequate funds on hand at the maturity dates of these convertible
debentures and are obligated to repay these convertible debentures, then we will
require significant additional funding if we are unable to restructure or
otherwise delay our obligation to satisfy this indebtedness. We are not certain
that alternative financing will be available to us on acceptable terms or at
all.
Fluctuations in our quarterly results based on our accounting methodologies may
adversely affect our stock price.
Our quarterly financial results may fluctuate significantly due to our
accounting methodologies. This may cause our operating results in any calendar
quarter to not meet securities analysts' or investors' expectations, which may
cause the price of our common stock to decrease. Our accounting methods for
particular affiliate companies will change as a result of changes in our
ownership percentages of our affiliate companies due to:
o our acquisition of additional ownership interests in
particular affiliate companies in which we already own
equity interests;
o a decrease in our ownership interests in particular
affiliate companies due to their issuance of additional
equity securities to third parties; and
o our acquisition or development of additional affiliate
companies which become majority owned subsidiaries of
our corporation.
For example, if we own interests that represent greater than 20% of the
issued and outstanding equity securities of an affiliate company, then we are
required to account for this ownership interest using the equity method of
accounting. The equity method of accounting requires us to reflect our share of
the earnings or losses of the affiliate company in our consolidated financial
statements. If this affiliate company issues additional equity securities to
third parties and our ownership interest is diluted below 20% of the issued and
outstanding equity securities of this affiliate company, then we will account
for this ownership interest using the cost method of accounting. Under the cost
method, our share of the affiliate company's earnings or losses is not included
in our consolidated financial statements. Accordingly, this type change in our
ownership interest of an affiliate company may cause our quarterly operating
results to fluctuate. In addition, if we own greater than 50% of the issued and
outstanding equity securities of an affiliate company, then we are required to
consolidate the affiliate company's financial statements with our financial
statements. Accordingly, as we acquire or develop additional affiliate companies
in which we own greater than 50% of the issued and outstanding equity
securities, our quarterly operating results will fluctuate. Based on our
business plan, we believe that period-to-period comparisons of our operating
results are not meaningful. However, securities analysts and investors may place
significant reliance on these results which may adversely affect our stock
price.
19
<PAGE>
Future securities offerings will dilute the ownership interest of our current
stockholders.
We expect to sell equity securities during the second quarter of 2000
in order to raise the funds necessary to internally develop or acquire equity
interests in affiliate companies and to fund our operations. In addition, we
expect to sell additional securities from time to time thereafter for the same
purposes. Any such financing will involve the issuance of our previously
authorized and unissued securities and will result in the dilution of the
ownership interests of our present stockholders.
If our acquisitions and disposals of our equity interests in our affiliate
companies cause negative tax consequences, then our business and results of
operations will be adversely affected.
Federal and state tax consequences will, in all likelihood, be major
considerations in our decision to make any investment in an affiliate company or
to undertake any business combination. Currently, pursuant to various federal
and state tax provisions, such transactions may be structured so as to result in
a tax-free treatment to both companies participating in the transaction. While
we intend to structure any business combination so as to minimize the federal
and state tax consequences to both us and the target entity, we cannot be
certain that such a business combination will meet the statutory requirements of
a tax-free reorganization or that the parties will obtain the intended tax-free
treatment upon a transfer of stock or assets. A non-qualifying reorganization
could result in the imposition of both federal and state taxes which may
adversely affect us and our stockholders. In addition, if we sell equity
interests in our affiliate companies, then we may recognize considerable gains
which could result in the imposition of both federal and state taxes which may
adversely affect us and our stockholders.
RISKS RELATED TO THE OFFERING.
Shares eligible for future sale by current holders of our securities may
decrease the price of our common stock.
If holders of our securities sell substantial amounts of our common
stock, including shares issued upon the exercise of outstanding options and
warrants and shares issued upon conversion of convertible debentures, then the
market price of our common stock could decrease. We currently have issued and
outstanding convertible debentures in the aggregate principal amount of
approximately $5,097,010 which are convertible at any time into shares of common
stock by the holders thereof at conversion prices ranging from $2.00 to $2.50
per share. In addition, we currently have issued and outstanding warrants to
purchase approximately 1,474,889 shares of our common stock. The holders of
these warrants may exercise them at any time at exercise prices ranging from
$2.50 per share to $6.00 per share. Although restrictions under federal
securities laws limit the ability of the shares of our common stock issuable
upon conversion of these securities to be resold in the public market upon
issuance, these restrictions may only apply for a period of one year from the
date of the convertible promissory notes and for one year from the date on which
these warrants are exercised. We have also issued and outstanding 4,824 shares
of our Series B Preferred Stock which are presently convertible at a price of
$4.0875 per share into 1,180,184 shares of our common stock. In addition, at any
time prior to the first anniversary of the effective date of this registration
statement, the holders of our Series B Preferred Stock may elect to reset their
conversion price to the closing sales price of our common stock, provided that
they may not reset their conversion below $2.50 per share. On January 7, 2000,
the closing sales price of our common stock was $10.50. If the holders of our
Series B Preferred Stock were to reset their conversion price to the conversion
floor price of $2.50 per share, then they would be entitled to receive 1,929,600
shares of our common stock upon full conversion of their shares of our Series B
Preferred Stock. This registration statement registers the resale of the shares
of our common stock issuable upon conversion of Series B Preferred Stock and the
shares of our common stock issuable upon exercise of the related warrants.
Accordingly, there are no longer any restrictions currently in place on the
shares of our common stock underlying the Series B Preferred Stock and the
related 295,040 warrants, and upon the conversion or exercise of these
securities, there will be approximately an additional 2,225,000 shares of our
common stock available for sale on the open market. This increase in the supply
of shares eligible for sale on the open market may decrease the trading price of
our common stock.
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There is no significant trading market for our common stock.
Our common stock is not eligible for trading on any national or
regional exchange. Our common stock is eligible for trading in the
over-the-counter market in the "Pink Sheets" or on the NASDAQ Over-the-Counter
Bulletin Board Trading System pursuant to Rule 15c2-11 of the Securities
Exchange Act of 1934. This market tends to be highly illiquid, in part because
there is no national quotation system by which potential investors can trace the
market price of shares except through information received or generated by a
limited number of broker-dealers that make a market in that particular stock.
The National Association of Securities Dealers has enacted new eligibility
requirements for issuers whose securities are quoted on the Bulletin Board.
Pursuant to these rules, no issuer's securities may be quoted on the Bulletin
Board unless the issuer files periodic reports with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Although we are not subject to these new eligibility requirements until
February 24, 2000, we intend to comply with these requirements as soon as
possible. If we do not comply with these eligibility requirements on a timely
basis, then our common stock will be ineligible for quotation on the Bulletin
Board until we are in compliance with these requirements. There are currently no
plans, proposals, arrangements or understandings with any person with regard to
the development of a trading market in the common stock. We are not certain that
an active trading market in the common stock will develop, or if such a market
develops, that it will be sustained. In addition, there is a greater chance for
market volatility for securities that trade in the Pink Sheets or on the
Bulletin Board as opposed to a national exchange or quotation system. This
volatility may be caused by a variety of factors, including:
o the lack of readily available price quotations;
o the absence of consistent administrative supervision of
"bid" and "ask" quotations;
o lower trading volume; and
o market conditions.
In a volatile market, we may experience wide fluctuations in the market
price of our securities. These fluctuations may have an extremely negative
effect on the market price of our securities and may prevent you from obtaining
a market price equal to your purchase price when you attempt to sell our
securities in the open market. In these situations, you may be required to
either sell our securities at a market price which is lower than your purchase
price, or to hold your investment in our securities for a longer period of time
than you planned to hold this investment.
If, in the future, our common stock satisfies the definition of a "penny stock,"
then broker-dealers will be required to provide their customers with disclosure
documents prior to allowing them to participate in transactions involving our
common stock.
Pursuant to the Securities Exchange Act of 1934, if, in the future, our
common stock satisfies the definition of a "penny stock," then broker-dealers
will be required to provide their customers with disclosure documents prior to
allowing them to participate in transactions involving our common stock. These
disclosure requirements may prove to be burdensome to broker-dealers and may
discourage them from allowing their customers to participate in transactions
involving our common stock. This may materially limit trading activities
involving our common stock.
"Penny stocks" are equity securities with a market price below $5.00
per share other than a security that is registered on a national exchange;
included for quotation in the NASDAQ system; or whose issuer has net tangible
assets of more than $2,000,000 and has been in continuous operation for greater
than three years. Issuers who have been in operation less than three years must
have net tangible assets of at least $5,000,000.
Rules promulgated by the Securities and Exchange Commission under
Section 15(g) of the Exchange Act require broker-dealers engaging in
transactions in "penny stocks," to first provide to their customers a series of
disclosures and documents, including:
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o a standardized risk disclosure document identifying the
risks inherent in investment in "penny stocks;"
o all compensation received by the broker-dealer in
connection with the transaction;
o current quotation prices and other relevant market
data; and
o monthly account statements reflecting the fair market
value of the securities. In addition, these rules
require that a broker-dealer obtain financial and other
information from a customer, determine that
transactions in penny stocks are suitable for such
customer and deliver a written statement to such
customer setting forth the basis for such
determination.
On January 7, 2000, the closing sales price of our common stock was
$10.50. Although our common stock does not presently constitute a "penny stock,"
we cannot predict with any certainty that our common stock will not trade below
$5.00 in the future and thereby constitute "penny stock." In that event, trading
activities for the common stock will be made more difficult for broker-dealers
than in the case of securities not defined as "penny stock." This may have the
result of depressing the market for our securities and an investor may find it
difficult to dispose of such securities.
Further, under the Exchange Act, and the regulations thereunder, any
person engaged in a distribution of shares of our common stock offered by this
prospectus may not simultaneously engage in market making activities with
respect to the common stock during the applicable "cooling off" periods prior to
the commencement of such distribution.
Anti-takeover provisions under our Certificate of Incorporation and Delaware Law
could make a third party acquisition of our corporation difficult.
Our Amended and Restated Certificate of Incorporation and Bylaws and
the Delaware General Corporation Law include provisions that could delay, defer
or prevent a takeover attempt that stockholders may consider to be in their best
interests. These include:
Staggered Board of Directors. Our Board of Directors is divided into
three classes serving terms currently expiring in 2000, 2001 and 2002 and
directors may only be removed for cause. These provisions may limit the ability
of holders of common stock to remove our Board of Directors through a proxy
contest.
Stockholder Proposals. Our stockholders must give advance notice,
generally 60 days prior to the relevant meeting, for stockholder nominations of
candidates for our Board of Directors and for certain other business to be
conducted at any stockholders' meeting. This limitation on stockholder proposals
could inhibit a change of control by delaying action on any proposed change in
control until the annual meeting of stockholders.
Preferred Stock. Our certificate of incorporation authorizes our Board
of Directors to issue up to 10,000,000 shares of preferred stock having such
rights as may be designated by our Board of Directors, without stockholder
approval. This issuance of preferred stock could inhibit a change in control by
making it more difficult to acquire the majority of our voting stock.
Delaware Anti-takeover Statute. The Delaware General Corporation law
restricts certain business combinations with interested stockholders. This
statute may have the effect of inhibiting a non-negotiated merger or other
business combination.
We do not anticipate paying dividends.
We have not paid any cash dividends on our common stock since our
inception and we do not anticipate paying cash dividends in the foreseeable
future. Any dividends which we may pay in the future will be at the discretion
of our Board of Directors and will depend on our future earnings, any applicable
regulatory considerations, our financial requirements and other similarly
unpredictable factors. For the foreseeable future, we anticipate that we will
retain any earnings which we may generate from our operations to finance and
develop our growth and that we will not pay cash dividends to our stockholders.
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RISKS PARTICULAR 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 Net Value, 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.
Most of our affiliate companies have inadequate amounts of capital and
will require significant additional financing to execute their business plans.
Other than BrightStreet, 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.
Our affiliate companies may be unable to protect their proprietary rights which
may increase the level of competition which they face.
Although our affiliate companies seek to protect their proprietary
rights, their actions may be inadequate to protect any trademarks, copyrights
and other proprietary rights. This may result in increased competition to our
affiliate companies. Many of our affiliate companies are in the development
stage and are either in the process of preparing their initial trademark or
patent applications or are awaiting approval of these initial applications by
the United States Patent and Trademark office. For example, our affiliate
companies have filed the following applications:
College 411.com, Inc. one trademark application
BrightStreet.com, Inc. one patent application and eight
trademark applications
AsiaCD, Inc. one trademark application
Webmodal, Inc. two trademark applications
Competitors will incur additional costs associated with developing
their own customer recognition and developing technology to offer similar
products and services without infringing on the affiliate companies' patents. If
our affiliate companies cannot successfully protect and enforce their
proprietary rights, then their ability to establish customer recognition will be
diminished, and our affiliate companies may face competition from competitors
who are using technology developed in whole or part by the affiliate company,
thus increasing the level of competition which our affiliate companies may face.
Our affiliate companies have experienced some difficulty in protecting
and enforcing their proprietary products and services. For example, BrightStreet
filed its initial patent application in 1995 and the United States Patent and
Trademark Office has not yet issued a patent covering BrightStreet's technology.
In addition, effective copyright and trademark protection may be unenforceable
or limited in certain countries and the global nature of the Internet makes it
impossible for some of our affiliate companies to control the dissemination of
their work.
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Our affiliate companies may be subject to claims that their products or services
infringe on intellectual property rights of third parties.
Our affiliate companies may be subject to claims that their products or
services infringe on patents or trademarks of third parties. Any of these
claims, with or without merit, could subject our affiliate companies to costly
litigation and divert the attention of their technical and management personnel.
If these claims are valid, then our affiliate companies may be required to cease
the infringing activity and pay substantial damages. For example, BrightStreet
is currently named as a defendant in a lawsuit in which the plaintiff has
alleged that BrightStreet's technology infringes upon its patent. If
BrightStreet loses this litigation, it may be required to cease offering its
product and services. Even if BrightStreet successfully defends this claim, it
will incur substantial legal fees and defense costs. If our affiliate companies
incur significant expenses in connection with litigation and their management
and personnel are required to divert their attention to this litigation, then
the expenses, lost time to further develop their products and services and
financial losses incurred by our affiliate companies will increase and their
profits, if any, will decrease.
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, AsiaCD, 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. For example, if financial institutions are unwilling to purchase and sell
loan portfolios over the Internet, then AssetExchange will not sufficiently
develop its service to meet its business plan. In addition, if businesses are
unwilling to forgo the service provided by marketing intermediaries in order to
plan and execute intermodal shipments over the Internet, then Webmodal will not
develop a sufficient customer base to execute its business plan.
Our long-term success depends on widespread market-acceptance of
e-commerce. A number of factors could prevent such acceptance, 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:
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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.
Our affiliate companies' computer and communications systems may fail, which may
discourage content providers and consumers from using our affiliate companies'
systems.
Our affiliate companies' businesses depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
Interruptions could result from natural disasters as well as power loss,
telecommunications failure and similar events. Any system interruptions that
cause our affiliate companies' Internet websites to be unavailable to Internet
browsers may reduce the attractiveness of our affiliate companies' Internet
websites to consumers and third party content providers. If consumers and third
party content providers are unwilling to use our affiliate companies' Internet
websites, then our business, financial condition and operating results could be
adversely affected.
Our affiliate companies' businesses may be disrupted if they are unable to
upgrade their systems to meet increased demand.
Capacity limits on our affiliate companies' technology, transaction
processing systems and network hardware and software may be difficult to project
and they may find it difficult to expand and upgrade their systems to meet
increased use. Our affiliate companies will require significant amounts of
capital to upgrade their technology systems. If our affiliate companies are
unable to obtain this financing to appropriately upgrade their systems and
network hardware and software, then the operations and processes of our
affiliate companies may be disrupted.
Since it only recently launched its Internet website, metacat believes
that its technology systems are currently being used at approximately 5% of
capacity. metacat believes that its technology systems can accommodate several
thousand transactions a day. In addition, metacat's technology systems can be
expanded by purchasing additional hardware and software licenses. metacat
believes that it can accomplish any required expansion of its technology systems
within one to two days.
Although College 411 owns its own web server, its operations are hosted
by AboveNet Communications 24 hours a day and is currently running at
approximately 20% capacity. College 411 believes that it can easily expand both
its database architecture and web server through the addition of server
hardware.
AssetExchange's technology systems have the capacity to handle
approximately 20,000 members. Accordingly, AssetExchange believes that its
technology systems are currently operating at less than 5% of its capacity.
AssetExchange believes that it can quickly increase its capacity by adding
processors to the existing server, providing additional servers or replacing the
server with a more powerful server.
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BrightStreet believes that its technology systems have the capacity to
deliver approximately 2,000,000 promotion views per day. BrightStreet is
presently experiencing an average of approximately 400 promotion views per day.
BrightStreet believes that it can easily increase its capacity by purchasing
additional servers, processors and hard disk arrays.
AsiaCD's web server is hosted by Mindspring. In addition, AsiaCD's
transaction processing is performed by Yahoo! Store and Wells Fargo Bank.
Accordingly, AsiaCD believes that it currently has sufficient capacity to handle
its transaction volume. AsiaCD can easily expand its technology systems by
purchasing additional web servers.
Since Webmodal and Swapit.com have not launched their Internet websites
and operations, they do not yet face capacity limits.
Our affiliate companies that publish or distribute content over the Internet may
be subject to legal liability.
Some of our affiliate companies may be subject to legal claims relating
to the content on their Internet websites, or the downloading and distribution
of this content. For example, College 411, AssetExchange, AsiaCD and Webmodal
all use content and information obtained from third party sources. Claims
involving matters such as defamation, invasion of privacy and copyright
infringement can be made against these affiliate companies if they improperly
obtain or use this content. Providers of Internet products and services have
been sued in the past, sometimes successfully, based on the content of material
contained on their Internet websites. In addition, some of the content provided
by our affiliate companies on their Internet websites is drawn from data
compiled by other parties, including governmental and commercial sources, and
our affiliate companies re-enter the data. This data may have errors. If any of
our affiliate companies' Internet website content is improperly used or if any
of our affiliate companies supply incorrect information, it could result in
unexpected liability. Any of our affiliate companies that incur this type of
unexpected liability may not have insurance to cover the claim or, if coverage
is in place, it may not be adequate. If our affiliate companies incur
substantial costs because of this type of unexpected liability, then the
expenses incurred by our affiliate companies will increase and their profits, if
any, will decrease.
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, AsiaCD 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.
Concerns regarding security of transactions and transmitting confidential
information over the Internet may have an adverse impact on our business.
We believe that concerns regarding the security of confidential
information transmitted over the Internet discourage many potential customers
from engaging in online transactions. If our affiliate companies that depend on
such transactions, such as metacat.com, AsiaCD, College 411 and Swapit.com do
not add sufficient security features to their future product releases, then our
affiliate companies' products and services may not gain market acceptance or
there may be additional legal exposure to them.
Since it launched its Internet website in December 1999, metacat has
experienced one 90 minute service interruption due to a disruption experienced
by metacat's Internet service provider. metacat's systems were not affected by
this outage.
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Since it launched its Internet website, College 411 has experienced
approximately ten service interruptions, each of which lasted for a duration of
five minutes or less.
In September 1999, AssetExchange experienced several brief outages due
to an incorrect database configuration setting. Each of these outages lasted for
less than 30 minutes. AssetExchange has not experienced any unscheduled outages
since this problem was corrected.
In the past 75 days, BrightStreet has experienced four service
interruptions. Three of these interruptions lasted for 30 minutes or less and
the fourth interruption lasted for approximately two hours. All of these service
interruptions were scheduled maintenance periods for BrightStreet's co-location
facility and occurred between the hours of 1:00 a.m. and 4:00 a.m. PST. These
service interruptions were pre-announced to BrightStreet's customer base seven
days in advance of each interruption. BrightStreet believes that these scheduled
maintenance interruptions are a regular activity that will continue to occur in
the foreseeable future.
During the past 18 months, AsiaCD experienced three service
interruptions. Two of these interruptions were related to web servers and were
resolved within two hours by installing new hardware and more servers. The third
interruption involved AsiaCD's online payment gateway and lasted for one day.
During this period, AsiaCD disabled its real time credit card authorization
system and processed orders by manually authorizing credit card purchases.
Since Webmodal and Swapit.com have not launched their Internet websites
and operations, they have not experienced any service interruptions.
Our affiliate companies' technology systems are vulnerable to break-ins, viruses
or similar problems which, if they occur, could adversely affect their
reputations.
The technology systems of our affiliate companies are potentially
vulnerable to physical or electronic break-ins, viruses or similar problems. If
a person circumvents the security measures imposed by any one of our affiliate
companies, then he or she could misappropriate proprietary information or cause
interruption in operations of the affiliate company. Security breaches that
result in access to confidential information could damage the reputations of our
affiliate companies and expose the affected affiliate company to a risk of loss
or liability. Some of our affiliate companies may be required to make
significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more widespread, our affiliate
companies' customers will become more concerned about security. If our affiliate
companies are unable to adequately address these concerns, then they may be
unable to sell their products.
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.
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Risks particular to metacat.com.
metacat.com's business will be adversely affected if it is unable to maintain a
current product database.
metacat.com will have to develop and maintain a product database from
the catalog merchants it serves. Keeping the product database updated as
individual catalogs change their selections and prices will require diligence
and continual dialogue with retailers. If metacat.com is unable to maintain a
current and accurate database, consumers will become frustrated with its service
and turn to other methods for purchasing products.
If merchants whose products metacat.com offers fail to ship orders properly,
metacat.com will incur increased costs and reduced sales.
If merchants whose products are ordered through metacat.com fail to
ship their orders in a timely manner, ship incomplete or otherwise faulty
orders, or fail to maintain inventory, then metacat.com will incur additional
expense in customer service in order to handle problems and may have to make
refunds to purchasers. In addition, consumers do not have great tolerance for
such problems, and chronic problems will result in fewer repeat customers and
reduced orders as frustrated customers cease using its service. Although
merchant performance is not under metacat.com's direct control, metacat.com will
maintain a customer service history for each cataloger and conduct a periodic
performance review, as well as act to either discipline or remove catalogers
with consistently poor service records in order to ensure timely information and
a high level of customer service.
Competition from various sources could aversely impact metacat's operating
results.
metacat.com, Inc. competes with a wide variety of online and offline
sources for mail order products. Competition includes literally 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
Catalog.com, each of whom have Internet websites that are currently in operation
and attracting consumers. Many of metacat's competitors have established
Internet websites and greater resources and customer recognition than metacat.
Metacat's ability to compete will be dependent on providing hard-to-find
products and on effective marketing to inform consumers of the existence of its
Internet website.
Risks particular to Webmodal.
If intermodal railroads are unwilling to establish relationships with Webmodal,
then Webmodal will be unable to implement its business plan.
Webmodal's business plan is dependent on establishing relationships
with intermodal railroads so that it can market intermodal products and
services. "Intermodal" refers to shipment of goods by truck from the point of
origin to a railroad yard, where entire truck trailers are loaded on railcars
and shipped by rail to a destination yard, where the trailers are offloaded and
trucked to the shipping destination. Most intermodal railroads have contract
minimum and creditworthiness requirements. If Webmodal fails to either meet
these requirements or obtain exceptions to the requirements based on the
potential value to the railroads of its services, then it will be unable to
establish relationships with the railroads. Webmodal has entered into
preliminary discussions with several railroads and believes that it is
reasonably likely that each of these discussions will result in an agreement. A
failure to establish these relationships on a consistent basis will reduce the
attractiveness of Webmodal's products and services.
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If Webmodal is unable to establish relationships with trucking companies in hub
cities, then it will be delayed in executing its business plan.
Webmodal's business plan requires that it establish relationships for
online pricing and operations interfaces with trucking companies in over 100
intermodal hub locations around the country. If too many trucking companies are
unwilling to provide the resources or attention necessary for such a
relationship, or lack necessary information interfaces, Webmodal's ability to
offer services in the applicable hub cities will be adversely affected until
such relationships can be established. Webmodal has entered into preliminary
discussions with several trucking companies and believes that it is reasonably
likely that each of these discussions will result in an agreement.
Webmodal will not be successful unless it can convert shippers from traditional
methods of arranging for shipments.
Shippers of goods by intermodal means traditionally have relied on
intermodal marketing companies to negotiate pricing, arrange for shipping and
otherwise act as intermediaries in the shipping process. Webmodal's success will
be dependent on its ability to educate shippers regarding the advantages of
Webmodal's services and persuade them to adopt a new way of doing business.
Webmodal has not yet started marketing its services to shippers. To the extent
that Webmodal is unsuccessful in this educational effort, its business will
suffer.
Competition from various sources could adversely impact Webmodal's operating
results.
Webmodal faces competition from various current and potential
participants in the intermodal shipping market, who could respond to Webmodal by
developing similar systems and apply greater marketing and management resources,
thus reducing Webmodal's entry into the market and adversely affecting
Webmodal's revenues. Existing intermodal marketing companies such as Hub Group
and Mark VII Transportation, Inc. and intermodal-enabled trucking companies such
as J.B. Hunt Transportation Services, Inc. and Schneider National have
pre-existing service relationships with intermodal carriers as well as
substantially greater resources than Webmodal. The Hub Group and CrossRoad have
introduced limited online information systems that do not have all of the
intended features of Webmodal's system, but could potentially develop systems
similar to Webmodal's. Railroads, trucking companies and other independent
entities similar to Webmodal also could enter this market. Third party logistics
companies, to whom shippers sometimes outsource shipment management activities
and who are a primary source of potential customers for Webmodal, could become
competitors. Finally, other transportation-related e- commerce ventures, such as
National Transportation Exchange, FreightQuote and RouteGuide.com do not appear
to be currently directed at the intermodal shipping market but could develop
applications for that market. If any of these companies successfully enters this
market, then Webmodal may incur increased expenses as a result of this increased
level of competition. This increase in expenses will adversely affect Webmodal's
operating results.
Risks particular to College 411.
College 411's target audience may not respond to its offerings in sufficient
numbers.
If College 411 does not attract sufficient college students to view
content and buy products on its Internet website, then its revenues will be
adversely affected. College 411's business model relies on advertising revenues
which are dependent on the number of visits to its Internet website, and on
revenues from sales of products offered for sale on its Internet website.
Although the Internet website's content is carefully chosen to attract college
students, College 411 is targeting a fast-paced consumer group with progressive,
rapidly shifting tastes and preferences who may not ultimately accept its
product offerings.
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Competition from various sources could adversely impact College 411's operating
results.
College 411 faces competition from a variety of sources, including such
online competitors as College Club, MyBytes and Student Advantage, each of which
have Internet websites providing a variety of products and services similar to
those provided by College 411. In addition to these entities, College 411
competes 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. Many of College 411's
competitors have greater resources than College 411 and have been providing
products and services to college students for longer periods of time. College
411's ability to compete will be dependent on its ability to provide content and
services that appeal to college students.
Risks particular to AsiaCD.
A larger competitor in the Asian music market could adversely affect AsiaCD's
operating results.
If a large, well-funded United States based music Internet website
launches an Internet website directed at sales of Asian music titles to the
Asian population in the United States, it would compete directly with AsiaCD and
could reduce AsiaCD's revenues and require that AsiaCD increase its marketing
efforts in response. However, existing music Internet websites contain almost no
Asian music, and therefore do not compete with AsiaCD, and AsiaCD is not aware
of any proposal for this type of Internet website to materially increase its
Asian music offerings or launch an Asia-specific Internet website. As AsiaCD
becomes a more prominent player in the already- crowded online music space,
competition is likely to arrive, either from larger entities with broad
offerings that include Asian titles or from other Asia-specific Internet
websites.
AsiaCD may be unable to obtain an adequate number of music titles to sell if it
is unable to develop supplier relationships in Asian countries.
AsiaCD relies on the supply of Asian music titles from local
distributors in various Asian countries. It has supplier relationships in Hong
Kong, Japan and Taiwan, but needs to build strong ties with suppliers in Korea,
China, and other Asian countries in order to broaden its selections. If it is
unable to do so, its potential business growth will be limited.
Relatively wide availability of counterfeit goods in Asia may make it difficult
for AsiaCD to sell genuine products in Asia.
Loose intellectual property laws and uneven enforcement of existing
laws in many Asian countries has led to wide availability of cheap but
low-quality compact discs and videos. Since AsiaCD carries only original, high-
quality products on its Internet website, it must depend on local copyright
enforcement efforts, or consumer perception of the higher quality of its
products, in order to compete against such goods in the Asian market. If it is
unsuccessful in creating consumer perception of the quality of its goods, it
will not be successful in these markets.
AsiaCD's sales in Asia could be adversely affected by economic conditions in
Asia.
AsiaCD's ability to generate significant sales in Asia will depend in
part on the speed with which various Asian countries recover from recent
economic instability and recession. Any recurring downturn or political or
economic instability could adversely affect AsiaCD's sales in that region.
30
<PAGE>
Risks particular to AssetExchange, Inc.
Buyers and sellers of financial assets may not accept AssetExchange's services,
resulting in lower than anticipated revenues.
AssetExchange's service may not attract the number and quality of
portfolios for sale and the number of buyers that it has anticipated. In
addition, particular classes of assets that are offered for resale on
AssetExchange's Internet website may not be priced attractively for resale. If
sufficient sellers and buyers do not use AssetExchange's services, then its
revenues and income will be adversely affected.
Competitive services for brokerage of financial assets could reduce
AssetExchange's business.
If other online financial asset brokerage systems appear, or buyers and
sellers of financial assets use online means for direct negotiation of
transactions, the result will be a reduction in the volume of transactions
through AssetExchange's service and resulting lower revenues and income. The
online asset brokerage business is new and rapidly evolving. It is likely that
other entities will emerge and attempt to compete in this market. As there are a
limited number of active buyers of credit card portfolios, it may be feasible
for buyers and sellers to make direct contact to negotiate transactions without
using AssetExchange or a competing service. Other potential competitors include
businesses currently conducting online mortgage portfolio auctions and loan
participations who may choose to enter the market for credit card portfolios.
Risks particular to Swapit.com.
- ------------------------------
Swapit.com may overvalue goods taken in trade, resulting in accumulation of
inventory and write-offs.
Swapit.com will attempt to credit users' accounts for any used good
submitted to it with an amount which reflects the market value that it can
acquire from other users in trade for the same item. As the market value in
trade of used goods cannot be estimated precisely, it may overvalue used goods.
In addition, Swapit.com may opt to credit users with an amount that exceeds the
valuation of the goods offered in trade by a current or potential user in order
to build a user base and develop its brand name. This may result in the
accumulation of inventory or the sale or exchange of overvalued goods at reduced
margins or at a loss. Swapit.com may be forced to write-off large quantities of
aging inventories, or maintain large reserves on our books, due to valuation
errors.
Competition from a variety of online trading services will be intense and
Swapit.com may not be able to compete successfully.
The market for trading and sales over the Internet is new, rapidly
evolving and intensely competitive, and Swapit.com expects competition 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 ours prior to or after our 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 does. Some of these competitors also have significantly
greater financial, marketing, technical and other resources. Other online
trading services may be acquired by, receive investments from or enter into
other commercial relationships with larger, well established and well financed
companies. As a result, some of its competitors with other revenue sources may
be able to devote more resources to marketing and promotional campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
website and systems development than Swapit.com. Increased competition may
result in reduced operating margins, loss of market share and diminished value
of Swapit.com's brand. In addition, some of its competitors have offered
services for free and others may do this as well.
31
<PAGE>
A decline in demand for used goods would adversely impact Swapit.com's business.
A decline in the popularity of, use of or demand for, certain items
traded or sold through Swapit.com's service could reduce the overall volume of
transactions on the service, resulting in reduced revenues. For instance if
audio compact discs become less popular because of the emergence of MP3s or
another new recording medium, trades or purchases of used compact discs from the
service may decline and thus harm Swapit.com's business. Swapit.com will derive
most of its revenues from fees received from sellers on trades made using the
service. Swapit.com's future revenues will depend upon the level of demand for
used and aged goods, as well as the demand for goods of the type that will be
traded through the service. The demand for used goods may fluctuate with changes
in consumer discretionary spending and other economic conditions.
Risks particular to BrightStreet.
BrightStreet may not be able to compete successfully in the consumer advertising
and promotion business due to the intense competition in the industry.
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. Many of these companies have longer operating
histories, greater market presence, and substantially greater financial and
other resources than BrightStreet. Many of these companies, including Catalina
Marketing Corporation, Money Mailer, Val-Pak Direct Marketing Systems,
Interactive Coupon Network, Valassis Communications, Inc. and News America
Holdings Incorporated have initiated or are planning to initiate programs and
services involving the Internet. 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. Accordingly,
there can be no assurance that competition will not increase from existing
competitors, that established or new companies will not enter the market, that
competitors will not offer comparable products and services at lower prices than
BrightStreet, or that BrightStreet will be able to compete successfully with
such existing or new competitors.
Rapid technological changes could reduce the value of BrightStreet's technology
or make it non-competitive.
The online services industry is subject to rapid and significant
changes in technology. Such changes could lead to new products and services that
compete with products proposed to be offered by BrightStreet or could lower the
cost of current competing products and services to the point where
BrightStreet's products and services could become non-competitive. In response
to these changes, BrightStreet could be required to reduce the prices of its
products or to increase its research and development expenses in an effort to
develop technological advances in its own products so that they remain
competitive in the marketplace. While BrightStreet is not aware of any
technology changes that would materially affect the attractiveness or
effectiveness of its proposed products and services, the effect of technological
changes on its business cannot be predicted. In the event that BrightStreet is
unable to continue to upgrade its products and services, it will be unable to
provide the types of products and services demanded by consumers of online
services.
32
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of up to 3,722,560
shares of our common stock which are being offered for sale by 13 of our
stockholders pursuant to this registration statement. However, 295,040 of these
shares will only be issued upon the exercise of warrants. If all of these
warrants are exercised, then we will receive gross proceeds of $1,507,470. We
will use these proceeds for general corporate and working capital purposes.
MARKET PRICE AND DIVIDEND INFORMATION
As of the date of this prospectus, our common stock is traded through
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
120,817 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, 1999
Fourth Quarter 5.7500 4.0000 31,539
Year Ending 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, 1999
First Quarter (through
January 7, 2000) 11.1250 10,000 109,480
</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 January 7, 2000, there were approximately 198
record holders of our common stock. We have not paid any cash dividends to date
and do not 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.
CAPITALIZATION
The following table sets forth our total capitalization on an actual
basis as of September 30, 1999 and on a pro-forma basis as if the following
transactions occurred on September 30, 1999:
o We received net proceeds of 2,582,000 in October 1999 from the
sale of 2,824 shares of our Series B Preferred Stock.
33
<PAGE>
o In the fourth quarter of 1999 and in January 2000, holders of our
convertible debentures converted principal and accrued interest
of $1,898,913 into 900,922 shares of our common stock.
o In the fourth quarter of 1999 and in January 2000, holders of our
convertible promissory notes converted principal and accrued
interest of $1,214,145 into 607,073 shares of our common stock.
o We issued 676,374 shares of our common stock in a private
placement with the RS Orphan Fund, LP and the RS Orphan Offshore
Fund, LP in October 1999 pursuant to which we received gross
proceeds of $676,374.
o We sold Net Value, Inc.'s assets to Promotions Acquisition, Inc.
for $2,000,000, an approximate 14% equity interest in Promotions
Acquisition, Inc. and the assumption by Promotions Acquisition,
Inc. of approximately $1,600,000 of Net Value, Inc.'s
liabilities. We have assumed approximately $2,000,000 of Net
Value, Inc.'s liabilities.
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------- ----------------
Actual Pro-Forma As Adjusted
------------------------------------- ----------------
<S> <C> <C> <C>
Debt:
Short-term, including current portion of long-term plus
accrued interest $ 1,884,577 $ 2,451,977 $ 2,451,977
Long-term, net of current portion 4,777,599 1,918,141 1,918,141
Series B mandatory redeemable preferred stock, Net Value
Holdings, Inc., $.001 par value per share $1,000
liquidation value, $1,250 redemption value. At September
30, 1999, 2,000 shares issued and outstanding; 4,824 shares
issued and outstanding on a Pro-Forma basis 1,732,000 4,177,584 4,177,584
Stockholders' equity (deficit):
Common stock, Net Value, Inc., $.001 par value per
share. At September 30, 1999, 1,037,338 shares
issued and outstanding; 1,037,338 shares issued and
outstanding as adjusted 1,038 1,038 1,038
Common stock, Net Value Holdings, Inc., $.001 par
value per share. At September 30, 1999, 13,371,902
shares issued and outstanding; 15,557,531 shares
issued and outstanding as adjusted 13,372 15,557 15,557
Additional paid-in capital 64,855,155 66,730,512 66,730,512
Deferred compensation - continuing operations (11,151,764) (11,151,764) (11,151,764)
Deferred compensation - discontinued operations (2,048,306) -- --
Deficit accumulated during the development stage (56,339,237) (50,334,004) (50,334,004)
----------------- ------------------ ----------------
Total Stockholders' Equity (deficit) (4,669,742) 5,261,339 5,261,339
----------------- ------------------ ----------------
Total Capitalization $ 3,724,434 $ 13,809,041 $ 13,809,041
================= ================== ================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Capitalization
Pro Forma Transactions
onversion
Sale of Conversion of
Sept. 30, Series B of onvertible Sale of Sale of Net
1999 Preferred Convertible romissory Common Value, Inc. Pro Forma
(unaudited) Stock Debentures Notes Stock Assets Balance
----------------- -------------- --------------- ------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt:
Short-term, including
current portion of
long-term plus accrued
interest 1,884,577 -- (131,913) (121,687) -- 821,000 2,451,977
Long-term, net of
current portion 4,777,599 -- (1,767,000) (1,092,458) -- -- 1,918,141
Series B mandatory
redeemable preferred
stock, Convertible
Series A, $.001 par
value per share. At
September 30, 1999, 2,000
shares issued and outstanding;
4,824 shares issued
and outstanding on a Pro-
Forma basis 1,732,000 2,445,584 -- -- -- -- 4,177,584
Stockholders' equity
(deficit):
Common stock, Net
Value Holdings, Inc.,
$.001 par value per
share. At September
30, 1999, 1,037,338
shares issued and
outstanding; 1,037,338
shares issued and
outstanding as
adjusted 1,038 -- -- -- -- -- 1,038
Common Stock, Net
Value Holdings, Inc.,
$.001 par value per
share. At September
30, 1999, 13,371,902
shares issued and
outstanding;
15,557,531 shares
issued and outstanding
as adjusted 13,372 -- 901 607 677 -- 15,557
Additional paid-in
capital 64,855,155 136,416 1,898,012 1,213,538 675,697 (2,048,306) 66,730,512
========== ======= ========= ========= ======= ========== ==========
Deferred
compensation -
continuing operations (11,151,764) -- -- -- -- -- (11,151,764)
Deferred
compensation -
discontinued
operations (2,048,306) -- -- -- -- 2,048,306 --
Deficit accumulated
during the
development stage (56,339,237) -- -- -- -- 6,005,233 (50,334,004)
----------------- -------------- --------------- ------------- -------- ------------ --------------
Total stockholders'
equity (deficit) (4,669,742) 136,416 1,898,913 1,214,145 676,374 6,005,233 5,261,339
----------------- -------------- --------------- ------------- -------- ------------ --------------
Total Capitalization 3,724,434 2,582,000 -- -- 676,374 6,826,233 13,809,041
================= ============== =============== ============= ======== ============ ==============
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
December 16, 1994
Year Ended (Inception)
December Year Ended Year Ended Nine Months Ended through
31, December 31, December 31, September 30, September 30,
Statement of Operations 1996 1997 1998 1998 1999 1999
---------- ----------- ----------- ----------- ---------- ---------------
Data: (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ - $ -
Operating expenses
Compensation and
related expenses - - - - 1,453,206 1,453,206
Professional fees - - 129,878 513,933 643,811
Consulting - - - - 107,849 107,849
Selling, general and
administrative - - 10,606 1,120 319,867 330,473
Equity loss - - - - 41,808 41,808
---------- ----------- ----------- ----------- ---------- -----------
Total Operating
Expenses - - 140,484 1,120 2,436,663 2,577,147
---------- ----------- ----------- ----------- ---------- -----------
Loss from Operations - - (140,484) (1,120) (2,436,663) (2,577,147)
---------- ----------- ----------- ----------- ---------- -----------
Other Income (expense)
Interest Income - - - - 19,690 19,690
Interest Expense - - (82,082) (4,685) (5,187,476) (5,269,558)
Financing Fees - - (48,436) - (542,624) (591,060)
---------- ----------- ----------- ----------- ---------- -----------
Total Other Income
(Expenses) - - (130,518) (4,685) (5,710,410) (5,840,928)
Loss from continuing
operations - - (271,002) (5,805) (8,147,073) (8,418,075)
---------- ----------- ----------- ----------- ---------- -----------
Loss from discontinued
operations (3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,068,553) (31,489,412)
---------- ----------- ----------- ----------- ---------- -----------
Net Loss (3,314,094) (11,235,237) (11,377,828) (10,201,148) (13,215,626) (39,907,487)
========== =========== =========== =========== =========== ===========
Preferred Stock
Dividend-Discontinued
operations (1,181,250) (15,250,500) (15,250,500) - (16,431,750)
----------- ----------- ----------- ---------- -----------
Net Loss to Common
Stockholders ($12,416,487) ($26,628,328) ($25,451,648) ($13,215,626) ($56,339,237)
=========== =========== =========== =========== ============
Net loss per common
share
outstanding Basic and
Diluted continuing
operations - - (0.06) - (0.94)
========== =========== =========== =========== ===========
Net loss per common
share
outstanding Basic and
Diluted discontinued
operations (3.55) (6.88) (5.59) (6.70) (0.59)
========== =========== =========== =========== ===========
Weighted average shares
outstanding
Basic and Diluted 934,810 1,804,700 4,711,351 3,796,197 8,647,063
</TABLE>
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
September
Balance Sheet Data December 31, December 31, 30,
1997 1998 1999
---------------- ------------------- --------------
Cash and cash
equivalents -- 1,466 1,051,931
Working capital (deficit) (3,427,635) (7,984,380) (2,627,800)
Total assets 1,800,402 1,422,519 7,027,378
Total liabilities 4,227,058 9,638,341 9,965,120
Long-term debt, net of
discounts & current
portion -- 947,192 4,777,599
Series B mandatory
redeemable preferred
stock -- -- 1,732,000
Stockholders' equity
(deficit) (2,426,656) (8,215,822) (4,669,742)
37
<PAGE>
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 under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with our
audited Consolidated Financial Statements and related Notes thereto included
elsewhere in this prospectus.
