<PAGE>
As filed with the Securities and Exchange Commission on October 4, 2000.
Registration No. 333-45162
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1 to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STONEPATH GROUP, INC. (formerly known as 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) 335-4700
(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:
<TABLE>
<CAPTION>
<S> <C>
Joseph P. Galda, Esquire Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation Managing Director, General Counsel and
Eleven Penn Center Secretary
14th Floor Stonepath Group, Inc.
1835 Market Street Two Penn Center Plaza, Suite 605
Philadelphia, PA 19103 Philadelphia, PA 19102
(215) 665-3879 (215) 564-9192
</TABLE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes effective and all
other conditions to the proposed merger described herein have been satisfied or
waived.
<PAGE>
If any of the securities being registered on this form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box: [ ]
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(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. ___________
-----------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Amount Proposed Maximum Proposed Maximum
Title of Each Class of Securities to To Be Offering Price Aggregate Offering Amount of
be Registered Registered (1) Per Share (2) Price (2) Registration Fee
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 1,754,140 $.00033 $579 $1 (3)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of shares of common stock, par value $.001 per share, of
Stonepath Group, Inc. ("Stonepath Group"), formerly known as Net Value
Holdings, Inc., is based on the estimated maximum number of such shares to
be issued to stockholders of Net Value, Inc. ("Net Value, Inc.") in
connection with the merger of Net Value Acquisition, Inc. ("Net Value
Acquisition"), a wholly-owned subsidiary of Stonepath Group, into Net
Value, Inc.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933, as
amended. There is no trading market for the shares of Net Value, Inc.
common stock, par value $.001, to be exchanged with shares of Stonepath
Group common stock in connection with the merger of Net Value Acquisition
into Net Value, Inc., and Net Value, Inc. has an accumulated capital
deficit. The registration fee is therefore calculated based on one-third of
the par value of the shares of Stonepath Group common stock which are to be
registered.
(3) Rounded to the nearest dollar.
Stonepath Group hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until Stonepath Group
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>
NET VALUE, INC.
1085 Mission Street
San Francisco, California 94103
Dear Stockholder:
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Net Value, Inc. and a special committee of
the Board have approved a merger agreement with Stonepath Group, Inc.
("Stonepath Group"), its parent corporation.
Stonepath Group will hold a special stockholders' meeting on Tuesday,
November 7, 2000 at 10:00 a.m. local time at the law offices of Buchanan
Ingersoll Professional Corporation, Eleven Penn Center, 14th Floor, 1835 Market
Street, Philadelphia, PA 19103, at which Stonepath Group will ask you to adopt
the merger agreement. If the merger agreement is adopted:
o Net Value Acquisition, Inc., a wholly-owned subsidiary of Stonepath
Group, will be merged into Net Value, Inc.
o You will receive 0.4 shares of common stock of Stonepath Group in
exchange for each of your shares of Net Value, Inc. common stock.
o The shares of Stonepath Group you receive will be subject to
restrictions upon resale as more fully described within the enclosed proxy
statement-prospectus.
o Each option and warrant to acquire Net Value, Inc. common stock that
is outstanding will continue to have, and be subject to, the same terms
and conditions that it had immediately prior to the merger, except that:
(1) each option will be exercisable for a number of shares of Stonepath
Group common stock determined by multiplying the number of shares of Net
Value, Inc. common stock issuable upon exercise of the option or warrant
immediately prior to the merger by 0.4; and (2) the exercise price for the
shares of Stonepath Group common stock issuable upon exercise of the
options and warrants will be determined by dividing the exercise price per
share of the Net Value, Inc. common stock at which the option or warrant
was exercisable immediately prior to the merger by 0.4.
The exchange ratio has been fixed and will not be adjusted for changes
in the price of Stonepath Group's common stock.
Stonepath Group's common stock is listed on The AMERICAN STOCK EXCHANGE
under the symbol "STG." On September 29, 2000, the closing bid price for
Stonepath Group's common stock was $1.875 per share.
PLEASE CAREFULLY CONSIDER ALL OF THE INFORMATION IN THIS PROXY
STATEMENT-PROSPECTUS REGARDING NET VALUE, INC., STONEPATH GROUP AND THE MERGER,
INCLUDING IN PARTICULAR THE DISCUSSION IN THE SECTION CALLED "RISK FACTORS"
BEGINNING ON PAGE 8.
<PAGE>
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR
DISAPPROVED THE STONEPATH GROUP COMMON STOCK TO BE ISSUED UNDER THIS PROXY
STATEMENT-PROSPECTUS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROXY
STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement-prospectus is dated October 6, 2000 and was first
mailed to stockholders on or about October 11, 2000.
Sincerely,
/s/ Andrew P. Panzo
----------------
Andrew P. Panzo
President
<PAGE>
NET VALUE, INC.
NOTICE OF SPECIAL MEETING
To Be Held Tuesday, November 7, 2000
TO THE STOCKHOLDERS OF
NET VALUE, INC.
I am pleased to give you notice of and cordially invite you to attend,
either in person or by proxy, the special meeting of the stockholders of Net
Value, Inc., which will be held on Tuesday, November 7, 2000, at the law
offices of Buchanan Ingersoll Professional Corporation, Eleven Penn Center, 14th
Floor, 1835 Market Street, Philadelphia, PA 19103, and at any adjournment or
adjournments thereof. The purposes of the special meeting are:
1. To consider and vote on a proposal to adopt a merger agreement
dated as of August 28, 2000, by and among Net Value, Inc.,
Stonepath Group, Inc. ("Stonepath Group") and Net Value
Acquisition, Inc., a wholly-owned subsidiary of Stonepath Group
("Net Value Acquisition"). The merger agreement provides that Net
Value Acquisition will be merged with and into Net Value, Inc. In
the merger, each stockholder of Net Value, Inc. will receive 0.4
shares, subject to adjustment as described in the enclosed proxy
statement-prospectus, of the common stock of Stonepath Group for
each outstanding share of common stock of Net Value, Inc. owned by
each stockholder prior to the effective time of the merger. The
shares received will be subject to those restrictions upon resale
as described within the enclosed proxy statement-prospectus. The
merger agreement is attached as Exhibit A hereto and is described
in the enclosed proxy statement-prospectus; and
2. To transact any other business that properly comes before the
special meeting.
Only stockholders of record at the close of business on September 29,
2000 will receive notice of and be able to vote at the special meeting.
The enclosed proxy statement-prospectus describes the merger agreement,
the proposed merger and the actions to be taken in connection with the merger.
The holders of a majority of the outstanding shares of Net Value, Inc. common
stock entitled to vote must be present or represented by proxy at the special
meeting in order to constitute a quorum for the transaction of business. It is
important that your shares are represented at the special meeting regardless of
the number of shares you hold. Whether or not you are able to be at the special
meeting in person, please sign and return promptly the enclosed proxy card in
the enclosed, postage-paid envelope. You may revoke your proxy in the manner
described in the enclosed proxy statement-prospectus at any time before it is
voted at the special meeting.
This notice, the enclosed proxy card and the enclosed proxy
statement-prospectus are sent to you by order of Net Value, Inc.'s Board of
Directors.
/s/ Andrew P. Panzo
-------------------
Andrew P. Panzo
President
<PAGE>
PROXY STATEMENT -- PROSPECTUS
1,754,140 SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE,
OF
STONEPATH GROUP, INC.
1085 Mission Street
San Francisco, California 94103
---------------
SPECIAL MEETING OF NET VALUE, INC.
STOCKHOLDERS TO BE HELD TUESDAY, NOVEMBER 7, 2000
--------------
This proxy statement-prospectus, and the accompanying notice, are being
furnished to the stockholders of Net Value, Inc. in connection with the special
meeting of stockholders of Net Value, Inc. to be held on Tuesday, November 7,
2000 at the offices of Buchanan Ingersoll Professional Corporation, Eleven Penn
Center, 14th Floor, 1835 Market Street, Philadelphia, PA 19103, at 10:00 a.m.,
local time, and at any adjournments or postponements thereof.