General
We are an Internet holding company actively engaged in e-commerce
through a network of affiliate companies. As of September 30, 1999, we owned
interests in five e-commerce companies, which we refer to as our affiliate
companies. We are currently in the process of acquiring all of the issued and
outstanding securities of Net Value, Inc. As of December 31, 1998 we acquired
66% of the outstanding shares of common stock of Net Value, Inc. through share
exchange transactions with 20 Net Value, Inc. shareholders. As a result of these
transactions, these Net Value, Inc. shareholders obtained a majority ownership
interest in our company. We were a dormant entity until October 1998 when we
commenced our acquisition of Net Value, Inc. We have accounted for this
acquisition as a recapitalization. This means that the historical financial
statements of Net Value, Inc. have become the financial statements of our
entity. We expect to complete a merger with Net Value, Inc. in 2000 pursuant to
which we will acquire the remaining issued and outstanding securities of Net
Value, Inc.
Net Value, Inc.'s operations consisted of developing software to be
used in connection with Internet based coupons. During 1999, the management of
Net Value, Inc. estimated that it would require approximately $15,000,000 to
$20,000,000 to fully implement its business plan. In November 1999, we
determined that the best use of our resources was to permit Net Value, Inc. to
seek outside investors to provide this funding. Net Value Inc.'s senior
management team, Scott Wills and Gregory Roberts, identified third party
investors who were only willing to make an investment of this magnitude through
the purchase of Net Value, Inc.'s assets by a newly-formed company with no
existing liabilities. Accordingly, in December 1999, Net Value, Inc. sold its
entire business operations to Promotions Acquisition, Inc., a newly-formed and
capitalized corporation, in exchange for $2,000,000 in cash, assumption by
Promotions Acquisition, Inc. of approximately $1,600,000 in liabilities,
cancellation of all employee stock options granted after June 1, 1998 and
releases from employment obligations for all existing employees, and 12% of
Promotions Acquisition, Inc.'s common stock calculated on a fully-diluted basis.
Six third- party investors provided $17,000,000 in exchange for preferred stock
convertible into approximately 63% of the common stock of Promotions
Acquisition, Inc. on a fully-diluted basis. The third party investors were not
affiliated with Messrs. Wills or Roberts.
Scott Wills and Gregory Roberts collectively own approximately 24% of
the common stock of Promotions Acquisition, Inc., calculated on a fully-diluted
basis. In addition, the remaining management team and employees of Promotions
Acquisition, Inc., substantially all of whom were previously employed by Net
Value, Inc., are entitled to receive options or restricted stock grants
representing approximately 5% of Promotions Acquisition, Inc.'s common stock
calculated on a fully-diluted basis. Neither Scott Wills nor Gregory Roberts
have or had any relationship with us other than as former officers of our
subsidiary.
Net Value, Inc. has loaned to us the cash which it received in this
transaction. We plan to use this cash to satisfy Net Value, Inc.'s remaining
liabilities of approximately $2,000,000 as instructed by Net Value, Inc. Any
payments which we make to creditors on behalf of Net Value, Inc. will reduce the
unpaid principal and interest related to this loan.
38
<PAGE>
We have changed significantly during the fourth quarter of fiscal year
1999. Subsequent to the sale of its assets to Promotions Acquisition, Inc. on
December 3, 1999, we refer to Net Value, Inc.'s operations as discontinued
operations. Our historical financial statements are those of Net Value, Inc.
Since Net Value, Inc. sold its operations, our financial statements for all
prior periods have been restated to segregate the results of operations of Net
Value, Inc. as results from discontinued operations.
Upon the completion of our merger with Net Value, Inc., Net Value, Inc.
will be merged into our company, and we will own all of Net Value, Inc.'s assets
and liabilities. This will not change our financial statement presentation as
these items are already reflected on our balance sheet.
Effect of Various Accounting Methods on our Results of Continuing Operations
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 September 30, 1999, metacat.com, Inc. was 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 a partner company is
reflected in our net 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 loss" in the
Consolidated Statements of Operations. As of December 31, 1998, we did not
account for any of our affiliate companies under the equity method of
accounting. As of September 30, 1999, we accounted for the following affiliate
companies under this method:
o College 411.com, Inc.
o AssetExchange, Inc.
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 were formed in 1999 and are expected to incur substantial
losses in 1999 and 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 September 30, 1999, we accounted for AsiaCD under the cost method
of accounting. In addition, subsequent to completion of our merger with Net
Value, Inc., we plan to account for BrightStreet.com, Inc. under the cost method
of accounting. We also plan to account for our ownership interest in Swapit.com,
Inc. under the cost method of accounting.
39
<PAGE>
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 1999 and 2000.
Net Results of Operations
Twelve Months Ended December 31, 1997 Compared to the Twelve Months Ended
December 31, 1996
Continuing Operations
The only operations that existed during this time period were from
operations which were disposed of in December, 1999. All management and
employees related to these operations are no longer employed by our company.
Discontinued Operations
The losses which we incurred in each of these years were related to the
software development operations, which we subsequently disposed of. During these
years, we incurred significant expenses relating to development and
infrastructure costs. Comparisons of the results for the twelve months ended
December 31, 1997 and 1996 can be misleading given the limited operating history
of Net Value, Inc. in 1996. We incurred a loss from operations of $11,235,237 in
1997 compared to a loss from operations of $3,314,094 during 1996, an increase
of $7,921,143. Approximately $1,300,000 of this increase was due to additional
non-cash compensation expense in 1997 as a result of grants of stock options
with exercise prices which were less than the fair value of Net Value, Inc.'s
common stock at the date of grant. Approximately $1,900,000 of this increase was
due to additional interest expense in 1997 from increased borrowings and
amortization of debt discounts. The remaining increase in losses from operations
was the result of an approximate $4,700,000 increase in general operating
expenses from the development of the company's infrastructure in anticipation of
launching its online coupon products. In addition, during 1997 Net Value, Inc.
granted a preferred stock dividend of $1,181,250 related to the issuance of
shares of Series A Convertible Preferred Stock pursuant to the terms of a
preferred stock purchase agreement.
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.
Comparisons of the results from continuing operations can be misleading
for the years ended December 31, 1998 and 1997 given our limited operating
history. We incurred a net loss from continuing operations of $271,002 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 $131,000 was primarily related to interest expense and financing fees
on convertible debentures issued during the fourth quarter of 1998.
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Discontinued Operations
We incurred a loss from discontinued operations of $11,106,826 in 1998
compared to a loss from discontinued operations of $11,235,237 during 1997. This
decrease of $128,411 was primarily due to a decrease in consulting fees of
$894,250 due to the reduction of Net Value, Inc.'s use of external system
development companies, a decrease of $545,118 in advertising expenses and an
increase in revenues of $1,330,367 from the licensing agreement with IQ Value
offset by an increase in compensation and related expense of $483,444 due to
stock compensation and severance costs, an increase in professional fees of
$611,006 and an increase in interest and financing fees of $1,570,715 due to our
increased use of debt securities in 1998 to fund our working capital
requirements.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Continuing Operations
We started to build our current infrastructure in September 1998 when
our current operations were established in Philadelphia. Comparisons of
operating results for the nine months ended September 30, 1999 and 1998 can be
misleading given our limited continuing operating activities prior to September
1998.
During the nine months ended September 30, 1999 and for the nine months
ended September 30, 1998, we did not generate any operating revenues.
We incurred net losses from continuing operations of $8,147,073 during
the nine months ended September 30, 1999 and $5,805 during the nine months ended
September 30, 1998, which was an increase of $8,141,268. This increase was
primarily due to an increase in interest expense of $5,182,791and financing fees
of $542,624. The increased loss was also the result of an increase in
professional fees of $513,933, an increase in compensation expense of
$1,453,206, a $426,596 increase in consulting and selling, general and
administrative expenses and an increase in our losses from our affiliates
accounted for under the equity method.
Compensation and related expenses increased to $1,453,206 during the
nine months ended September 30, 1999 from $0 during the nine months ended
September 30, 1998, an increase of $1,453,206. This increase was primarily from
the non-cash amortization of stock based compensation issued in connection with
the employment agreements from the addition of core management staff during our
development stage, which amounted to $1,220,022 as of September 30, 1999, while
salaries and related expenses amounted to $233,184. We recorded approximately
$12,372,000 of compensation expense in connection with the stock and options
issued to our management staff and consultants of which approximately
$11,152,000 has been deferred as of September 30, 1999 and will be amortized
over the terms of the employment and consulting agreements.
Professional fees were $513,933 during the nine months ended September
30, 1999 and $0 during the nine months ended September 30, 1998, an increase of
$513,933. We incurred the professional fees during the nine months ended
September 30, 1999 for general corporate matters and preparation of a
registration statement registering the resale of shares of our common stock.
Other general administrative expense and consulting expense increased
to $427,716 during the nine months ended September 30, 1999 from $1,120 during
the nine months ended September 30, 1998, an increase of $426,596. The increase
was primarily attributable to additional general corporate expenses incurred
during our development stage as we developed our operating plan and continued to
expand our operations.
Interest expense, which was primarily a non-cash expense, increased to
$5,187,476 during the nine months ended September 30, 1999 from $4,685 during
the nine months ended September 30, 1998, an increase of $5,182,791. The
increase was primarily attributable to additional 1999 interest and debt
discount amortization on the convertible promissory notes issued in January
1999, additional interest and debt discount amortization on the convertible
debentures which we issued in the fourth quarter of 1998 and the first nine
months of 1999, as well as additional interest and debt discount amortization on
the convertible debentures which we issued to Founders Equity Group and its
affiliates in March 1999. The discount was the result of beneficial conversion
features attached to the convertible promissory notes and convertible debentures
that allowed those noteholders to convert their notes into shares our common
stock at below market rates. As of September 30, 1999, we have approximately
$2,440,000 of unamortized discounts that will amortize over the term of the
convertible debentures.
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Financing fees increased by $542,624 during the nine months ended
September 30, 1999. The increase in financing fees was primarily from the
amortization of loan costs we paid in the fourth quarter of 1998 and the nine
months ended September 30, 1999 related to the issuance of the convertible
debentures we issued in the fourth quarter of 1998 and the first nine months of
1999, and the convertible debentures which we issued to Founders Equity Group
and its affiliates in March 1999. As of September 30, 1999, there was
approximately $299,000 of prepaid financing fees that will be amortized over the
remaining term of the convertible debentures.
As of September 30, 1999, we had an accumulated deficit of $56,339,237.
We believe approximately $23,000,000 of this amount will be available to offset
future taxable income, if any. These carryforwards will expire between 2011 and
2020. We have recorded a full valuation allowance against the future benefit
from these loss carryforwards because it is more likely than not that sufficient
taxable income will not be realized during the carryforward period to utilize
the deferred tax asset. It is also possible that certain loss carryforwards
resulting from our discontinued operations may be significantly limited if
future offerings of our common stock significantly dilute our present ownership.
Discontinued Operations
We incurred a loss from the discontinued operations during the nine
months ended September 30, 1999 of $5,068,553 compared to a loss of $10,195,343
during the nine months ended September 30, 1998. This decrease of $5,126,790 was
primarily due to a decrease in revenues of $77,667 in 1999, increases in
advertising expenses of $63,080 and general and administration expenses of
$394,436 with corresponding decreases in 1999 in interest and financing fee
expense of $2,594,392, research and development expense of $1,698,519,
compensation and related expenses of $673,451, professional fees of $369,403,
and consulting expenses of $326,208.
Changes in Financial Position, Liquidity and Capital Resources
Our net losses and the need for additional financing to implement our
business plan and continue our operations raise substantial doubt about our
ability to continue as a going concern unless additional financing can be
obtained from alternative sources. We do not expect to be able to generate
significant revenues to meet our operational needs, nor do we expect our
majority owned affiliate company to generate revenues to meet our combined
operational needs over the next twelve months. We also do not expect to receive
dividends from our affiliate companies over the next twelve months given the
nature of development stage companies.
As of January 7, 2000 we had approximately 2,925,000 of cash and cash
equivalents on hand, of which $2,000,000 was a loan which we received from Net
Value, Inc. We anticipate that our current operations will require approximately
$225,000 per month over the next twelve months. We have agreed to use the
proceeds of our loan from Net Value, Inc. to pay Net Value, Inc.'s remaining
liabilities of approximately $1,715,000. In addition, on March 1, 2000, we will
be required to repay convertible debentures in the amount of $900,000 if the
holders of these convertible debentures do not exercise their conversion rights
prior to this date. We therefore estimate that we have sufficient working
capital to fund our current operations through June 30, 2000 and to pay the
obligations of Net Value, Inc. as they are presented.
We intend to obtain financing to fund our operations for the
subsequent next twelve to eighteen months through the sale of additional debt
and equity securities. We believe that this is a viable plan that removes the
threat to the continuation of the business through September 30, 2000. We are
not certain that we will be able to obtain additional financing or complete a
business combination. If we fail to raise to raise additional financing, then we
will be required to adjust our business plan. In addition, we may be required to
sell some or all our investments at liquidation values or to cease operations
and liquidate our assets. For a more complete description of our financial
condition, see "Consolidated Audited Financial Statements."
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We are a development stage enterprise and from our inception through
September 30, 1999 we have earned no revenues from our operations and have not
received any dividends from our affiliate companies. Since inception through
September 30, 1999, we received net proceeds of approximately $2,391,000 from
the sale of our equity securities. In addition, during the period from January
1, 1998 through September 30, 1999, we received approximately $9,257,000 net of
loan financing costs paid from the sale of convertible debentures. Accordingly,
net proceeds from the sale of debt and equity amounted to approximately
$11,648,000 during the period from January 1, 1998 through September 30, 1999.
During the period from January 1, 1998 through December 31, 1998, we
received gross proceeds of $2,906,500 from the sale of our debt securities to
various related and independent third parties, including $1,402,500 in proceeds
from the sale of our convertible debentures in the fourth quarter of 1998. The
convertible debentures accrue interest at the simple rate of 8% per annum. The
holders may convert the convertible debentures at any time. We may force the
mandatory conversion of the convertible debentures into shares of our common
stock at a conversion price of $2.00 per share upon the occurrence of:
o the completion of our merger with Net Value, Inc.;
o our acquisition of at least 80% of the issued and
outstanding capital stock of BrightStreet; or
o the effective date of a registration statement registering
the resale of all shares of common stock issuable upon
conversion of the convertible debentures.
The maturity date of the convertible debentures is the earlier of:
o the date on which the holder elects to convert all of the
outstanding unpaid principal and accrued interest on the
note into shares of common stock;
o the date upon which we elect to cause a mandatory conversion
of all of the outstanding principal and accrued interest on
the note into shares of common stock; or
o two years from the date of the issuance of the convertible
debentures.
From January 1, 1999 through June 30, 1999, we issued additional
convertible debentures in the aggregate principal amount of $6,455,000 having
conversion prices ranging from $2.00 to $2.50 per share on the same terms and
conditions. Through January 7, 2000, holders of these convertible debentures
converted an aggregate of $4,607,000 of principal and approximately $169,521 of
accrued interest into 2,076,590 shares of our common stock. We used the funds
received from the sale of these convertible debentures to pay commercial
accounts payable and to fund both our operations and the continuing operations
of Net Value, Inc. Accordingly, as of January 7, 2000, the unpaid principal
amount of these convertible debentures was $3,250,500. This amount will become
due at various dates in the fourth quarter of 2000 through the first quarter of
2001 if the convertible debentures are not converted prior to their maturity
date.
During October, November and December 1997, Net Value, Inc. issued
promissory notes in the aggregate principal amount of $4,025,000. These
promissory notes matured on the one-year anniversary of their dates of issuance.
Net Value, Inc. did not repay these promissory notes on their maturity dates.
Accrued interest on these promissory notes at December 31, 1998 was $495,646.
These promissory notes were held by investors with no other affiliation or
relationship with Net Value, Inc. or Net Value Holdings, Inc. Net Value, Inc.
had defaulted on these promissory notes and did not have the capital resources
to repay these promissory notes and continue its operations. Effective January
1, 1999, we issued convertible promissory notes in the aggregate principal
amount of $4,270,125 to the holders of Net Value, Inc.'s promissory notes in
exchange for their agreement to cancel Net Value, Inc. promissory notes in the
aggregate principal amount of $3,800,000 plus $470,125 of accrued interest
thereon and to release our corporation, Net Value, Inc. and the present and
future officers and directors of each corporation from any claims related to the
Net Value, Inc. promissory notes. Since Net Value, Inc. was our only affiliate
company at the time, we issued our convertible promissory notes to satisfy Net
Value, Inc.'s obligations in order to protect our equity interest in Net Value,
Inc. This allowed Net Value, Inc. to continue to develop its operations. The
holders of these convertible promissory notes have the right to convert the
principal balance plus all accrued interest related to these convertible
promissory notes into shares of our common stock at a conversion price of $2.00
per share at any time. We may convert the principal and accrued interest on
these convertible promissory notes into shares of common stock at a rate of
$2.00 per share, upon our common stock's achievement of certain market price
targets. These convertible promissory notes accrue interest at the simple rate
of 12% per annum and have a maturity date of the earlier of:
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o the date on which the convertible promissory notes are
converted into shares of our common stock; or
o the one-year anniversary of the closing of our merger with
Net Value, Inc.
We are required to issue warrants to purchase one-half of one share of
our common stock for each share issued to the holders upon any conversion of the
convertible promissory notes. The warrants are exercisable over a period of
three years from the date of issuance at an exercise price of $6.00 per share.
The holders of the remaining Net Value, Inc. promissory notes did not
participate in this exchange offering. In December 1999, on behalf of Net Value,
Inc., we repaid the outstanding principal balance and accrued interest on the
remaining promissory notes of $283,990. Through January 7, 2000, holders
converted these convertible promissory notes in the aggregate principal amount
of $3,323,615 plus accrued interest of $235,442 into 1,779,526 shares of our
common stock and received warrants to purchase an additional 889,772 shares of
our common stock. Accordingly, as of January 7, 2000, the unpaid principal
amount of these convertible promissory notes was $946,510. We believe that we
will close our merger with Net Value, Inc. on or before March 31, 2000.
Accordingly, this amount will become due on March 31, 2001 if the convertible
promissory notes are not converted prior to their maturity date.
In March and April 1998, Net Value, Inc. received licensing fees in the
aggregate amount of $1,250,000 from IQ Value L.L.C. pursuant to the terms of a
Distribution and License Agreement which the parties entered into on April 7,
1998. Net Value, Inc. used these funds to pay commercial accounts payable and to
fund continuing operations. This fee represented approximately 90% of Net Value,
Inc.'s revenues from its inception through June 30, 1999. In December 1998, the
parties determined that it would be in each of their best interests to terminate
their relationship. Net Value, Inc. had granted IQ Value exclusivity with
respect to sales of Net Value, Inc.'s services to local merchants. This
exclusivity arrangement covered a significant component of Net Value Inc.'s
potential business. Over time, Net Value, Inc. lost confidence in IQ Value's
ability to execute its business plan and generate sufficient revenues from its
arrangement with Net Value, Inc. Net Value, Inc. believed that it could generate
significantly greater revenues selling its services into this local merchant
market. Conversely, IQ Value lost confidence in Net Value, Inc.'s ability to
develop the technology which IQ Value had licensed from Net Value, Inc.
Accordingly, the parties mutually agreed to terminate this agreement as of June
30, 1999, and Net Value, Inc. will not generate any additional revenues from
this relationship.
On March 1, 1999, we issued four convertible promissory notes in the
aggregate principal amount of $900,000 to Founders Equity Group, Inc. and three
of its affiliates in exchange for the lender's cancellation of a promissory note
which matured on March 1, 1999 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 may
convert all or any part of the outstanding principal amount of the convertible
promissory notes, plus all accrued interest thereon through the date of
conversion, into shares of our common stock at a conversion price of $2.50 per
share. We may force the lenders to convert the entire principal amount of the
convertible promissory notes, plus all accrued interest thereon, upon our common
stock's satisfaction of certain price and volume requirements and the
registration of the resale of all shares of our common stock issuable to the
lenders upon such mandatory conversion of the convertible promissory note. The
lenders are also 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 lender is not entitled to
any registration rights with respect to any shares of our common stock issued
upon the exercise of either of these warrants. The convertible promissory notes
have a maturity date of March 1, 2000. Accordingly, we will be required to pay
the lenders $900,000 on March 1, 2000 if the convertible promissory notes are
not converted prior to this maturity date.
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Since inception through September 30, 1999, we used approximately
$1,210,000 to fund our general corporate expenses, including salaries and wages,
professional and consulting fees and interest expense and we advanced
approximately $6,503,000 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 Net Value, Inc.
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
AsiaCD, 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. 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 unvested
shares of our capital stock issued in this transaction were scheduled to vest on
a monthly basis over periods ranging from 24 months to 48 months. 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 $3.51 per share and $.45
per share, respectively. The value of our stock issued in the transaction was
allocated to the investments in Metacat, AsiaCD and College411, which were
investments held by Strategicus.
As a result of the merger, we now own Strategicus' investments in
AsiaCD 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. Other than Strategicus' equity interests in AsiaCD, College411 and
metacat.com, Inc., we acquired Strategicus' total assets of $817,000, which
consisted primarily of cash of $4,000, a loan to an officer and director of
$383,000, subscription receivables to officers and directors of $100,000, a loan
to an employee of $60,000, an investment in AsiaCD of $250,000 and an investment
in College411 of $20,000, and metacat's total assets of $11,000 in connection
with this merger, which consisted primarily of computer hardware and software.
We also assumed Strategicus' liabilities of $73,000, which consisted primarily
of trade accounts payable, accrued expenses and a loan from a director, and
metacat's liabilities of $5,600, which consisted primarily of trade accounts
payable. In connection with this merger, we recorded goodwill of $241,267.
Strategicus was a holding company at the time of the merger. metacat was a
development stage company that was designing an Internet website with the
ability to aggregate catalogs and allow consumers to purchase items from those
catalogs over the Internet. 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 Mr. Aley. For a more complete discussion of the terms
of these agreements, see "MANAGEMENT - Employment Agreement" and "MANAGEMENT -
Consulting Agreements." Pursuant to each of these agreements, we will forgive
the repayment of each of Messrs. Spink and Aley's loans if they remain employed
or engaged by us for certain periods of time. For a more complete description of
these terms, see "TRANSACTIONS WITH OFFICERS AND DIRECTORS AND OTHER BUSINESS
RELATIONSHIPS - Forgiveness of Certain Loans to Members of Our Management Team."
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On October 10, 1999, we acquired a 20% interest in AssetExchange, Inc.
for $420,000. This transaction did not result in our acquisition of any business
or assets other than equity securities of AssetExchange, Inc. and did not result
in an assumption of any liabilities. This transaction resulted in goodwill of
$370,000. This transaction resulted in our acquisition of an equity interest in
an affiliate company and therefore did not have any effect on the nature of our
operations as a holding company. In addition, since this affiliate company is in
the development stage, this acquisition did not have a material effect on the
results of operations.
During the fourth quarter of 1999 we continued to actively pursue the
acquisition of additional equity interest in affiliate companies as follows:
o On October 11, 1999, we acquired a 12% interest in
Webmodal, Inc. for $350,000 in cash. Since we account
for Webmodal using the cost method of accounting, we
have not recorded any goodwill in connection with
this transaction.
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. As this was merely an
exercise of common stock purchase warrants, there was
no goodwill associated with this transaction.
o On November 24, 1999, we acquired a 12% interest in
Swapit.com, Inc. for $500,000 in cash. Since we
account for Swapit.com using the cost method of
accounting, we have not recorded any goodwill in
connection with this transaction.
None of the transactions consummated during the fourth quarter of 1999
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.
During July 1999, we loaned $60,000 to Cowboys and Robots, Inc. Cowboys
and Robots, Inc. is a development stage company currently engaged in developing
an Internet website, armyHQ.com, which will provide content to personnel serving
in the United States military. We have determined not to acquire an equity
interest in this company and are presently attempting to negotiate the repayment
of this loan.
During the period from June 1999 through December 1999, Net Value, Inc.
has failed to make required rent payments in the aggregate amount of
approximately $105,000 pursuant to the lease agreement for its Fairfield,
Connecticut office. The landlord is currently holding a security deposit of
$79,711. In November 1999, the landlord filed a lawsuit against Net Value, Inc.
seeking damages, interest, attorneys' fees and costs related to Net Value,
Inc.'s alleged breach of this lease agreement. Net Value, Inc. is presently
attempting to negotiate a settlement of this lawsuit. This settlement may
require Net Value, Inc. to forfeit its security deposit and make additional
payments. If Net Value, Inc. is unable to reach a settlement agreement with the
landlord, and it is unsuccessful in its defense of this lawsuit, then it may be
subject to a judgment equal to the remaining lease payments through the
expiration of the lease in December 2000 plus additional damages. As of
September 30, 1999, we accrued an expense for all future rent payments under the
lease, amounting to approximately $244,000.
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On October 6, 1998, Net Value, Inc. entered into a settlement agreement
with DMR Consulting Group, Inc. Pursuant to this agreement, DMR agreed to accept
$270,000 as full payment of Net Value, Inc.'s obligation of approximately
$745,000 in consulting fees incurred in connection with consulting services
which DMR provided to Net Value, Inc.. Net Value, Inc. was unable to make the
required payments under this settlement agreement. On December 3, 1998, the
parties amended this settlement agreement to provide for a payment schedule
whereby Net Value, Inc. paid $50,000 upon executing the agreement and agreed to
repay the remaining balance upon the earlier of:
o the closing of its private placement of convertible
debentures; or
o if Net Value, Inc. is unable to close its private placement
in 1999, then in quarterly installments throughout 1999.
The amended settlement agreement states that if Net Value, Inc.
breaches any of its payment obligations, then the amended settlement agreement
is terminated and Net Value, Inc. remains liable for the full amount of its
original obligation. Accordingly, DMR may at any time assert a claim for the
$170,000 due under the amended settlement agreement and the $475,000 which
constitutes the difference between the original obligation and the agreed upon
settlement amount. If DMR asserts this claim, then Net Value, Inc. may be
required to pay DMR $625,000, which would have a negative effect on its
liquidity and financial position.
In order to fund our current operations and to satisfy our current
obligations as they come due, we consummated several equity transactions in
September and October, 1999 as follows:
o During September and October 1999, we sold 4,824 shares of
our Series B Preferred Stock for net proceeds of
approximately $4,574,000 after payment of offering costs of
$250,000 in October 1999.
o During October 1999, we sold 676,374 shares of our common
stock to the RS Orphan Fund, LP and the RS Orphan Offshore
Fund, LP for an aggregate purchase price of $676,374.
After the next six months, we expect to need additional funds for our
continuing operations and to fund current and prospective affiliate companies
through offerings of our debt and equity securities.
Year 2000
Many computer programs were written using two digits rather than four
digits to define the applicable year. This posed a problem at the end of 1999
because these computer programs may have recognized a date using "00" as the
year 1900, rather than the year 2000. This in turn could have resulted in major
system failures or miscalculations and is generally referred to as the Year 2000
issue. We have not experienced any system failures since January 1, 2000. In
addition, none of our affiliate companies have experienced any system failures
since January 1, 2000. We did not incur any material expenses in preparation for
the Year 2000 Issue. Our affiliate companies incurred the following expenses in
preparation for the Year 2000 Issue:
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Affiliate Company Approximate Total Expenses
----------------- --------------------------
metacat.com, Inc. $ 0
College411.com, Inc. 0
AssetExchange, Inc. 0
AsiaCD, Inc. 5,600
BrightStreet.com, Inc 17,000
Webmodal, Inc. and Swapit.com, Inc. do not plan to develop or launch
their Internet websites until the spring of 2000. Accordingly, they did not
incur any expenses related to preparation for the year 2000 issue.
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BUSINESS
History
We were formed as a Florida Corporation on December 20, 1991. In 1992,
we failed to file our annual report with the State of Florida and were
administratively dissolved on October 9, 1992. On June 15, 1998, we filed all
required reports and paid all deficient annual fees and penalties and were
reinstated as a corporation in the State of Florida. Accordingly, from October
9, 1992 through June 15, 1998, we had no operations and generated no revenues or
expenses. In October 1998, we redomesticated in the State of Delaware and we are
presently a Delaware corporation.
Pursuant to share exchange transactions completed during October 1998
through December 1998 with 20 Net Value, Inc. stockholders, we acquired
approximately 66% 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. We currently intend to merge with Net Value, Inc. on
or before March 31, 2000. Subsequent to the completion of our merger with Net
Value, Inc., we will own 100% of Net Value, Inc.'s assets and Net Value, Inc.'s
other stockholders will receive 1,659,740 shares of our common stock.
On July 30, 1999, we merged with Strategicus Partners, Inc., an Oregon
corporation. For a complete discussion of this merger, see "TRANSACTIONS WITH
OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPS-Loan and Merger
Agreements with Strategicus Partners, Inc." As a result of our merger with
Strategicus, we now own interests in metacat.com, Inc., AsiaCD, Inc. and College
411.com, Inc. In addition, we have a new management team. For a complete
description of our management team, see "MANAGEMENT."
In September 1999, we acquired an equity interest in AssetExchange.com,
Inc. In October 1999, we acquired an equity interest in Webmodal, Inc. In
November 1999, we acquired an equity interest in Swapit.com, Inc.
General
We are an Internet holding company which owns equity interests in, and
provides strategic management services to our affiliate companies. We primarily
assist these companies by performing the following functions:
o formulation of business models;
o introducing the companies to strategic partners;
o supporting their marketing and public relations functions;
o providing strategic advice regarding operations and
management;
o recruiting key employees; and
o assisting with the completion of future rounds of capital
financing.
The current market environment creates significant opportunities for
our business model which brings entrepreneurs a flexible source of capital, a
hands-on management team to assist in navigating the critical early steps in a
development stage company and contacts in the Internet industry that provide
beneficial strategic alliances or resources.
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Our operating strategy is to both originate concepts for new Internet
businesses that we will found and identify appropriate existing Internet
businesses, fund such businesses and develop them into a collaborative network
that leverages the collective financial, strategic planning and management
experience and key industry relationships of our management team. We currently
have ownership interests in seven Internet businesses in various stages of
development. Our corporate headquarters are located in San Francisco. We also
have an east coast satellite office, in which two of our employees are
principally engaged in identifying potential affiliate companies located on the
East Coast.
In some cases, we will identify the concept for a new Internet company
that we believe will satisfy consumer or business needs that are presently
underserved in the Internet market and that is complementary to our other
affiliate companies. We will then recruit management, fund the start-up and
development of these companies and manage their operations, taking a majority
equity interest. We will also search for and identify entrepreneurs throughout
the United States who have started companies that meet these criteria and
provide them with funding and management support to assist them in the
development of their companies. In these instances, we usually will hold a
minority interest, but will have substantial control over operations by having:
o the right to elect one or more directors,
o the right to designate outside accountants and approval
rights over attorneys, public relations firms and other
outside consultants;
o approval rights over significant corporate decisions such as
annual budgets, executive compensation, indebtedness,
capital expenditures and new securities issuances,
o preemptive rights; and
o enhanced voting rights.
The premise of our business plan is that to succeed in the digital
economy, Internet start-up companies need to work with a team of hands-on,
experienced entrepreneurs who can help develop management teams, raise capital,
create operational excellence and manage processes in diverse areas such as
customer service, marketing, logistics management and technology.
Our current affiliate companies include:
metacat.com, Inc. (www.metacat.com). Founded in 1998, metacat is an
Internet-based e-commerce superstore that aggregates and searches the product
offerings of catalog and mail order businesses. Based in Portland, Oregon,
metacat currently has six 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.
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 purchase and sell loan
portfolio assets in an efficient manner. Based in Portland, Oregon,
AssetExchange currently has three employees.
Net Value, Inc. Founded in 1996 as a distributer of coupons and other
promotions to consumers via the Internet, Net Value, Inc. sold substantially all
of its assets to BrightStreet.com, Inc. in December 1999. Net Value presently
has no operations and owns an equity interest in BrightStreet.com, Inc. We
anticipate completing a merger with Net Value, Inc. in the next three to six
months.
BrightStreet.com, Inc. (www.brightstreet.com). Founded in 1999,
BrightStreet develops and distributes online promotional campaigns. Based in
Mountain View, California, BrightStreet currently has 17 employees.
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AsiaCD, Inc. (www.asiacd.com). Founded in 1998, AsiaCD is a leading
e-commerce company for the Asian community in the United States. Based in San
Francisco, California, AsiaCD currently has 40 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. Based in
Woodstock, Illinois, Webmodal 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. Based
in Boston, Massachusetts Swapit.com currently has six employees.
Identifying Affiliate Companies
We actively research and target both unexploited Internet business
concepts and existing development stage Internet companies that possess the
following characteristics:
o Development stage companies with current capital requirements of $1 million
or less. Venture capital deals in the Internet industry have dramatically
increased both in number and size over the last four years. Of the 332
Internet transactions completed in the second quarter of 1999, the average
investment size was approximately $11.5 million (source: Ventureone, Fall
1999). Increasingly, venture capital firms seek to invest approximately $2
million to $5 million in the early stage financing of start-up companies.
These investments significantly increase the market capitalization of the
issuing company, which may make subsequent rounds of financing cost
prohibitive to potential sources of capital. These investments may also
significantly dilute the ownership interest of the founders of the issuing
company. As a result, most venture capital firms are an unattractive source
of capital for companies that require only $250,000 to $1 million in
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 limited
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 entrepreneurs.
o Business models that focus on creating loyal customer relationships through
electronic content, commerce and community. Both Internet and traditional
"bricks and mortar" businesses are rewarded if their brands command a loyal
customer following which can be converted into sales transactions. Unless
Internet businesses provide sufficient value to legitimately claim the
customers or the Internet traffic as their own, the customers of these
businesses and their associated revenue streams will choose other brands.
We therefore target those businesses which can develop brand identity and
loyalty with customers.
o Opportunities rooted in the transition of industry segments to the
Internet. The Internet is still in its infancy. Only a few industries, such
as the retail securities brokerage industry, the travel industry and the
publishing and recorded music industries, have significantly transitioned
to the Internet as a medium for sales and distribution of products. We
believe that there are many more industries that will begin to use the
Internet as a medium for sales and the distribution of products. We focus
our efforts on developing or locating companies that service industries
which we believe should begin or increase using the Internet to sell their
products and services. Internet companies that capitalize on these
transition industries can gain a competitive advantage and create
significant business value to their customers.
o Business models that facilitate the formation of communities. One step in
building an Internet business is to create communities of value where the
host facilitates content created by the community and provides a forum that
supports transactions among members. Communities in diverse areas such as
health care, personal finance, cooking and pets have already emerged on the
Internet and there are many more new communities that will emerge in a
widening array of areas in the near future.
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o Management team whose values mirror our belief in the importance of
passion, commitment and highly- effective performance. We seek long-term
relationships with hard working entrepreneurs who recognize that it takes
more than capital to develop a successful business. We target companies
managed by individuals who recognize that creating an Internet business
requires that management focus on teamwork and that management recognize
the value of management and operations experts who can facilitate
operational excellence, developing relationships with other Internet-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 both the Internet space and in the industry or "domain" in
which their company will operate. 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.
We believe it is important for the management teams of our affiliate
companies to have experience in the Internet space so that they can provide
our affiliate companies with a strong understanding of e-commerce. We
believe that it is important for the management teams of our affiliate
companies to have "domain" experience so that they can provide our
affiliate companies with an established reputation within the industries
which our respective affiliate companies operate as well as an extensive
network of contacts within these industries.
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.
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
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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.
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 The National Transportation
Exchange, Inc., RouteGuide.com and FreightQuote. 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.
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.
metacat.com, Inc. competes with a wide variety of online and offline
sources for mail order products. Competition will include literally 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
Catalog.com. 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 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 all products offered in the
catalogs of its merchants rather than a selected few products from each
merchant. Catalog.com provides a searchable index of catalogs and hosts Internet
websites for each listed catalog. Consumers are not able to conduct a search by
product and direct purchases from the Catalog.com Internet website are limited.
Catalog.com also has targeted larger merchants than those that metacat intends
to do business with. Metacat believes that the significant differences in the
product mix and ease of purchase that its Internet website will provide will
permit it to compete effectively with these online merchants.
AsiaCD competes generally with all retailers of music 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 AsiaCD. If a
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large, well-funded company launches an Internet website directed at sales of
Asian music titles to the Asian population in the United States, it will compete
directly with AsiaCD and could reduce AsiaCD's revenues and cause an increase in
AsiaCD's marketing expenses in response. However, AsiaCD is not aware of any
Internet website that is proposing to materially increase its Asian music
offerings or launch an Asia-specific Internet website. As AsiaCD becomes a more
prominent player in the online 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. AsiaCD 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.
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. No competing
online or offline "marketplace" for such assets currently exists. However,
AssetExchange believes that other providers will enter this market, especially
if AssetExchange's service proves to be popular with buyers and sellers of
financial assets. 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. As there are a limited number of active buyers of credit card
portfolios, it will continue to be feasible for buyers and sellers to make
direct contact to negotiate transactions without using AssetExchange or a
competing service, although AssetExchange believes that the demonstrated
efficiencies and cost-saving potential of its service will be attractive even to
sophisticated buyers and sellers. Other potential competitors include businesses
currently conducting online mortgage portfolio auctions and loan participations
who may choose to enter the market for credit card portfolios.
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.
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 Internet 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
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o epylon.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 two 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 venture capital industry. Although it may be easier for us to
assist our affiliate companies if they are located 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 Internet companies. As a result of
these activities, our management team has participated in
transactions involving alliances among Internet companies and
possess an extensive contact list consisting of individuals who
work in the Internet industry. Through this network of
relationships and experiences, our management team can provide
superior business assistance to our affiliate companies.
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 twenty
years in the Internet industry. We believe that the Internet and
the digital economy are not disruptive, but rather an
evolutionary way of life. This vision helps in identifying
business models and development stage companies on the Internet
that will develop and produce commercially needed products. In
addition, members of our management team are seasoned in
fundamental business principles due to their experience at firms
such as:
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; and
o Diamond Technology Partners, Inc.
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.
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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, particularly in the areas of
strategic relationship development, planning, senior management staffing,
capital structure advice and budgeting.
1. Transaction Sourcing
We believe that the following factors will 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 compliment 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.
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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.
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 Close Working Relationship with Management. 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 senior 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 will 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
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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 plan to 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.
Disposition of Interests
Although we intend to invest 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 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.
Our Affiliate Companies
We currently own equity in each of the following affiliate companies:
<TABLE>
<CAPTION>
Approximate
% of Amount of
Date(s) of Equity Capital Stock
Affiliate company Location Investment Acquired Purchased
- ----------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C>
METACAT.COM, INC. PORTLAND, OR June 1999 100% $ 250,000
COLLEGE 411.COM, INC. SAN FRANCISCO, CA June 1999 and 27% $ 250,000
September 1999
ASSETEXCHANGE, INC. PORTLAND, OR September 1999 20% $ 420,000
ASIACD, INC. SAN FRANCISCO, CA June 1999 11% $ 1,000,000
WEBMODAL, INC. WOODSTOCK, IL October 1999 10% $ 350,000
SWAPIT.COM, INC. BOSTON, MA November 1999 12% $ 500,000
</TABLE>
In addition, we own approximately 66% of the issued and outstanding
common stock and 100% of the issued and outstanding Series A Preferred Stock of
Net Value, Inc. We acquired this ownership interest through a series of share
exchange transactions with stockholders of Net Value, Inc. In December 1999, Net
Value, Inc. sold substantially all of its assets, including the name
BrightStreet.com, Inc., to Promotions Acquisition Inc., a Delaware corporation
formed by the former management of Net Value, Inc. Subsequent to this
transaction, Promotions Acquisition Inc. changed its name to BrightStreet.com,
Inc. As a result of this transaction, Net Value, Inc. owns approximately 12% of
BrightStreet's common stock on a fully diluted basis. Net Value, Inc. does not
have any
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operations. We plan to complete a merger with Net Value, Inc. within three to
six months pursuant to which we will 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 and 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.