This proxy statement-prospectus is furnished to the holders of shares
of common stock of Net Value, Inc., par value $.001, in connection with the
adoption by the Board of Directors of Net Value, Inc. of a resolution approved
as of August 28, 2000, which was also approved by the Board of Directors of
Stonepath Group, Inc., a Delaware corporation, and Net Value Acquisition, Inc.,
a Delaware corporation and a wholly-owned subsidiary of Stonepath Group, which
resolutions authorize the Agreement and Plan of Merger, dated August 28, 2000,
by and among Net Value, Inc., Stonepath Group and Net Value Acquisition. The
Agreement and Plan of Merger is attached to this proxy statement-prospectus as
Exhibit A. The affirmative vote of the holders of a majority of the outstanding
shares of Net Value, Inc. common stock as of the record date is required to
approve and adopt the Agreement and Plan of Merger. Stonepath Group owns
8,079,406 shares of Net Value, Inc. common stock, representing an aggregate of
approximately sixty-five percent (65%) of the issued and outstanding shares of
Net Value, Inc. common stock. Stonepath Group has informed Net Value, Inc. by
written consent that it intends to vote its shares in favor of the merger.
Accordingly, in recognition of the affirmative vote of Stonepath Group, the
holders of sixty-five percent (65%) of the issued and outstanding shares of Net
Value, Inc. common stock, the merger will be approved at the special meeting.
Pursuant to the Agreement and Plan of Merger, Net Value Acquisition will be
merged with and into Net Value, Inc., and each outstanding share of Net Value,
Inc. common stock (other than shares with respect to which dissenters' rights
are perfected in accordance with Delaware law and shares held directly or
indirectly by Stonepath Group and Net Value Acquisition or held in Net Value,
Inc.'s treasury, which shall be cancelled) will be converted into 0.4 shares of
common stock, par value $.001, of Stonepath Group, as described in this proxy
statement-prospectus.
The Board of Directors of Net Value, Inc. knows of no business that
will be presented at the special meeting other than the matters described in
this proxy statement-prospectus.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
i
<PAGE>
No person is authorized to give any information or to make any
representation not contained in this proxy statement-prospectus, and, if given
or made, such information or representation should not be relied upon as having
been authorized. This proxy statement-prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, the securities offered by the
proxy statement-prospectus, or the solicitation of a proxy, in any jurisdiction
to or from any person to whom it is unlawful to make such offer, or solicitation
of an offer or proxy, in such jurisdiction. Neither the delivery of this proxy
statement-prospectus nor any distribution of the securities offered pursuant to
this proxy statement-prospectus shall create an implication that there has been
no change in the affairs of Net Value, Inc. or Stonepath Group since the date of
this proxy statement-prospectus.
---------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT-
PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement-prospectus is dated October 6, 2000 and was first
mailed or given to Net Value, Inc. stockholders on or about October 11, 2000.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY...........................................................................................................1
RISK FACTORS......................................................................................................8
THE SPECIAL MEETING..............................................................................................22
PROXY SOLICITATION......................................................................................22
RECORD DATE AND QUORUM REQUIREMENT......................................................................22
VOTING PROCEDURES.......................................................................................22
VOTING AND REVOCATION OF PROXIES........................................................................23
DISSENTERS' AND APPRAISAL RIGHTS........................................................................23
EFFECTIVE TIME..........................................................................................25
THE MERGER.......................................................................................................26
GENERAL.................................................................................................26
PURPOSE AND REASONS OF STONEPATH GROUP FOR THE MERGER...................................................26
THE BOARD'S RECOMMENDATIONS.............................................................................27
POSITION OF STONEPATH GROUP.............................................................................27
CONFLICTS OF INTEREST...................................................................................27
EFFECTS OF THE MERGER...................................................................................28
CONVERSION OF SECURITIES................................................................................28
EFFECT OF THE MERGER ON NET VALUE, INC. STOCK OPTIONS AND WARRANTS......................................29
EXCHANGE OF SHARES......................................................................................29
TRANSFER OF SHARES......................................................................................30
EXPENSES................................................................................................30
ACCOUNTING TREATMENT....................................................................................30
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
REGULATORY APPROVALS....................................................................................30
RESTRICTIONS ON SALES OF SHARES.........................................................................30