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 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. Our 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.
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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 A Concerted Branding Campaign: metacat plans to execute targeted
marketing campaigns through which it seeks to establish its
brand. metacat plans to establish its initial customer marketing
at upscale, female consumers. metacat plans to initiate its first
marketing campaign in the Spring of 2000. Its 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.
We currently own 100% of the issued and outstanding common stock of
metacat. As of September 30, 1999, metacat has not recognized any revenues, had
minimal assets, had net losses of $67,000 (unaudited) for the nine months ended
September 30, 1999, and had an accumulated deficit of $120,000 (unaudited).
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
September 30, 1999, College 411 had not generated any revenues, had assets of
$92,278, net losses of approximately $100,000 (unaudited) for the nine months
ended September 30, 1999 and had an accumulated deficit of approximately
$100,000 (unaudited).
AssetExchange, Inc.
AssetExchange, Inc. has created a network which allows financial
institutions to buy and sell loan portfolios and other assets among themselves.
AssetExchange supports this network by providing an Internet-based listing
service of financial assets. AssetExchange's network will initially focus on
credit card portfolios. AssetExchange's Internet website, which was launched in
August 1999, now has approximately 100 registered members who own portfolios
consisting of a combined total of greater than 60% of the outstanding general
purpose credit card debt in the United States. The registered members are
entities that are generally in the market to purchase portfolios. In addition,
AssetExchange's Internet website currently has three loan portfolios listed for
sale. There are currently two pending transactions priced at approximately
$20,000,000 each, at least one of which AssetExchange believes will close during
the first quarter of 2000.
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. This increase in transaction volume has been driven by the banking
and financial industry's trend toward specialization, consolidation and risk
management goals.
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
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markets. Since search and transaction costs can prevent deals and limit
marketing efforts, medium and small sized banks are deterred from participating
in these markets.
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 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 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 transactions completed on its Internet website. 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 level of services
provided by the finder or broker. AssetExchange currently charges 30-50 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. As of September 30, 1999, AssetExchange had not generated
any revenues, had assets of $439,233, net losses for the nine months ended
September 30, 1999 of $48,529 (unaudited) and had an accumulated deficit of
48,529 (unaudited).
We currently own 258,065 shares of AssetExchange's Series A Preferred
Stock which we are entitled to convert into 258,065 shares of AssetExchange's
common stock at any time. As of the date of this prospectus, if we were to elect
to exercise this conversion option, then we would own approximately 20% of
AssetExchange's issued and outstanding shares of common stock. Douglas Spink
currently sits on the Board of Directors of AssetExchange, Inc.
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Net Value, Inc./BrightStreet.com, Inc.
Asset Sale Transaction
On December 3, 1999, Net Value, Inc. (f/k/a BrightStreet.com, Inc.)
sold substantially all of its assets to 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:
o $2,000,000;
o the assumption by Promotions Acquisition, Inc. of Net Value, Inc.
liabilities presently valued at approximately $1,600,000;
o the release from all of Net Value, Inc.'s employees of all of Net
Value, Inc.'s obligations under employment agreements entered
into by Net Value, Inc. and these employees;
o the cancellation of all issued and outstanding Net Value, Inc.
stock options held by Net Value, Inc.'s employees; and
o 2,958,819 shares of Promotions Acquisition, Inc. common stock
equal to an approximate 12% ownership interest in Promotions
Acquisition, Inc. calculated on a fully diluted basis.
Simultaneous with this transaction, Promotions Acquisition Inc.
consummated the following transactions:
o the issuance to its management team of options and restricted
stock grants representing an approximate 25% ownership interest
of Promotions Acquisition Inc. calculated on a fully diluted
basis; and
o an equity financing transaction in which Promotions Acquisition
Inc. received equity investments in the aggregate of $17,000,000
for shares of Promotions Acquisition Inc.'s Series A Preferred
Stock representing an approximate 63% ownership interest in
Promotions Acquisition, Inc. calculated on a fully diluted basis.
The shares of common stock which Net Value, Inc. received in this
transaction are entitled to the same registration, preemptive and other rights
as the holders of Promotion Acquisition Inc.'s Series A Preferred Stock. As a
result of this transaction, Net Value, Inc. no longer has any operations and no
longer has any obligations to consultants or employees who were employed or
engaged by Net Value, Inc. on the closing date of this transaction. Accordingly,
we do not anticipate providing any additional financial support to Net Value,
Inc. or BrightStreet.com, Inc. Net Value, Inc. has 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
Promotions Acquisition Inc. 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 will 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
66% 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
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o No dividends or voting rights.
Subsequent to this merger, we will own 100% of Net Value, Inc.'s assets
and Net Value, Inc.'s other stockholders will receive 1,659,740 shares of our
common stock.
Subsequent to the completion of the sale of Net Value, Inc.'s assets to
Promotions Acquisition, Inc., Promotions Acquisition, Inc. changed its name to
BrightStreet.com, Inc.
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 September 30, 1999, BrightStreet had assets of approximately
$34,000 (unaudited), had not generated any revenues, had no net losses or income
(unaudited) for the nine months ended September 30, 1999, and had an accumulated
deficit of $0 (unaudited).
AsiaCD, Inc.
AsiaCD is a 24-hour online music store for 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. AsiaCD is focused on delivering quality service and the
best prices to its customers. AsiaCD has over 24,000 customers and has
historically experienced customer growth of approximately 85% per
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calendar quarter since AsiaCD's inception. Management believes that AsiaCD 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. AsiaCD was founded in January 1998
and launched its Internet website, www.asiacd.com, in May 1998. AsiaCD currently
has 40 employees working in three offices located in the following cities:
o San Francisco (27);
o Hong Kong (11); and
o Taiwan (2).
AsiaCD has over 24,000 customers who have purchased products from its
Internet website. Approximately 44% of these customers have returned to AsiaCD's
Internet website and made at least one additional purchase. The average order
size for each AsiaCD customer is approximately $40. AsiaCD expects to experience
continued sales growth as a result of its aggressive marketing in the United
States. AsiaCD 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.
AsiaCD also plans to expand into other Asian markets where it will
apply its concept of "cross-cultural sales." By providing convenient,
inexpensive access to a broad range of titles "foreign" to a given market,
AsiaCD 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, AsiaCD'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. AsiaCD has established accounts with three major
record companies and five movie production companies in Hong Kong. AsiaCD
purchases all products which it sells in Hong Kong and Taiwan either directly
from these companies or from authorized distributors of these companies. AsiaCD
intends to utilize its presence in multiple nations to increase distribution and
purchasing power. AsiaCD currently sells compact discs, digital video discs and
videocassettes. If AsiaCD completes its proposed financing, then it expects to
introduce gifts, comic books, toys, games and magazines as new product offerings
on its Internet website in 2000. In addition, AsiaCD plans to offer electronics
on its Internet website in 2001. AsiaCD plans to launch a business-to-business
Internet website in the first quarter of 2000 and plans to expand its market to
include Japan, Korea, China and other Asian countries.
We currently own 1,000,000 shares of AsiaCD's Series A Preferred Stock
which we are entitled to convert into 1,000,000 shares of AsiaCD's common stock
at any time. As of the date of this prospectus, if we were to elect to exercise
this conversion option, then we would own approximately 11% of AsiaCD's issued
and outstanding shares of common stock. We are also entitled to receive a
warrant to purchase 300,000 shares of AsiaCD's common stock at an exercise price
of $1.00 per share. In addition, we have appointed Stephen George to serve on
AsiaCD's board of directors. Through September 30, 1999, AsiaCD had generated
approximately $1,473,845 in revenues (unaudited). AsiaCD's losses for the nine
months ended September 30, 1999 were approximately $271,478 (unaudited). As of
September 30, 1999, AsiaCD's accumulated deficit was approximately $380,789
(unaudited).
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:
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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
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associated with intermodal freight transportation. Webmodal is currently
designing its technology and expects to launch its Internet website in 2000.
We currently own 1,221 shares of Webmodal's common stock. This
represents approximately 10% of Webmodal's issued and outstanding common stock.
As of September 30, 1999, Webmodal had not generated any revenues, had assets of
approximately $220,000 (unaudited), net losses of approximately $70,000
(unaudited) for the nine months ended September 30, 1999 and an accumulated
deficit of approximately $70,000 (unaudited). Douglas Spink, a member of our
Board of directors, currently sits on Webmodal's Board of Directors.
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 believes that its Internet website will be fully
operational in April 2000.
We currently own 162,590 shares of Swapit.com 's Series A Convertible
Preferred Stock, which we are entitled to convert into 162,590 shares of
Swapit.com's common stock at any time. In addition, we currently own 26,589
shares of Swapit.com's common stock. This represents an aggregate of
approximately 12% of Swapit.com's issued and outstanding common stock on a
fully-diluted basis. In addition, we have the contractual right to vote an
additional 258,411 shares of Swapit.com's common stock held by Thomas Aley, our
Executive Vice President, Business Development, representing approximately an
additional 15% of its common stock on a fully-diluted basis. Thomas Aley
currently serves on Swapit.com's Board of Directors. As of November 30, 1999,
Swapit.com had not generated any revenue, had assets of $479,048 and had an
accumulated deficit of $78,016.
Investment Company Act of 1940
The Investment Company Act of 1940 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.
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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. Under current regulations, we are considered to control metacat,
College411 and Net Value, Inc. 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 structuring all
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 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 believe that we are primarily engaged in the
e-commerce business through the activities of our affiliate companies and the
services we provide to them. 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 December 31, 1999, excluding our affiliate companies, we had six
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.
Facilities
We currently sublease office space at Two Penn Center Plaza, Suite 605,
Philadelphia, Pennsylvania at a rate of $2,000 per month. We also share office
space in San Francisco, California with Epylon.com, Inc., a corporation owned by
Stephen George, a director of Net Value Holdings, Inc., at no expense.
In November 1997, Net Value, Inc. entered into a lease for its
executive offices located at 1960 Bronson Road, Building No. 2, Fairfield,
Connecticut. The office space consists of approximately 8,800 square feet.
Pursuant to the terms of this lease, Net Value, Inc. is required to pay rent of
$13,284 per month plus utilities, general liability insurance premiums for up to
$5,000,000 of coverage and the amount of any increases in operating expenses and
real estate taxes up to 5% over the amounts paid for these expenses during the
year ended June 30, 1998. This lease expires on December 31, 2000. Net Value,
Inc. vacated this office space and ceased making rent payments under this lease
in June 1999. On November 23, 1999, the landlord filed a lawsuit against Net
Value, Inc. seeking damages, interest, attorneys' fees and costs, related to Net
Value, Inc.'s alleged breach of this lease agreement.
In April 1999, Strategicus Partners, Inc. and Douglas Spink entered
into a lease agreement with Q-19, Incorporation, an Oregon corporation, for
office space for metacat.com, Inc. located at 1526 N.W. 19th Avenue, Portland,
Oregon. The office space consists of approximately 1,200 square feet. This lease
agreement terminates on April 30, 2001. Pursuant to this lease agreement,
monthly rent is $1,200 through April 30, 2000 and $1,248 for the remaining lease
term, plus all costs for electricity and janitorial services.
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<PAGE>
Legal Proceedings
Net Value Holdings is not currently involved in any material legal
proceedings.
On August 23, 1999, coolsavings.com, Inc. filed an action against Net
Value, Inc. (f/k/a BrightStreet.com, Inc.) in the United States District Court
for the Northern District of Illinois, Eastern Division, alleging that Net
Value, Inc. had infringed upon United States Letters Patent No. 5,761,648
entitled "Interactive 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. Net
Value, Inc. 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, Net Value, Inc. may decide to settle this case for an
amount that, although substantially less than the damages sought by coolsavings,
may be significant. Pursuant to the Asset Purchase Agreement which Net Value,
Inc. entered 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.
On November 23, 1999, The Bronson Road Group filed an action against
Net Value, Inc. in Superior Court, State of Connecticut. The Bronson Road Group
is the landlord of Net Value, Inc.'s Fairfield, Connecticut office. The
complaint seeks damages, interest, attorneys' fees and costs related to Net
Value, Inc.'s alleged breach of the lease agreement which the parties entered
into in November 1997. The complaint alleges that Net Value, Inc. has breached
this lease agreement by failing to make required rent payments since June 1,
1999. Pursuant to the Asset Purchase Agreement which Net Value, Inc. entered
into with BrightStreet.com, Inc., Net Value, Inc. agreed to assume all
liabilities related to this lawsuit, including all legal expenses incurred in
defending against these claims.
Independent Accountants
In June 1998, subsequent to Net Value Holdings' reinstatement as a
corporation in the State of Florida, we retained Barry L. Friedman, P.C. to
audit Net Value Holdings' financial statements for the period from January 1,
1998 through June 15, 1998 and for the years ended December 31, 1997 and
December 31, 1996. In December 1996, we determined that it would be beneficial
to have the same independent accounting firm audit both Net Value, Inc.'s
financial statements and Net Value Holdings' financial statements. Accordingly,
we did not reappoint Barry L. Friedman, P.C. as our independent accounting firm.
Barry L. Friedman, P.C. has confirmed that it did not have any disputes or
disagreements with Net Value Holdings or its management regarding accounting
principles or practices, financial statement disclosure or auditing scope or
procedures.
In January 1999, subsequent to the consummation of the share exchange
transactions with the stockholders of Net Value, Inc., we engaged LJ Soldinger
Associates as our independent accountant. LJ Soldinger Associates has completed
the audit of our consolidated financial statements for the year ended December
31, 1998. To review our consolidated audited financial statements, see
"Consolidated Audited Financial Statements."
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<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, their ages and positions are set
forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
Andrew P. Panzo 35 Chairman of the Board of Directors and Chief
Executive Officer
Lee Hansen 32 President
Darr Aley 35 Executive Vice President, Business Development and
Director
Thomas Aley 35 Executive Vice President, Business Development
Barry Uphoff 33 Director
Douglas Spink 29 Chief Technology Officer and Director
Stephen George 32 Director
</TABLE>
Andrew P. Panzo has served as one of our directors and as our President
and Chief Executive Officer since January 1999. Prior to joining our management
team and during the first six months of his employment with Net Value Holdings,
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 currently serves on BrightStreet's board
of directors. Mr. Panzo received a masters degree in International Business and
Finance from Temple University.
Lee Hansen has served as our Chief Operating Officer since October 1,
1999. 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 strategy projects and merger and
acquisition activities. From July 1993 to April 1997, Mr. Hansen served as an
associate in the Lease Finance and the Private Placement and High Yield Groups
and as Vice President in the International Capital Raising Group at Banc of
America Securities, where he originated, structured and executed over $2 billion
of private placements and bond offerings. Mr. Hansen received an MBA from the
J.L. Kellogg Graduate School of Management.
Darr Aley has served as our Executive Vice President for Business
Development and as one of our directors since July 1999. 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 Who/Where, 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 College411's Board of Directors. Mr. Aley received a BA from the
University of New Hampshire.
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 Web, Inc. from June 1997
through November 1999 where he oversaw business development including
operations, marketing and sales for Wild Web's online and television divisions.
In November 1998, Mr. Aley played an instrumental role in the sale of WildWeb 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 1992, Mr. Aley worked at Shiva
Corporation. Mr. Aley currently serves on Swapit.com, Inc.'s Board of Directors.
Mr. Aley received an MBA in High Technology Marketing and Operations from
Northeastern University.
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<PAGE>
Barry Uphoff has served as Chairman 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.
Douglas B. Spink has served as our Chief Technology Officer and as one
of our directors since July 1999. Prior to joining our management team, Mr.
Spink was President and founder of Strategicus Partners Inc., a technology
consulting firm and e-commerce business incubator, from March 1999 to July 1999,
where he was responsible for the formation of metacat.com, inc. Prior to forming
Strategicus, Mr. Spink served as the Vice- President of Direct Marketing of G.I.
Joe's, a sporting goods retailer based in Portland, Oregon, from September 1998
through March 1999. Mr. Spink founded and operated Timberline Direct, Inc., a
direct marketing company, and Athletica.com, Inc., a sports nutritional portal,
from July 1997 until September 1998, when he sold these companies to G.I. Joe's.
From April 1996 to July 1997, Mr. Spink served as the Western Region Director of
Tessera Enterprise Systems. Mr. Spink also served as the Director of Technical
Controls and Vice-President of Financial and Analytical Services of Ideon
Technology Group, Inc. from December 1994 to April 1996. Mr. Spink also served
as a strategic consultant with the Boston Consulting Group from September 1994
to December 1994, and served as a database marketing consultant with Leo Burnett
from September 1993 to September 1994, where he consulted in marketing with
Fortune l00 companies. Mr. Spink currently serves on the Board of Directors of
both Webmodal and AssetExchange. Mr. Spink 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 AsiaCD's Board of Directors. Mr. George received a BA in
Government from Cornell University.
Executive Compensation
During the period from March 31, 1992 through September 4, 1998, Marc
A. Kuperman served as our sole officer and director. During this period, Mr.
Kuperman did not receive any compensation in exchange for his services. 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.
Employment Agreements
In June 1999, Net Value Holdings entered into three year employment
agreements with each of Messrs. Panzo and Spink. In addition to an annual salary
of $150,000, the employment agreements provide for bonus compensation at the
discretion of the Board of Directors. Pursuant to the employment agreements,
each of Messrs. Panzo and Spink are 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. Spink's employment agreement also provides for the
forgiveness of a loan in the principal amount of $310,000 which Strategicus
Partners had previously provided to Mr. Spink. Net Value Holdings has 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). Net Value Holdings also agreed to forgive Mr. Spink's
obligation to repay:
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<PAGE>
o 50% of the principal amount plus accrued interest of this loan if
Mr. Spink remains an employee of Net Value Holdings on January 1,
2000 and the remaining 50% of the principal amount plus accrued
interest of this loan if Mr. Spink remains an employee of Net
Value Holdings on May 28, 2000;
o the entire principal amount plus accrued interest of this loan if
his employment is terminated in breach of the employment
agreement; or
o the entire principal amount plus accrued interest of this loan in
the event of a "Change in Control," as that term is defined in
the employment agreement.
The unvested shares of our capital stock which we issued to Mr. Spink
in connection with our merger with Strategicus Partners vest in equal increments
over a period of 24 months as long as he remains our employee during this
vesting period. If we terminate Mr. Spink's employment agreement due to his
death, disability or for "cause" as such terms are defined in his employment
agreement or if Mr. Spink terminates his employment agreement without any cause,
then he shall forfeit all of his unvested shares of our capital stock.
Mr. Panzo's employment agreement provides that he will be awarded
options to purchase 1,200,000 shares of common stock pursuant to a stock option
plan which Net Value Holdings intends to implement in 2000. Options to purchase
120,000 shares of common stock will vest immediately and the remainder of the
options will vest 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 pursuant
to his employment agreement. Mr. Panzo is now entitled to receive options to
purchase 1,080,000 shares of our common stock.
In September 1999, Net Value Holdings entered into a three year
employment agreement with Lee Hansen pursuant to which Mr. Hansen will serve as
Net Value Holdings' chief operating officer. 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. Net
Value Holdings has agreed to award Mr. Hansen options to purchase 900,000 shares
of common stock pursuant to a stock option plan that it intends to implement in
2000. Options to purchase 90,000 shares of common stock will vest immediately
and the remainder of the options will vest over a three year period. As long as
he is employed by Net Value Holdings, Inc., 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, Net Value Holdings entered into a one-year employment
agreement with Thomas Aley pursuant to which Mr. Aley will serve as an Executive
Vice President of Net Value Holdings. In addition to an annual salary of
$150,000, Mr. Aley's employment agreement provides for bonus compensation at the
discretion of the Board of Directors. Pursuant to his employment agreement, Mr.
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.
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<PAGE>
Consulting Agreements
We have entered into consulting agreements with each of Messrs. Uphoff,
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. The
options to purchase shares of our common stock which we have agreed to issue to
Messrs. Uphoff, Aley and George in exchange for their cancellation of the
unvested shares of our capital stock which we issued to each of them in
connection with our merger with Strategicus Partners will vest in equal
increments over a period of 48 months provided each remains engaged as a
consultant to our company. For a detailed discussion of the issuance and
cancellation of these shares of our common stock, see "TRANSACTIONS WITH
OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPS." We may terminate their
consulting agreements at any time and for any reason. If we terminate either of
Mr. Aley's or Mr. George's consulting agreements, then the respective consultant
shall forfeit all unvested stock options. If we terminate Mr. Uphoff's
consulting agreement, then Mr. Uphoff shall forfeit all options which have not
vested within 60 days of the termination date of his consulting agreement.
Mr. Aley's consulting agreement also provides for the forgiveness of a
loan in the principal amount of $267,000 which we have provided to Mr. Aley. We
will forgive:
o one-third of the principal amount of this loan, plus accrued
interest thereon, if Mr. 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 Mr. 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 Mr. 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. 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.
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<PAGE>
Board of Directors
Our bylaws currently provide that the authorized number of directors
that serve on our Board of Directors at any time will be a variable number
ranging from one to nine with the exact number to be fixed by the Board of
Directors. Our Board of Directors currently consists of five members. Members of
our Board of Directors hold office for a period of three years. The terms of the
current directors are staggered as follows:
Class of 2002: Messrs. Aley and George
Class of 2001: Mr. Panzo
Class of 2000: Messrs. Spink and Uphoff
Each director holds office until his successor is elected and qualified
at the Annual Meeting of Stockholders held during the year in which his term
expires. Our Board of Directors has an audit committee which consists of Messrs.
Panzo, Uphoff and George. Our Board of Directors has a compensation committee
which consists of Messrs. Panzo and Spink.
Our directors who are also officers, employees, consultants or
principal stockholders of our company do not currently receive additional
compensation for their services to the board of directors. We intend to award
stock options to our non-employee directors following implementation of a stock
option plan.
Advisory Board
We are currently in the process of establishing an Advisory Board. The
members of our Advisory Board will provide us and our affiliate companies with
strategic guidance in all aspects of our operations. Current members of our
Advisory Board include Paul Stephen, Warren Zide and Tom Cohen.
Liability and Indemnification of Officers and Directors
Our Amended and Restated Certificate of Incorporation provides that our
directors will not be liable for monetary damages for breach of their fiduciary
duty as directors, other than the liability of a director for:
o for a breach of the director's duty of loyalty to our corporation
or its stockholders;
o for acts or omissions by the director not in good faith or which
involve intentional misconduct or a knowing violation of law;
o for a willful or negligent declaration of an unlawful dividend,
stock purchase or redemption; or
o for transactions from which the director derived an improper
personal benefit.
These provisions are consistent with the applicable provisions of Delaware law.
Our Amended and Restated Certificate of Incorporation requires us to
indemnify all persons whom we may indemnify pursuant to the Delaware General
Corporation Law to the full extent permitted by Delaware Law.
In addition, our bylaws require us to indemnify our officers and
directors and other persons against expenses, judgments, fines and amounts
incurred or paid in settlement in connection with civil or criminal claims,
actions, suits or proceedings against such persons by reason of serving or
having served as officers, directors, or in other capacities, if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to our best interests and, in a criminal action or proceeding, if he
had no reasonable cause to believe that his/her 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
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<PAGE>
person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to our best interests or that he or she had
reasonable cause to believe his or her conduct was unlawful. Indemnification as
provided in our bylaws shall be made only as authorized in a specific case and
upon a determination that the person met the applicable standards of conduct.
Insofar as the limitation of, or indemnification for, liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers, or persons
controlling us pursuant to the foregoing, or otherwise, we have been advised
that, in the opinion of the Securities and Exchange Commission, such limitation
or indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore, unenforceable.
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<PAGE>
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 January 7, 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.
Prior to this offering, as of January 7, 2000, 14,173,913 shares of our
common stock were issued and outstanding. Assuming the consummation of this
offering, as of January 7, 2000, an aggregate of 14,173,913 shares of our common
stock will remain 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 Prospectus
have been exercised by these individuals and the appropriate number of shares of
our common stock have been issued to these individuals.
<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>
Sven Behrendt Beneficial 834,644 5.9
10 Gilston Road Owner
London, United Kingdom
Rozel International Holdings, Ltd. Beneficial 2,950,950 20.8
Whitehill House Owner
Newby Road, Industrial Estate
Hazel Grove, Stockport
Cheshire, United Kingdom
SK7 5DA
Andrew P. Panzo (2) Officer, 141,663 1.0
8 Pennsford Lane Director
Media, PA 19063
Douglas Spink (3) Officer, 798,506 5.6
15455 NW Greenbrier Parkway Director
Suite 210
Beaverton, OR 97006
Barry Uphoff (2) Director 142,584 1.0
4080 Winberie Avenue
Naperville, IL 60564
Darr Aley (2) Director 142,584 1.0
615 Howard Avenue
Brulingame, CA 94010
Stephen George (2) Director 142,584 1.0
5 Morning Sun Avenue
Mill Valley, CA 94941
Lee Hansen (2) Officer -0- *
1475 Vallejo Street, #3
San Francisco, CA 94109
</TABLE>
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<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>
Thomas Aley (2) Officer -0- *
260 Elsinore Street
Concord, MA 01742
Tonga Partners, L.P. Beneficial 824,963 5.5
c/o Cannell Capital Management Owner
600 California Street
14th Floor
San Francisco, CA 94108
Attn: J. Carlo Cannell
RS Orphan Fund, LP Beneficial 983,458 6.7
388 Market Street Owner
Suite 200
San Francisco, CA 94111
Attn: Paul H. Stephens
All directors and executive 1,367,921 9.6
officers 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) Does not include stock options which we have agreed to grant to our
officers and directors as our stock option plan remains subject to approval
by our Board of Directors and our stockholders. We have agreed to grant the
following stock options to our officers and directors upon adoption and
approval of our stock option plan:
Grantee Number of Options
------- -----------------
Darr Aley 828,708
Thomas Aley 828,708
Stephen George 757,416
Lee Hansen 900,000
Andrew Panzo 1,020,000
Barry Uphoff 307,416
We anticipate that our board of directors will approve our stock option
plan on or about January 1, 2000.
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<PAGE>
(3) Includes 651,520 shares of vested common stock and 146,986 shares of common
stock which will vest within 60 days of January 7, 2000. Mr. Spink's
ownership of these shares will vest within 60 days. Does not include
1,249,370 shares of common stock. Mr. Spink's ownership of these shares
will not vest within 60 days of January 7, 2000 in accordance with the
terms of the Merger Agreement and Plan of Reorganization dated as of June
21, 1999 between Net Value Holdings, Inc., Strategicus Partners, Inc. and
Douglas Spink, as amended. These shares of our common stock are scheduled
to vest pro rata on a monthly basis commencing on March 31, 2000 and ending
on May 31, 2001.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders,
the number of shares of our common stock beneficially owned by the selling
stockholders as of January 7, 2000 and the number of shares of our common stock
which may be offered for sale pursuant to this prospectus by the selling
stockholders.
The shares listed for Messrs. Behrendt, Jaekel and Markman represent
shares of common stock which are presently owned by each of these individuals.
Other than the shares listed for each of these individuals, the number of shares
set forth in this table represents an estimate of the number of shares of our
common stock to be offered for resale by the selling stockholders. The remaining
selling stockholders own shares of our Series B Preferred Stock and common stock
purchase warrants. We cannot determine the actual number of our shares of common
stock issuable upon conversion of our Series B Preferred Stock. This number will
change based on the unanimous election by the holders of the Series B Preferred
Stock to exercise their one-time right to reset the conversion price to the
greater of the current market price of our common stock or $2.50 per share of
the Series B Preferred Stock. This number of shares of our common stock could be
significantly less or more than these estimates depending on factors which we
cannot predict at this time including, among other factors, the future market
price of our common stock.
The number of shares of our common stock issuable upon conversion of
the Series B Preferred Stock is calculated by dividing the liquidation value of
$1,000 per share of the Series B Preferred Stock by the conversion price per
share. Since there are 4,824 shares of Series B Preferred Stock issued and
outstanding, the total liquidation value of the Series B Preferred Stock is
$4,824,000. Accordingly, if the holders had converted all of the shares of the
Series B Preferred Stock on January 7, 2000, then the conversion price per share
would have been $4.0875 and the Series B Preferred Stock would have been
converted into approximately 1,180,184 shares of our common stock. This table is
prepared assuming:
o that the holders of the Series B Preferred Stock will
convert their shares of our Series B Preferred Stock
at the conversion floor price of $2.50 per share into
1,929,600 shares of our common stock; and
o that the holders of Series B Preferred Stock will
exercise all 295,040 issued and outstanding warrants.
Pursuant to the Registration Rights Agreement which we entered into
with the holders of the Series B Preferred Stock, we are required to register
the resale of 2,750,000 shares of our common stock on behalf of the holders of
the Series B Preferred Stock. However, this obligation was conditioned upon the
holders purchasing a total of 5,000 shares of our Series B Preferred Stock.
Since we only sold 4,824 shares of our common stock, we are only obligated to
register 2,653,200 shares of our common stock on behalf of the holders of the
Series B Preferred Stock and the warrants. We allocated the difference between
this amount and the 2,224,640 shares identified above of 428,560 to the holders
of the Series B Preferred Stock on a pro rata basis.
Each holder may only convert its shares of Series B Preferred Stock to
the extent that the number of shares of our common stock issuable upon
conversion, together with the number of shares of our common stock owned by the
holder and its affiliates would not exceed 4.99% of the issued and outstanding
shares of our common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934. This calculation of shares of common stock
owned by a holder does not include shares of our common stock underlying
unconverted shares of
78
<PAGE>
our Series B Preferred Stock owned by the holder. Accordingly, the number of
shares of our common stock set forth in this table for each selling stockholder
may exceed the number of shares of our common stock that each selling
stockholder could own beneficially at any given time through their ownership of
our Series B Preferred Stock.
These shares may be offered from time to time by the selling
stockholders named below. However, the selling stockholders are under no
obligation to sell all or any portion of these shares of our common stock. In
addition, the selling stockholders are not obligated to sell such shares of our
common stock immediately under this prospectus. Since the selling stockholders
may sell all or part of the shares of common stock offered in this prospectus,
we cannot estimate the number of shares of our common stock that will be held by
the selling stockholders upon termination of this offering.
None of the selling stockholders is an officer or director of our
company. Other than Paul Stephens, who manages the RS Orphan Fund L.P. and the
RS Orphan Offshore Fund, L.P. and is a member of our Advisory Board, none of the
selling stockholders has had any material relationship with our company, our
affiliate companies or our predecessors within the last three years.
<TABLE>
<CAPTION>
Number of Shares Percentage Number of Shares of
of Common Stock Before Common Stock After Percentage After
Name Before Offering Offering (1) Offering Offering
- ------------------------------------------- ---------------------- ------------------ ------------------------ ------------------
<S> <C> <C> <C> <C>
Sven Behrendt (2)
10 Gilston Road
London, U.K. SW1695R 834,644 5.9 27,000 *
Juergen Jaekel (3)
51 Valley Road
Athenton, CA 94027 229,533 1.6 27,000 *
Gary E. Markman (4)
424 Charles Lane
Wynnewood, PA 19096 59,183 * -0- *
Tonga Partners, L.P. (5)
c/o Cannell Capital Management
600 California Street
14th Floor
San Francisco, CA 94108
Attn: J. Carlo Cannell 824,963 5.5 -0- *
Yeoman Ventures, Ltd. (6)
P.O. Box 146
Road Town, Tortola
British Virgin Islands
Attn: Giora Lavie 137,449 1.0 -0- *
Lightline Limited (7)
P.O. Box 146
Road Town, Tortola
British Virgin Islands
Attn: Giora Lavie 137,449 1.0 -0- *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage Number of Shares of
of Common Stock Before Common Stock After Percentage After
Name Before Offering Offering (1) Offering Offering
- ------------------------------------------- ---------------------- ------------------ ------------------------ ------------------
<S> <C> <C> <C> <C>
Little Wing LP (8)
c/o Quilcap Corp.
375 Park Avenue
Suite 1404
New York, NY 10152
Attn: Parker Quillen 247,568 1.7 -0- *
Little Wing Too LP (9)
c/o Quilcap Corp.
375 Park Avenue
Suite 1404
New York, NY 10152
Attn: Parker Quillen 82,523 * -0- *
Tradewinds Fund, LLC (10)
c/o Quilcap Corp.
375 Park Avenue
Suite 1404
New York, NY 10152
Attn: Parker Quillen 82,523 * -0- *
JDN Partners, L.P. (11)
2420 Camino Ramon, Suite 222
San Raman, CA 94583 371,220 2.6 -0- *
Attn: John Nguyen
Bayhill Fund, Ltd. (12)
2420 Camino Ramon, Suite 222
San Raman, CA 94583
Attn: John Nguyen 41,129 * -0- *
RS Orphan Fund, L.P. (13)
388 Market Street
Suite 200
San Francisco, CA 94111
Attn: Paul H. Stephens 983,458 6.7 473,462 2.8
RS Orphan Offshore Fund,
L.P. (14)
CITCO Fund Services
Corporate Center
West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
British West Indies
Attn: Paul H. Stephens 421,292 2.9 202,912 1.2
--------- ---------- ------- ---------
TOTAL 4,452,934 716,374
========= =======
</TABLE>
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<PAGE>
- ----------
* Less than one percent.
(1) Calculated in accordance with Rule 13d-3(d)(i) of the Securities
Exchange Act of 1934.
(2) Sven Behrendt has sole voting and investment control over these
securities.
(3) Juergen Jaekel has sole voting and investment control over these
securities.
(4) Gary Markman has sole voting and investment control over these
securities.
(5) J. Carlo Cannell has sole voting and investment control over these
securities.
(6) Giora Lavie has sole voting and investment control over these
securities.
(7) Giora Lavie has sole voting and investment control over these
securities.
(8) Parker Quillen has sole voting and investment control over these
securities.
(9) Parker Quillen has sole voting and investment control over these
securities.
(10) Parker Quillen has sole voting and investment control over these
securities.
(11) John Nguyen has sole voting and investment control over these
securities.
(12) John Nguyen has sole voting and investment control over these
securities.
(13) Paul H. Stephens has sole voting and investment control over these
securities.
(14) Paul H. Stephens has sole voting and investment control over these
securities.
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<PAGE>
PLAN OF DISTRIBUTION
The shares of our common stock which the selling stockholders or their
respective pledgees, donees, transferees or other successors in interest are
offering for resale will be sold from time to time in one or more of the
following transactions:
o block transactions;
o transactions on the over the counter electronic bulletin
board or on such other market on which our common stock may
from time to time be trading;
o privately negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination of these transactions
The sale price to the public in these transactions may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o negotiated prices; or
o such other price as the selling stockholders determine from
time to time.
In the event that we permit or cause this registration statement to
lapse, the selling stockholders may sell shares of our common stock pursuant to
Rule 144 promulgated under the Securities Act of 1933. The selling stockholders
shall have the sole and absolute discretion not to accept any purchase offer or
make any sale of these shares of our common stock if they deem the purchase
price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledges, donees,
transferees or other successors in interest, may also sell these shares of our
common stock directly to market makers acting as principals and/or
broker-dealers acting as agents for themselves or their customers. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of these shares
of our common stock for whom such broker-dealers may act as agents or to whom
they sell as principal or both. As to a particular broker-dealer, this
compensation might be in excess of customary commissions. Market makers and
block purchasers purchasing these shares of our common stock will do so for
their own account and at their own risk. It is possible that a selling
stockholder will attempt to sell shares of our common stock in block
transactions to market makers or other purchasers at a price per share which may
be below the prevailing market price of our common stock. There can be no
assurance that all or any of these shares of our common stock offered hereby
will be issued to, or sold by, the selling stockholders. Upon effecting the sale
of any of these shares of our common stock offered pursuant to this registration
statement, the selling stockholders and any brokers, dealers or agents, hereby,
may be deemed "underwriters" as that term is defined under the Securities Act of
1933 or the Securities Exchange Act of 1934, or the rules and regulations
thereunder.
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a selling
stockholder enters
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<PAGE>
into an agreement or agreements with an underwriter, then the relevant details
will be set forth in a supplement or revisions to this prospectus.
The selling stockholders and any other persons participating in the
sale or distribution of these shares of our common stock will be subject to
applicable provisions of the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder including, without limitation, Regulation M.
These provisions may restrict activities of, and limit the timing of purchases
and sales of any of these shares of our common stock by, the selling
stockholders. Furthermore, pursuant to Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously engaging in market
making and other activities with respect to such securities for a specified
period of time prior to the commencement of such distributions, subject to
specified exceptions or exemptions. These regulations may affect the
marketability of these shares of our common stock.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the selling stockholders or
their respective pledges, donees, transferees or other successors in interest,
may be required to make in respect thereof. We have agreed to indemnify the
selling stockholders holding our Series B Convertible Preferred Stock and
related Warrants against losses incurred by those selling stockholders as a
result of any inaccuracy in or breach of the representations, warranties or
covenants which we made to them in the stock purchase agreement relating to the
sale of our Series B Convertible Preferred Stock and related warrants. We have
also agreed in the related registration rights agreement to indemnify those
selling stockholders against losses incurred as a result of any untrue or
alleged untrue statement or omission of a material fact from this prospectus,
except any statements or omissions based solely upon information provided to us
by the selling stockholders or regarding the plan of distribution. To the extent
that a claim for indemnification under the registration rights agreement is
unavailable to those selling stockholders due to the failure or refusal of a
governmental authority to enforce it, we have agreed to contribute to the amount
paid or payable by those selling stockholders as a result of these losses. We
have agreed to make these contributions in an amount that is proportionate to
our relative fault with regard to any losses. Insofar as we are permitted to
indemnify the selling stockholders for liabilities arising under the Securities
Act of 1933, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities act of 1933 and is unenforceable.
We will pay substantially all of the expenses incident to the
registration and offering of our common stock, other than commissions or
discounts of underwriters, broker-dealers or agents.
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 $2,680,000 and 500,000 shares of our Series A Preferred Stock
valued at $25,000 in exchange for 178,700 shares of BrightStreet's Series A
Preferred Stock. This represented 100% of BrightStreet's issued and outstanding
shares of Series A Preferred Stock. 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 $2,680,690 and 1,145,594 shares
of our Series A Preferred Stock valued at $57,280 in exchange for 4,582,377
shares of BrightStreet's common stock. Rozel International Holdings, Ltd. is a
beneficial owner of approximately 22.5% of our common stock.
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<PAGE>
Loan and Merger Agreements with Strategicus Partners, Inc.
On May 28, 1999, we entered into a loan agreement with Strategicus
Partners Inc. Pursuant to this loan agreement, we agreed to lend Strategicus
Partners up to $2,000,000 on a revolving credit basis with all advances made
under the loan agreement due on July 12, 1999. We subsequently amended the due
date for the repayment of these loans to July 30, 1999. Strategicus Partners was
permitted to use the proceeds of these loans to make loans to two of its
stockholders and to make investments in AsiaCD, Inc. and College 411.com, Inc.
The obligation of Strategicus Partners to repay these loans was evidenced by a
promissory note in the principal amount of up to $2,000,000. Strategicus
Partners secured its obligation to repay these loans by granting us a security
interest in all of its assets including any of its investments in AsiaCD, Inc.
and College 411.com, Inc. We advanced an aggregate amount of $1,555,000 to
Strategicus Partners pursuant to this loan agreement. Strategicus Partners used
approximately $310,000 of these funds to make a loan to Douglas Spink and used
the remainder of these funds to make investments in AsiaCD, Inc. and College
411.com, Inc. and to pay the professional fees related to the completion of our
merger with Strategicus Partners. Upon the completion of our merger with
Strategicus Partners, we agreed to forgive the loan to Mr. Spink if he remains
an employee of Net Value Holdings on May 28, 2000. For a more detailed
discussion of this arrangement, see "MANAGEMENT-Employment Agreements."
On June 21, 1999, we entered into a merger agreement with Strategicus
Partners and Douglas Spink, the founder of Strategicus Partners, in which we
agreed to merge with Strategicus Partners. 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 $2,109,012 $24,301,832 $83,083 $957,075
</TABLE>
The unvested shares of our capital stock listed above 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. For a more detailed discussion of this arrangement, see
"Management -Employment Agreements, Consulting Agreements." These shares, upon
full vesting, were intended to represent approximately 40% of our capital stock
as of June 21, 1999, assuming we had 18,811,569 shares of common stock
calculated on a fully-diluted basis and 5,778,699 shares of Series A Preferred
Stock. In exchange for this issuance of our capital stock, we acquired all of
the issued and outstanding capital stock of Strategicus Partners. Our primary
purpose for completing the merger with Strategicus Partners was to acquire
rights to the investments made by Strategicus Partners in metacat.com, inc.,
AsiaCD, Inc. and College 411.com, Inc. and to retain the services of the four
stockholders of Strategicus Partners as employees and/or consultants of our
company.
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<PAGE>
Forgiveness of Loans to Members of Our Management Team
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 reimburse
him 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. For a more
detailed discussion of this arrangement, see "MANAGEMENT-Employment Agreements."
In addition, in July 1999, Strategicus extended an advance to Mr. Spink in the
principal amount of approximately $185,000. We do not expect to receive payment
of this advance.
In June 1999, we extended a loan to Mr. 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. For a more detailed
discussion of this arrangement, see "MANAGEMENT-Consulting Agreements."
Series A Preferred Stock Exchange
In September 1999, we exchanged 2,898,788 shares of our common stock
for all 4,831,312 issued and outstanding shares of our Series A Preferred Stock.
For a detailed discussion of this transaction, see "DESCRIPTION OF CAPITAL
STOCK-Preferred Stock." Messrs. Spink, Uphoff, Aley and George participated in
this offering and received a total of 1,386,876 shares of our common stock
valued at $3,481,059 in exchange for the cancellation of all of their 2,311,460
shares of our Series A Preferred Stock.
Cancellation of Unvested Shares of Common Stock and Agreement to Issue Options
to Purchase Shares of Our Common Stock
On August 31, 1999, we entered into an agreement with each of Messrs.
Uphoff, Aley and George to immediately cancel all of their 6,255,876 unvested
shares of our common stock valued at $21,958,124. In addition, for each share of
common stock that we agreed to cancel, we agreed to issue an option to purchase
one share of our common stock pursuant to a stock option plan which we intend to
implement in 1999. Accordingly, we issued options to purchase a total of
6,255,876 shares of our common stock valued at $2,017,520 to Messrs. Uphoff,
Aley and George. Each of these options will have 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. On September 13, 1999, each of Messrs. Uphoff, Aley,
George and Panzo agreed to forfeit their rights to receive 180,000 stock options
valued at $58,050. On September 13, 1999, Mr. Spink agreed to allow Net Value
Holdings to cancel 180,000 of his unvested shares of common stock valued at
$631,800. These members of the management team entered into these agreements to
allow us to issue 900,000 stock options to Mr. Hansen. In September 1999, we
entered into an employment agreement with Mr. Hansen pursuant to which we agreed
to issue 900,000 stock options to Mr. Hansen valued at $519,327. For a detailed
discussion of the terms of Mr. Hansen's employment agreement, see
"MANAGEMENT--Employment Agreements."
85
<PAGE>
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. Through January 7, 2000, members of our management team own
the following equity interests in our affiliate companies:
<TABLE>
<CAPTION>
Affiliate company Equity Interest
----------------- ---------------
<S> <C> <C>
Andrew P. Panzo AsiaCD 12,000 shares of common stock
Barry Uphoff AsiaCD 12,000 shares of common stock
Darr Aley AsiaCD 12,000 shares of common stock
Darr Aley College 411 50,000 stock options
Stephen George AsiaCD 12,000 shares of common stock
Stephen George College 411 37,500 stock options
Douglas Spink Webmodal 400 shares of common stock
Douglas Spink AsiaCD 12,000 shares of common stock
Thomas Aley Swapit.com 258,411 shares of common stock
</TABLE>
San Francisco Office Space
We share office space in San Francisco, California with a corporation
owned by Mr. George, at no expense.
86
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 50,000,000 shares of common stock, par value
$.001 per share, and 10,000,000 shares of preferred stock, par value $.001 per
share.
The following discussion, which describes all material terms of our
capital stock, is qualified in its entirety by reference to our certificate of
incorporation and bylaws, copies of which are filed as exhibits to this
registration statement.
Common Stock
The holders of our common stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. There is no
cumulative voting with respect to the election of directors. Accordingly,
holders of a majority of the outstanding shares of our common stock can elect
all members of our Board of Directors, and holders of the remaining shares by
themselves cannot elect any member of the Board of Directors.
The holders of our common stock are entitled to receive dividends in
the discretion of our Board of Directors. We may only pay dividends out of funds
legally available for this purpose. In the event of the liquidation, dissolution
or winding up of Net Value Holdings, Inc., the holders of our common stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over our common stock. Holders of
shares of our common stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemptive provisions applicable to our
common stock. All of the outstanding shares of our common stock are fully paid
and nonassessable.
Preferred Stock
Our certificate of incorporation provides that our Board of Directors
may establish one or more classes or series of preferred stock having such
number of shares and relative voting rights, designation, dividend rates,
liquidation and other rights, preferences and limitations as may be fixed by
them without further stockholder approval. The holders of our preferred stock
may be entitled to preferences over common stockholders with respect to
dividends, liquidation, dissolution or our winding up in such amounts are
established by our Board of Directors' resolutions issuing such shares.
In 1998 and 1999, we issued of 4,831,312 shares of our Series A
Preferred Stock to accredited investors. Our Series A Preferred Stock was
convertible into up to one share of our common stock upon our achievement of
specified performance objectives. After discussions with potential investment
bankers, underwriters and other sources of capital financing, we determined that
the conversion features of our Series A Preferred Stock were too complicated and
created uncertainty regarding the number of shares of our common stock which may
have been issuable into the market at any given time upon our satisfaction of
the performance objectives. Therefore, pursuant to a private offering, 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. Pursuant to this offering,
the holders of our Series A Preferred Stock forfeited all ownership rights to
the Series A Preferred Stock and any shares of our common stock issuable upon
conversion of the Series A Preferred Stock and released and discharged us and
each of our present and future officers, directors and employees from all claims
or rights related to the Series A Preferred Stock. As there are no longer any
issued and outstanding shares in this series, we plan to cancel the Series A
Preferred Stock.
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<PAGE>
In September 1999, we designated our Series B Preferred Stock. In
September and October 1999, we issued 4,824 shares of this series to ten
accredited investors in connection with a private placement offering in which we
raised gross proceeds of $4,824,000.
The shares of Series B Preferred Stock, valued at $4,824,000, are
convertible into shares of our common stock at a conversion price of $4.0875 per
share. The number of shares of our common stock issuable upon conversion of the
Series B Preferred Stock is calculated by dividing the liquidation value of
$1,000 per share of the Series B Preferred Stock by the conversion price per
share. Since there are 4,824 shares of Series B Preferred Stock issued and
outstanding, the total liquidation value of the Series B Preferred Stock is
$4,824,000. Accordingly, if the holders had converted all of the shares of the
Series B Preferred Stock on January 7, 2000, then the conversion price per share
would have been $4.0875 and the Series B Preferred Stock would have been
converted into approximately 1,180,184 shares of our common stock. The holders
of the Series B Preferred Stock may elect to convert the Series B Preferred
Stock into shares of our common stock at any time after the earlier of:
o March 15, 2000; and
o 20 days after the effective date of this registration
statement.
During the period from September 17, 1999 until the first anniversary
of the effective date of this registration statement, the holders of the Series
B Preferred Stock may elect to reset the conversion price to a price per share
equal to the greater of:
o the closing bid price of our common stock on the two trading
days immediately preceding the date that we receive notice
of the reset election from all of the holders of the Series
B Preferred Stock, as a group; and
o $2.50.
The holders of the Series B Preferred Stock may only elect to reset the
conversion price once and they may not reset the conversion price below $2.50
per share. The Series B Preferred Stock accrues dividends at the rate of 5% per
annum of the liquidation value of $1,000 per share. However, the dividend rate
increases to 10% per annum whenever the closing bid price of our common stock is
below 2.50 per share for ten consecutive trading days. The dividend rate of the
Series B Preferred Stock is reset to 5% per annum only after the closing bid
price of our common stock is above $2.50 per share for five consecutive trading
days.
If the holders elected to convert all of the Series B Preferred Stock
on January 7, 2000, then the Series B Preferred Stock would have been converted
into approximately 1,180,184 shares of our common stock. However, this number of
shares will be significantly greater if the conversion price is reset to $2.50
per share. Purchasers of our common stock could therefore experience substantial
dilution of their investment upon conversion of the Series B Preferred Stock.
The shares of Series B Preferred Stock are not registered and may only be resold
if registered under the Securities Act of 1933 or sold in accordance with an
applicable exemption from registration, such as Rule 144 promulgated under the
Securities Act of 1933. We are registering the shares of our common stock which
are issuable upon conversion of the Series B Preferred Stock in this
registration statement.
We may redeem all or a portion of the Series B Preferred Stock at a
price per share equal to 120% of the liquidation preference amount, plus any
accrued and unpaid dividends on the Series B Preferred Stock.
The holders of the Series B Stock have the option of requiring us to
redeem their shares of Series B Preferred Stock upon the occurrence of any of
the following events:
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<PAGE>
o any consolidation, merger or other business
combination which we consummate with any other party
pursuant to which the holders of a majority of the
voting power of our capital stock immediately prior
to such transaction do not hold a majority of the
voting power of the capital stock of the surviving
entity subsequent to such transaction;
o the sale or transfer of all or substantially all of
our assets;
o the consummation of a purchase, render or exchange
offer made to the holders of more than 30% of the
outstanding shares of common stock;
o the failure of this registration statement to be
declared effective by the Securities and Exchange
Commission on or prior to February 14, 2000;
o the lapse prior to September 17, 2001, of the
effectiveness of this registration statement or its
unavailability for use by the holders of the Series B
Preferred Stock for a period of at least ten
consecutive trading days;
o the suspension from listing or the failure of the
common stock to be listed on either the NASDAQ
Over-The Counter Bulletin Board Trading System, the
NASDAQ SmallCap Market, The NASDAQ National Market,
The New York Stock Exchange or the American Stock
Exchange for a period of five consecutive days;
o our notice to any holder of the Series B Preferred
Stock of our inability to comply or our intention not
to comply with proper requests for conversions of any
Series B Preferred Stock into shares of our common
stock;
o our failure to comply with any conversion notice
tendered by a holder of the Series B Preferred Stock
within ten business days after we receive it and the
stock certificates representing the shares of Series
B Preferred Stock being converted; and
o our breach of any representation, warranty, covenant,
or other term or condition contained in any of the
documents related to our sale and issuance of the
Series B Preferred Stock, except for a breach of
covenant which is cured within ten days.
The holders of the Series B Preferred Stock may require us to redeem
all or a portion of their shares of Series B Preferred Stock at a price per
share of Series B Preferred Stock equal to the greater of:
o $1,250; or
o the product of the conversion price per share of the
Series B Preferred Stock and the closing bid price of
our common stock on the trading date immediately
preceding any of the aforementioned events.
Registration Rights
Subsequent to this offering, holders of four convertible promissory
notes in the aggregate principal amount of $900,000, which are convertible into
a total of 400,000 shares of our common stock, plus additional shares for unpaid
interest at the time of conversion, are entitled to registration rights for such
shares issuable upon conversion. The holders of these convertible promissory
notes have "piggy-back" registration rights with regards to the shares of our
common stock issuable upon conversion of these notes in any offering of our
securities pursuant to a
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registration statement on Forms S-1, S-2 or S-3 filed subsequent to the
consummation of our merger with BrightStreet. We will bear the expenses incurred
in connection with filing such registration statement.
The merger agreement with Strategicus Partners and Douglas Spink which
grants these registration rights, defines a change of control as the occurrence
of any one of the following:
o any "person" as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, other than one
of our subsidiaries or affiliates becomes a "beneficial
owner," as such term is used in Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, of 50% or more of any
class of issued and outstanding capital stock which
ownership interest constitutes 50% or more of all issued and
outstanding voting shares;
o the majority of the members of our Board of Directors
consists of individuals other than members of our Board of
Directors on July 30, 1999, provided that persons elected to
the Board of Directors whose election or nomination was
supported by one-half of the directors at July 30, 1999
shall be considered a member of the Board of Directors as of
July 30, 1999; and
o any event which we would be required to report pursuant to
Items 1 or 2 of Form 8-K under the Securities Exchange Act
of 1934, whether or not we are actually required to file a
Form 8-K in relation to this transaction or event.
Upon a change of control Messrs. Panzo, Spink, Uphoff, Aley and George
may demand registration of the vested shares of common stock owned by each in a
public offering of such securities under the Securities Act of 1933. We are
required to use our best efforts to effect such registration. We will bear the
expenses incurred in connection with such registrations.
We are obligated to register 807,644 shares of our common stock owned
by Sven Behrendt and 202,533 shares of our common stock owned by Juergen Jaekel.
We agreed to file a registration statement with the Securities and Exchange
commission registering the resale of these shares of common stock on or before
August 15,1999. We did not file this registration statement until October 7,
1999. As a result of our breach of this agreement, we issued 27,000 shares of
our common stock to each of Messrs. Behrendt and Jaekel. These shares represent
the agreed upon penalty of 10,000 shares for breaching the agreement and 10,000
shares per month until the registration statement was filed on October 7, 1999,
calculated on a daily basis.
Subsequent to this offering, two stockholders holding an aggregate of
676,374 shares of our common stock are entitled to registration rights. These
stockholders have "piggy-back" registration rights in any offering of our
securities pursuant to a registration statement on Forms S-1, S-2 or S-3 filed
subsequent to the effective date of this registration statement. We will bear
the expenses incurred in connection with filing such registration statement.
Common Stock Purchase Warrants
As of the date of this prospectus, we have issued 1,474,889 common
stock purchase warrants.
On March 1, 1999, in connection with an issuance of convertible
promissory notes in the aggregate principal amount of $900,000, we issued
warrants to purchase 90,000 shares of our common stock at an exercise price of
$2.50 per share and warrants to purchase 90,000 shares of our common stock at an
exercise price of $5.00 per share. These warrants are exercisable at any time
prior to February 28, 2002.
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In May 1999, we issued convertible promissory notes in the aggregate
principal amount of $4,270,125 to a group of accredited investors. The
convertible promissory notes were issued in satisfaction of promissory notes
issued by BrightStreet. Each participant in this offering received a convertible
promissory note with a principal amount equal to the principal amount of his
BrightStreet promissory note, plus all accrued interest thereon as of December
31, 1998, in exchange for the cancellation of his BrightStreet promissory note
and their agreement to release us, BrightStreet and the present and future
officers and directors from any claims related to his promissory note. The
noteholders may convert these convertible promissory notes at any time at a
conversion rate of $2.00 per share. We may require the noteholders to convert
the entire principal amount of their convertible promissory notes, plus all
accrued interest thereon, if the market price of our common stock is $5.00 per
share for a period of twenty consecutive trading days and we have registered 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 after their grant date at
an exercise price of $6.00 per share. As of the date of this prospectus, we have
issued warrants to purchase 889,772 shares of our common stock to holders who
have converted their promissory notes.
In connection with the private offering which we completed in September
1999, we issued warrants to purchase 110,077 shares of our common stock at an
exercise price of $5.00 per share. These warrants are exercisable for a period
of three years from the date of grant.
As of January 7, 2000, we had issued and outstanding callable and
non-callable A, B, C and D warrants to purchase, in the aggregate, 295,040
shares of our common stock. We issued these warrants to the purchasers of the
Series B Preferred Stock and they are exercisable until October 1, 2004. Each
type of warrant is exercisable for, in the aggregate, the number of shares and
at the exercise price set forth below:
Shares Exercise Price
Non-callable A Warrants 36,880 $4.49625
Callable A Warrants 36,880 $4.49625
Non-callable B Warrants 36,880 $4.905
Callable B Warrants 36,880 $4.905
Non-callable C Warrants 36,880 $5.31375
Callable C Warrants 36,880 $5.31375
Non-callable D Warrants 36,880 $5.7225
Callable D Warrants 36,880 $5.7225
The exercise price of each of these warrants may be adjusted upon the
occurrence of:
o a recapitalization, reorganization, reclassification, merger
or sale of substantially all assets;
o a subdivision or combination of shares of our common stock;
o a stock dividend;
o our issuance of additional shares of our common stock at a
price per share less than the closing bid price per share on
the date of issuance;
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<PAGE>
o our issuance of common stock equivalents pursuant to which
shares of our common stock are issuable at a price per share
that is less than the closing bid price per share on the
date of issuance; and
o any purchase or redemption of shares of our common stock by
us at a price per share which is greater than the exercise
price of the warrants.
However, the following transactions will not trigger an adjustment to the
exercise price:
o any issuance of our securities other than for cash, as
consideration for a merger, consolidation or sale of assets,
in connection with any strategic partnership or joint
venture or in exchange for assets, stock or joint venture
interests;
o our grant of any securities pursuant to an employee benefit
plan, stock option plan, restricted stock plan or stock
purchase plan for the benefit of our employees or directors;
o any transactions regarding the sale or exchange of our
securities at a price per share greater than the price of
the Series B Preferred Stock;
o any securities issued upon conversion of the Series B
Preferred Stock or exercise of these warrants; and
o any securities issued in connection with transactions listed
on Schedule 2.1(c) or Schedule 2.1(z) of the Series B
Convertible Preferred Stock Purchase Agreement dated as of
September 17, 1999, a copy of which is included at Exhibit
10.19 hereto.
If the closing bid price of our common stock is at least 150% of the
relevant exercise price for 20 consecutive trading days and this registration
statement has been effective for 20 days, then we may terminate the callable
warrants by delivering 20 days written notice to the holders. The shares of our
common stock issuable upon exercise of these warrants are being registered
pursuant to this registration statement.
Transfer Agent and Registrar
The transfer agent for our common stock is StockTrans, Inc. The
transfer agent's address is 7 East Lancaster Avenue, Ardmore, Pennsylvania
19003, and its telephone number is (610) 649-7300.
SHARES ELIGIBLE FOR FUTURE SALE
14,173,913 shares of our common stock were outstanding as of January
7, 2000.
Under the terms of the subscription agreements of previous private
placements of our securities, 7,324,723 outstanding shares of our common stock
may not be sold or otherwise transferred, without our prior written consent or
the prior written consent of a placement agent whom we designate, except for
transfers to immediate family members or trusts for estate planning purposes,
until the date set forth below:
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Number of Shares Restrictions in
Subject to Restriction Effect Through
---------------------- --------------
3,019,852 First anniversary
of the later of
(i) the date the
shares are
eligible for sale
under Rule 144 or
(ii) the effective
date of a
registration
statement
registering the
resale of the
shares.
4,304,871 First anniversary of effective
date of our merger with
BrightStreet
Holders of 5,847,193 shares of our common stock have registration
rights with respect to the registration of the resale of such shares under the
Securities Act of 1933. Upon the effectiveness of this registration statement,
which we are filing on behalf of thirteen such stockholders, 3,722,560 of these
shares will be freely tradeable under the Securities Act of 1933.
Upon completion of this offering, 6,501,354 "restricted shares" as
defined in Rule 144 will be outstanding. None of these shares will be eligible
for sale in the public market as of the effective date of this registration
statement.
In general, under Rule 144 as currently in effect, beginning on the
later of 90 days after the effective date of this registration statement or the
date on which the transfer restrictions described above have expired, a person
(or persons whose shares are aggregated) who owns shares that were purchased
from us (or any affiliate) at least one year previously, including a person who
may be deemed our affiliate, is entitled to sell within any three-month period,
a number of shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; or
o the average weekly trading volume of our common stock during
the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange
commission.
Sales under Rule 144 are also subject to manner of sale provisions,
notice requirements and the availability of current public information about us.
Any person (or persons whose shares are aggregated) who is not deemed to have
been our affiliate at any time during the 90 days preceding a sale, and who owns
shares within the definition of "restricted securities" under Rule 144 under the
Securities Act that were purchased from us (or any affiliate) at least two years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
In addition to the outstanding shares of our common stock described
above, as of the date of this prospectus, we have 4,642,248 shares of common
stock reserved for issuance upon the exercise of outstanding options, 2,183,705
shares of our common stock reserved for issuance upon the conversion of issued
and outstanding convertible debentures in the aggregate principal amount of
$5,097,010 and 1,474,889 shares of common stock reserved for issuance upon the
exercise of common stock purchase warrants. All of these securities and the
shares of our common stock underlying each of these securities are restricted
securities. The transfer of these restricted securities is subject to the
requirements of Rule 144, as discussed above.
Future sales of restricted common stock under Rule 144 or otherwise or
of the shares which we are registering on this registration statement could
negatively impact the market price of our common stock. For a detailed
discussion of this risk, see "RISK FACTORS--RISKS RELATED TO THIS
OFFERING--Shares Eligible For Future Sale By Current Holders Of Our Securities
May Decrease The Price Of Common Stock." We are unable
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<PAGE>
to estimate the number of shares that may be sold in the future by our existing
stockholders or the effect, if any, that sales of shares by such stockholders
will have on the market price of our common stock prevailing from time to time.
Sales of substantial amounts of our common stock by existing stockholders could
adversely affect prevailing market prices.
PRINCIPAL UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
For U.S. federal income tax purposes, a resident alien individual is
treated like a citizen: he or she is subject to U.S. tax on all of his or her
income, regardless of the source. A nonresident alien individual, on the other
hand, is subject to a special tax regime that is fundamentally different from
that which applies to citizens and resident aliens. You are a non-resident alien
if:
o you are not a lawful permanent resident of the U.S. at
anytime during the calendar year;
o you do not make an election to be treated as a resident
alien; and
o you are not physically present in the U.S. for 183 days or
more during the calendar year or the sum of your days of
physical presence in the U.S. for the current calendar year
plus 1/3 the number of days in the first preceding calendar
year plus 1/6 the number of days in the second preceding
calendar year equals less than 183 days provided; however,
that you will not be treated as a resident pursuant to this
lookback rule if (i) you are not physically present in the
U.S. for at least 31 days during the calendar year; or (ii)
you can establish that you have a tax home in and closer
connections to a foreign country.
The following discussion summarizes principal U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by
"non-U.S. holders." You are a "non-U.S. holder" for U.S. federal income tax
purposes if you are:
o a non-resident alien individual;
o a foreign corporation;
o a foreign partnership; or
o an estate or trust that in either case is not subject to
U.S. federal income tax on a net income basis on income or
gain from common stock.
This discussion does not consider the specific facts and circumstances
that may be relevant to particular holders and does not address the treatment of
holders of common stock under the laws of any state, local or foreign taxing
jurisdiction. This discussion is based on the tax laws of the U.S., including
the Internal Revenue Code, as amended to the date hereof, existing and proposed
regulations thereunder, and administrative and judicial interpretation thereof,
as currently in effect. These laws are subject to change, possibly on a
retroactive basis.
You should consult your own tax advisors with regard to the application
of the federal income tax laws to your particular situation, as well as to the
applicability and effect of any state, local or foreign tax laws to which you
may be subject.
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Dividends
If you are a non-U.S. holder of our common stock, dividends paid to you
are subject to withholding of U.S. federal income tax at a 30% rate or at a
lower rate if so specified in an applicable income tax treaty. If, however, the
dividends are effectively connected with your conduct of a trade or business
within the U.S. (holding stock in a corporation engaged in a trade or business
in the U.S. does not cause the shareholder to be engaged in a U.S. trade or
business by reason of the stock ownership), and they are attributable to a
permanent establishment that you maintain in the U.S., if that is required by an
applicable income tax treaty as a condition for subjecting you to U.S. income
tax on a net income basis on such dividends, then such "effectively connected"
dividends generally are not subject to withholding tax. Instead, such
effectively connected dividends are taxed at rates applicable to U.S. citizens,
resident aliens and domestic U.S. corporations.
Effectively connected dividends received by a non-U.S. corporation may
be subject to an additional "branch profits tax" at a 30% rate or at a lower
rate if so specified in an applicable income tax treaty.
Under currently effective U.S. Treasury regulations, dividends paid to
an address in a foreign country are presumed to be paid to a resident of that
country, unless the payor has knowledge to the contrary, for purposes of the 30%
withholding tax discussed above. Under current interpretations of U.S. Treasury
regulations, this presumption that dividends paid to an address in a foreign
country are paid to a resident of that country, unless the payor has knowledge
to the contrary, also applies for the purposes of determining whether a lower
tax treaty rate applies.
Under U.S. Treasury regulations that will generally apply to dividends
paid after December 31, 2000, the "New Regulations," if you claim the benefit of
a lower treaty rate, then you must satisfy certification requirements. In
addition, in the case of common stock held by a foreign partnership, the
certification requirements generally will apply to the partners of the
partnership and the partnership must provide specific information, including a
U.S. taxpayer identification number. The final withholding regulations also
provide look-through rules for tiered partnerships.
If you are eligible for a reduced rate of U.S. withholding tax under a
tax treaty, you may obtain a refund of any excess amounts withheld by filing a
refund claim with the IRS.
Gain On Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to U.S.
federal income tax on gain recognized on a disposition of common stock unless:
o the gain is effectively connected with your conduct of
a trade or business in the U.S. and the gain is
attributable to a permanent establishment that you
maintain in the U.S., if that is required by an
applicable income tax treaty as a condition for
subjecting you to U.S. taxation or a net income basis
on gain from the sale or other disposition of the
common stock;
o you are an individual, you hold the common stock as a
capital asset and you are present in the U.S. for 183
or more days in the taxable year of the sale or certain
other conditions exist; or
o you are or have been a "United States real property
holding corporation" for federal income tax purposes
and you held, directly or indirectly, at any time
during the five-year period ending on the date of
disposition, more than 5% of our common stock, and you
are not eligible for any treaty exemption.
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Effectively connected gains recognized by a corporate non-U.S. holder
may also be subject to an additional "branch profits tax" at a 30% rate or at a
lower rate if so specified in an applicable income tax treaty.
We have not been, are not, and do not anticipate becoming a "United
States property holding corporation" for federal income tax purposes.
Federal Estate Tax
For estate tax purposes, an individual is a resident if at the time of
death he or she has domicile in the U.S. One has domicile if one intends to
reside in the U.S. permanently or indefinitely. Common stock held by an
individual non-U.S. holder at the time of death will be included in the holder's
gross estate for U.S. federal estate tax purposes and may be subject to U.S.
federal estate taxes, unless an applicable estate tax treaty provides otherwise.
The amount of the Federal estate tax will be between 6% and 30% of the non-U.S.
holder's taxable estate, depending upon the size of the estate.
Information Reporting and Backup Withholding
In general, U.S. information reporting requirements and backup
withholding tax will not apply to dividends paid to you if you are either:
o subject to the 30% withholding tax discussed above, or
o not subject to the 30% withholding tax because an
applicable tax treaty reduces or eliminates such
withholding tax,
although dividend payments to you will be reported for purposes of the
withholding tax. See the discussion under "Dividends" above for further
discussion of the reporting of dividend payments. If you do not meet either of
these requirements for exemption and you fail to provide certain information,
including your U.S. taxpayer identification number, or otherwise establish your
status as an "exemption recipient," you may be subject to backup withholding of
U.S. federal income tax at a rate of 31% on dividends paid with respect to
common stock.
U.S. information reporting and backup withholding requirements
generally will not apply to a payment of the proceeds of a sale of common stock
made outside the U.S. through an office outside the U.S. of a non-U.S. broker.
However, U.S. information reporting, but not backup withholding, will apply to a
payment made outside the U.S. of the proceeds of a sale of common stock through
an office outside the U.S. of a broker that:
o is a U.S. person;
o derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the
U.S.;
o is a "controlled foreign corporation" as to the U.S.;
or
o with respect to payments made after December 31, 2000,
is a foreign partnership with certain connections to
the U.S.
in each case, unless the broker has documentary evidence in its records that the
holder or beneficial owner is a non- U.S. person and has no knowledge to the
contrary or the holder otherwise establishes an exemption.
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Payment of the proceeds of a sale of common stock to or through a U.S.
office of a broker is subject to both U.S. backup withholding and information
reporting unless the holder certifies its non-U.S. status under penalty of
perjury or otherwise establishes an exemption.
Backup withholding is not an additional tax and you may apply any taxes
that are withheld against your tax liability and you generally may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing a refund claim with the Internal Revenue Service.
EXPERTS
The consolidated financial statements of Net Value Holdings, Inc. as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 have been included herein and in the registration
statement in reliance on the report of LJ Soldinger Associates, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for
us by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia,
Pennsylvania.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act of
1933 with respect to our common stock offered in this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits to the registration statement. For further
information with respect to Net Value Holdings, Inc. and our common stock
offered hereby, reference is made to the registration statement and the exhibits
filed as part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete; reference is made in each instance to the copy of such
contract and any other document filed as an exhibit to the registration
statement. Each such statement is qualified in all respects by reference to such
exhibit. The registration statement, including exhibits thereto, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C. and copies of all or any part thereof may be obtained
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain additional information
regarding the operation of the Public Reference Section by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at the address http://www.sec.gov.
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Net Value Holdings, Inc.
(A Development Stage Entity)
Financial Statements and
Independent Auditors' Report
Years Ended December 31, 1998, 1997 and 1996
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
----
Net Value Holdings, Inc.
Independent Auditors' Report............................................................................................F2
Balance Sheets as of December 31, 1997 and 1998 (audited) and September 30, 1999 (unaudited)............................F3
Statement of Operations for the years ended December 31, 1996, 1997 and 1998 (audited), for the
nine months ended September 30, 1998 and 1999 (unaudited), and the period December 16, 1994
(Inception) through September 30, 1999 (unaudited)....................................................................F4
Statement of Changes in Stockholders' Deficit for the years ended December 31, 1996, 1997 and 1998
(audited), and for the nine months ended September 30, 1999 (unaudited)...............................................F5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 (audited), for the nine
months ended September 30, 1998 and 1999 (unaudited), and the period December 16, 1994 (Inception)
through September 30, 1999 (unaudited)................................................................................F9
Notes to Financial Statements..........................................................................................F10
Pro Forma Condensed Consolidated Financial Statements
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1999 (unaudited).....................................P2
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet (unaudited)...........................................P3
AssetExchange.com
Independent Auditors' Report...........................................................................................F46
Balance Sheet as of September 30, 1999 (audited).......................................................................F47
Statement of Operations for the period March 12, 1999 (date of inception)
through September 30, 1999 (unaudited)...............................................................................F48
Statement of Changes in Stockholders' Equity for the period March 12, 1999 (date of inception)
through September 30, 1999 (unaudited)...............................................................................F49
Statements of Cash Flows for the period March 12, 1999 (date of inception)
through September 30, 1999 (unaudited)...............................................................................F50
Notes to Financial Statements..........................................................................................F51
College411.com, Inc.
Independent Auditors' Report...........................................................................................F55
Balance Sheet as of September 30, 1999 (audited).......................................................................F56
Statement of Operations for the period April 13, 1999 (date of inception) through
September 30, 1999 (unaudited).......................................................................................F57
Statement of Changes in Stockholders' Equity for the period April 13, 1999 (date of inception)
through September 30, 1999 (unaudited)...............................................................................F58
Statements of Cash Flows for the period April 13, 1999 (date of inception) through
September 30, 1999 (unaudited).......................................................................................F59
Notes to Financial Statements..........................................................................................F60
Swapit.com
Independent Auditors' Report...........................................................................................F65
Balance Sheet as of November 30, 1999 (audited)........................................................................F66
Notes to Financial Statements..........................................................................................F67
</TABLE>
- F1 -
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Net Value Holdings, Inc.
We have audited the accompanying balance sheets of Net Value Holdings, Inc. (a
development stage entity) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-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 financial statements referred to above present fairly, in
all material respects, the financial position of Net Value Holdings, Inc. as of
December 31, 1997 and 1998, and the results of its operations, stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully discussed in Note 3 to
the financial statements, 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. Management's plans concerning these
matters are described in Note 3.
L J SOLDINGER ASSOCIATES
/s/ L J Soldinger Associates
- ------------------------------
Arlington Heights, Illinois
April 30, 1999 (except Notes 2 and 4,
for which the date is December 3, 1999)
[LETTERHEAD]
- F2 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
---------------------------------- ----------------
1997 1998 1999
---------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ - $ 1,466 $ 1,051,930
Loan receivable - related parties - - 577,000
Loan receivable - 200,000 60,000
Prepaid financing fees, net - 170,182 298,935
Prepaid expenses - - 52,786
Other - - 15,562
Net current assets of discontinued operations 799,423 335,121 503,508
---------------- --------------- ----------------
Total Current Assets 799,423 706,769 2,559,721
Property and Equipment, Net - - 41,412
Ownership Interests in Affiliate Companies - - 3,647,035
Intangibles, Net - - 227,863
Other Assets - - 65,746
Deposits - - 6,452
Net Other Assets of Discontinued Operations 1,000,979 715,750 479,149
---------------- --------------- ----------------
$ 1,800,402 $ 1,422,519 $ 7,027,378
================ =============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Short-term borrowings - other $ - $ - $ 380,000
Stock subscription payable to affiliated company - - 250,000
Notes payable, net of discounts - 940,000 766,400
Notes payable - related party - 200,000 12,000
Long-term debt due within one year - - 71,287
Accrued interest - 41,399 404,890
Accounts payable, accrued salaries and accrued expenses - 107,022 384,630
Net current liabilities of discontinued operations 4,227,058 7,402,728 2,918,314
---------------- --------------- ----------------
Total Current Liabilities 4,227,058 8,691,149 5,187,521
---------------- --------------- ----------------
Non-Current Liabilities
Long-term debt, net of discounts and portion included in
current liabilities - 868,158 4,777,599
Net other liabilities of discontinued operations - 79,034 -
---------------- --------------- ----------------
Total Non-Current Liabilities - 947,192 4,777,599
---------------- --------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Commitments and Contingencies
Series B mandatory redeemable preferred stock, Net
Value Holdings, Inc., $.001 par value per share,
$1,000 liquidation value, $1,250 redemption value. At
September 30, 1999, 2000 shares issued and
outstanding; 5,000 shares authorized - - 1,732,000
Stockholders' Deficit
Preferred stock, Net Value, Inc., $.001 par value per
share. At December 31, 1997, 22,500 shares
issued and outstanding; 0 shares issued and
outstanding at December 31, 1998 and September 30,
1999; $225,000 liquidation preference at December 31,
1997 22 - -
Series A preferred stock, Net Value Holdings, Inc., $.001
par value per share. At December 31, 1997 and 1998 and
September 30, 1999, 2,019,852, 2,519,852 and 0 shares
issued and outstanding, respectively 2,020 2,520 -
Common stock, Net Value, Inc., $.001 par value per share.
At December 31, 1997 and 1998 and September 30, 1999,
651,650, 1,037,338 and 1,037,338 shares issued
and outstanding, respectively 652 1,038 1,038
Common stock, Net Value Holdings, Inc., $.001 par value
share. At December 31, 1997 and 1998 and September 30,
1999, 2,019,852, 6,969,852 and 13,371,901 shares
issued and outstanding, respectively 2,020 6,970 13,372
Additional paid-in capital 14,561,663 38,180,793 64,855,155
Deferred compensation - - (11,151,764)
Deferred compensation of discontinued operations (497,750) (3,283,532) (2,048,306)
Deficit accumulated during the development stage (16,495,283) (43,123,611) (56,339,237)
---------------- --------------- ----------------
Total Stockholders' Deficit (2,426,656) (8,215,822) (4,669,742)
---------------- --------------- ----------------
$ 1,800,402 $ 1,422,519 $ 7,027,378
================ =============== ================
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- F3 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30, December 16, 1994
----------------------------------------- --------------------------- (Inception) through
1996 1997 1998 1998 1999 September 30, 1999
------------ ------------ ------------ ------------ ------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ - $ -
------------ ------------ ------------ ------------ ------------- ----------------
Operating Expenses
Compensation and related
expenses $ - $ - $ - $ - $ 1,453,206 $ 1,453,206
Professional fees - - 129,878 - 513,933 643,811
Consulting - - - - 107,849 107,849
Selling, general and
administrative - - 10,606 1,120 319,867 330,473
Equity loss - - - - 41,808 41,808
------------ ------------ ------------ ------------ ------------- ----------------
Total Operating Expenses - - 140,484 1,120 2,436,663 2,577,147
------------ ------------ ------------ ------------ ------------- ----------------
Loss From Operations - - (140,484) (1,120) (2,436,663) (2,577,147)
------------ ------------ ------------ ------------ ------------- ----------------
Other Income (Expense)
Interest income - - - - 19,690 19,690
Interest expense - - (82,082) (4,685) (5,187,476) (5,269,558)
Financing fees - - (48,436) - (542,624) (591,060)
------------ ------------ ------------ ------------ ------------- ----------------
Total Other Income (Expense) - - (130,518) (4,685) (5,710,410) (5,840,928)
------------ ------------ ------------ ------------ ------------- ----------------
Loss from Continuing Operations - - (271,002) (5,805) (8,147,073) (8,418,075)
------------ ------------ ------------ ------------ ------------- ----------------
Loss from Discontinued
Operations (3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,068,553) (31,489,412)
------------ ------------ ------------ ------------ ------------- ----------------
Net Loss $ (3,314,094) (11,235,237) (11,377,828) (10,201,148) (13,215,626) (39,907,487)
============
Preferred Stock Dividend -
Discontinued Operations (1,181,250) (15,250,500) (15,250,500) - (16,431,750)
------------ ------------ ------------ ------------- ----------------
Net Loss to Common Stockholders $(12,416,487) $(26,628,328) $(25,451,648) $ (13,215,626) $ (56,339,237)
============ ============ ============ ============= ================
Basic and Diluted Net Loss Per Common
Share - Continuing Operations $ (0.00) $ (0.06) $ (0.00) $ (.94)
============ ============ ============ =============
Basic and Diluted Net Loss Per Common
Share - Discontinued Operations $ (6.88) $ (5.59) $ (6.70) $ (0.59)
============ ============ ============ =============
Basic and Diluted Weighted Average
Number of Common Shares
Outstanding 1,804,700 4,711,351 3,796,197 8,647,063
============ ============ ============ =============
Pro Forma Information (Unaudited):
Net Loss $ (3,314,094)
Pro Forma Tax Provision -
------------
Pro Forma Net Loss $ (3,314,094)
============
Net Loss Per Share Data:
Basic and Diluted Net
Loss Per Common Share -
Discontinued
Operations $ (3.55)
============
Basic and Diluted Weighted
Average Number of Common
Shares Outstanding 934,810
============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- F4 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------------------- --------------------------------------
Net Value, Inc. Holdings Net Value, Inc. Holdings
------------------ ------------------ ------------------ -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 - $ - - $ - - $ - - $ -
Capital contribution - - - - - - - -
Founders' stock issued - - - - 272,500 273 - -
Founders' common
stock warrants issued - - - - - - - -
Common stock issued in
private placements (net of
offering costs of $189,090) - - - - 482,857 483 - -
Common stock issued and issuable
to former members - - - - 768,500 769 - -
Compensatory common stock options
issued - - - - - - - -
Common stock granted for consulting
services - - - - 87,500 87 - -
Unearned consulting services - - - - (43,750) (44) - -
Effects of common stock exchanged - - 1,567,607 1,568 (1,567,607) (1,568) 1,567,607 1,568
Net loss - - - - - - - -
-------- --------- -------- --------- --------- ------- --------- --------
Balance at December 31, 1996 - - 1,567,607 1,568 - - 1,567,607 1,568
Common stock granted for consulting
services - - - - 43,750 44 - -
Compensatory common stock options
issued - - - - - - - -
Amortization of deferred
compensation - - - - - - - -
Common stock issued in private
placements (net of offering
costs of $38,167) - - - - 73,750 73 - -
Common stock issued as consideration
for notes and loans payable - - - - 80,050 80 - -
Common stock and warrants issued
in connection with short-term
bridge financing (net of offering
costs of $286,109) - - - - 100,625 101 - -
Common stock issued in
connection with conversion of
note and accrued interest - - - - 805,720 806 - -
Issuance of preferred stock 22,500 22 - - - - - -
Preferred stock dividend - - - - - - - -
Effects of common stock exchanged - - 452,245 452 (452,245) (452) 452,245 452
Net loss - - - - - - - -
-------- --------- -------- --------- --------- ------- --------- --------
Balances at December 31, 1997,
carryforward 22,500 $ 22 2,019,852 $ 2,020 651,650 $ 652 2,019,852 $ 2,020
-------- --------- -------- --------- --------- ------- --------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Members' Deferred Development
Capital Capital Compensation Stage Total
------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ - $ 485,000 $ - $ (764,702) $ (279,702)
Capital contribution - 15,000 - - 15,000
Founders' stock issued 817 - - - 1,090
Founders' common
stock warrants issued 2,000 - - - 2,000
Common stock issued in
private placements (net of
offering costs of $189,090) 2,485,427 - - - 2,485,910
Common stock issued and issuable
to former members 499,231 (500,000) - - -
Compensatory common stock options
issued 172,200 - - - 172,200
Common stock granted for consulting
services 962,415 - - - 962,502
Unearned consulting services (349,954) - - - (349,998)
Effects of common stock exchanged (1,568) - - - -
Net loss - - - (3,314,094) (3,314,094)
------------ ------------ ----------- ----------- ----------
Balance at December 31, 1996 3,770,568 - - (4,078,796) (305,092)
Common stock granted for consulting
services 612,453 - - - 612,497
Compensatory common stock options
issued 1,932,150 - (1,932,150) - -
Amortization of deferred
compensation - - 1,434,400 - 1,434,400
Common stock issued in private
placements (net of offering
costs of $38,167) 551,760 - - - 551,833
Common stock issued as consideration
for notes and loans payable 1,300,920 - - - 1,301,000
Common stock and warrants issued
in connection with short-term
bridge financing (net of offering
costs of $286,109) 2,410,541 - - - 2,410,642
Common stock issued in
connection with conversion of
note and accrued interest 2,577,495 - - - 2,578,301
Issuance of preferred stock 224,978 - - - 225,000
Preferred stock dividend 1,181,250 - - (1,181,250) -
Effects of common stock exchanged (452) - - - -
Net loss - - - (11,235,237) (11,235,237)
------------ ------------ ----------- ----------- -----------
Balances at December 31, 1997,
carryforward $ 14,561,663 $ - $ (497,750) $(16,495,283) $(2,426,656)
------------ ------------ ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- F5 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------------------- --------------------------------------
Net Value, Inc. Holdings Net Value, Inc. Holdings
------------------ ------------------ ------------------ -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1997, brought forward 22,500 $ 22 2,019,852 $ 2,020 651,650 $ 652 2,019,852 $ 2,020
Issuance of preferred stock 276,200 277 - - - - - -
Preferred stock conversion (80,000) (80) - - 250,000 250 - -
Preferred stock repurchase (40,000) (40) - - - - - -
Issuance of warrants - - - - - - - -
Issuance of common stock - - - - 7,500 7 - -
Common stock issued in
connection with the
conversion of accrued
interest - - - - 688 1 - -
Common stock issued as
consideration for the
satisfaction of preferred
stock purchase commitment - - - - 37,500 38 - -
Common stock issued pursuant
to the amended IQ Agreement - - - - 90,000 90 - -
Acquisition of assets of
Holdings - - - - - - 1,000,000 1,000
Common stock issued in
connection with 504 offering
(net of offering costs of
$60,570) - - - - - - 2,950,000 2,950
Exchange of preferred stock (178,700) (179) 500,000 500 - - 1,000,000 1,000
Compensatory common stock
options issued - - - - - - - -
Amortization of deferred
compensation - - - - - - - -
Debt discount arising from
convertible debt offering - - - - - - - -
Financing fee - - - - - - - -
Preferred stock dividend - - - - - - - -
Net loss - - - - - - - -
-------- --------- --------- --------- -------- ------- --------- -------
Balances at December 31, 1998 - $ - 2,519,852 $ 2,520 1,037,338 $ 1,038 6,969,852 $ 6,970
-------- --------- --------- --------- --------- ------- --------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Members' Deferred Development
Capital Capital Compensation Stage Total
------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1997, brought forward $ 14,561,663 $ - $ (497,750) $(16,495,283) $(2,426,656)
Issuance of preferred stock 2,761,723 - - - 2,762,000
Preferred stock conversion (170) - - - -
Preferred stock repurchase (399,960) - - - (400,000)
Issuance of warrants 49,200 - - - 49,200
Issuance of common stock 149,993 - - - 150,000
Common stock issued in
connection with the
conversion of accrued
interest 13,749 - - - 13,750
Common stock issued as
consideration for the
satisfaction of preferred
stock purchase commitment (38) - - - -
Common stock issued pursuant
to the amended IQ Agreement 251,910 - - - 252,000
Acquisition of assets of
Holdings (1,000) - - - -
Common stock issued in
connection with 504 offering
(net of offering costs of
$60,570) 526,480 - - - 529,430
Exchange of preferred stock (1,321) - - - -
Compensatory common stock
options issued 4,368,039 - (4,368,039) - -
Amortization of deferred
compensation - - 1,582,257 - 1,582,257
Debt discount arising from
convertible debt offering 575,025 - - - 575,025
Financing fee 75,000 - - - 75,000
Preferred stock dividend 15,250,500 - - (15,250,500) -
Net loss - - - (11,377,828) (11,377,828)
------------- --------- ----------- ------------- -----------
Balances at December 31, 1998 $ 38,180,793 $ - $(3,283,532) $(43,123,611) $(8,215,822)
------------- --------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- F6 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------------------- --------------------------------------
Net Value, Inc. Holdings Net Value, Inc. Holdings
------------------ ------------------ ------------------ -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 - $ - 2,519,852 $ 2,520 1,037,338 $ 1,038 6,969,852 $ 6,970
Common stock issued in
connection with the conversion
of convertible debt and
accrued interest - - - - - - 1,175,668 1,175
Common stock issued in connection
with the conversion of exchange
notes and accrued interest - - - - - - 1,172,455 1,172
Debt discount arising from
convertible debt offering - - - - - - - -
Debt discount related to the
exchange notes and warrants - - - - - - - -
Debt discount related
to Founders' equity note - - - - - - - -
Compensatory common stock
options issued - - - - - - 1,763,822 1,764
Amortization of deferred
compensation - - - - - - - -
Founders' Warrants issued as
financing fees - - - - - - - -
Issuance of warrants attached
to Series B preferred stock,
net of offering costs - - - - - - - -
Common and preferred stock issued
in connection with Strategicus
transaction - - 184,627 185 - - 601,029 601
Common stock issued in connection
with the conversion of accrued
interest - - - - - - 6,138 6
Issuance of common stock - - - - - - 60,250 61
Conversion of Series A preferred
stock - - (2,704,479) (2,705) - - 1,622,687 1,623
Net loss - - - - - - - -
------- ------- ---------- ------- --------- -------- ---------- -------
Balances at September 30, 1999
(Unaudited) - $ - - $ - 1,037,338 $ 1,038 13,371,901 $13,372
======= ======= ========== ======== ========= ======== ========== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Members' Deferred Development
Capital Capital Compensation Stage Total
------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $ 38,180,793 $ - $ (3,283,532) $(43,123,611) $(8,215,822)
Common stock issued in
connection with the conversion
of convertible debt and
accrued interest 2,876,432 - - - 2,877,607
Common stock issued in connection
with the conversion of exchange
notes and accrued interest 2,343,740 - - - 2,344,912
Debt discount arising from
convertible debt offering 2,757,888 - - - 2,757,888
Debt discount related to the
exchange notes and warrants 3,458,802 - - - 3,458,802
Debt discount related
to Founders' equity note 288,000 - - - 288,000
Compensatory common stock
options issued 12,370,022 - (12,371,786) - -
Amortization of deferred
compensation - - 2,455,248 - 2,455,248
Founders' Warrants issued as
financing fees 175,500 - - - 175,500
Issuance of warrants attached
to Series B preferred stock,
net of offering costs 129,372 - - - 129,372
Common and preferred stock issued
in connection with Strategicus
transaction 2,191,908 - - - 2,192,694
Common stock issued in connection
with the conversion of accrued
interest 30,076 - - - 30,082
Issuance of common stock 51,540 - - - 51,601
Conversion of Series A preferred
stock 1,082 - - - -
Net loss - - - (13,215,626) (13,215,626)
------------- ------------ ------------ ----------- -----------
Balances at September 30, 1999
(Unaudited) $ 64,855,155 $ - $(13,200,070) $(56,339,237) $(4,669,742)
============= ============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- F7 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended December 16,
Year Ended December 31, September 30, 1994 (Inception)
-------------------------------------- --------------------------- Through
1996 1997 1998 1998 1999 September 30, 1999
----------- ----------- ----------- ----------- ----------- ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net Loss $(3,314,094) $(11,235,237) $(11,377,828) $(10,201,148) $(13,215,626) $ (39,907,487)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 13,148 179,304 240,323 172,250 189,570 629,915
Amortization of financing fees - 70,496 275,423 75,000 542,624 888,543
Amortization of note payable discount - 583,660 2,503,773 2,525,410 4,597,514 7,684,947
Amortization of registration costs - - 597,740 597,740 - 597,740
Interest expense paid with stock issuance - 1,129,301 13,750 13,750 181,445 1,324,496
Compensatory common stock,
options and warrants issued and issuable 786,704 2,046,896 1,608,457 1,054,148 2,455,248 6,897,305
Equity loss - - - - 41,808 41,808
Change in assets and liabilities
(Increase) Decrease in
Other current assets and deposits (354,223) (416,302) 774,197 578,860 (236,735) (235,470)
Other non-current assets - - (21,107) (334) 42,925 21,460
Increase (Decrease) in
Accounts payable, accrued expenses and
deferred 671,806 1,344,949 (65,077) 360,627 514,957 2,715,326
Deferred revenue - - - 1,252,700 - -
Accounts payable and accrued expenses
related parties 58,333 (58,333) 80,785 - (65,192) 15,593
----------- ----------- ----------- ----------- ----------- ---------------
Total Adjustments 1,175,768 4,879,971 6,008,264 6,630,151 (8,264,164) 20,581,663
----------- ----------- ----------- ----------- ----------- ---------------
Net Cash Used in Operating Activities (2,138,326) (6,355,266) 5,369,564 (3,570,997) (4,951,462) (19,325,824)
----------- ----------- ----------- ----------- ----------- ---------------
Cash Flows from Investing Activities
Disbursements of loans - - (200,000) - (637,000) (837,000)
Collections on loans - - - - 200,000 200,000
Payments for organizational costs - - - - - 9,063
Payments for ownership interest in
Affiliates - - - - (1,496,149) (1,496,149)
Purchases of furniture and equipment (308,896) (544,618) (57,478) (45,416) (87,367) (1,017,868)
----------- ----------- ----------- ----------- ----------- ---------------
Cash Used in Investing Activities (308,896) (544,618) (257,478) (45,416) (2,020,516) (3,160,080)
----------- ----------- ----------- ----------- ----------- ---------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from member loans 26,045 - - - - 80,823
Repayment of member loans (80,823) - - - - (80,823)
Proceeds from bridge loan 245,000 - - - - 245,000
Repayment of bridge loan (245,000) - - - - (245,000)
Proceeds from short-term borrowings - - - - 443,000 443,000
Proceeds from notes and loans payable -
related parties - 3,601,000 1,728,000 778,000 - 5,329,000
Repayments of notes and loans payable -
related parties - (1,501,000) (745,000) (370,000) (380,184) (2,626,184)
Proceeds from notes payable - 1,728,250 1,690,000 750,000 - 3,418,250
Repayment of notes payable - - (750,000) (750,000) - (750,000)
Proceeds from long-term debt - - 1,402,500 950,600 6,635,122 8,037,622
Principal payments of long-term debt - - (34,173) (43,752) (40,991) (75,164)
Proceeds from member capital
contributions 15,000 - - - - 500,000
Proceeds from member private placements
and Founders' Stock, net of offering
costs 2,487,000 551,833 529,430 - - 3,568,263
Net proceeds from issuance of stock and
warrants - 2,560,641 - - - 2,560,641
Proceeds from sale of preferred stock - 225,000 2,762,000 2,762,000 1,861,372 4,848,372
Payment to repurchase preferred stock - - (400,000) - - (400,000)
Payment of financing fees - (140,919) (80,000) (80,000) (495,877) (716,796)
Registration costs - (124,921) (474,249) (285,855) - (599,170)
----------- ----------- ----------- ----------- ----------- ---------------
Net Cash Provided by Financing
Activities 2,447,222 6,899,884 5,628,508 3,710,993 8,022,442 23,537,834
----------- ----------- ----------- ----------- ----------- ---------------
Net Increase (Decrease) in Cash and
Cash Equivalents - - 1,466 94,480 1,050,464 1,051,930
Cash and Cash Equivalents at Beginning
of Period - - - - 1,466 -
----------- ----------- ----------- ----------- ----------- ---------------
Cash and Cash Equivalents at End of Period $ - $ - $ 1,466 $ 94,480 $ 1,051,930 $ 1,051,930
=========== =========== =========== =========== =========== ===============
Cash Paid for Interest $ - $ 3,200 $ 93,537 $ 4,353 $ 172,679 $ 269,416
=========== =========== =========== =========== =========== ===============
Cash Paid for Taxes $ - $ - $ - $ - $ - $ -
=========== =========== =========== =========== =========== ===============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
- F8 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 1 - DESCRIPTION OF THE BUSINESS
Nature of Operations
Net Value Holdings, Inc. is an Internet holding company which owns equity
interests in and provides strategic management services to development stage
Internet companies. It is a Development Stage Enterprise, as defined in
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting for
Development Stage Enterprises."
Prior to its disposition of one of the Company's operating segments in December
1999, the Company was developing Internet software products intended to provide
fee-based online promotions management services to manufacturers, retailers and
advertisers of consumer products and services through the electronic
transmission of online promotions.
History
Net Value, Inc. (formerly BrightStreet.com, Inc., netValue, Inc., COL
Acquisition Corp., and Vsquared, Inc.) was formed on July 16, 1996 and
subsequently merged on September 18, 1996 with Coupons Online, LLC (the "LLC"),
a limited liability company (collectively, "Net Value, Inc."). The Initial
Merger resulted in the LLC being the acquirer, for accounting purposes, since
the former members of the combining company retained the larger portion of the
voting rights pursuant to the terms of the merger agreement. Net Value, Inc., as
the surviving entity, was the legal acquirer.
On August 31, 1998, Net Value, Inc. entered into a letter of intent to merge
with SUNCL, Inc. (the "Merger"), a public shell company that did not engage in
business or operations of any kind, had nominal assets and liabilities, and
whose common stock was eligible for quotation on the NASDAQ Over-the-Counter
Bulletin Board Trading System. SUNCL, Inc. was incorporated under the laws of
the state of Florida on December 20, 1991 and reincorporated in the state of
Delaware on October 8, 1998. In contemplation of the Merger, the shareholders of
SUNCL, Inc. agreed to change the corporation's name to Net Value Holdings, Inc.
("Holdings"). The terms of the letter of intent provided that the shareholders
of Net Value, Inc. would receive a mutually agreed-upon portion of the equity of
Holdings, and that Holdings would be the surviving legal entity in the Merger.
As of December 31, 1998, Holdings had entered into share exchange agreements
with twenty Net Value, Inc. shareholders, who tendered approximately 66% of the
issued and outstanding shares of common stock and 100% of the issued and
outstanding shares of preferred stock of Net Value, Inc. to Holdings ("Share
Exchanges"). Terms of the Share Exchanges provided that the Net Value, Inc.
shareholders exchange four shares of Net Value, Inc. common stock for one share
of Holdings' common stock and one share of Holdings' Series A convertible
preferred stock. Each holder of Holdings' Series A convertible preferred stock
would be entitled to receive up to one share of Holdings' common stock based
upon the achievement of certain performance objectives. As a result of
negotiations between the Company and the Series A preferred shareholders, in
September 1999 each share of the preferred stock was converted into .6 shares of
the Company's common stock.
Net Value, Inc., a development stage enterprise, was developing Internet
software products intended to provide fee-based online promotions management
services to manufacturers, retailers and advertisers of consumer products and
services through the electronic transmission of online promotions to be targeted
and delivered to specific consumer segments. Net Value, Inc. has incurred losses
since its inception.
On July 30, 1999, as part of a step transaction to obtain an ownership interest
in three unrelated Internet companies, Holdings acquired Strategicus Partners,
Inc. ("Strategicus"). Strategicus was an Oregon corporation that was formed in
August 1998, had minimal assets, was in the process of developing Internet
operations of its own through its wholly-owned subsidiary, Metacat.com, Inc.
("Metacat"), and which had the opportunity to consummate transactions in two
other Internet companies in which Holdings desired to obtain interests. Prior to
the merger, Holdings advanced funds to Strategicus, which it principally
- F9 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 1 - DESCRIPTION OF THE BUSINESS (Continued)
used to acquire the desired ownership interests. At the date of the merger,
Strategicus had ownership interests in three Internet businesses in various
stages of development, Metacat, Asia CD, Inc. ("AsiaCD") and College411.com,
Inc. ("College411"). In September, October and November 1999, Holdings exercised
warrants to purchase additional shares of common stock in College411 and
acquired equity interests in three more Internet businesses, Asset Exchange,
Inc. ("Asset Exchange"), Webmodal, Inc. ("Webmodal") and Swapit.com, Inc.
("Swapit").
On December 3, 1999, Net Value, Inc. sold substantially all of its assets and
its business including the name BrightStreet.com, Inc. In 2000, the Company
plans to complete its merger with Net Value, Inc. whereby the remaining
shareholders of Net Value, Inc. will receive the Company's securities on the
same terms and conditions as contained in the Share Exchanges, as adjusted for
the conversion of the Company's Series A convertible preferred stock.
Accordingly, the remaining shareholders of Net Value Inc. will receive .4 shares
of the Company's common stock for each share of Net Value, Inc. common stock
tendered in the merger.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles, and have
been presented on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company's dependence on outside financing or a business combination, along with
limited opportunities to invest in viable enterprises, raises 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.
The combination of Holdings and Net Value, Inc. has been treated as a
recapitalization of Net Value, Inc. Holdings was the legal acquirer in the
merger. Net Value, Inc. was the accounting acquirer, since its shareholders
acquired a majority ownership interest in Net Value Holdings, Inc.,
Consequently, the historical financial information included in these financial
statements prior to October 1998 is that of Net Value, Inc.'s. All significant
intercompany transactions and balances have been eliminated. Pro forma financial
information is not presented, since the combination is a recapitalization and
not a business combination.
Minority Interest
The financial statements of Net Value Holdings, Inc. are those of Net Value,
Inc. as the result of an in-process merger of the two entities which has been
recorded as a recapitalization. At September 30, 1999 Net Value Holdings, Inc.
owned 66% of the outstanding common stock of Net Value, Inc. Net Value Holdings,
Inc. plans on completing a merger with Net Value, Inc. in 2000 by acquiring the
remaining shares of Net Value, Inc. it does not own.
The presentation of the common shares of Net Value, Inc. not owned by Net Value
Holdings, Inc. reflect a minority interest of 34% in the assets and liabilities
related to Net Value, Inc. At September 30, 1999, 34% of the outstanding common
stock of Net Value, Inc. continued to be owned by stockholders other than Net
Value Holdings, Inc.
Discontinued Operations
In November 1999, Net Value, Inc.'s Board of Directors approved a term sheet
encompassing the sale of substantially all of the assets of Net Value, Inc. in
exchange for cash, assumption of certain liabilities, cancellation of certain
stock options, release of employment obligations, and a 14.3% ownership in
Promotions Acquisition, Inc., a newly formed and capitalized company.
Accordingly, Net Value, Inc. is accounted for as a discontinued operation in the
accompanying consolidated financial statements. The operating results of the
discontinued operations of Net Value, Inc. have been segregated from continuing
operations and reported as a separate line item on the statement of operations.
The Company has restated its prior financial statements to present the operating
results of Net Value, Inc. as a discontinued operation.
- F10 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim Information
The interim consolidated financial data as of September 30, 1999 and for the
nine months ended September 30, 1999 and 1998 is unaudited. The information
reflects all adjustments, consisting only of normal recurring adjustments that,
in the opinion of management, are necessary to fairly present the financial
position and results of operations of the Company for the periods indicated.
Results of operations for the interim periods are not necessarily indicative of
the results of operations for a full fiscal year.
Development Stage Enterprise
The Company is a Development Stage Enterprise , and accordingly, certain
additional financial information is required to be included in the financial
statements from the inception of the Company to the current balance sheet date.
Principles of Consolidation
The financial statements are consolidated as of September 30, 1999 and for the
nine month period ended September 30, 1999 to include the accounts of the
Company and its wholly-owned subsidiary, Metacat. The various interests that the
Company acquires in other entities ("Affiliate Companies") are accounted for
under three broad methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on the Company's
voting interest in the Affiliate Company.
Consolidation
Affiliate Companies in which the Company directly or indirectly owns 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
results of operations are reflected within the Company's Consolidated Statement
of Operations. All significant intercompany accounts and transactions have been
eliminated.
Equity Method
Affiliate Companies whose results are not consolidated, but over whom the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company 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 the Company's ownership level, which is generally a 20% to 50%
interest in the voting securities of the Affiliate Company, including voting
rights associated with the Company's 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 the Company's Consolidated Statements of Operations; however, the
Company's share of the earnings or losses of the Affiliate Company is reflected
in the caption "Equity loss" in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Affiliate Companies accounted for under the
consolidation or equity method of accounting is amortized on a straight-line
basis over three years, which adjusts the Company's share of the Affiliate
Company's earnings or losses.
Cost Method
Affiliate Companies not accounted for under the consolidation or the equity
method of accounting are accounted for under the cost method of accounting.
Under this method, the Company's share of the earnings or losses of such
Affiliate Companies is not included in the Consolidated Statements of
Operations.
- F11 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Evaluations
The Company is continuously evaluating the carrying costs of its ownership
interest in its Affiliate Companies. The evaluation consists of possible
impairment based on the lack of the achievement of business plan objectives, the
value of each ownership interest in the Affiliate Company relative to carrying
value, the Affiliate Company's financial condition and prospects, and other
relative factors. The business plan objectives considered by the Company include
achievement of planned financial results, successful completion of fundraising
activities, the hiring of key personnel, and other financial and non-financial
performance objectives.
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 financial statements and the accompanying
notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid instruments with an original maturity of
90 days or less at the time of purchase to be cash equivalents.
Statements of Stockholders' Deficit
The recapitalization resulted in Net Value, Inc.'s equity accounts being
restated based on the ratio of the shares exchanged in the Share Exchanges. The
number of shares restated was equivalent to the amount of shares exchanged under
the Share Exchanges. Every four shares of Net Value, Inc. common stock have been
reflected as one share of Holdings' common stock and one share of Holding's
preferred stock (similar to a reverse stock split). While not changing
stockholders' deficit in the aggregate, the restatement changed the allocation
of capital between par value and additional paid-in capital. The par values of
Holdings' securities and Net Value, Inc.'s securities are identical.
Loss Per Share
The Company reports loss per share utilizing Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"), which requires companies to
present basic earnings per share and diluted earnings per share (as defined in
SFAS 128). Both presentations under SFAS 128 require the use of the weighted
average number of shares outstanding for each period presented in the
computation of earnings per share; however, when including the dilutive effect
of options and warrants issued, the computation of diluted earnings per share
under SFAS 128 increases the weighted average number of shares.
The Company formerly presented loss per share in accordance with Staff
Accounting Bulletin No. 83. Staff Accounting Bulletin No. 98 "Earnings Per Share
Computations in an Initial Public Offering," issued in February 1998, amended
SAB 83 to require that historical earnings per share be presented in accordance
with SFAS 128. The Company has therefore followed the requirements of SFAS 128
for all applicable periods presented in these financial statements.
Fair Value of Financial Instruments
The carrying value of the Company's cash and cash equivalents, accounts payable
and accrued expenses approximates the fair market value due to the relatively
short maturity of these instruments. The carrying value of the Company's notes
payable and long term debt is less than fair value when discounts have been
netted against the maturity amount of the debt. The fair value of the Company's
notes payable and long term debt approximates fair market value due to the
relatively short maturity of these instruments.
- F12 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Prepaid Expenses and Financing Fees
Prepaid expenses consist of prepaid insurance premiums and consulting fees.
These prepaid expenses are charged to expense over the service term of each
respective agreement. Prepaid financing fees include commissions, placement
fees, professional fees and other consideration incurred by the Company on
borrowings received during 1997 and 1998. These prepaid financing fees are being
charged to expense over the remaining term of the outstanding borrowings.
Intangibles
Goodwill is defined as the excess of cost over net assets of the businesses
being acquired. Goodwill is being amortized on a straight-line basis over a
three-year period. There was no goodwill at December 31, 1998.
Property and Equipment
Property and equipment are recorded at cost. The Company's policy is to
depreciate these assets over their estimated useful lives, as indicated in the
following table, using straight-line methods. The Company's policy is to
amortize leasehold improvements over the shorter of their useful lives or the
remaining periods of the related leases.
Years
-----
Leasehold improvements 3
Computer hardware 4
Office furniture and equipment 5
Equipment acquired under long-term capital lease arrangements is recorded at
amounts equal to the net present value of the future minimum lease payments
using the interest rate implicit in the lease. Amortization is provided by use
of the straight-line method over the estimated useful lives of the related
assets.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," ("SFAS
131") during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company has
determined that it has three reportable segments. The Company's three reportable
segments consist of Affiliate Company operations, the discontinued software
development operation and general Company operations, representing the expenses
of providing strategic and operational support and related administrative
functions.
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes." Income taxes are
recorded in the period in which the related transactions are recognized in the
financial statements, net of the valuation allowances which have been recorded
against deferred tax assets. Deferred tax assets and liabilities are recorded
for the expected future tax consequences of temporary differences between the
tax basis and the financial reporting of assets and liabilities. Net deferred
tax assets and liabilities, relating primarily to federal and state net
operating loss carryforwards, stock-based compensation, financing costs
associated with stock issuances, and depreciation differences that have been
deferred for tax purposes, have been offset by a valuation reserve because the
future utilization of these assets and liabilities cannot be determined.
- F13 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
During 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(" SFAS 123".) As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Board No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants and
common stock issuances as of the grant date. APB 25 recognizes the intrinsic
value of the instruments issued by the Company as of the measurement date, which
is generally the date at which both the number of shares that an individual is
entitled to receive and the purchase price are known.
Credit Risk
The Company has maintained cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to a maximum of $100,000. The Company had an uninsured cash
balance of $981,459 at September 30, 1999. Cash and cash equivalents at
September 30, 1999 were invested principally in money market funds.
Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards Board No. 121,
the Company records impairment losses on long-lived assets used in operations
when indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the asset's carrying
amount.
Recent Accounting Pronouncements
A recently issued accounting pronouncement which may have a significant impact
on the Company's results of operations, financial position or cash flows is
Emerging Issues Task Force No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios"
("EITF 98-5") which was applicable in May 1999. In the past, any beneficial
conversion feature amount was offset against related debt and amortized over the
remaining life of the financial instrument. EITF 98-5 now requires certain
beneficial conversion amounts to be expensed immediately.
Pro Forma Financial Information
The LLC was originally organized in the form of a limited liability company.
Upon the Initial Merger, its capital structure changed to that of a corporation.
The change resulted in the Company retaining the tax benefit for subsequent net
operating losses whereas the previous losses were passed through to the LLC
members. A pro forma condensed income statement for the year ended December 31,
1996 has been presented in the statement of operations which reflects the impact
of the Company's change in capital structure as if it had occurred December 16,
1994 (the Company's inception). This presentation reflects the Company
generating a tax benefit for the net operating losses which were incurred by the
LLC during 1996 prior to the LLC's termination.
NOTE 3 - CONTINGENCY - GOING CONCERN
At December 31, 1997 and 1998 and at September 30, 1999, the Company had
significant liabilities and an accumulated deficit. The Company's management
expects to obtain additional financing from future private offerings and to
utilize the proceeds of its future offerings to facilitate a business
combination, pay certain obligations, invest in other companies and fund cash
requirements. Management believes that this is a viable plan that removes the
threat to the continuation of the business through September 30, 2000. There can
be no assurance that the Company will obtain such additional financing or
complete a business combination. The failure of the Company to raise additional
financing would require the Company to adjust its business plan, may require the
Company to sell some of its investments at liquidation values, may require the
Company to adjust its current course of action, or may require the Company to
cease operations and liquidate. As a result of the foregoing, there is
substantial doubt about the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
- F14 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 4 - DISCONTINUED OPERATIONS AND THE SALE OF SUBSTANTIALLY ALL OF THE ASSETS
OF NET VALUE, INC.
On December 3, 1999, Net Value, Inc. sold substantially all of its assets to
Promotions Acquisitions, Inc. ("Promotions"), a Delaware corporation which was
formed by the former management team of Net Value, Inc. in connection with a $17
million investment in Promotions by outside investors. In exchange for
substantially all of its assets, Net Value, Inc. received $2 million in cash,
the assumption by Promotions of approximately $1.6 million of Net Value, Inc.
liabilities, shares of Promotions' common stock equal to a 14.3% ownership
interest in Promotions, cancellation of all Net Value, Inc. stock options held
by Net Value, Inc. employees, and the release by Net Value, Inc. of all
obligations to all employees and consultants who were employed or engaged as of
the closing date of this transaction. As a result of the transaction, Net Value,
Inc. no longer has any operations nor any obligations to consultants or
employees that were engaged or employed by Net Value, Inc. as of the closing
date of this transaction. Management intends to use the $2 million of proceeds
to purchase equity interests in additional affiliate companies and to satisfy
Net Value, Inc.'s existing obligations of approximately $2 million which were
not assumed by Promotions. The Company is contractually bound to satisfy the
obligations of Net Value, Inc. Subsequent to the completion of the sale,
Promotions changed its name to BrightStreet.com, Inc. and Net Value, Inc.
changed its name from BrightStreet.com, Inc. to Net Value, Inc. The results of
operations for Net Value, Inc. for the respective periods presented are reported
as discontinued operations in the consolidated statements of operations.
Summarized results of operations for Net Value, Inc. for the years ended
December 31, 1998, 1997 and 1996 and for the nine months ended September 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ 1,330,367 $ 77,667 $ -
=========== ============ ============ ============ ===========
Operating Loss $(3,316,522) $ (9,364,898) $ (7,784,925) $ (7,519,260) $(4,981,051)
=========== ============ ============ ============ ===========
Loss from Discontinued
Operations $(3,314,094) $(11,235,237) $(11,106,826) $(10,195,343) $(5,068,553)
=========== ============ ============ ============ ===========
</TABLE>
NOTE 5 - LOAN RECEIVABLE - RELATED PARTIES
In May 1999, Strategicus loaned $310,000 to one of its officers. The loan
accrued interest at 9% per annum and was due on July 30, 1999. In connection
with the Company's merger with Strategicus, the Company assumed the loan and
entered into an employment agreement with the officer whereby the Company agreed
not to demand repayment on the loan during the employment period. The Company
also agreed to forgive 50% of the loan principal, plus all accrued interest
thereon, on January 1, 2000 and the remaining 50% plus accrued interest on the
first anniversary of the officer's employment, provided that the agreement had
not been terminated.
In June 1999, the Company loaned $267,000 to another officer of Strategicus. In
connection with the Company's merger with Strategicus, the officer entered into
a consulting agreement with the Company and the Company agreed not to demand
repayment of the loan during the term of the consulting agreement. The Company
also agreed to forgive the loan principal and accrued interest thereon ratably
over the first three-year period of the consulting agreement.
- F15 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 6 - LOAN AND ADVANCE RECEIVABLE
In December 1998, the Company made a non-interest bearing, unsecured loan of
$200,000 to a stockholder. The loan was outstanding as of December 31, 1998 and
repaid during March and April of 1999.
In July 1999, the Company made a non-interest bearing, unsecured advance of
$60,000 to a potential future investee company. The advance remained outstanding
as of September 30, 1999.
NOTE 7 - OWNERSHIP INTERESTS AND ADVANCES IN INVESTMENTS
The following summarizes the Company's ownership interests in Affiliated
Companies accounted for under the equity method or cost method of accounting.
The ownership interests are classified according to applicable accounting
methods at December 31, 1998 and September 30, 1999. Cost basis represents the
Company's original acquisition cost less any impairment charges in such
companies.
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
(Unaudited)
-------------------------------------------------- ---------------------------------------------------
Percentage Percentage
Carrying of Carrying of
Value Cost Basis Ownership Value Cost Basis Ownership
----------- ----------- -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Equity Method
College411 $ - $ - - $ 559,419 $ 597,769 22
Asset Exchange - - - 396,542 400,000 20
----------- ----------- ---------- ----------
- - - 955,961 997,769
Cost Method
Asia CD - - - 2,691,074 2,691,074 12
----------- ----------- ---------- ----------
$ - $ - $3,647,035 $3,688,843
=========== =========== ========== ==========
</TABLE>
- F16 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 7 - OWNERSHIP INTERESTS AND ADVANCES IN INVESTMENTS (Continued)
The following summarized financial information for Affiliate Companies accounted
for under the equity method of accounting at December 31, 1998 and September 30,
1999 has been compiled from the financial statements of the respective
companies:
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999
December 31, -----------------------------------------------------
1998 College411 Asset Exchange Combined
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Current Assets $ - $ 60,497 $ 179,127 $ 239,624
Noncurrent Assets - 31,782 10,106 41,888
----------- ------------- -------------- --------------
Total Assets $ - $ 92,279 $ 189,233 $ 281,512
=========== ============= ============== ==============
Current Liabilities $ - $ 8,046 $ 36,762 $ 44,808
Stockholders' Equity - 84,233 152,471 236,704
----------- ------------- -------------- --------------
Total Liabilities and
Stockholders' Equity $ - $ 92,279 $ 189,233 $ 281,512
=========== ============= ============== ==============
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30, 1999
December 31, -----------------------------------------------------
1998 College411 Asset Exchange Combined
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
Net Loss - (100,017) (48,529) (148,546)
=========== ============= ============== ==============
Loss Attributable to the
Company $ - $ (29,470) $ (3,458) $ (32,928)
=========== ============= ============== ==============
</TABLE>
<PAGE>
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Computer Equipment $ - $ - $ 27,898
Office Furniture - - 15,791
------------- -------------- --------------
- - 43,689
Less Accumulated Depreciation - - (2,277)
------------- -------------- --------------
$ - $ - $ 41,412
============= ============== ==============
</TABLE>
Depreciation expense for 1998 was $0 and $2,277 for the nine-month period ended
September 30, 1999 for continuing operations. Depreciation expense for
discontinued operations for 1996, 1997, 1998 and for the nine-month periods
ended September 30, 1998 and 1999 was $11,452, $177,491, $224,291, $168,515 and
$174,565 respectively.
- F17 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 9 - 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 and carryforwards that give rise to significant portions of the
deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------- September 30,
1997 1998 1999
--------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets (liabilities)
Temporary differences:
Amortization of financing fees - 16,000 19,000
Losses from equity investments - - 17,000
Deferred compensation - - 488,000
Deferred tax assets (liabilities)
Temporary differences discontinued operations:
Vesting of non-qualified stock options 72,000 82,000 87,000
Accrued salaries and compensation to related parties - 37,000 (37,000)
Amortization of discount 21,000 132,000 (132,000)
Common stock warrants issued 1,000 20,000 20,000
Depreciation (27,000) (29,000) (45,000)
--------------- -------------- ---------------
Total temporary differences 67,000 258,000 417,000
Federal and state deferred tax benefits arising from
net operating loss carryforwards - 75,700 1,011,000
Federal and state deferred tax benefits arising from net
operating loss carryforwards of discontinued operations 4,043,000 6,781,300 8,246,000
Research and development credits from discontinued
operations 168,000 278,000 294,000
--------------- -------------- ---------------
4,278,000 7,393,000 9,968,000
Less valuation allowance (4,278,000) (7,393,000) (9,968,000)
--------------- -------------- ---------------
Net deferred tax asset $ - $ - $ -
=============== ============== ===============
</TABLE>
In accordance with federal income tax regulations, the net loss incurred by the
LLC from inception to the date of the Initial Merger has been excluded from the
benefits of the net operating loss carryforwards reflected above.
- F18 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 9 - INCOME TAXES (Continued)
The following table presents the principal reasons for the difference between
the income tax benefit using the Company's effective tax rates and the United
States federal statutory income tax rate of 35%:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30, Pro Forma
-------------------------------------- ------------------------- December 31,
1996 1997 1998 1998 1999 1996
--------- ----------- ----------- ----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit at
statutory rate $ $ - $ 74,000 $ 2,000 $ 2,851,000 $1,160,000
State and local income tax benefits, net
of effect of federal income tax benefit - - 11,000 - 407,000 166,000
Nondeductible research and
development costs - - - - - (354,000)
Nondeductible stock-based
compensation and interest - - - - (2,327,000) -
Tax benefit from discontinued operations 767,000 3,511,000 3,030,000 2,754,000 1,644,000 -
--------- ----------- ----------- ----------- ----------- ----------
767,000 3,511,000 3,115,000 2,756,000 2,575,000 972,000
Valuation allowance for deferred
income tax benefit (767,000) (3,511,000) (3,115,000) (2,756,000) (2,575,000) (972,000)
--------- ----------- ----------- ----------- ----------- ----------
Income tax benefit $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= =========== =========== =========== =========== ==========
</TABLE>
Prior to September 18, 1996, the Company was a limited liability company and,
accordingly, losses were passed through to its members. For the period from
September 18, 1996 through December 31, 1998 and through September 30, 1999, the
Company had losses which resulted in net operating loss carryforwards for income
tax purposes amounting to approximately $17,144,000 and $23,000,000,
respectively, which expire during 2011 through 2019. However, this carryforward
may be significantly limited due to changes in the ownership of Net Value, Inc.
as a result of future equity offerings. Net Value, Inc. has also generated
research and development credits approximating $294,000 that expire in 2012
through 2014.
The pro forma presentation reflects the effect on the Company had the change in
capital structure to a corporation been effective as of December 16, 1994 (the
Company's inception) (see Note 2).
Recognition of the benefits of the net deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company has established valuation
allowances for deferred tax assets (net of liabilities) of approximately
$4,278,000, $7,393,000 and $9,968,000 as of December 31, 1997 and 1998, and
September 30, 1999, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Commitments and contingencies not disclosed elsewhere in the financial
statements are as follows:
Subsequent to the sale of substantially all of the assets of Net Value, Inc.
(see Note 4), Net Value, Inc. retained approximately $2 million of liabilities.
Included in these liabilities is an ongoing lease obligation for vacated office
space at Net Value, Inc.'s previous headquarters. On November 23, 1999, the
landlord filed a lawsuit against Net Value, Inc. seeking to recover damages and
costs related to an alleged breach of the lease. The entire remaining base lease
obligation has been included in net current liabilities of discontinued
operations as of September 30, 1999.
- F19 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Net Value, Inc. may also remain liable for an obligation to DMR Consulting
Group, Inc. ("DMR") in connection with consulting services which DMR was to
provide Net Value, Inc. According to a settlement agreement amended on December
3, 1998, Net Value, Inc. has a remaining outstanding balance of $170,000 due to
DMR. Net Value, Inc. did not make the required payments to DMR, and by the terms
of the amended settlement agreement, DMR may assert a claim against Net Value,
Inc. for an additional $475,000. Should DMR assert such a claim, management
believes that Net Value, Inc. has valid defenses against such claims. At
September 30, 1999, Net Value, Inc. had a liability due to DMR of $170,000 on
its books and records.
Upon the contemplated Share Exchanges with the remaining Net Value, Inc.
stockholders and the completion of the Merger, any liabilities of Net Value,
Inc. will become liabilities of the Company.
Additional commitments and contingencies relating to discontinued operations are
disclosed in Note 21.
NOTE 11 - NOTES AND LOANS PAYABLE
Notes and loans payable consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
---------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Convertible Debt Offering (a) $ 1,402,500 $ 5,017,500
Rozel (b) 200,000 -
FAC Enterprises (c) 40,000 -
FEG (d) 900,000 900,000
Transamerica (e) - 100,336
Exchange Notes (f) - 2,038,969
Short-Term Borrowings (g) - 392,000
Discontinued Operations 4,275,000 5,199,327 815,816
---------------- --------------- ---------------
4,275,000 7,741,827 9,264,621
Less - Discount on notes payable (534,342) (2,441,519)
- Discount on notes payable -
discontinued operations (2,463,090) - -
---------------- --------------- ---------------
1,811,910 7,207,485 6,823,102
Less - Amount due within one year (1,140,000) (1,229,687)
- Amount due within one year -
discontinued operations (1,811,910) (5,120,293) (815,816)
---------------- --------------- ---------------
Noncurrent portion $ - $ 868,158 $ 4,777,599
================ =============== ===============
Noncurrent portion-discontinued operations $ - $ 79,034 $ -
================ =============== ===============
</TABLE>
- F20 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 11 - NOTES AND LOANS PAYABLE (Continued)
(a) In October 1998, the Company commenced a private offering of
convertible debentures ("Debentures"). The Debentures are convertible
promissory notes that accrue simple interest at 8% per annum and are
convertible into the Company's common stock at any time by the holders
at a conversion price of $2.00 per share. The Company may force the
mandatory conversion of the Debentures into shares of its common stock
at a conversion price upon the occurrence of (i) the consummation of
the Merger (see Note 1); (ii) the acquisition of 80% of the issued and
outstanding capital stock of Net Value, Inc. by the Company; or (iii)
the effective date of a registration statement registering all shares
of common stock issuable upon conversion of the Debentures. The
maturity date of the convertible promissory notes is the earlier of (i)
the date on which the holder elects to convert all of the outstanding
unpaid principal and accrued interest on the note into shares of common
stock; (ii) the date upon which the Company elects to cause a mandatory
conversion of all of the outstanding principal and accrued interest on
the note into shares of common stock; or (iii) two years from the date
of the issuance of the Debentures. The Company completed the private
offering of the Debentures in January 1999. The aggregate principal
amount of the Debentures was $1,642,500, of which approximately
$1,402,500 was raised as of December 31, 1998. During 1999, holders of
these Debentures converted the aggregate principal amount of $240,000
and the accrued interest thereon of $7,448 into 123,724 shares of the
Company's common stock.
In the first quarter of 1999, the Company commenced a second private
offering of Debentures. Other than having a conversion price of $2.50
per share, these Debentures contain the same terms as the above
Debentures containing a $2.00 conversion price. Through this second
offering, the Company sold additional Debentures in the aggregate
principal amount of $6,215,000 as of September 30, 1999. In 1999,
holders of these Debentures converted the aggregate principal amount of
$2,600,000 and the accrued interest thereon of $30,159 into 1,051,943
shares of the Company's common stock.
In connection with these two offerings of Debentures, the Company paid
commissions ranging from 6% to 10% of the aggregate principal amount of
the Debentures sold by placement agents. These commissions and certain
professional fees related to the sale of the Debentures amounted to
$147,485 in 1998 and $495,877 for the nine- month period ended
September 30, 1999, and are being amortized as financing fee expense
over the term of the Debentures. The unexpired portion of these
financing fees amounting to $129,049 and $216,477 at December 31, 1998
and September 30, 1999, respectively, have been reflected on these
financial statements as prepaid financing fees. Financing fee expense
relating to the Debentures in 1998 and for the nine months ended
September 30, 1999 amounted to $18,436 and $414,595, respectively.
The conversion rights provide the holders of the Debentures with a
beneficial conversion feature upon issuance in accordance with Emerging
Issues Task Force D-60 "Accounting for the Issuance of Series A
Convertible Preferred Stock and Debt Securities with a Nondetachable
Conversion Feature" ("EITF D-60"). A discount related to the beneficial
conversion feature was ascribed to the Debentures upon issuance, and is
being amortized as interest expense through March 1, 2000, the date the
Merger is expected to become effective. The discount related to the
beneficial conversion feature for the Debentures issued in 1998 and
during the nine months ended September 30, 1999 amounted to an
aggregate of $575,025 and $2,757,888, respectively, based upon a fair
market value for the Company's common stock on each issuance date, as
determined by an independent valuation company. The fair market value
ranged between $2.82 and $3.85 per share. Amortization of the discount
amounted to $40,683 and $1,897,165 in 1998 and for the nine-month
period ended September 30, 1999, respectively, and has been reflected
as interest expense in the accompanying statements of operations. At
December 31, 1998 and September 30, 1999, the unexpired portion of the
discount amounted to $534,342 and $1,395,065, respectively, and has
been reflected on the balance sheet as a reduction in notes payable.
The effective interest rate on the Debentures approximated 63% in 1998
and ranged from between 21% to 195% for the nine months ended September
30, 1999.
(b) In December 1998, the Company borrowed $200,000 from Rozel
International Holdings Limited ("Rozel"), a related party. The loan was
non-interest bearing and was repaid in February 1999.
(c) In 1998, the Company borrowed $40,000 from FAC Enterprises, Inc. The
loan accrued simple interest at a rate of 10% per annum, and was repaid
in February 1999.
- F21 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 11 - NOTES AND LOANS PAYABLE (Continued)
(d) In September 1999, the Company borrowed $900,000 from Founds Equity
Group, Inc. ("FEG"). The note accrued simple interest at 10% per annum
and had a maturity date of March 1, 1999 ("Founders' Note"). Interest
expense on the Founders' Note amounted to $27,616 in 1998 and $22,500
in 1999 through March 1. The entire interest expense was paid in March
1999. The Company incurred a $45,000 financing fee on the procurement
of this note, and this amount has been amortized over a six-month
period. The unexpired portion of this financing fee, amounting to
$15,000 at December 31, 1998, has been reflected on these financial
statements as prepaid financing fees at December 31, 1998. The
financing fee expense on the Founders' Note in 1998 and for the two
months ended March 1, 1999 amounted to $30,000 and $15,000,
respectively. An affiliate of a shareholder of the Company guaranteed
the Founders' Note and the accrued interest thereon.
On March 1, 1999, the Company issued a convertible promissory note in
the principal amount of $900,000 to FEG, and paid $50,334 in accrued
interest in full payment of the original Founders' Note. The
convertible promissory note accrues interest at the simple rate of 10%
per annum and matures on the earlier of (i) the date on which the
lender elects to exercise its conversion rights; (ii) the date on which
the Company elects to exercise its conversion rights; (iii) the
one-year anniversary of the consummation of the Merger; or (iv) March
1, 2000, if the Merger has not been consummated by that date. An
affiliate of a shareholder of the Company guaranteed the convertible
promissory note, including accrued interest. The Company is required to
pay all unpaid interest accrued on the convertible promissory note on a
quarterly basis commencing on July 1, 1999. At the noteholder's option,
such payments may be in cash or in shares of the Company's common stock
at a price equal to 80% of the bid price of the Company's common stock
on the interest payment due date. The noteholder may convert all or any
part of the outstanding principal amount of the convertible promissory
note, plus all accrued interest thereon through the date of conversion,
into shares of the Company's common stock at a conversion rate of $2.50
per share. The Company may require the holder to convert the entire
principal amount of the convertible promissory note, plus all accrued
interest thereon, upon the Company's common stock attaining certain
price and volume requirements and upon the registration for resale of
all shares of the Company's common stock issuable to the holder upon
such mandatory conversion of the convertible promissory note. The
holder is also entitled to piggyback registration rights on any
registration statement filed by the Company subsequent to the Merger,
with respect to all shares issuable upon its conversion of the
convertible promissory note. As additional consideration for the
agreement to cancel the Founders' Note and accept a convertible
promissory note in full satisfaction of the Company's obligations
pursuant to the Founders' Note, the Company issued a warrant to
purchase 90,000 shares of the Company's common stock at an exercise
price of $2.50 per share and a warrant to purchase 90,000 shares of the
Company's common stock at an exercise price of $5.00 per share
("Founders' Warrant"). Each of these warrants may be exercised at any
time prior to February 28, 2002. There are no registration rights
granted with respect to any shares of the Company's common stock issued
upon the exercise of either of these warrants. The value ascribed to
the Founders' Warrants, as determined by an independent valuation
company, aggregated $175,500 and is being expensed as financing fee
expense through March 1, 2000, the date the Merger is expected to
become effective and conversion of the promissory note is expected to
take place. Financing fee expense related to the Founders' Warrants for
the nine months ended September 30, 1999 amounted to $102,375 and the
unexpired portion of the financing fee at September 30, 1999 was
$73,125.
<PAGE>
The conversion rights under the convertible promissory note provides
the holder with a beneficial conversion feature in accordance with EITF
D-60. A discount related to the beneficial conversion feature was
ascribed to the convertible promissory note upon issuance, and is being
amortized as interest expense through March 1, 2000, the date the
Merger is expected to become effective and conversion of the promissory
note is expected to occur. The discount related to the beneficial
conversion feature for the convertible promissory note amounted to
$288,000, based upon a fair market value for the Company's common stock
of $3.30 per share as determined by an independent valuation company.
Amortization of the discount amounted to $154,400 for the nine months
ended September 30, 1999 and has been reflected as interest expense in
the accompanying statements of operations. At September 30, 1999, the
unexpired portion of the discount amounted to $133,600 and has been
reflected on the balance sheet as a reduction in notes payable. The
effective interest rate on the convertible promissory note approximated
62% during the nine-month period ended September 30, 1999.
(e) In May 1998, Net Value, Inc. financed $175,500 of a three-year
insurance premium, amounting to $197,500, for the liability coverage of
its directors and officers. In 1999, the binder was rewritten to cover
the directors and officers of the Company and all of the Company's
majority-owned subsidiaries effective October 1998, and
correspondingly, the financing liability was assumed by the Company in
1999. The financing accrues interest at 7.76% per annum, and requires
monthly installment payments of $5,923. Interest expense on the loan
amounted to $6,399 for the first nine months of 1999.
- F22 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 11 - NOTES AND LOANS PAYABLE (Continued)
(f) On January 7, 1999, the Company offered the holders of certain
promissory notes previously issued by Net Value, Inc. an exchange of
their existing promissory notes for promissory notes issued by the
Company through a private offering ("Exchange Notes"). The principal
balances for each of the Exchange Notes was equivalent to the principal
balances on the Net Value, Inc. notes, plus the accrued interest on the
notes through December 31, 1998. The holders of the Exchange Notes may
convert all or any part of the outstanding principal plus the accrued
interest thereon into shares of the Company's common stock at a
conversion rate of $2.00 per share at any time. The Company may convert
the principal and accrued interest on the Exchange Notes into shares of
the Company's common stock at a rate of $2.00 per share, upon the
Company's common stock achieving certain market price targets. The
Exchange Notes accrue simple interest at 12% per annum, and have a
maturity date of the earlier of (i) the date on which either the holder
or the Company exercise their respective conversion rights under the
Exchange Notes; or (ii) the one-year anniversary of the closing of the
Merger. The terms of the Exchange Notes also provide that the Company
issue to the holders of the Exchange Notes warrants to purchase
one-half of one share of the Company's common stock for each share
purchased through conversion ("Exchange Warrants"). The Exchange
Warrants will be exercisable over a period of three years from the date
of issuance, and will carry an exercise price of $6.00 per share. The
shares of stock purchased through the conversion of the Exchange Notes
or through the Exchange Warrants are subject to a lockup agreement for
a one-year period subsequent to the effective date of the Merger,
unless prior written agreement from American Maple Leaf ("AML") is
obtained. AML had served as the investment banker for Net Value, Inc.
and had been responsible for all fundraising efforts involving the
promissory notes. As of April 30, 1999, $4,270,125 of Exchange Notes
had been issued by the Company, which replaced $3,800,000 of principal
and $470,125 of accrued interest on the Net Value, Inc. promissory
notes. The remaining holders of the Net Value, Inc. promissory notes
elected not to participate in the offering of the Exchange Notes. In
December 1999, Net Value, Inc. repaid $225,000 of outstanding principal
and the accrued interest thereon in full satisfaction of these
remaining Net Value, Inc. notes.
The conversion rights under the Exchange Notes provide the holders a
beneficial conversion feature upon issuance in accordance with EITF
D-60. A discount related to the beneficial conversion feature was
ascribed to the Exchange Notes upon issuance, and is being amortized as
interest expense through March 1, 2000, the date the Merger is expected
to become effective. The discount related to the beneficial conversion
feature for the Exchange Notes issued during the nine months ended
September 30, 1999 amounted to $3,458,802, based upon a fair market
value for the Company's common stock of $3.37 per share, as determined
by an independent valuation company. Amortization of the discount
amounted to $2,545,949 for the nine months ended September 30, 1999 and
is reflected as interest expense in the accompanying statements of
operations. At September 30, 1999, the unexpired portion of the
discount amounted to $912,853 and has been reflected as a reduction in
notes payable in the accompanying balance sheet. The effective interest
rate on the Exchange Notes approximated 385% during the nine-month
period ended September 30, 1999. Interest incurred on the Exchange
Notes, exclusive of amortization on the debt discount, amounted to
$181,820 for the nine months ended September 30, 1999. Exchange
Warrants to acquire 586,228 shares were outstanding at September 30,
1999.
(g) From July 1999 through September 1999, the Company borrowed $392,000 in
the form of non-interest bearing advances from three of its
shareholders. $380,000 of these advances were repaid in October 1999.
NOTE 12 - CAPITAL STOCK ACTIVITY
As more fully described in Notes 1 and 2, the combination of Net Value, Inc. and
Holdings was treated as a recapitalization of Net Value, Inc., whereby a limited
number of Net Value, Inc. shareholders exchanged four shares of Net Value, Inc.
common stock for one share of Holdings' common stock and one share of Holdings'
Series A convertible preferred stock. Upon the consummation of the Merger in
2000, the recapitalization of Net Value, Inc. is expected to be completed. The
following capital stock transactions for the years ended December 31, 1996, 1997
and 1998 and for the nine months ended September 30, 1999, have been restated to
reflect the recapitalization, whereby Holdings issued one share of common stock
and one share of Series A convertible preferred stock for every four shares of
Net Value, Inc. common stock originally issued.
- F23 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
On July 16, 1996, Net Value, Inc. was formed solely for the purpose of merging
with the LLC. On August 2, 1996, in exchange for $1,090, the initial
stockholders ("the Founders") received an aggregate of the equivalent of 272,500
shares of common stock and preferred stock (the "Founders' Shares"). In
connection with Net Value, Inc.'s formation, APP Investments, Inc. ("APP"), an
affiliate of American Maple Leaf Financial Corporation ("AML"), a related party
and one of the Founders, was issued warrants to acquire the equivalent of
500,000 shares of Net Value, Inc.'s common stock at an exercise price of $6.00
per share. The warrants are currently exercisable, expire in August 2001 and
carry antidilutive rights. At December 31, 1998, the antidilutive provisions
entitle APP to obtain 1,060,222 shares of Net Value, Inc.'s common stock at an
exercise price of $2.83 per share.
On September 6, 1996, Net Value, Inc. sold an aggregate of the equivalent of
145,357 shares of common stock and preferred stock to a group of Accredited
Investors [as defined under Regulation D of the Securities Act of 1933, as
amended ("Accredited Investors")] for an aggregate price of $100,000. This
Accredited Investor group consisted of certain Founders and a group of other
initial investors. These funds were utilized to fund operating and formation
costs.
On September 6, 1996, Net Value, Inc. sold an aggregate of the equivalent of
62,500 shares of common stock and preferred stock to a group of Accredited
Investors for an aggregate price of $350,000.
On September 6, 1996, Net Value, Inc. sold the equivalent of 162,500 shares of
common stock and preferred stock to VDC Corporation, LTD ("VDC") for an
aggregate purchase price of $650,000. At the time of the sale, VDC was a
strategic investor that the Company was considering for a business combination.
All shares held by VDC were sold to Rozel, a related party, on December 18, 1997
(see Note 21).
On September 12, 1996, the LLC entered into an agreement with Muzak Limited
Partnership ("Muzak") (the "Muzak Agreement") whereby Muzak was appointed as the
exclusive sales agent for a three-year period. In connection with the Muzak
Agreement and the Initial Merger (see Note 1), Muzak, in its capacity as a
member of the LLC, received the equivalent of 118,500 shares of common stock and
preferred stock in the Initial Merger, and options to purchase shares of Net
Value, Inc.'s common stock. On April 3, 1997, Net Value, Inc. and Muzak mutually
agreed to terminate the Muzak Agreement. Upon the termination of the Muzak
Agreement, Muzak retained the equivalent of 118,500 shares of common stock and
preferred stock; however, all options granted to Muzak automatically expired and
were canceled.
On September 18, 1996, Net Value, Inc. entered into an agreement with AML, a
related party, pursuant to which AML agreed to provide investment banking
services to Net Value, Inc. for the nine-month period commencing September 18,
1996 in exchange for the equivalent of 87,500 shares of common stock and
preferred stock valued at $1,225,000. Such shares were issuable to AML in six
equal installments over the term of the agreement which commenced on October 17,
1996 and ended on March 17, 1997. During 1996, Net Value, Inc. recorded
consulting expense of approximately $671,000 in a noncash transaction
representing the cost of the equivalent of 43,750 shares issued to AML as of
December 31, 1996. During 1997, the remaining equivalent of 43,750 shares of
common stock and preferred stock were issued, resulting in consulting expense of
approximately $554,000 in 1997.
In connection with the Initial Merger, the members of the LLC exchanged all of
their issued and outstanding membership interests, representing cumulative
capital contributions of $500,000, plus the termination and waiver of all
related party agreements, pre-existing rights, claims and causes of action
(except for some predetermined surviving claims) for the equivalent of 768,500
shares of common stock and preferred stock of Net Value, Inc. The Initial Merger
was a reverse acquisition, whereby the legal acquirer, the LLC, was the
accounting acquirer in the transaction. The equivalent of 150,000 of these
shares were issuable pending verification of certain representations and
warranties made by two former executives of the LLC, who are also significant
shareholders of Net Value, Inc. ("Co-Founders"), which was accomplished in July
1997.
- F24 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
On September 19, 1996, after the Initial Merger and subsequent to the first
three private offerings, Net Value, Inc. sold an aggregate of the equivalent of
112,500 shares of common stock and preferred stock to a group of unrelated
Accredited Investors for an aggregate amount of $1,575,000 ($14.00 per common
share).
During the first quarter of 1997, Net Value, Inc. sold an aggregate of the
equivalent of 48,125 shares of common stock and preferred stock to a group of
Accredited Investors for an aggregate purchase price of $385,000 (the equivalent
of $8.00 per common share) less approximately $18,852 in commissions paid.
On May 31, 1997, Net Value, Inc. sold an aggregate of the equivalent of 25,625
shares of common stock and preferred stock to a group of Accredited Investors
for an aggregate purchase price of $205,000 ($8.00 per common share).
Commissions of $4,500 were paid on this offering.
During 1997, Net Value, Inc. issued the equivalent of 25,000 shares of common
stock and preferred stock to VDC and the equivalent of 7,500 shares to a private
investor in connection with the requirements of each of their respective loan
agreements (see Note 21).
In accordance with the terms of the Bridge Offerings, Net Value, Inc. issued the
equivalent of 100,625 shares of common stock and preferred stock and the
equivalent of 402,500 warrants to purchase Net Value, Inc. common stock to a
group of Accredited Investors (see Note 21). The warrants have an exercise price
equal to the lower of $4.00 per share or an initial public offering price
("IPO") per share, should Net Value, Inc. participate in an IPO. The warrants
are exercisable for a period of five years commencing on the date the common
stock issued in connection with the Bridge Offerings is first registered with
the Securities and Exchange Commission.
On November 14, 1997, in a noncash transaction, Net Value, Inc. and VDC agreed
to convert the outstanding Bridge Financing principal and accrued interest due
VDC amounting to $2,578,301 into the equivalent of 805,719 shares of Net Value,
Inc.'s common stock and preferred stock (see Note 21).
On December 15, 1997, in a noncash transaction, Net Value, Inc. issued the
equivalent of 47,550 shares of common stock and preferred stock to AML as
consideration to AML for the issuance of unsecured advances to Net Value, Inc.
(see Note 21).
On December 18, 1997, Rozel acquired the equivalent of all 993,219 shares of
Net Value, Inc.'s common stock and preferred stock which had been owned by VDC
(see Note 21).
On April 13, 1998, Net Value, Inc. issued the equivalent of 688 shares of common
stock and preferred stock as compensation for interest to the lender of a debt
obligation.
In April of 1998, Net Value, Inc. issued the equivalent of 7,500 shares of
common stock and preferred stock to a consultant in exchange for consulting
services performed in 1997.
On June 1, 1998, Rozel converted the equivalent of 80,000 shares of Net Value,
Inc.'s Series A preferred stock into the equivalent of 250,000 shares of Net
Value, Inc.'s common stock (see Note 21).
On July 28, 1998, Net Value, Inc. issued the equivalent of 37,500 shares of its
common stock and preferred stock to Rozel pursuant to the terms of its Series A
preferred stock agreement (see Note 21).
In September 1998, in connection with the recapitalization (see Notes 1 and 2),
Net Value, Inc. reflected an additional 1,000,000 shares of common stock which
represent those Holdings shares outstanding prior to the recapitalization.
- F25 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
In accordance with the terms of the Amended IQ Agreement, in 1998 Net Value,
Inc. issued the equivalent of 90,000 shares of common stock and warrants to
purchase 360,000 shares of Net Value, Inc. common stock to IQ (see Note 21).
In September and October 1998, the Company sold an aggregate of 2,950,000 shares
of common stock for an aggregate purchase price of $590,000 ($.20 per share),
less approximately $60,570 in commissions paid to a group of Accredited
Investors. Such shares are subject to a lockup agreement for one year from the
first anniversary of the proposed Merger unless prior written consent of the
Underwriter is obtained.
On November 15, 1998, in accordance with a share exchange agreement between Net
Value, Inc. and the Company, Rozel exchanged all of its Net Value, Inc. Series A
preferred shares for 1,000,000 shares of the Company's common stock and 500,000
shares of the Company's Series A Convertible Preferred Stock. As a result of
exchange, the Company obtained 100% of the issued and outstanding Series A
preferred stock of Net Value, Inc.
As of December 31, 1998, the Company entered into share exchange agreements with
twenty Net Value, Inc. shareholders. The Company exchanged 2,019,852 shares of
common stock and 2,019,852 shares of Series A preferred stock for approximately
66% of the issued and outstanding shares of common stock of Net Value, Inc.
Costs of issuance relating to the above transactions amounted to $189,090 in
1996, $38,167 in 1997 and $60,570 in 1998. AML, a related party, received
$31,150 and $23,352 of these costs in 1996 and 1997, respectively.
From March 1999 through September 1999, certain holders of the Debentures from
both offerings converted the principal amount of $2,840,000 and accrued interest
thereon of $37,607 into 1,175,668 shares of the Company's common stock (see Note
11).
In the period May 1999 through September 1999, holders of Exchange Notes (see
Note 11) converted principal and accrued interest of $2,344,910 into 1,172,455
shares of the Company's common stock and 586,228 Exchange Warrants. From October
1999 through January 10, 2000, an additional $1,214,146 of principal and
interest was exchanged for 607,073 shares of the Company's common stock and
303,537 Exchange Warrants.
On July 30, 1999, the Company issued 184,627 vested shares of Series A preferred
stock and 601,029 vested shares of common stock, 6,923,599 unvested shares of
common stock and 2,126,833 unvested shares of Series A preferred stock to the
stockholders of Strategicus, in connection with the merger with Strategicus. The
unvested shares for everyone except for one principal were converted to common
stock and then to options. Upon consummation of the merger, each of the former
Strategicus stockholders was appointed to the Company's Board of Directors. In
connection with the Strategicus merger, the principal signed an employment
agreement with the Company and was issued 1,641,310 shares of common stock and
504,187 shares of the Company's Series A preferred stock (all included above).
Subsequently, the principal agreed to exchange his preferred shares for an
additional 302,512 shares of the Company's common stock. In September 1999, the
principal agreed to reduce his common stock shares to 1,763,822.
In July 1999, the Company issued 6,138 shares of the Company's common stock at
the request of the Founders' Note noteholders as payment for $30,084 of accrued
interest which was due on July 1, 1999 (see Note 11).
Pursuant to an offering by the Company in August and September 1999, all of the
outstanding Series A preferred stock was exchanged at a rate of one share of
Series A preferred stock for the equivalent of .6 of a share of the Company's
common stock (the "Preferred Exchange"). The basis of the conversion ratio was
as a result of a negotiated transaction between the Company and the Series A
preferred stockholders.
In September 1999, the Company issued 4,000 shares of its common stock as
consideration for the extension of a Net Value, Inc. note payable. The Company
recognized $10,040 as bad debt expense, based upon a fair market value for the
Company's common stock of $2.51 per share as determined by an independent
valuation company.
- F26 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
In September 1999, the Company issued 3,750 shares of its common stock to a
former employee of Net Value, Inc. as consideration for entering into a
settlement agreement regarding his employment with Net Value, Inc. The Company
recognized $10,313 as bad debt expense, based upon a fair market value for the
Company's common stock of $2.75 per share as determined by an independent
valuation company.
In September 1999, the Company issued 6,250 shares of its common stock to each
of two consultants in exchange for consulting services rendered. The Company
recognized $31,250 as consulting expense, based upon a fair market value for the
Company's common stock of $2.50 per share as determined by an independent
valuation company.
The Company intends to file a registration statement with the Securities and
Exchange Commission to register shares of its common stock previously issued to
certain shareholders. In August through September 1999, the Company issued an
aggregate of 40,000 shares of its common stock to two such shareholders for
failing to meet an agreed-upon deadline for the filing. The agreed-upon deadline
and associated penalty were negotiated in connection with the issuance of shares
of the Company's common stock. These penalty shares are deemed to be additional
costs incurred to raise capital and, consequently, the stock issued has been
recorded at par value with an offsetting entry to additional paid-in capital. An
additional 14,000 shares were issued in October 1999.
Holdings plans to complete the Merger with Net Value, Inc. by acquiring the
remaining outstanding shares of common stock on the same terms and conditions as
the Share Exchange transactions, and by exchanging warrants and options to
acquire common stock in Net Value, Inc for warrants and options to acquire
common stock in Holdings. Immediately subsequent to the sale of substantially
all of the assets of Net Value, Inc., there were 4,149,350 shares of Net Value,
Inc. common stock which the Company did not own, outstanding warrants to
purchase 1,822,722 shares of Net Value, Inc. common stock at prices ranging from
$1.50 to $4.00 per share and outstanding options to acquire 989,250 shares of
Net Value, Inc. common stock at prices ranging from $.63 through $7.00 per
share. Included in the outstanding warrants of Net Value, Inc. are warrants to
acquire 1,060,222 shares of common stock that have been granted to an affiliate
of the Company's Chief Executive Officer (see Note 21 for additional
disclosures).
<TABLE>
<CAPTION>
Grant Date Exercise Price Expiration
Warrants Granted and Outstanding Shares Date Exercisable per Share Date
- ------------------------------------ ------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Granted [See Note 11d] 90,000 3/1/99 3/1/99 $ 2.50 2/28/2002
Granted [See Note 11d] 90,000 3/1/99 3/1/99 $ 5.00 2/28/2002
Granted [See Note 11d] 586,228 5/99-9/99 5/99-9/99 $ 6.00 5/2002-9/2002
-------
Granted [See Note 14] 110,498 9/99 9/99 $4.25-$4.875 9/2004
-------
Balance at September 30, 1999
(Unaudited) 876,726
=======
</TABLE>
- F27 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
The Company is contractually obligated as of September 30, 1999 to issue the
following options under a stock option plan yet to be approved by the Company's
stockholders. The following is a reconciliation of options to be issued,
restricted stock, deferred compensation and stock compensation as of September
30, 1999.
<TABLE>
<CAPTION>
Options & Amor- Total Stock
Grant Exercise Restricted tization Deferred Compensation Deferred
Date Price Stock Earned Period Compensation Expense Compensation
------- -------- ------------ ----------- ------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[see Note 20] Options 6/99 $1.00 1,020,000 120,000 3 years $ 2,978,400 $ 330,933 $ 2,647,467
[see Note 19] Options 8/99 $1.00 5,715,876 - 4 years 1,843,371 115,212 1,728,159
[see Note 20] Options 9/99 $1.00 900,000 90,000 3 years 1,359,000 - 1,359,000
--------- ------------ --------- ----------
7,635,876 6,180,771 446,145 5,734,626
=========
[see Note 19] Unvested
Stock 7/99 1,763,822 2 years 6,191,015 773,877 5,417,138
========= ----------- ---------- -----------
Balance as of
September 30, 1999 $12,371,786 $1,220,022 $11,151,764
=========== ========== ===========
</TABLE>
Preferred Stock
As of December 31, 1998, the Company had 5,000,000 shares of preferred stock
authorized, having a par value of $.001 per share. Dividends, voting rights and
other terms, rights and preferences of the preferred stock may be designated by
the Company's Board of Directors from time to time. As of December 31, 1998, the
Company had 2,519,852 issued and outstanding shares of Series A convertible
preferred stock (see Note 20).
In September 1999, the Company entered into a convertible preferred stock
purchase agreement with certain investors to raise a maximum of $5,000,000.
2,000 Series B shares were issued and outstanding as of September 30, 1999 (see
Note 14).
Stock-Based Compensation
During 1998, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"). As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Boards No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants and
common stock issuances as of the grant date. APB 25 recognizes the intrinsic
value of the instruments issued by the Company as of the measurement date, which
is generally the date at which the number of shares that an individual is
entitled to receive and the purchase price are both known. Had compensation
expense for the years ended December 31, 1996, 1997 and 1998, and the nine month
periods ended September 30, 1998 and 1999 have been determined under the fair
value provisions of SFAS 123, the Company's net loss and net loss per share
would have differed as follows:
- F28 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
<TABLE>
<CAPTION>
December 31, December 31, December 31, September 30, September 30,
1996 1997 1998 1998 1999
------------------ ------------------ ---------------------- ------------------- -----------------------
Net Per Net Per Net Per Net Per Net Per
Loss Share Loss Share Loss Share Loss Share Loss Share
-------- ------- ------- -------- ----------- --------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As reported
Under APB 25 $ - $ - $ - $ - $(271,002) $(0.06) $(5,805) $ - $(8,147,073) $(0.94)
======== ======= ======= ======== ========= ======= ======== ======== ============ =======
Pro Forma
Under SFAS
123 $ - $ - $ - $ - $(271,002) $(0.06) $(5,805) $ - $(8,617,141) $(1.00)
======== ======= ======= ======== ========= ======= ======== ======== ============ =======
</TABLE>
Loss Per Share
The Company has adopted SFAS 128, and has followed the guidelines of SFAS 128 in
the presentation of loss per share for all periods presented in the financial
statements. Options and warrants to purchase common stock and Series A
convertible preferred stock are not included in the computation of diluted loss
per share because the effect of these instruments would be antidilutive for all
periods presented. The common shares potentially issuable arising from these
instruments which were outstanding during the periods presented in the financial
statements are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
Exercise ------------------------------------ -------------------------
Conversion Price 1996 1997 1998 1998 1999
----------------- ---------- ------------ ------------ ------------ ------------
<S> <C>
Options* $0.00 - - - - -
Warrants $2.50-6.00 - - - - 1,386,468
Series A preferred stock .6 common shares - - 1,511,911 - -
Series B mandatory redeemable
convertible preferred stock $4.0875 ** - - - - 489,297
Convertible debt $2.00-2.50 - - 701,250 - 3,610,984
Unvested common stock $0.00 - - - - 1,763,822
----------------- ---------- ------------ ------------ ------------ ------------
- - 2,213,161 - 7,250,571
========== ============ ============ ============ ============
</TABLE>
*The Company is obligated to issue options to purchase 7,635,876 shares of the
Company's common stock at an exercise price of $1.00.
**The conversion price may be reset at the election of the holder to the higher
of the average closing bid price of $2.50. (See Note 14).
NOTE 13 - STOCK OPTION PLAN
The Company is contractually obligated to issue options under a stock option
plan yet to be approved by the Company's stockholders (see Notes 12, 19, and
20).
In June 1999, Metacat adopted a Stock Option Plan (the "Plan") which provides
for the granting of options to employees, officers and directors of Metacat. The
number of shares which can be purchased under this plan is limited to 50,000
shares of Metacat common stock and 50,000 shares of Metacat Series B preferred
stock. The Plan is intended to qualify as an "incentive stock option plan" under
Section 422 of the Internal Revenue Code. The exercise prices of the options
granted under the Plan are to
- F29 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 13 - STOCK OPTION PLAN (Continued)
be determined by the Board of Directors or other Plan administrators but shall
not be lower than one hundred percent of the fair market value of a share of
common stock on the date the option is granted for employees and not less than
one hundred and ten percent for officers and directors with greater than ten
percent voting power. The options under the Plan vest immediately upon grant
unless otherwise specified and are valid for ten years, except for officers and
directors with greater than ten percent voting power, which options expire five
years after grant. Through September 1999, Metacat issued options to purchase
27,025 shares of its Series B preferred stock to one of its directors.
NOTE 14 - MANDATORY REDEEMABLE PREFERRED STOCK
In September 1999, the Company entered into a convertible preferred stock
purchase agreement with certain investors ("Preferred Agreement") to raise a
maximum of $5,000,000. Under the Preferred Agreement, investors purchased an
aggregate of 4,824 shares of the Company's Series B convertible preferred stock
("Series B Shares"), with a liquidation preference of $1,000 per share, and
related warrants (the "Series B Warrants"). Should the Company fail to maintain
the listing of its stock on the OTC Bulletin Board, or should its current
registration statement fail to become effective by February 2000, the holders of
the Series B shares may force the Company to redeem their shares for 125% of
their purchase price. If the Company's current registration statement is not
effective by February 23, 2000, the Company's stock may de-list from the OTC
Bulletin Board. The holders may elect not to exercise their redemption rights if
the Company fails to maintain the listing of its stock and the holders are then
entitled to receive 1% of the purchase price for the first thirty days the
Company shares are de-listed and 2% for the following sixty-day period.
The Series B Shares are convertible into the Company's common stock at a
conversion price equal to the lower of the average closing bid price of the
Company's common stock for a five-day period prior to the closing date which was
calculated to be $4.0875, provided that the conversion price shall not be below
$2.50 ("Conversion Price"). The holders of the Series B Shares have the right,
on a one-time basis, to elect to reset the Conversion Price. This election can
be made within one year after the date the shares of the Company's common stock,
underlying the Series B Shares and the Series B Warrants, are registered with
the Securities and Exchange Commission (the "Effective Date"). The reset
Conversion Price is to be based on the average closing bid price of the
Company's common stock for a two-day period immediately preceding the receipt by
the Company of the holders' notice of exercise of their reset option. Except as
noted above, the Series B Shares may not be converted by the holder until the
earlier of 180 days from the closing date and 20 days after the Effective Date
and shall automatically convert on the third anniversary of the Effective Date.
However, the automatic conversion date may be extended in certain circumstances.
The Series B Shares bear a dividend rate of 5% per annum, which may increase to
10% per annum in the event the closing bid price of the Company's common stock
falls below $2.50 for a period of ten consecutive trading days. The dividend
rate may then be reinstated at 5% if the closing bid price of the common stock
exceeds $2.50 for a period of five consecutive trading days. The Series B
warrants are exercisable at prices equivalent to a range between 110% to 140% of
the Conversion Price for a period of five years from the closing date; however,
after the registration statement becomes effective, the Company may terminate
the Series B Warrants upon 20 days' notice if the closing bid price of the
common stock exceeds 150% of the purchase price for the preceding 20 days. The
Series B Warrants are exercisable into 295,040 shares of common stock pursuant
to the terms of the Preferred Agreement. The shares of common stock to be issued
upon the conversion of the Series B Shares or upon the exercise of the Series B
Warrants have registration rights. The Company has the right to redeem the
Series B Shares at any time for an amount equivalent to 120% of the liquidation
preference plus accrued and unpaid dividends. 2,000 Series B Shares were issued
and outstanding and Series B Warrants to purchase 110,498 shares had been
granted as of September 30, 1999. The Series B offering was completed with
unrelated third parties and did not contain any beneficial conversion feature.
The offering was therefore deemed to have been at fair market value. Per an
independent valuation, the $1,000 per share proceeds were allocated as $866
attributable to the preferred stock and $134 attributable to the warrants.
- F30 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 15 - RELATED PARTIES
Related party transactions not disclosed elsewhere in the financial statements
and notes are as follows:
On December 2, 1998, the Company borrowed $200,000 from Rozel in the form of a
non-interest bearing loan (see Note 11). As of December 31, 1998, Rozel owned
approximately 21% of the Company's common stock.
Related party transactions relating to discontinued operations are disclosed in
Note 21.
NOTE 16 - STOCK SUBSCRIPTION PAYABLE
On September 23, 1999, the Company acquired a 20% interest in AssetExchange,
Inc. for $420,000. At September 30, 1999, $250,000 of the acquisition price had
not yet been paid. The Company paid the balance in full on October 1, 1999. This
amount is reflected as a stock subscription payable on the September 30, 1999
balance sheet.
NOTE 17 - OPERATING SEGMENT INFORMATION
The following summarizes information relating to the Company's segments. All
significant intercompany activity has been eliminated. Assets are owned or
allocated assets are used by each operating segment. Total assets and result of
operations attributable to the discontinued operations, which was previously
considered a separate segment, are not included in the following information.
- F31 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 17 - OPERATING SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
December 31, December 31, December 31, September 30,
--------------------------
1996 1997 1998 1998 1999
------------- -------------- ------------- ------------- -----------
Affiliate Company Operations
Operating Expenses
<S> <C> <C> <C> <C> <C>
Compensation and related expense $ - $ - $ - $ - $ 55,598
Professional fees - - - - 200
Consulting - - - - -
Selling, general and administrative - - - - 10,167
Assumed obligation expense - - - - -
Equity loss - - - - 41,808
----------- -------------- --------- ------- ------------
Operating Loss - Affiliate Company
Operations Before Equity Income - - - - (107,773)
Other Income (Expense)
Interest expense - - - - (1,065)
----------- -------------- --------- ------- ------------
Total Other Expense - - - - (1,065)
----------- -------------- --------- ------- ------------
Net Loss - Affiliate Company Operations $ - $ - $ - $ - $ (108,838)
=========== ============ ========= ======= ============
General Net Value Holdings Operations
Operating Expenses
Compensation and related expense $ - $ - $ - $ - $ 1,397,608
Professional fees - - 129,878 - 513,733
Consulting - - - - 107,849
Selling, general and administrative - - 10,606 1,120 309,700
Assumed obligation expense - - - - 4,368,675
------------- ------------ --------- ------- ------------
Operating Loss - General Net Value Holdings - - (140,484) (1,120) (10,582,283)
Other Expense
Interest expense, net - - 82,082 4,685 5,166,721
Financing fees - - 48,436 - 542,624
------------- ------------ --------- ------- ------------
Total Other Expense - - (130,518) (4,685) (5,709,345)
------------- ------------ --------- ------- ------------
Net Loss - General Net Value Holdings $ - $ - $(271,002) $(5,805) $(16,291,628)
============= ============ ========= ======= ============
Total Assets
Affiliate Company Operations $ - $ - $ - $ - $ 38,618
General Net Value Holdings Operations 371,648 94,480 6,006,103
------------- -------------- ----------- ------- -----------
$ - $ - $ 371,648 $94,480 $ 6,044,721
=========== ============ ========= ======= ==========
</TABLE>
NOTE 18 - OPERATING LEASES
The Company shares office space for its principal executive offices in San
Francisco, California with a related party at no expense. The value of the
shared space is minimal. The Company also subleases office space in
Philadelphia, Pennsylvania on a month to month basis at a rate of $2,000 per
month.
In April 1999, Strategicus entered into a lease agreement on behalf of Metacat
for office space in Portland, Oregon. The monthly rent through April 2000 is
$1,200 and $1,248 through April 2001, the date the lease terminates.
- F32 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 19 - SUBSEQUENT ACQUISITION (UNAUDITED)
As part of a step transaction to obtain an ownership interest in three unrelated
Internet companies, the Company entered into a letter of intent on May 28, 1999
with Strategicus and a principal of Strategicus ("Principal"), whereby the
Company intended to acquire all of the common stock of Strategicus in exchange
for shares of common and Series A convertible preferred stock ("Strategicus
Merger"). Strategicus was an Oregon corporation that was formed in August 1998,
was in the process of developing Internet operations of its own through its
wholly-owned subsidiary, Metacat, and which had the opportunity to consummate
transactions in two other Internet companies which the Company desired to
obtain. Under the terms of the agreement and as part of a step transaction, the
Company entered into a loan agreement with Strategicus. The loan agreement
permitted Strategicus to borrow a maximum amount of $2,000,000 on a revolving
credit basis, had a maturity date of July 30, 1999, and earned simple interest
at the rate of 10% per annum. The funds loaned to Strategicus under the loan
agreement amounted to $1,555,000, of which $310,000 was then loaned by
Strategicus to its Principal. The loan to the Principal bears simple interest at
9% per annum, and is to be forgiven subject to the Principal remaining an
employee of the Company through May 2000. Of the remaining amounts loaned to
Strategicus, $1,000,000 was used to acquire a 12% interest in AsiaCD, $100,000
was used to acquire an initial 14% interest in College411, and the balance
utilized to pay professional fees related to the Strategicus Merger and fund
certain operating expenses and a $60,000 advance to a potential future investee
company. In connection with the acquisitions, Strategicus also received warrants
to acquire additional shares of AsiaCD and College411 common stock for aggregate
purchase prices of $300,000 and $150,000, respectively. In September 1999, the
Company exercised the College411 warrant, and as a result, the Company's
ownership interest in College411 then increased to approximately 29%. The
Company also loaned $267,000 to a Strategicus shareholder. This loan bears
simple interest at a rate of 9% per annum and is to be forgiven ratably over a
three-year period which is equivalent to the period of the shareholder's
consulting agreement with the Company. The merger with Strategicus was completed
in July 1999 and as a result of the merger, Strategicus no longer exists as a
legal entity and the loan agreement between Strategicus and the Company has been
discharged. The operations of Strategicus and Metacat have been included in the
Company's results of operations beginning in July 1999.
The Strategicus Merger agreement was signed on June 21, 1999, and the merger was
consummated on July 30, 1999. In connection with the Strategicus Merger, the
Principal and three other Strategicus shareholders signed employment or
consulting agreements with the Company. The employment and consulting agreements
provide for specified compensation. In accordance with the merger agreement as
amended, the Principal and the remaining three shareholders of Strategicus
collectively received 601,029 shares of the Company's common stock and 184,627
shares of Series A convertible preferred stock as consideration for the
Strategicus shares received. The Company's common stock and preferred stock
exchanged for Strategicus stock was ascribed a value of $3.51 and $.45 per
share, respectively, as determined by an independent valuation company. The
value of the Company's stock issued in the transaction was allocated to the
investments in Metacat, AsiaCD and College411, which were investments held by
Strategicus. In August 1999, the shares of Series A convertible preferred stock
were converted into 110,776 shares of the Company's common stock in accordance
with the Preferred Exchange. Additionally, the Principal received 1,641,310
unvested shares of the Company's common stock and 504,187 shares of Series A
convertible preferred stock, and the three remaining shareholders each received
1,760,763 shares of the Company's common stock and 540,882 shares of Series A
convertible preferred stock as additional consideration. The additional
consideration was to vest over the periods of their respective consulting and
employment contracts. The shares of Series A convertible preferred stock
received as additional consideration were exchanged in August 1999 for shares of
common stock in accordance with the Preferred Exchange. The Principal retained
the shares of common stock received in the Preferred Exchange; however, the
three remaining Strategicus shareholders subsequently agreed to exchange all of
their unvested shares of common stock received as additional consideration for
options to acquire an identical number of shares of common stock in the Company
at an exercise price of $1.00 per share. The unvested shares that the Principal
received and the options the three remaining shareholders received had an
ascribed value of $3.51 per unvested share and an average value of $.32 per
option as determined by an independent valuation company. These agreements, as
well as a stock option plan, are subject to the approval of the Company's
shareholders. The additional consideration issued to the Principal and the three
remaining shareholders vests over 24 and 48-month periods, respectively. As of
September 30, 1999, options to acquire 5,715,876 shares were included in these
agreements. In connection with the additional consideration, the Company
recorded total deferred compensation of $8,034,386 (see Note 12).
- F33 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 20 - EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
Effective June 1, 1999, the Company's Chief Executive Officer entered into an
employment agreement with the Company. The employment agreement provides that
the Chief Executive Officer will receive a specified annual salary along with
options to acquire 1,200,000 shares of the Company's common stock at an exercise
price of $1.00 per share, of which 120,000 options are to vest immediately and
the remaining options are to vest equally over a three-year period. The options
may be exercised over a five-year period commencing on the date the options
vest. These options are to have an exercise price that will be less than the
fair market value of the common stock at the date of grant, which resulted in
compensation expense of $330,933 for the nine months ended September 30, 1999.
In September 1999, the Chief Executive Officer agreed to reduce his option award
from 1,200,000 shares to 1,020,000 shares. The Company recorded total deferred
compensation of $2,978,400, based upon a fair market value for the Company's
common stock of $3.92 per share as determined by an independent valuation
company. The stock option plan is subject to the approval of the Company's
shareholders.
In August 1999, pursuant to a private offering by the Company and as the result
of negotiations between the Company and the Series A preferred shareholders, the
holders of the Series A convertible preferred stock agreed to exchange the
equivalent of one share of Series A convertible preferred stock for .6 share of
common stock.
In September 1999, the Company entered into a three-year employment agreement
with its Chief Operating Officer ("COO"). In accordance with the employment
agreement, the COO is to receive a salary at a specified amount and options to
purchase 900,000 shares of the Company's common stock at an exercise price of
$1.00 per share. The options may be exercised over a five-year period. In order
to facilitate the Company granting the COO these options, the Chief Executive
Officer and three former shareholders of Strategicus each agreed to the
cancellation of their options to purchase 180,000 shares of the Company's common
stock. In addition, the Principal agreed to the cancellation of 180,000 shares
of his Company common stock. The Company recorded total deferred compensation of
$1,359,000, based upon a fair market value of $2.51 per share as determined by
an independent valuation company. The stock option plan is subject to the
approval of the Company's shareholders.
In September 1999, the Company entered into a Series B convertible preferred
stock purchase agreement with certain investors to raise a maximum of $5,000,000
(see Note 14).
In September 1999, the Company agreed to acquire convertible preferred stock in
Asset Exchange, a development stage company intending to provide banks and other
financial institutions with an Internet-based service which allows them to more
efficiently trade loan portfolio assets. The purchase price of the convertible
preferred stock of Asset Exchange was $420,000. If this preferred stock is
converted, the Company would own approximately 20% of Asset Exchange. The
Company has the right to convert the preferred stock at any time. The conversion
price is subject to adjustment in the event the capital structure of Asset
Exchange is modified.
In October 1999, the Company exercised warrants to purchase additional shares of
common stock in College411. The additional investment in College411was $75,000
and increased the Company's ownership interest to 29% for a total cost of
$420,000.
In October 1999, the Company purchased an approximate 11% interest in Webmodal
directly from the Startegicus Principal, a related party, for $250,000 and
purchased an additional 1% of Webmodal's common stock for $100,000 from
Webmodal. Webmodal is a development stage company intending to develop an
Internet application for use by shippers in purchasing and executing domestic
full-truckload intermodal freight shipments.
- F34 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 20 - EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT (Continued)
In October 1999, the Company agreed to issue a total of 676,374 shares of common
stock at a price of $1.00 per share to two entities that are affiliated with a
consultant who is to provide future investment banking services to the Company.
The services are to be provided over a three-year period, and the Company will
recognize consulting fee expense, amounting to the difference between the fair
market value of the common stock and the purchase price, ratably over the
three-year period. The Company recorded total deferred consulting fees of
$953,687 as of the date of issuance, based upon a fair market value of $2.41 per
share as determined by an independent valuation company. The two entities also
invested $1,324,000 in the private placement offering of Series B Shares.
In October 1999, the Company issued warrants to purchase 110,077 shares of
common stock to Montrose Capital Management, Ltd. in connection with the Series
B preferred stock private placement offering. The warrants have an exercise
price of $5.00 per share and are exercisable for a period of three years from
the date of issuance. The issuance of these warrants was deemed to have been a
cost of raising capital, and therefore they have been recorded with offsetting
entries to additional paid-in capital.
In November 1999, the Company purchased an 11% interest in Swapit for $500,000.
Swapit is a development stage company intending to develop a consumer-driven
electronic barter exchange on the Internet.
In November 1999, the Company entered into a one-year employment agreement with
its Executive Vice President. In accordance with the employment agreement, the
Executive Vice President is to receive a specified salary.
On December 3, 1999, Net Value sold substantially all of its assets (see Note
4).
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS
Research and Development Costs for Discontinued Operations
The Company has expensed its research and development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86").
Feasibility of the Company's software was to be demonstrated when the Company
earned significant revenue in the marketplace from its software. The Company
intended to continue expensing such costs until software feasibility would be
established, which was expected to take place in 2000. Thereafter, the Company
intended to capitalize the direct costs and allocate overhead associated with
the development of software products. Under SFAS 86, maintenance costs incurred
subsequent to the product feasibility are to be charged to operations. The
Company disposed of its software development operations on December 3, 1999.
Revenue Recognition for Discontinued Operations
The Company generated revenues in the form of license fees and transaction fees.
Revenue from license fees is recognized when the license agreement is in effect,
delivery of the product has occurred, the license fee is fixed or determinable
and collectibility is reasonably assured. Revenue representing transaction fees
is recognized as manufacturer promotions are requested for viewing on the
Internet. Certain customers paid the Company in advance for license and
transaction fees. These amounts have been recorded as deferred revenue until
earned. Revenue from licensing agreements is recognized ratably over the
applicable service periods when post-contract support is required.
Commitments and Contingencies for Discontinued Operations
On June 1, 1998, Net Value, Inc. and its former Chief Executive Officer ( "CEO")
entered into a separation agreement pursuant to which the CEO's employment
agreement was terminated. The CEO immediately resigned from his positions as an
officer and as a director of Net Value, Inc. Under the terms of the separation
agreement, Net Value, Inc. agreed to pay deferred compensation and severance
benefits to the CEO, and permitted all of the CEO's options to purchase Net
Value, Inc.'s common stock to immediately vest. In June 1998, Net Value, Inc.
made certain deferred compensation and severance payments to the CEO
- F35 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
and, in accordance with the terms of the separation agreement, the CEO released
all of his rights under a lien and security interests in certain of Net Value,
Inc.'s assets. Additional severance compensation payments were to be paid to the
CEO in monthly installments through October 1999 under the terms of the
separation agreement. Net Value, Inc. was obligated to the CEO in the amount of
$61,875 and $20,625 as of December 31, 1998 and September 30, 1999,
respectively, and those amounts have been included in net current liabilities of
discontinued operations. $158,000 of noncash compensation, related to the
options which vested upon the CEO's termination, was expensed in 1998.
During 1996, the Company entered into an agreement with DMR Consulting Group,
Inc. ("DMR") pursuant to which DMR agreed to develop the material portion of the
core software for Net Value, Inc. and perform Net Value, Inc.'s initial systems
integration for its products. In October 1998, Net Value, Inc. and DMR entered
into a settlement agreement whereby DMR agreed to accept payment from Net Value,
Inc. in the amount of $270,000 as the final settlement of all outstanding
amounts then due DMR, which totaled $744,355. Net Value, Inc. was unable to
timely make the required settlement payment and on December 3, 1998, Net Value,
Inc. and DMR amended the settlement agreement ("Amended Settlement Agreement").
Under the terms of the Amended Settlement Agreement, in the event Net Value,
Inc. is in default, the previously outstanding balance due to DMR prior to the
execution of the settlement agreement will become fully due and payable. At
December 31, 1997 and 1998 and at September 30, 1999, Net Value, Inc. owed DMR
$818,368, $220,000 and $170,000, respectively, net of the agreed upon
prepayments and accrued interest. These amounts have been included in net
current liabilities of discontinued operations in the accompanying financial
statements. Net Value, Inc. did not make the required payments to DMR under the
Amended Settlement Agreement (see Note 10).
On April 7, 1998, Net Value, Inc. entered into a distribution and license
agreement with IQ Value, LLC ("IQ"), whereby IQ was granted the exclusive right
to the use of COL, one of Net Value, Inc.'s products, in providing services to
local merchants and the nonexclusive right to use COL and i-Value, another
Company product, elsewhere to provide fee-based marketing services to its
customers (the " IQ Agreement"). The IQ Agreement required Net Value, Inc. to
provide and manage a data center facility to be used to service IQ's customers.
Net Value, Inc. also agreed to provide IQ with one seat on its Board of
Directors during the term of the IQ Agreement or until such time that IQ no
longer retained any exclusivity under the IQ Agreement. Net Value, Inc. was to
receive a minimum licensing fee in the amount of $3,000,000, of which $1,250,000
was received in April 1998. In addition to the minimum licensing fee, Net Value,
Inc. was to receive a fee for each transaction processed under the IQ Agreement.
In order to maintain the exclusivity of the license for COL, IQ was required to
meet minimum annual levels of transaction fees. Due to contentious service
issues between Net Value, Inc. and IQ, IQ made no additional payments under the
terms of the IQ Agreement in 1998. On December 1, 1998 Net Value, Inc. and IQ
amended the IQ Agreement ("Amended IQ Agreement") whereby IQ agreed to
immediately terminate its exclusivity rights under the IQ Agreement, except for
certain exclusive rights that expired November 30, 1999, to solicit specified
merchant agreements. The Amended IQ Agreement provided that Net Value, Inc.
continue to support IQ promotions through June 30, 1999, and that Net Value,
Inc. would earn a minimum of $62,500 for its services in 1999. In addition, the
Amended IQ Agreement provided IQ with the right to use any intellectual property
rights contained within Net Value, Inc.'s patent rights on its software in order
for IQ to develop its own coupon delivery system. Upon the issuance of a patent
to Net Value, Inc., IQ has agreed to pay Net Value, Inc. a royalty for each
coupon or offer delivered by Net Value, Inc.'s proprietary system, subject to
the mutual agreement of Net Value, Inc. and IQ that Net Value, Inc.'s
proprietary technology was utilized in the process. The Amended IQ Agreement
also provided that Net Value, Inc. issue to IQ the equivalent of 90,000 shares
of common stock ("IQ Shares") and warrants to purchase 360,000 shares of Net
Value, Inc. common stock (the "IQ Warrants") for consulting services to be
performed by IQ. The IQ Warrants have exercise prices per share of $1.50, $1.80
and $2.16 for a total of 120,000 shares, and carry a two-year exercise period.
The IQ Shares and the IQ Warrants are not entitled to receive any shares of
preferred stock upon any share exchange or in connection with the Merger.
Consulting expense in 1998 relating to the IQ Shares and the IQ Warrants
amounted to $252,000 and $49,200, respectively, based upon a valuation of these
securities performed by an independent valuation company. In May 1999, Net
Value, Inc. entered into a termination agreement with IQ that provided, among
other things, the terms under which the IQ Agreement was to be terminated.
In September 1999 a lawsuit was filed against Net Value, Inc. claiming that the
process used by Net Value, Inc.'s products to distribute coupons infringes upon
existing patents. Management, along with Net Value, Inc.'s patent attorneys,
believes that Net Value, Inc.'s process does not infringe on the existing
patents, and that the claim is without merit. This liability was assumed by
Promotions Acquisition, Inc. as a result of the sale of substantially all of the
assets of Net Value, Inc.
- F36 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Notes and Loans Payable of Discontinued Operations
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------
1997 1998 1999
---------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C>
AML (a) $ - $ 783,000 $ 590,816
Golden Eagle Partners (b) 250,000 250,000 -
Transamerica (c) - 141,327 -
Bridge Offerings (d) 4,025,000 4,025,000 225,000
------------ ---------- -----------
4,275,000 5,199,327 815,816
Less discount on notes payable (2,463,090) - -
------------ ---------- -----------
1,811,910 5,199,327 815,816
Less amount due within one year (1,811,910) (5,120,293) (815,816)
------------- ---------- -----------
Noncurrent portion $ - $ 79,034 $ -
============ ========== ============
</TABLE>
(a)In 1998, AML, advanced $783,000 to Net Value, Inc. in unsecured advances.
In 1999, Net Value, Inc. paid $250,000 of principal and accrued interest
to AML, resulting in a balance due AML of $590,816 at September 30, 1999.
These advances accrue interest at a rate of 8% per annum. Interest
expense of $34,470 and $47,504 was incurred in 1998 and for the
nine-month period ended September 30, 1999, respectively, and has been
reflected in net current liabilities of discontinued operations at
December 31, 1998 and at September 30, 1999.
(b)On June 17, 1997, Net Value, Inc. obtained $250,000 in financing from
Golden Eagle Partners ("Golden Eagle") and executed a Loan and Security
Agreement ("Golden Eagle Agreement") which was subsequently modified in
December 1997. In consideration for the financing, Net Value, Inc. issued
a convertible promissory note which accrued interest at the rate of 10%
per annum. Pursuant to the terms of the Golden Eagle Agreement, Net
Value, Inc. executed an assignment of certain patents and trademarks for
the benefit of Golden Eagle. The modification of the Golden Eagle
Agreement required Net Value, Inc. to issue 10,000 shares of Net Value,
Inc.'s common stock as additional consideration at the time of the
repayment. $50,000 of financing fee expense related to Net Value, Inc.'s
future stock issuance under this modification was incurred in 1997 and is
a noncash transaction, and has been reflected in net current liabilities
of discontinued operations at December 31, 1997 and 1998. In September
1999, the Golden Eagle obligation was paid in full.
(c)In May 1998, Net Value, Inc. financed $175,500 of a three-year insurance
premium, amounting to $197,500, for the liability coverage of its
directors and officers. In 1999, the binder was rewritten to cover the
directors and officers of Holdings and all of Holdings's majority-owned
subsidiaries effective October 1998. The financing accrues interest at
7.76% per annum, and requires monthly installment payments of $5,923.
Interest expense on the loan amounted to $7,879 in 1998.
(d)In October 1997, Net Value, Inc. completed a $3,000,000 private placement
offering aggregating 120 units ("Units") at $25,000 per Unit. In December
1997, Net Value, Inc. completed a $1,025,000 private placement offering
aggregating 41 Units at $25,000 per Unit (collectively the "Bridge
Offerings"). Each Unit in the Bridge Offerings consisted of a promissory
note in the principal amount of $25,000 ("Note"), 625 shares of Net
Value, Inc.'s common stock, and a warrant to purchase 2,500 shares of Net
Value, Inc.'s common stock (collectively "Equity Instruments"). The Notes
are unsecured subordinated obligations of Net Value, Inc., which accrue
interest at the rate of 10% per annum or at a default rate of 15% per
annum. All principal and accrued interest became payable in full on the
one-year anniversary of their date of issuance.
- F37 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Proceeds of $2,696,750 were allocated to the Equity Instruments based
upon the relative fair market values of the Notes and Equity Instruments.
Of these proceeds, $2,012,500 has been allocated to common stock, based
upon an ascribed value of the equivalent of $20.00 per share, and
$684,250 has been allocated to the warrants based upon a value of the
equivalent of $6.80 per warrant. The remaining proceeds from the Bridge
Offerings amounting to $1,328,250 from the sale of the Units were
recorded as notes payable, reflecting an aggregate discount of $2,696,750
at the date of issuance. The discount on the Notes has been amortized as
interest expense over the term of the Notes. Amortization of the discount
for 1997 and 1998 amounted to $233,660 and $2,463,090, respectively, and
is reflected in loss from discontinued operations in the accompanying
statements of operations. At December 31, 1997, the unexpired portion of
the discount amounting to $2,463,090 had been reflected as a reduction in
net current liabilities of discontinued operations. There was no
unexpired portion at December 31, 1998.
Financing fees, consisting of commissions and legal fees, amounting to
$427,028 were incurred in connection with the Bridge Offerings. $286,109
of the financing fees have been prorated to Net Value, Inc.'s issuance of
Equity Instruments. The proration has been determined by an allocation
based on the fair market values of the Notes and Equity Instruments.
These financing fees have been recorded as an increase to the
stockholder's deficit in 1997. The remaining portion of the financing
fees incurred in the Bridge Offerings amounted to $140,919. The unexpired
portion of these financing fees amounting to $120,423 at December 31,
1997 had been reflected in net current assets of discontinued operations.
There was no unexpired portion at December 31, 1998. Financing fee
expense in 1997 and 1998 amounted to $20,496 and $120,423, respectively.
In 1998, Net Value, Inc. defaulted on the payment terms of the Notes. The
Notes were not paid within the one-year anniversary of the date of their
issuance. Pursuant to the terms of the Notes, Net Value, Inc. began
accruing interest as of the date of default at the default rate of 15%.
Interest expense incurred on the Notes, exclusive of the aforementioned
amortization of the discount on the Notes, amounted to $56,969, $438,707
and $25,313 in 1997, 1998 and for the nine months ended September 30,
1999, respectively, including $93,146 and $25,313 of default interest in
1998 and in the nine months ended September 30, 1999, respectively.
Accrued interest on the Notes amounted to $56,967, $495,646 and $50,834
at December 31, 1997 and 1998 and September 30, 1999, respectively.
On January 7, 1999, the Company offered the holders of the Notes an
exchange of their existing promissory notes for promissory notes issued
by Holdings through a private offering.
The following additional transactions occurred in 1997 and 1998:
In January 1997 and August 1997, VDC provided Net Value, Inc. with bridge
financing in the principal amount of $2,500,000 (the "Bridge Financing") and a
senior secured convertible loan in the amount of $100,000 (the "VDC Loan"). The
financing was made in anticipation of a statutory merger between Net Value, Inc.
and VDC. The Bridge Financing and the VDC Loan were secured by a lien on all of
Net Value, Inc.'s tangible and intangible assets. In consideration for the
receipt of the Bridge Financing, Net Value, Inc. issued 25,000 shares of common
stock to VDC, a non-cash transaction, which was recorded as interest expense of
$200,000 in 1997. Both the Bridge Financing and the VDC Loan accrued interest at
10% per annum.
On April 22, 1997, Net Value, Inc. entered into an agreement with VDC pursuant
to which VDC proposed to acquire Net Value, Inc. through a statutory merger or
similar business combination. This agreement was subsequently terminated in
order to allow Net Value, Inc. to proceed with other financing alternatives.
In December 1997, $2,400,000 of Bridge Financing principal and accrued interest
of $178,301 due to VDC was canceled and converted into 805,719 shares of common
stock. On December 18, 1997, all of Net Value, Inc.'s common stock and debt
obligations owned by VDC were acquired by Rozel, a related party. Subsequently
in December 1997, Net Value, Inc. repaid the remaining $200,000 of principal
outstanding on the Bridge Financing and the VDC Loan.
In 1997, Net Value, Inc. received and repaid $1,001,000 in unsecured advances
from AML, a related party. Net Value, Inc. also issued 47,550 shares of common
stock to AML in a noncash transaction as consideration to AML for the issuance
of the unsecured advances. The consideration amounting to $951,000 (based on an
ascribed value of $20.00 per share) had been recorded as interest expense in
1997.
- F38 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
On September 5, 1997, Net Value, Inc. obtained $300,000 in an unsecured
thirty-day loan at an interest rate of 10% from a private investor. As
additional consideration for such financings in 1997, Net Value, Inc. issued
7,500 shares of common stock to the investor in a noncash transaction resulting
in $150,000 of interest expense, based on an ascribed value of $20.00 per share.
On October 5, 1997, the note was acquired by another private investor, who
extended its maturity date to November 5, 1997. Net Value, Inc. retired the note
in October 1997 with the proceeds received from the Bridge Offerings.
In February 1998, Net Value, Inc. obtained $750,000 in financing from an
independent party and correspondingly issued a promissory note with an interest
rate of 10% per annum. Net Value, Inc. paid $50,000 of investment banking fees
relating to this financing to a shareholder owning approximately 1% of Net
Value, Inc.'s outstanding common stock at December 31, 1997. Expense related to
this financing fee is being recognized over the term of the note. Financing fee
expense of $43,182 was recorded in 1998. Upon repayment of the note, the lender
agreed to accept 2,750 shares of common stock as payment in full for $13,750 of
interest expense. The note was repaid on April 9, 1998.
Capital Stock Activity Not Disclosed in Note 12
Options and Warrants
A summary of Net Value, Inc. stock warrants as of December 31, 1996, 1997 and
1998 and September 30, 1999 (unaudited) is as follows:
<TABLE>
<CAPTION>
Grant Date Exercise Price Expiration
Warrants Granted and Outstanding Shares Date Exercisable per Share Date
- ------------------------------------ ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 500,000
Five Years
Granted 402,500 10/97-12/97 IPO Date $4.00 from IPO
-------------
Balance at December 31, 1997 902,500
-------------
Granted 120,000 12/1/98 12/1/98 $1.50 11/30/2000
Granted 120,000 12/1/98 12/1/98 $1.80 11/30/2000
Granted 120,000 12/1/98 12/1/98 $2.16 11/30/2000
-------------
Balances at December 31, 1998
and September 30, 1999
(Unaudited) 1,262,500
-------------
Cumulative Antidilutive Effect
[see Note 12] 560,222
-------------
Balance at September 30, 1999
(Unaudited) 1,822,722
=============
</TABLE>
- F39 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Stock Option Plan
A summary of Net Value, Inc.'s Stock Option Plan as of December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1998
-----------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 515,968 $ 3.25 1,674,000 $ 4.02
Granted 1,614,000 4.15 2,354,000 2.22
Canceled (455,968) 3.59 (901,750) 4.53
---------- ----------
Outstanding at end of year 1,674,000 $ 4.02 3,126,250 $ 2.51
========== ==========
Options exercisable at end of year 407,500 1,314,917
========== ==========
Shares available for grant 826,000 873,750
========== ==========
Weighted average fair value of options
granted during the year as determined
by an independent valuation company $ 2.10 $ 1.61
========== ==========
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Outstanding Contractual Exercise Outstanding Exercise
Options Life Price Options Price
-------------- ------------------------------------------- ----------
<S> <C> <C> <C> <C> <C>
From $0.20 to $0.80 598,500 4.44 $ 0.51 428,500 $ 0.64
From $1.20 to $2.50 1,655,000 9.72 1.74 551,667 1.74
From $4.00 to $5.00 528,750 4.13 4.64 334,750 4.45
From $6.00 to $7.00 344,000 7.21 6.46 - -
--------- ---- ------ --------- ------
From $0.20 to $7.00 3,126,250 7.49 $ 2.51 1,314,917 $ 2.07
========= ==== ====== ========= ======
</TABLE>
A summary of Net Value, Inc.'s stock options as of September 30, 1999
(unaudited) is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Net Value, Inc.:
<S> <C> <C>
From $ .20 to $ .80 598,500 428,500
From $1.20 to $2.50 2,138,000 573,302
From $4.00 to $5.00 528,750 334,750
From $6.00 to $7.00 344,000 -
------------- ------------
3,609,250 1,336,552
============= ============
</TABLE>
- F40 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Under Net Value, Inc.'s 1996 Stock Option Plan (the "Plan"), stock options to
purchase shares of Net Value, Inc.'s common stock may be granted to officers,
directors, employees, consultants and independent contractors. Accordingly, Net
Value, Inc., as of December 31, 1998, had reserved a total of 4,000,000 shares
of Net Value, Inc.'s common stock for issuance upon the exercise of options
granted pursuant to the Plan. Options granted under the Plan generally expire
five years following the date of vesting and are subject to limitations on
transfer. Option grants under the Plan are subject to various vesting
provisions. The exercise price of options granted under the Plan are determined
by the Board of Directors. The Board may amend, suspend or terminate the Plan at
any time, subject to restrictions imposed by applicable law.
On September 19, 1996, options to acquire 350,000 shares of Net Value, Inc.
common stock were granted to the former CEO in connection with his employment
agreement in effect at that time. In December 1997, 290,000 of these options
were canceled and reissued with new exercise prices. On September 19, 1997,
options to acquire an additional 550,000 shares of Net Value, Inc. common stock
were granted to the former CEO and 152,000 options were granted to the former
CTO in connection with their revised employment agreements. In addition to the
options granted to the former CEO and former CTO in 1997, Net Value, Inc.
granted compensatory options to acquire 622,000 shares of Net Value, Inc. common
stock to employees and other directors of Net Value, Inc., including the
Co-Founders.
In January 1998, Net Value, Inc. granted additional options to acquire 294,000
shares of Net Value, Inc. common stock to certain directors, officers, employees
and consultants. In February 1998, Net Value, Inc. entered into an agreement to
cancel options to acquire 90,000 shares of Net Value, Inc. common stock
originally granted to the Co-Founders and granted additional options to acquire
150,000 shares of Net Value, Inc. common stock with an exercise price equivalent
to the price per share to be ultimately realized in the event of an IPO by Net
Value, Inc.
Of the outstanding options as of December 31, 1997, 1998 and September 30, 1999
that had been granted by Net Value, Inc. to acquire 1,674,000, 3,126,250 and
3,609,250 shares of common stock, respectively, options to acquire 407,500,
1,314,917 and 1,336,552 shares of common stock, respectively, were exercisable.
Certain options that carry exercise prices that were less than the fair value of
the common stock at the date of grant resulted in compensation and consulting
expense of $1,434,400 and $1,582,457 in the years ended December 31, 1997 and
1998, and $904,148 and $1,235,226 for the nine months ended September 30, 1998
and 1999, respectively.
In March and April 1999, Net Value, Inc. granted options to acquire an aggregate
of 385,000 shares of common stock to certain Net Value, Inc. employees. Of the
total options to acquire common stock granted, 245,000 vest evenly over a
four-year period beginning on each employee's date of hire. The remaining
140,000 options were to vest upon Net Value, Inc. attaining certain performance
objectives.
As a result of the sale of substantially all of the assets of Net Value, Inc. on
December 3, 1999, all of the Net Value, Inc. stock options held by Net Value,
Inc.'s existing employees at the dat e of the sale were canceled. Therefore
immediately subsequent to the sale of the assets, options to acquire 989,250
shares of Net Value, Inc's common stock at prices ranging from $.63 to $7.00 per
share remained outstanding.
Preferred Stock
Net Value, Inc. authorized 1,000,000 shares of preferred stock with a par value
of $.001 per share. On December 15, 1997, Net Value, Inc. entered into a
preferred stock purchase agreement with Rozel (the "Preferred Stock Agreement").
Pursuant to the terms of the Preferred Stock Agreement, the Company's Board of
Directors designated 300,000 shares of Preferred Stock as Series A convertible
preferred stock at a $10.00 per share stated value with no voting or
registration rights ("Series A Shares"). The Series A Shares bear no dividends,
and the preferred shareholders receive the stated value of their shares as a
priority over common stock shareholders in the event of a liquidation of Net
Value, Inc. Each Series A Share was convertible into the equivalent of 3.125
shares of Net Value, Inc.'s common stock at the option of Net Value, Inc. or
Rozel. These conversion rights provided the Series A shareholders with a
beneficial conversion feature upon issuance, valued at $52.50 per Series A
Share, or the equivalent of $16.80 per each converted common share, based upon
the ascribed value of the equivalent of $20.00 per share of common stock. This
beneficial conversion feature resulted in a preferred dividend upon the issuance
of Series A Shares in accordance with EITF D-60.
- F41 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
The Preferred Stock Agreement permitted Net Value, Inc. to request that Rozel
periodically purchase up to an aggregate of the equivalent of 300,000 of Series
A shares at an aggregate purchase price of $3,000,000. In accordance with the
Preferred Stock Agreement, Rozel purchased 22,500 shares of Series A Shares for
$225,000 and 276,200 shares for $2,762,000 in 1997 and 1998, respectively,
exclusive of amounts repurchased. In September 1998, Net Value, Inc. repurchased
40,000 shares of Series A Shares from Rozel for $400,000. Pursuant to the terms
of the Preferred Stock Agreement, Net Value, Inc. issued the equivalent of
37,500 shares of common stock to Rozel in exchange for the satisfaction of
Rozel's funding obligations. Pursuant to the requirements of EITF D-60, the
issuance of the Series A Shares and the addition of the equivalent of 37,500
shares of common stock by Net Value, Inc. has been recorded as preferred stock
dividends of $1,181,250 and $15,250,500 in 1997 and 1998, respectively. On June
1, 1998, Rozel converted 80,000 Series A Shares into the equivalent of 250,000
shares of Net Value, Inc.'s common stock. On November 15, 1998, in accordance
with a Share Exchange agreement between Net Value, Inc. and Holdings, Rozel
exchanged the remaining balance of 178,700 Net Value, Inc. Series A Shares for
an additional 1,000,000 shares of Holdings common stock and 500,000 shares of
Holdings Series A convertible preferred stock (see Note 12).
Stock-Based Compensation
During 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(" SFAS 123".) As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Board No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants and
common stock issuances as of the grant date. APB 25 recognizes the intrinsic
value of the instruments issued by the Company as of the measurement date, which
is generally the date at which both the number of shares that an individual is
entitled to receive and the purchase price are known. Had compensation expense
for 1996, 1997 and 1998 been determined under the fair value provisions of SFAS
123, the Company's net loss and net loss per share would have differed as
follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31, September 30, September 30,
1996 1997 1998 1998 1999
--------------------- --------------------- --------------------- --------------------- ---------------------
Pro
Forma
Per Per Per Per Per
Net Loss Share Net Loss Share Net Loss Share Net Loss Share Net Loss Share
------------ ------ ------------ ------ ------------ ------ ------------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As reported
Under APB
25 $ (3,314,094) $(3.55) $(12,416,487) $(6.88) $(26,357,326) $(5.59) $(25,445,843) $(6.71) $(5,068,553) $(0.59)
============ ====== ============ ====== ============ ====== ============ ====== =========== ======
Pro Forma
Under SFAS
123 $ (3,149,487 $(3.37) $(14,036,064) $(7.78) $(26,983,255) $(5.73) $(25,445,843 $(6.71) $(5,068,553) $(0.59)
============ ====== ============ ====== ============ ====== ============ ====== =========== ======
</TABLE>
The fair market value of the options and warrants used in the above computation
were determined by an independent valuation company, using a simulation model
which simulates many potential outcomes for the value of Net Value, Inc.'s stock
over the period during which the options or warrants may be exercised. Because
of the expected high volatility of the value of Net Value, Inc.'s common stock
and the long-term nature of some of the options and warrants, standard models
were not deemed appropriate by the independent valuation company. The
independent valuation company determined the potential stock price outcomes
using a log-normal distribution with expected returns of between 23% (after Net
Value, Inc.'s stock price had reached an equivalent of $20.00 per share) and 50%
(prior to that), a standard deviation of 26% to 100%. The independent valuation
company determined that there was also a 50% likelihood that the value of the
common stock would drop to zero in any one year before reaching an equivalent of
$20.00 per share level.
- F42 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Related Parties Not Disclosed Elsewhere in the Financial Statements and Notes
AML was an employer of a former Director of Net Value, Inc. until September
1997. In 1998, the President of AML and APP Investments, Inc. became a Director
of Net Value, Inc. and in January 1999 became a Director and Chief Executive
Officer of Holdings.
On September 18, 1996, Net Value, Inc. entered into three-year consulting
agreements with the Co-Founders providing for compensation in the aggregate of
$168,000 annually. The aggregate amount paid on these agreements was $183,225 in
1997. In December 1997, the consulting agreements were canceled and replaced
with employment agreements providing each of the Co-Founders with an annual
salary of $85,000 plus commissions for the first year of the contract, and with
compensation solely on a commission basis thereafter. The employment agreements
also granted the Co-Founders options to acquire 120,000 shares of common stock.
In February 1998, Net Value, Inc. and the Co-Founders agreed to terminate the
Co-Founders' employment agreements. These terminations, which became effective
upon the execution of the IQ Agreement, provide that the Co-Founders receive
compensation of $40,000 which was paid in 1998. The Co-Founders continued to
receive their annual salaries through September 30, 1998 and their options to
acquire shares of Net Value, Inc. common stock have been renegotiated.
During 1998, Net Value, Inc. borrowed $1,528,000 from AML, of which $745,000 was
repaid as of December 31, 1998.
Loss Per Share
Net Value, Inc. adopted SFAS 128 in 1997, and has followed the guidelines of
SFAS 128 in the presentation of loss per share for all periods presented in the
financial statements. Options and warrants to purchase common stock and
convertible preferred stock are not included in the computation of diluted loss
per share because the effect of these instruments would be antidilutive for all
periods presented. The common shares potentially issuable arising from these
instruments which were outstanding during the period presented in the financial
statements are as follows:
<TABLE>
<CAPTION>
Exercise/ December 31,
Conversion -----------------------------------------
Price 1996 1997 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Options $0.63-$5.00 18,753 32,205 8,569
Convertible preferred stock $.080 - 17,578 -
Warrants $4.00 - 2,927 -
Convertible debt $2.00 - - 87,656
------ ------- ------
Total common shares
potentially issuable 18,753 52,710 96,225
====== ======= ======
</TABLE>
Operating Leases
In November 1997, Net Value, Inc. executed an operating lease agreement for a
facility located in Fairfield, Connecticut. The agreement commenced December
1997 and expires December 2000. Monthly rent under this lease agreement amounts
to $13,284 plus additional rent for Net Value, Inc.'s pro rata portion of
certain property expenses. In 1999, Net Value, Inc. vacated the facility and
relocated to Mountain View, California. On November 23, 1999, the landlord filed
a lawsuit against Net Value, Inc. seeking to recover damages and costs related
to an alleged breach of the lease. The entire remaining base lease obligation
has been recorded as a liability on the books and records of Net Value, Inc. as
of September 30, 1999.
- F43 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
In November 1998, Net Value, Inc. executed an operating sublease agreement for a
facility located in Mountain View, California. The agreement commenced November
1998, expired August 15, 1999 and a new lease became effective thereafter.
Monthly rent under this sublease agreement amounts to $4,816 plus additional
rent for the Company's pro rata portion of certain property expenses. As a
result of the sale of substantially all of the assets of Net Value, Inc. on
December 3, 1999, Net Value Inc. has no further liability under this lease
following the date of the sale.
In February and December 1998, Net Value, Inc. entered into operating lease
agreements for computer equipment. The lease agreements call for 36 monthly
payments of $4,285 and $460, respectively. As a result of the sale of
substantially all of the assets of Net Value, Inc. on December 3, 1999, Net
Value, Inc. has no further liability under these leases following the date of
the sale.
Total rental expense amounted to $29,300, $145,682 and $191,906 in 1996, 1997
and 1998 and $133,517 and $201,212 for the nine-month periods ended September
30, 1998 and 1999, respectively. There are no future minimum payments required
subsequent to December 3, 1999 under the terms of Net Value, Inc.'s lease
agreements as a result of the sale of substantially all of the assets of Net
Value, Inc.
December 31, September 30,
Year 1998 1999
- ------------------- ----------------- -----------------
(Unaudited)
1999 $198,319 $ 36,058
======== ========
- F44 -
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet reflects
the historical balance sheet of Netvalue Holdings, Inc. and the balance sheet of
Net Value, Inc. after the adjustment for the sale of substantially all of the
business assets of Net Value Holdings, Inc. to Promotions Acquisition, Inc. as
if the transaction had occurred on September 30, 1999. The information presented
is derived from, should be read in conjunction with, and is qualified in its
entirety by reference to the separate historical financial statements and the
notes thereto appearing elsewhere in this Prospectus/S-1 or incorporated
elsewhere in this Prospectus/S-1 by reference. The unaudited pro forma condensed
consolidated balance sheet has been included for comparative purposes only and
does not purport to be indicative of the financial position or results of
operations which may be obtained in the future.
The financial statements of Net Value Holdings, Inc. are those of Net Value,
Inc. as the result of an in-process merger of the two entities which has been
recorded as a recapitalization. At September 30, 1999 Net Value Holdings, Inc.
owned 66% of the outstanding common stock of Net Value, Inc. Net Value Holdings,
Inc. plans on completing a merger with Net Value, Inc. in 2000 by acquiring the
remaining shares of Net Value, Inc. it does not own.
The presentation of the common shares of Net Value, Inc. not owned by Net Value
Holdings, Inc. reflect a minority interest of 34% in the assets and liabilities
related to Net Value, Inc. At September 30, 1999, 34% of the outstanding common
stock of Net Value, Inc. continued to be owned by stockholders other than Net
Value Holdings, Inc.
- P1 -
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Pro forma Condensed Consolidated Balance Sheet
September 30 1999
<TABLE>
<CAPTION>
ASSETS
Pro forma
Historical Adjustments As Adjusted
---------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 1,051,930 $ 2,000,000 $ 3,051,930
Loan receivable - related parties 577,000 - 577,000
Loan receivable 60,000 - 60,000
Prepaid financing fees, net 298,935 - 298,935
Prepaid expenses 52,786 - 52,786
Other 15,562 - 15,562
Net current assets of discontinued operations 503,508 (503,508) -
---------------- --------------- ----------------
Total Current Assets 2,559,721 1,496,492 4,056,213
Property and Equipment, Net 41,412 - 41,412
Ownership Interests in Affiliate Companies 3,647,035 4,069,576 7,716,611
Intangibles, Net 227,863 - 227,863
Intangible Net 65,746 - 65,746
Deposits 6,452 - 6,452
Net Other Assets of Discontinued Operations 479,149 (479,149) -
---------------- --------------- ----------------
$ 7,027,378 $ 5,086,919 $ 12,114,297
================ =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Short-term borrowings - other $ 380,000 $ 63,000 $ 443,000
Stock subscription payable to affiliated company 250,000 - 250,000
Notes payable, net of discounts 766,400 225,000 991,400
Notes payable - related party 12,000 533,000 545,000
Long-term debt due within one year 71,287 - 71,287
Accrued interest 404,890 - 404,890
Accounts Payable, Accrued Salaries and Other Expenses 384,630 1,179,000 1,563,630
Net current liabilities of discontinued operations 2,918,314 (2,918,314) -
---------------- --------------- ----------------
Total Current Liabilities 5,187,521 (918,314) 4,269,207
---------------- --------------- ----------------
Non-Current Liabilities
Long-term debt, net of discounts and portion included in current
liabilities 4,777,599 - 4,777,599
Net other liabilities of discontinued operations - - -
---------------- --------------- ----------------
Total Non-Current Liabilities 4,777,599 - 4,777,599
---------------- --------------- ----------------
Commitments and Contingencies - - -
Series B mandatory redeemable preferred stock, Net Value Holdings,
Inc., $.001 par value, $1,000 liquidation value, $1,250 redemption
value. At September 30, 1999, 2000 shares issued and outstanding;
5,000 shares authorized 1,732,000 - 1,732,000
Stockholders' Equity (Deficit)
Preferred stock, Net Value, Inc., $.001 par value per share. At
December 31, 1997, 22,500 shares issued and outstanding; 0 shares
issued and outstanding at December 31, 1998 and September 30, 1999;
$225,000 liquidation preference at December 31, 1997 - - -
Series A preferred stock, Net Value Holdings, Inc., $.001 par value
per share. At December 31, 1997 and 1998 and September 30, 1999,
2,019,852, 2,519,852 and 0 shares issued and outstanding, respectively - - -
Common stock, Net Value, Inc., $.001 par value per share. At
December 31, 1997 and 1998 and September 30, 1999, 651,650, 1,037,338
and 1,037,338 shares issued and outstanding, respectively 1,038 - 1,038
Common stock, Net Value Holdings, Inc., $.001 par value share. At
December 31, 1997 and 1998 and September 30, 1999, 2,019,852,
6,969,852 and 13,371,901 shares issued and outstanding,
respectively 13,372 - 13,372
Additional paid-in capital 64,855,155 (2,048,306) 62,806,849
Deferred compensation (11,151,764) - (11,151,764)
Deferred compensation of discontinued operations (2,048,306) 2,048,306 0
Deficit accumulated during the development stage (56,339,237) 6,005,233 (50,334,004)
---------------- --------------- ----------------
Total Stockholders' Equity (Deficit) (4,669,742) 6,005,233 1,335,491
---------------- --------------- ----------------
$ 7,027,378 $ 5,086,919 $ 12,114,297
================ =============== ================
</TABLE>
The accompanying notes are an integral part of this
unaudited pro forma condensed consolidated balance sheet.
- P2 -
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The unaudited pro forma information for September 30, 1999 reflects the
adjustments to record the sale of substantially all the business assets of
Net Value, Inc. to Promotions Acquisitions, Inc. ("Promotions") as if the
sale had occurred on September 30, 1999.
(2) This presentation assumes that as stated in the sale agreement, Net Value
Inc. would sell all of its business assets and the rights to all of its
intellectual property and certain trade names, and in consideration would
receive $2,000,000 in cash at closing, the assumption of approximately
$1,600,000 of liabilities by Promotions and 2,958,819 shares of Promotions
common stock, representing a 12% ownership interest in Promotions on a fully
diluted basis. Additionally Net Value, Inc. would retain approximately
$2,000,000 in existing liabilities. The presentation also assumes, as
specified in the sale agreement, that all options to employees issued after
June 1, 1998 would be canceled, resulting in the elimination of deferred
compensation. The transaction would result in a gain on the sale of the
assets of approximately $6,005,233.
(3) This presentation assumes that Net Value Holdings, Inc. records a cost basis
investment in Promotions of $3,994,406 plus $75,170 of professional fees
based on a valuation of Promotions of $1.35 per share.
(4) The financial statements of Net Value Holdings, Inc. are those of Net Value,
Inc. as the result of an in-process merger of the two entities which has
been recorded as a recapitalization. At September 30, 1999 Net Value
Holdings, Inc. owned 66% of the outstanding common stock of Net Value, Inc.
Net Value Holdings, Inc. plans on completing a merger with Net Value, Inc.
in 2000 by acquiring the remaining shares of Net Value, Inc. it does not
own.
The presentation of the common shares of Net Value, Inc. not owned by Net
Value Holdings, Inc. reflect a minority interest of 34% in the assets and
liabilities related to Net Value, Inc. At September 30, 1999, 34% of the
outstanding common stock of Net Value, Inc. continued to be owned by
stockholders other than Net Value Holdings, Inc.
- P3 -
<PAGE>
To the Directors and Officers
ASSET EXCHANGE, INC.
310 SW 4th Avenue
Portland, OR 97204
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Asset Exchange, Inc. (A
Development Stage Company) as of September 30, 1999. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to in the first paragraph presents
fairly, in all material respects, the financial position of Asset Exchange, Inc.
(A Development Stage Company) as of September 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note D to the
financial statements, the Company has incurred losses in its development stage,
and will need to raise additional capital to complete its development
activities. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note D. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MORGENSTERN & ASSOCIATES
Certified Public Accountants
December 6, 1999
- F46 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 175,645
Prepaid expenses 2,482
---------
Total current assets 178,127
PROPERTY AND EQUIPMENT, NET 10,106
DEPOSITS 1,000
---------
TOTAL ASSETS $ 189,233
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 29,347
Accrued expenses 247
Loans payable - officers 7,168
---------
Total current liabilities 36,762
---------
COMMITMENTS AND CONTINGENCIES (NOTE D)
STOCKHOLDER'S EQUITY:
Preferred stock, $.0001 par value; 4,000,000 shares authorized,
290,323 shares issued and outstanding 29
Common stock, $.0001 par value; 10,000,000 shares authorized,
1,000,000 shares issued and outstanding 100
Additional paid-in capital 450,871
Stock subscriptions receivable (250,000)
Deficit accumulated during the development stage (48,529)
---------
Total stockholders' equity 152,471
---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 189,233
=========
</TABLE>
The accompanying notes are an integral part of the financial statements
- F47 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
From March 12, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
REVENUES $ 0
---------
OPERATING EXPENSES
Bank charges 25
Conferences 976
Consulting 1,757
Depreciation 692
Dues and subscriptions 125
Interest 392
Internet service providers 2,638
Office 5,182
Payroll 24,000
Payroll processing fees 77
Professional fees 27,373
Rent 1,695
Tax and licenses 100
Tax on salaries 1,836
Travel and entertainment 370
Telephone 1,436
---------
Total operating expenses 68,674
---------
NET LOSS FROM OPERATONS BEFORE EXTRAORDINARY ITEM (68,674)
---------
EXTRAORDINARY ITEM - Debt extinguishment (NOTE F) 20,145
---------
NET LOSS TO COMMON STOCKHOLDERS $ (48,529)
=========
Basic and diluted net loss from operations per common share $ (0.0989)
Basic and diltued extraordinary gain per common share 0.0290
---------
Basic and diluted net loss per common share $ (0.0699)
=========
Basic and diluted weighted average number of common shares outstanding 694,581
=========
</TABLE>
- F48 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Stock During the
Preferred Stock Common Stock Paid-In Subscription Development
Shares Amount Shares Amount Capital Receivable Stage Total
----------- -------- ----------- -------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 12, 1999 - - - - - - - -
Common stock issued - - 1,000,000 $ 100 $ 900 - - $ 1,000
Preferred stock issued 290,323 $ 29 - - 449,971 - - 450,000
Stock subscription receivable - - - - - $(250,000) - (250,000)
Net loss for period (unaudited) - - - - - - $ (48,529) (48,529)
----------- -------- ----------- -------- ----------- ------------ ------------- ----------
Balance at September 30, 1999 290,323 $ 29 1,000,000 $ 100 $450,871 $(250,000) $ (48,529) $ 152,471
=========== ======== =========== ======== =========== ============ ============= ==========
</TABLE>
- F49 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(UNAUDITED)
From March 12, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (68,674)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation/amortization 692
Non-cash interest expense on debt extinguishment 145
Changes in assets and liabilities:
Prepaid expenses (2,482)
Deposits (1,000)
Accounts payable 29,347
Accrued expenses 247
---------
Net cash provided / (used) by operating activities (41,725)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of computer equipment and furniture and fixtures (10,798)
---------
Net cash provided / (used) by investing activities (10,798)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt extinguished 20,000
Proceeds from officers loans 7,168
Proceeds from the issuance of common stock 1,000
Proceeds from the issuance of preferred stock 200,000
---------
Net cash provided / (used) by financing activities 228,168
---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 175,645
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 175,645
=========
</TABLE>
- F50 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Asset Exchange, Inc., a Delaware corporation, was incorporated on March
12, 1999. Asset Exchange is a development stage company which, through the
Internet, allows financial institutions to buy and sell loan portfolios
and other assets among themselves. The Company's website provides matches
between buyers and sellers of these loan portfolios. The website allows
medium and small sized banks to participate in these markets. The Company
anticipates that its customer base will consist of banks, finance
companies thrifts, community banks, credit unions, and other financial
institutions. The Company intends to generate revenue from commissions on
the buying and selling of these instruments on its website.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to potential concentrations
of credit risk consist principally of cash. Cash consists of deposits with
a large United States financial institution that management believes is
credit worthy. The account is insured by the Federal Deposit Insurance
Corporation up to a maximum of $100,000. At September 30, 1999, the
Company had an uninsured cash balance of $75,645.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Computer equipment and software 3 years
Furniture and fixtures 7 years
Office equipment 7 years
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
stock subscriptions receivable, accounts payable and borrowings, are
carried at cost, which approximates fair value.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
- F51 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," during 1999. SFAS 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," during 1999. SFAS 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. To date, the Company has not had any transactions that are
required to be reported in comprehensive income.
REVENUE RECOGNITION
The Company recognizes revenues when earned or when services performed,
provided no significant obligations remain, and collectibility is
probable.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities and operating losses available to
offset future taxable income, using enacted tax rates in effect in the
years in which the differences are expected to reverse. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
START-UP COSTS
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Cost of Start-up Activities", the Company expenses all start-up
activities, including organizational costs, as they are incurred.
LOSS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires presentation of basic loss per share and diluted loss
per share for the period presented. Basic net income (loss) per share is
computed by dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common
shares outstanding during the period. Incremental common shares issuable
upon the exercise of stock options and warrants, are included in the
computation of diluted net income (loss) loss per share to the extent such
shares are dilutive.
CONCENTRATIONS
Concentrations not disclosed elsewhere in the financial statements are as
follows:
The Company plans to generate income from one source which utilizes a
single medium. Lack of website (product) development or customer interest
could have a materially adverse effect on the Company.
- F52 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Computer hardware 8,483
Computer software 1,384
Office equipment 382
Furniture and fixtures 549
--------
10,798
Less Accumulated Depreciation (692)
--------
10,106
Depreciation expense for the period March 12, 1999 (Inception) through
September 30, 1999 was $692.
C. INCOME TAXES
For Federal income tax purposes start-up costs must be amortized over not
less than 60 months. The Company has recognized a deferred tax benefit for
start-up costs to be amortized over 60 months for tax purposes. However,
as it is not more likely than not that the deferred tax asset will be
utilized, management has established a full valuation reserve of
approximately $10,000.
D. COMMITMENTS AND CONTINGENCIES
GOING CONCERN:
Since March 12, 1999 (Inception), the Company has been in the development
stage and the principal activities have consisted of raising capital and
developing its Internet-based website.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
is not yet generating revenues from website operations and, at September
30, 1999, had accumulated a deficit from its operating activities.
Continuation of the Company as a going concern is dependent upon, among
other things, obtaining additional capital, achieving market acceptance of
its product and achieving satisfactory levels of profitable operations.
The financial statements do not contain any adjustments relating to the
realization of assets and liquidation of liabilities that may be necessary
should the Company be unable to continue as a going concern.
LEASES:
The Company leases two office facilities, both under operating leases.
One lease has a term of one year, expiring on July 12, 2000. The entire
amount for this lease has been paid in full and is being expensed over the
term of the lease. The monthly rental expense is $184.
The other lease has a term of one year, expiring on August 31, 2000.
Future minimum annual lease payments, as of September 30, 1999, were as
follows:
1999 $1,641
2000 $3,829
- F53 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
E. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes the issuance of
10,000,000 shares of Common Stock, $0.0001 par value per share, of which
1,000,000 were outstanding as of September 30, 1999. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be
voted on by the stockholders.
The Company issued 1,000,000 shares of common stock at $0.001 per share on
May 13, 1999 to various founders for a total cash contribution of $1,000.
The Company's Articles of Incorporation authorizes the issuance of
4,000,000 shares of "Series A Preferred Stock", $0.0001 par value per
share, of which 290,323 shares were outstanding as of September 30, 1999.
Holders of each share of "Series A Preferred Stock" are entitled to vote
on all matters at stockholder's meetings with the exception of directors.
So long as at least 100,000 shares of "Series A Preferred Stock" is
outstanding, the holders of a majority of the "Series A Preferred Stock"
shall be entitled to elect one member of the Board of Directors. Holders
of each share of the "Series A Preferred Stock" shall convert their shares
to common stock at the conversion price set forth in the Amended and
Restated Articles of Incorporation. The conversion price at September 30,
1999 was $1.55.
The Company issued 290,323 shares of "Series A Preferred Stock" at $1.55
per share on September 23, 1999. There was $250,000 still due from this
private placement on September 30, 1999. This amount was paid in full on
October 1, 1999.
F. EXTRAORDINARY ITEM (UNAUDITED)
The Company realized an extraordinary gain from debt extinguishment in the
amount $20,145 for the period March 12, 1999 (Inception) to September 30,
1999. On August 11, 1999, the Company received $20,000 cash in exchange
for an 8% promissory note payable in full on February 11, 2000. A
provision in the note called for the closing of the "Series A Preferred
Stock Purchase Agreement" (with same party) within thirty days of the
note. Failure to close the agreement, would cause the entire note, with
unpaid accrued interest, to be forgiven. The "Series A Preferred Stock
Purchase Agreement", closed on September 23, 1999, forty-three days after
the signed promissory note. Accrued interest amounted to $145 during this
period.
G. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the period March 12, 1999 (Inception) to September
30, 1999:
<TABLE>
<CAPTION>
Numerator:
<S> <C>
Numerator for basic and diluted earnings per share - net loss from operation ($ 68,674)
Numerator for basic and diluted earnings per share - extraordinary gain 20,145
---------
Numerator for basic and diluted earnings per share - net loss ($ 48,529)
=========
Denominator:
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding: 694,581
=========
</TABLE>
H. RELATED PARTY TRANSACTIONS
The Company had debt outstanding to it's shareholders on September 30,
1999 in the amount of $7,168. The loans accrue interest at the rate of 8%
per annum. The loans were subsequently paid back to the shareholders on
November 1, 1999.
The Company paid salaries to the top three majority shareholders in the
amount of $24,000 for services for the period March 12, 1999 (Inception)
to September 30, 1999.
- F54 -
<PAGE>
To the Directors and Officers
COLLEGE411. COM, INC.
1085 Mission Street
San Francisco, CA 94103
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of College411.com, Inc. (A
Development Stage Company) as of September 30, 1999. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to in the first paragraph presents
fairly, in all material respects, the financial position of College411.com, Inc.
(A Development Stage Company) as of September 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company has incurred losses in its development stage,
and will need to raise additional capital to complete its development
activities. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note C. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MORGENSTERN & ASSOCIATES
Certified Public Accountants
November 30, 1999
- F55 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 59,497
Prepaid expenses 1,000
---------
Total current assets 60,497
PROPERTY AND EQUIPMENT, NET 22,281
DEPOSITS 9,500
---------
TOTAL ASSETS $ 92,278
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,695
Accrued expenses 5,350
---------
Total current liabilities 8,045
---------
COMMITMENTS AND CONTINGENCIES (NOTE C)
STOCKHOLDER'S EQUITY:
Common stock, $.001 par value; 15,00,000 shares authorized,
11,875,000 shares issued and outstanding 11,875
Additional paid-in capital 172,375
Deficit accumulated during the development stage (100,017)
---------
Total stockholders' equity 84,233
---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 92,278
=========
</TABLE>
The accompanying notes are an integral part of the financial statements
- F56 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
From April 13, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
REVENUES $ 300
------------
OPERATING EXPENSES
Bank charges 65
Consulting 69,572
Depreciation 1,969
Dues and subscriptions 25
Insurance 517
Miscellaneous 585
Office 860
Payroll 5,350
Payroll processing fees 1,500
Professional fees 15,486
Software 311
Travel and entertainment 1,170
Telephone 2,907
------------
Total operating expenses 100,317
------------
NET LOSS TO COMMON STOCKHOLDERS $ (100,017)
============
Basic and diluted net loss per common share $ (0.0100)
============
Basic and diluted weighted average number of common shares outstanding 10,049,806
============
</TABLE>
- F57 -
<PAGE>
College411.Com, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-In Development
Shares Amount Capital Stage Total
--------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, April 13, 1999 - - - - -
Common stock granted for services 9,250,000 $ 9,250 - - $ 9,250
Common stock issued in private placements 2,625,000 2,625 172,375 - 175,000
Net loss for period (unaudited) - - - (100,017) (100,017)
--------------- ---------------- --------------- --------------- ---------------
Balance at September 30, 1999 11,875,000 $ 11,875 $ 172,375 $ (100,017) $ 84,233
=============== ================ =============== =============== ===============
</TABLE>
- F58 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(UNAUDITED)
From April 13, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(100,017)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation/amortization 1,969
Common stock issued for services 9,250
Changes in assets and liabilities:
Prepaid expenses (1,000)
Deposits (9,500)
Accounts payable 2,695
Accrued expenses 5,351
---------
Net cash provided / (used) by operating activities (91,252)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of computer equipment (24,251)
---------
Net cash provided / (used) by investing activities (24,251)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of stock 175,000
---------
Net cash provided / (used) by financing activities 175,000
---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,497
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,497
=========
</TABLE>
- F59 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
College411.com, Inc., a Delaware corporation, was incorporated on April
13, 1999. College411.com is a development stage company which intends to
provide, through the Internet, a wide array of information, products and
services that are useful to college students. The Company's website
includes: news, research information, academic research, career
suggestions, online radio, travel guides, dating tips, movie tickets,
textbook finder, online tutoring, chat, procrastination tools, student
classifieds, auctions and game resources. The Company intends to generate
revenue from its website through six different sources: e-commerce,
chargeable services, affiliate programs, targeted advertising, sponsorship
fees, and syndication fees from its website.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to potential concentrations
of credit risk consist principally of cash. Cash consists of deposits with
a large United States financial institution that management believes is
credit worthy. At September 30, 1999, the Company had no significant
concentrations of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents
and accounts payable and borrowings, are carried at cost, which
approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Computer equipment 3 years
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities and operating losses available to
offset future taxable income, using enacted tax rates in effect in the
years in which the differences are expected to reverse. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
- F60 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
REVENUE RECOGNITION
The Company recognizes revenues when earned or when services performed,
provided no significant obligations remain, and collectibility is
probable.
START-UP COSTS
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Cost of Start-up Activities", the Company expenses all start-up
activities, including organizational costs, as they are incurred.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," during 1999. SFAS 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. To date, the Company has not had any transactions that are
required to be reported in comprehensive income.
LOSS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires presentation of basic loss per share and diluted loss
per share for the period presented. Basic net income (loss) per share is
computed by dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common
shares outstanding during the period. Incremental common shares issuable
upon the exercise of stock options and warrants, are included in the
computation of diluted net income (loss) loss per share to the extent such
shares are dilutive.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," during 1999. SFAS 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment.
CONCENTRATIONS
Concentrations not disclosed elsewhere in the financial statements are as
follows:
The Company plans to generate income from six sources. All of these
sources, both under development and currently offered to generate income,
utilize the same medium. Lack of product (website) development or customer
interest could have a materially adverse effect on the Company.
- F61 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
B. INCOME TAXES
For Federal income tax purposes start-up costs must be amortized over not
less than 60 months. The Company has recognized a deferred tax benefit for
start-up costs to be amortized over 60 months for tax purposes. However,
as it is not more likely than not that the deferred tax asset will be
utilized, management has established a full valuation reserve of
approximately $5,000.
C. CONTINGENCY - GOING CONCERN
Since April 13, 1999 (inception), the Company has been in the development
stage and the principal activities have consisted of raising capital and
developing its Internet-based website.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
is not yet generating significant revenues from website operations and, at
September 30, 1999, had accumulated a deficit from its operating
activities. Continuation of the Company as a going concern is dependent
upon, among other things, obtaining additional capital, achieving market
acceptance of its product and achieving satisfactory levels of profitable
operations. As discussed in Note H, the Company is in late stage
negotiations in closing its next round of financing. The financial
statements do not contain any adjustments relating to the realization of
assets and liquidation of liabilities that may be necessary should the
Company be unable to continue as a going concern.
D. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes the issuance of
15,000,000 shares of Common Stock, $0.001 par value per share, of which
11,875,000 were outstanding as of September 30, 1999. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be
voted on by the stockholders.
The Company issued 9,250,000 shares of common stock at $0.001 per share on
April 13, 1999 to its founders for intellectual property contributed to
the Company. The total fair market value of the property contributed
amounted to $9,250.00.
The Company issued 3,750,000 shares of common stock at $0.067 per share
between June 21, 1999 and October 6, 1999.
E. STOCK OPTIONS AND WARRANTS
The Company accounts for its stock option plan in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The exercise price of options granted under the Option Plan is
determined at the discretion of the Company, and is typically based on the
estimated fair value of the stock at the date of grant. The Company has
reserved 2,000,000 shares to be offered through the plan. Options expire
at the earlier of two events: (a) ninety days after the employee or
consultant terminates their services or (b) ten years after the options
vest. Compensation expense is recognized when the exercise price of
options is less than the fair value of the underlying stock on the date of
grant. Since the exercise price is based on estimated fair value, no
compensation cost has been recognized.
While the Company continues to apply APB Opinion No. 25, Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", requires the Company to provide pro-forma
information regarding net income (loss) as if compensation cost for the
Company's stock option plan had been determined in accordance with the
fair value based method prescribed by SFAS No. 123. Since the option price
is either greater than or equal to the fair value of both the underlying
stock and the option, no compensation expense would be recognized under
either APB 25 or SFAS 123. Thus, no pro-forma information has been
presented.
- F62 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
The following summarizes information about the Company's stock options at
September 30, 1999:
(a) EMPLOYEE OPTIONS
During the period ended September 30, 1999 the Company granted options to
thirteen employees. A summary of the status of the Company's stock options
as of September 30, 1999, and changes during the period is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Outstanding at April 13, 1999 0 $ 0.000
Granted 595,000 $ 0.031
Exercised 0 $ 0.000
Forfeited (171,250) ($ 0.016)
-------- ----------
Outstanding at September 30, 1999 423,750 $ 0.036
======== ==========
Options exercisable at September 30, 1999 72,500 $ 0.010
======== ==========
</TABLE>
(b) NON-EMPLOYEE OPTIONS
During the period ended September 30, 1999 the Company granted options to
certain non-employees. A summary of the status of the Company's stock
options as of September 30, 1999, and changes during the period is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at April 13, 1999 0 $ 0.000
Granted 550,000 $ 0.011
Exercised 0 $ 0.000
Forfeited 0 $ 0.000
------- -----------
Outstanding at September 30, 1999 550,000 $ 0.011
======= ===========
Options exercisable at September 30, 1999 56,250 $ 0.010
======= ===========
</TABLE>
Stock Options during the period ended September 30, 1999 are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding at April 13, 1999 0 $ 0.000
Granted 1,145,000 $ 0.021
Exercised 0 $ 0.000
Forfeited ( 171,250) ($ 0.011)
--------- -------------
Outstanding at September 30, 1999 973,750 $ 0.022
========= =============
Options exercisable at September 30, 1999 128,750 $ 0.010
========= =============
</TABLE>
- F63 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
F. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the period April 13, 1999 (inception) to September
30, 1999:
<TABLE>
<CAPTION>
Numerator:
<S> <C>
Numerator for basic and diluted earnings per share - net loss ($ 100,017)
===========
Denominator:
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding: 10,049,806
==========
</TABLE>
G. RELATED PARTY TRANSACTIONS
The Company has entered into a one year, non-binding agreement with
Epylon.com who has agreed to pay the cost of renting office space for the
Company. Stephen George, a member of Net Value Holding's board of
directors, is a 15% owner in Epylon.com. Currently, netValue Holdings,
Inc. owns 29% of the outstanding common stock of the company. This
agreement expires one year from the date of the Common Stock Purchase
Agreement between the Company and Net Value Holdings, Inc. (July 28,
2000).
During the period ended September 30, 1999, the Company paid approximately
$14,000 for consulting services from two shareholders.
H. SUBSEQUENT EVENTS (UNAUDITED)
The company is in late-stage negotiations to close its next round of
financing. At the time of this statement, the Company expects to raise an
additional $1,100,000 in equity financing during December 1999 to help
support expansion.
- F64 -
<PAGE>
To the Directors and Officers
SWAPIT. COM, INC.
Five Clock Tower Place, Fourth Floor
Maynard, MA 01754
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of SwapIt.com, Inc. (A
Development Stage Company) as of November 30, 1999. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to in the first paragraph presents
fairly, in all material respects, the financial position of SwapIt.com, Inc. (A
Development Stage Company) as of November 30, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note E to the
financial statements, the Company has incurred losses in its development stage,
and will need to raise additional capital to complete its development
activities. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note E. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MORGENSTERN & ASSOCIATES
Certified Public Accountants
December 7, 1999
- F65 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 454,549
Prepaid expenses 1,124
---------
Total current assets 455,673
PROPERTY AND EQUIPMENT, NET 2,075
DEPOSITS 21,300
---------
TOTAL ASSETS $ 479,048
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 30,537
Accrued payroll liabilities 11,505
---------
Total current liabilities 42,042
---------
COMMITMENTS AND CONTINGENCIES (NOTE E)
STOCKHOLDER'S EQUITY:
Preferred stock, $0.001 par value; 332,500 shares authorized,
132,941 shares issued and outstanding 13
Common stock, $0.001 par value; 1,667,500 shares authorized
975,000 shares issued and outstanding 975
Additional paid-in capital 516,112
Deferred compensation (2,078)
Deficit accumulated during the development stage (78,016)
---------
Total stockholders' equity 437,006
---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 479,048
=========
</TABLE>
The accompanying notes are an integral part of this balance sheet
- F66 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
SwapIt.com, Inc., a Delaware corporation, was incorporated on October 28,
1999. SwapIt.com, Inc. is a development stage company which intends to
create an electronic barter exchange marketplace on the Internet. The
Company intends to make available for barter, music CDs, movies, and
books, and plans to initially target their website to college students.
The Company intends to generate revenue from its website through the
following sources: transaction fees, advertising revenues, commissions on
referrals, and direct sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to potential concentrations
of credit risk consist principally of cash. Cash consists of deposits with
a large United States financial institution that is insured by the Federal
Deposit Insurance Company up to a maximum of $100,000. At November 30,
1999, the Company had an uninsured cash balance of $354,549.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
prepaid expenses, and accounts payable and borrowings, are carried at
cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Furniture and fixtures 7 years
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system.
START-UP COSTS
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Cost of Start-up Activities", the Company expenses all start-up
activities, including organizational costs, as they are incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities and operating losses available to
offset future taxable income, using enacted tax rates in effect in the
years in which the differences are expected to reverse. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
- F67 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
(Continued)
DEFERRED COMPENSATION
The Company has issued common stock to certain employees and consultants
in exchange for future services. The Company has recorded the aggregate
amount of the total fair market value of the stock issued as deferred
compensation. The amounts recorded as deferred compensation are then
amortized over the appropriate vesting period (generally four years).
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," during 1999. SFAS 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment.
CONCENTRATIONS
Concentrations not disclosed elsewhere in the financial statements are as
follows:
The Company plans to generate income from various sources that utilizes
the same medium. Lack of product (website) development or customer
interest could have a materially adverse effect on the Company.
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $2,100
Less Accumulated Depreciation (25)
----------
$2,075
==========
</TABLE>
C. DEPOSITS
Deposits at November 30, 1999, consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Deposit for the URL name "swapit.com", money held in escrow $10,000
Rental deposit for lease signed December 4, 1999 11,300
--------
$21,300
========
</TABLE>
D. INCOME TAXES
For Federal income tax purposes, start-up costs must be amortized over not
less than 60 months. The Company has recognized a deferred tax benefit for
start-up costs to be amortized over 60 months for tax purposes. However,
as it is not more likely than not that the deferred tax asset will be
utilized, management has established a full valuation reserve of
approximately $40,000.
- F68 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
(Continued)
E. COMMITMENTS AND CONTINGENCIES
GOING CONCERN:
Since October 28, 1999 (Inception), the Company has been in the
development stage and the principal activities have consisted of raising
capital. The Company is still in the process of developing its website.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
is not yet generating revenues and, at November 30, 1999, had accumulated
a deficit from its operating activities. Continuation of the Company as a
going concern is dependent upon, among other things, obtaining additional
capital, achieving market acceptance of its product and achieving
satisfactory levels of profitable operations. The financial statements do
not contain any adjustments relating to the realization of assets and
liquidation of liabilities that may be necessary should the Company be
unable to continue as a going concern.
LEASES:
The Company currently leases its office facility under an operating lease
signed on December 2, 1999 (see NOTE H).
The lease has a term of five years, expiring on December 31, 2004. The
monthly rental cost is $12,648. Future minimum annual lease payments for
the next five years is as follows:
2000 $151,771
2001 $151,771
2002 $151,771
2003 $151,771
2004 $151,771
F. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes the issuance of
1,667,500 shares of Common Stock, $0.001 par value per share, of which
975,000 were outstanding as of November 30, 1999. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be
voted on by the stockholders.
The Company issued 855,000 shares of common stock at $0.0175 per share on
November 12, 1999 to its founders for an aggregate purchase price of
$15,000.
The Company issued 120,000 shares of common stock at $0.0175 per share on
November 12, 1999 to various employees and contractors in exchange for
future services. The rights associated with the common stock shares (i.e.
- voting, dividends, etc.) were subsequently assigned back to the Company.
The common stock shares will revert back to each person based on a
bi-annual-four-year vesting schedule. Upon termination of services, all
unvested shares shall be forfeited to the Company. The fair market value
of the stock, on the grant date, was valued at $0.0175 per share. The
Company has treated the aggregate amount of $2,100 as deferred
compensation (see NOTE A) with respect to the assignment of shares.
- F69 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
(Continued)
The Company's Articles of Incorporation authorizes the issuance of 332,500
shares of "Series A Preferred Stock", $0.001 par value per share, of which
132,941 shares were outstanding as of November 30, 1999. Holders of each
share of "Series A Preferred Stock" are entitled to vote on all matters at
stockholder's meetings. Holders of each share of the "Series A Preferred
Stock" shall convert their shares to common stock at the earliest of:
their own option or upon the first underwritten public offering pursuant
to an effective registration statement filed under the Securities Act of
1933. The conversion price varies as stated in the Amended and Restated
Articles of Incorporation. The conversion price at November 30, 1999 was
$3.761.
The Company issued 132,941 shares of "Series A Preferred Stock" at $3.761
per share on November 23, 1999 for a total purchase price of $500,000.
G. STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The exercise price of options granted under the Option Plan is
determined at the discretion of the Company, and in the case of Incentive
Stock Options, the amount will not be less than 100% of the fair market
value on the date of grant. The Company has reserved 155,000 shares to be
offered through the plan. Compensation expense is recognized when the
exercise price of options is less than the fair value of the underlying
stock on the date of grant. As of November 30, 1999, the Company had not
yet granted any options to employees or consultants.
H. SUBSEQUENT EVENTS (UNAUDITED)
The Company entered into a five year lease agreement for its office space
on December 2, 1999 (see NOTE E). The Company paid an additional $13,995
for the deposit on this lease. An additional deposit amount equal to one
month's rent, $12,648, is due to the lessor by March 31, 2000.
- F70 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesman or any other person has been authorized to give any -------------------------------
information or to make any representations other than those contained in this
prospectus in connection with the offer made by this prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by Net Value Holdings, Inc. This prospectus does not constitute an
offer to sell or solicitation of an offer to buy any securities in any
jurisdiction in which such offer or solicitation is not authorized, or in which
he person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale made hereunder shall, under any NET VALUE HOLDINGS, INC.
circumstances, create any implication that there has been no change in the
affairs of Net Value Holdings, Inc. or that information contained herein is
correct as of any time subsequent to the date hereof. 3,722,560 SHARES OF COMMON STOCK
--------------
PROSPECTUS
------------------- --------------
Until _______, 2000 (90 days after the date of this prospectus), all dealers
effecting transactions in the shares of our common stock registered in this
registration statement, whether or not participating in this distribution, may January 19, 2000
be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSE OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all estimated expenses which we have
incurred or expect to incur in connection with the issuance and distribution of
the securities which we are registering in this registration statement. All
amounts are estimated except for the Securities and Exchange Commission
Registration Fee
Securities and Exchange Commission Registration Fee.. $ 4,527.56
EDGAR and Printing Expenses.......................... 5,000.00
Legal Fees and Expenses.............................. 100,000.00
Accounting Fees and Expenses......................... 80,000.00
Blue Sky Fees and Expenses........................... 5,000.00
Transfer Agent's Fees and Expenses................... 1,000.00
Miscellaneous Expenses............................... 4,472.44
-----------
Total*...................................... $200,000.00
===========
*All expenses other than the Securities and Exchange
Commission Registration Fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the General Corporate Law of the State of
Delaware, Net Value Holdings, Inc. has broad powers to indemnify its directors
and officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act of 1933. Net Value Holding, Inc.'s bylaws
(Exhibit 3.1 hereto) also provide for mandatory indemnification of its
directors, officers, employees and agents to the fullest extent permissible
under Delaware Law.
Net Value Holdings, Inc.'s Amended and Restated Certificate of
Incorporation (Exhibit 3.2 hereto) provides that the liability of its directors
for monetary damages shall be eliminated to the fullest extent permissible under
Delaware law. Pursuant to Delaware law, this includes elimination of liability
for monetary damages for breach of the directors' fiduciary duty of care to Net
Value Holdings, Inc. and its stockholders. These provisions do not eliminate the
directors' duty of care and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to Net Value Holdings,
Inc., for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
Net Value Holdings, Inc. intends to obtain in conjunction with
the effectiveness of the registration statement, a policy of directors' and
officers' liability insurance that insures our directors and officers against
the cost of defense, settlement or payment of a judgment under certain
circumstances.
II - 1
<PAGE>
ITEM 15. 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 may convert all or
any part of the outstanding principal amount of the convertible promissory
notes, plus all accrued interest thereon through the date of conversion, into
shares of our common stock at a conversion price of $2.50 per share. We may
force the lenders to convert the entire principal amount of the convertible
promissory notes, plus all accrued interest thereon, upon our common stock's
satisfaction of certain price and volume requirements and the registration of
the resale of all shares of our common stock issuable to the lenders upon such
mandatory conversion of the convertible promissory note. The lenders are also
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 lender is 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.
In October 1998 we issued 1,000,000 shares of our common stock
and 500,000 shares of our 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.,
II - 2
<PAGE>
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 January 7, 2000, holders of five convertible debentures
issued in this offering have converted their debentures in the principal amount
of $1,540,000 and the accrued interest thereon into 830,508 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 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 January 7, 2000, holders of 11
convertible debentures issued in this offering have converted their debentures
in the principal amount of $3,067,000 plus accrued interest into 1,246,082
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
noteholder 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
II - 3
<PAGE>
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 January 7, 2000, holders of
convertible promissory notes issued in this offering have converted their
promissory notes in the principal amount of $3,323,615, plus accrued interest
into 1,779,526 shares of our common stock and we issued warrants to purchase
889,772 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.
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 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
II - 4
<PAGE>
Exhibit
Number Document
2.1* 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* Amendment No. 1 to Merger Agreement and Plan of Reorganization
2.3* Amendment No. 2 to Merger Agreement and Plan of Reorganization
2.4* Fairness Opinion of Ferris Baker Watts, dated July 30, 1999, Regarding
the Merger Between Net Value Holdings, Inc. and Strategicus Partners
Inc.
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen Certificate for Net Value Holdings, Inc.'s Common Stock
4.2* 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* 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* Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock
4.5* Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock
5.1** Form of Opinion of Klehr Harrison Harvey Branzburg & Ellers as to the
legality of the shares of common stock being registered
10.1* Employment Agreement with Andrew P. Panzo, dated June 1, 1999
10.2* Amended and Restated Employment Agreement with Douglas Spink, dated
June 17, 1999
10.3* Employment Agreement with Lee Hansen, dated September 15, 1999
10.4* Consulting Agreement with Barry Uphoff, dated June 30, 1999
10.5* Consulting Agreement with Darr Aley, dated June 30, 1999
10.6* Consulting Agreement with Stephen George, dated June 21, 1999
10.7* Loan Agreement between Strategicus Partners Inc. and Net Value
Holdings, Inc., dated as of May 28, 1999
10.8* Amendment No. 1 to the Loan Agreement between Strategicus Partners Inc.
and Net Value Holdings, Inc.
II - 5
<PAGE>
10.9* Amendment No. 2 to the Loan Agreement between Strategicus Partners Inc.
and Net Value Holdings, Inc.
10.10* Promissory Note in the amount of $310,000 issued by Douglas Spink in
favor of Strategicus Partners Inc., dated May 28, 1999
10.11* 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* Promissory Note issued by Net Value, Inc. in favor of SUNCL, Inc.,
dated October 1, 1998
10.13* Loan Agreement by and among Net Value, Inc., American Maple Leaf
Financial Corporation and the other signatories thereto, dated June 26,
1998
10.14* Promissory Note issued by Net Value, Inc. in favor of American Maple
Leaf Financial Corporation, dated June 26, 1998
10.15* Stock Purchase Agreement By and Between AsiaCD, Inc. and Strategicus
Partners, Inc., dated July 29, 1999
10.16* Common Stock Purchase Agreement By and Between College 411.com, Inc.
and Strategicus Partners, Inc., dated July 28, 1999
10.17* AssetExchange, Inc. Series A Preferred Stock Purchase Agreement, dated
September 10, 1999
10.18* AssetExchange. Inc. Investor Rights Agreement, dated September 10, 1999
10.19* Series B Convertible Preferred Stock Purchase Agreement, dated as of
September 17, 1999
10.20* Registration Rights Agreement
10.21* Form of Warrant
10.22* Employment Agreement with Tom Aley dated November 22, 1999
10.23* 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* Stock Purchase Agreement between Merus Partners, Inc. and Net Value
Holdings, Inc. dated as of October 11, 1999
10.25* Stock Purchase Agreement between Net Value Holdings, Inc. and Webmodal,
Inc. dated as of October 11, 1999
10.26* 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* Investor Rights Agreement by and between Swapit.com, Inc. and Net Value
Holdings, Inc. dated as of November 23, 1999
II - 6
<PAGE>
10.28* 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* 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* Stockholders Agreement by and among Promotions Acquisitions, Inc. and
certain stockholders dated as of December 3, 1999.
10.31* Registration Rights Agreement dated as of December 3, 1999
10.32* Common Stock Purchase Agreement dated as of October 1, 1999
10.33* Consulting Agreement dated as of October 1, 1999
11 Statement re: computation of per share earnings
16* Letter from Barry L. Friedman, PC dated November 23, 1999
21.1* Subsidiaries of Net Value Holdings, Inc.
23.1 Consent of L.J. Soldinger Associates regarding Net Value Holdings, Inc.
dated December 17, 1999
23.2 Consent of Morgenstern & Associates regarding College 411.com, Inc.
dated December 17, 1999
23.3 Consent of Morgenstern & Associates regarding AssetExchange, Inc. dated
December 17, 1999
23.4 Consent of Morgenstern & Associates regarding Swapit.com, Inc. dated
December 17, 1999
24.1* Power of Attorney, included on the signature page hereof
27.1 Financial Data Schedule
* Previously filed
** To be filed on Amendment
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(i) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(A) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(B) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement.
II - 7
<PAGE>
(C) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(ii) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(iii) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(c) The registrant further undertakes that:
(i) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to
be part of this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II - 8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania, on January 19, 2000.
<TABLE>
<CAPTION>
<S> <C>
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 (Principal Financial and Account
Officer)
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement 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 Financial Officer (Principal Executive, Financial and
Andrew P. Panzo Accounting Officer)
/s/ Barry Uphoff * Director
- -------------------------------------------
Barry Uphoff
/s/ Douglas Spink* Chief Technology Officer and Director
- -------------------------------------------
Douglas Spink
/s/ Darr Aley* Executive Vice President, Business Development and Director
- -------------------------------------------
Darr Aley
/s/ Stephen George* Director
- -------------------------------------------
Stephen George
* By: Andrew P. Panzo, as power of attorney
</TABLE>
II - 9
<PAGE>
EXHIBIT 11
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------------- ------------------------------
1996 1997 1998 1997 1998
-------------- --------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Loss from Continuing Operation $ - $ (271,002) $ (5,805) $ (8,147,073)
Loss from Discontinued Operations $(3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,068,553)
Preferred Stock Dividend - Discontinued Operations - (1,181,250) (15,250,500) (15,250,500) -
---------- ------------- ------------ -------------- ------------
Net Loss to Common Stockholders -
Discontinued Operations $(12,416,487) $(26,628,328) $(25,451,648) $(13,215,626)
============= ============ ============ ============
Basic and Diluted Weighted Average
Number of Common Shares Outstanding 1,804,700 4,711,351 3,796,197 8,647,063
============= ============ ============ ============
Basic and Diluted Net Loss Per Common Share -
Continuing Operations $ 0.00 $ (0.06) $ 0.00 $ (0.94)
============= ============ ============ ============
Basic and Diluted Net Loss Per Common Share -
Discontinued Operations $ (6.88) $ (5.59) $ (6.70) $ (0.59)
============= ============ ============ ============
Pro Forma Information (Unaudited):
Net loss - discontinued operations (3,314,094)
Pro forma tax provision -
-----------
Pro forma net loss - discontinued operations $(3,314,094)
===========
Net Loss Per Share Data:
Basic and diluted weighted average number
of common shares outstanding 934,810
===========
Basic and diluted net loss per share common
share - discontinued operations $ (3.55)
===========
</TABLE>
o In 1997, the Company adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" for all applicable periods presented in the
accompanying financial statements. See Note 2 to the Company's financial
statements included herein.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and the use
of our report dated April 30, 1999, in the Registration Statement (Form S-1 No.
333-88629) and related Prospectus of Net Value Holdings, Inc. for the
registration of 3,722,560 shares of its common stock.
LJ SOLDINGER ASSOCIATES
Arlington Heights, Illinois
January 18, 1999
<PAGE>
[LETTERHEAD OF MORGENSTERN & ASSOCIATES]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated November 30, 1999 accompanying the financial
statements of College411.com, Inc. contained in this Registration Statement, and
we consent to the use of the aforementioned report in this Registration
Statement and Prospectus, and to the use of our name as it appears under the
captions "selected Financial Data" and "Experts".
MORGENSTERN & ASSOCIATES
Certified Public Accountants
January 18, 2000
<PAGE>
[LETTERHEAD OF MORGENSTERN & ASSOCIATES]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated December 6, 1999 accompanying the financial
statements of Asset Exchange, Inc. contained in this Registration Statement, and
we consent to the use of the aforementioned report in this Registration
Statement and Prospectus, and to the use of our name as it appears under the
captions "selected Financial Data" and "Experts".
MORGENSTERN & ASSOCIATES
Certified Public Accountants
January 18, 2000
<PAGE>
[LETTERHEAD OF MORGENSTERN & ASSOCIATES]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated December 7, 1999 accompanying the balance
sheet of SwapIt.com, Inc. contained in this Registration Statement, and we
consent to the use of the aforementioned report in this Registration Statement
and Prospectus, and to the use of our name as it appears under the captions
"selected Financial Data" and "Experts".
MORGENSTERN & ASSOCIATES
Certified Public Accountants
January 18, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 1,466 1,051,931
<SECURITIES> 0 0
<RECEIVABLES> 200,000 637,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 706,769 2,559,721
<PP&E> 0 43,688
<DEPRECIATION> 0 2,277
<TOTAL-ASSETS> 1,422,519 7,027,378
<CURRENT-LIABILITIES> 8,691,149 5,187,521
<BONDS> 947,192 4,777,599
0 1,732,000
2,520 0
<COMMON> 8,008 14,410
<OTHER-SE> (8,226,350) (4,684,152)
<TOTAL-LIABILITY-AND-EQUITY> 1,422,519 7,027,378
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 140,484 2,463,663
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 82,082 5,187,476
<INCOME-PRETAX> (271,002) (8,147,073)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (271,002) (8,147,073)
<DISCONTINUED> (11,106,826) (5,068,553)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,377,828) (13,215,626)
<EPS-BASIC> (5.65) (1.53)
<EPS-DILUTED> (5.65) (1.53)
</TABLE>