FEDERAL INCOME TAX CONSEQUENCES.........................................................................31
DESCRIPTION OF CAPITAL STOCK OF STONEPATH GROUP..................................................................32
DELAWARE ANTI-TAKEOVER LAW.......................................................................................35
MARKET PRICE OF STONEPATH GROUP..................................................................................36
BUSINESS OF STONEPATH GROUP, NET VALUE, INC., AND NET VALUE ACQUISITION..........................................36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF STONEPATH GROUP.........62
MANAGEMENT OF STONEPATH GROUP....................................................................................72
EXECUTIVE COMPENSATION...........................................................................................74
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS AND BENEFICIAL OWNERS OF GREATER THAN 5% OF
STONEPATH GROUP'S VOTING SECURITIES..............................................................................80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................84
LEGAL OPINION....................................................................................................87
EXPERTS..........................................................................................................87
FINANCIAL STATEMENTS AND AUDITOR REPORTS........................................................................F-i
</TABLE>
iv
<PAGE>
SUMMARY
This summary highlights selected information from the proxy
statement-prospectus and may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents Stonepath Group refers to for a more complete understanding of the
merger. In particular, you should read the documents that are attached to this
proxy statement-prospectus, including the merger agreement, which is attached as
Exhibit A and incorporated by reference into this proxy statement-prospectus. In
addition, Stonepath Group has attached important business and financial
information about Stonepath Group and Net Value, Inc. as exhibits to this
proxy statement-prospectus that you should carefully review.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting will be held on Tuesday, November 7, 2000, at
10:00 a.m., local time, at the law offices of Buchanan Ingersoll Professional
Corporation, Eleven Penn Center, 14th Floor, 1835 Market Street, Philadelphia,
PA 19103.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, the stockholders of Net Value, Inc. will
consider and vote on a proposal to adopt the merger agreement. The merger
agreement provides that Net Value Acquisition, a wholly-owned subsidiary of
Stonepath Group, would merge with and into Net Value, Inc., a majority-owned
subsidiary of Stonepath Group. Each outstanding share of common stock of Net
Value, Inc., other than shares held by Net Value, Inc. in treasury and shares
held by Stonepath Group, would be converted automatically into the right to
receive 0.4 shares of the common stock of Stonepath Group.
RECORD DATE AND QUORUM
You can vote at the special meeting if you owned Net Value, Inc. common
stock at the close of business on September 29, 2000, which is the record date
for the special meeting. You are entitled to one vote for each share of Net
Value, Inc. common stock held by you on the record date. At the close of
business on the record date, there were 12,464,756 shares of Net Value, Inc.
common stock outstanding. Holders of a majority of the outstanding shares of Net
Value, Inc. common stock entitled to vote at the special meeting must be present
in person or represented by proxy to constitute a quorum for the transaction of
business.
VOTE REQUIRED AND REVOCATION OF PROXIES
Under Delaware law, holders of a majority of the outstanding shares of
Net Value, Inc. common stock entitled to vote at the special meeting must adopt
the merger. Stonepath Group, which owns approximately 65% of the outstanding Net
Value, Inc. common stock, owns enough shares of Net Value, Inc. common stock to
adopt the merger under Delaware law without the vote of any other holders of Net
Value, Inc. common stock. Stonepath Group has agreed to vote its shares of Net
Value, Inc. common stock in favor of the merger agreement.
1
<PAGE>
You may revoke your proxy at any time before your shares are voted at
the special meeting by sending a written notice to the secretary of Net Value,
Inc. so that it is received prior to the special meeting, by executing and
returning a later-dated proxy, or by voting in person at the special meeting.
If you send in your proxy card without instructions as to how to vote,
your shares will be voted "FOR" the adoption of the proposed merger agreement.
The Board of Directors of Net Value, Inc. does not expect any other
matters to be voted on at the special meeting. If any other matters do properly
come before the special meeting, the people named on the accompanying proxy card
will vote the shares represented by all properly executed proxies in their
discretion. However, shares represented by proxies that have been voted
"AGAINST" adoption of the merger agreement will not be used to vote "FOR"
adjournment of the special meeting to allow more time to solicit additional
votes "FOR" adoption of the merger agreement.
Please complete, sign and mail your proxy card in the enclosed envelope
as soon as possible after you have read this proxy statement-prospectus. You
should receive a proxy card from your broker if you hold your shares through a
broker as nominee. You must return your proxy card or attend the special meeting
in person in order for your vote to be counted.
PARTIES TO THE MERGER
STONEPATH GROUP
Stonepath Group is actively engaged in building a network of
technology businesses which management believes offer significant growth
opportunities. To date, Stonepath Group has focused on technology businesses
with significant Internet features and applications. Its operating strategy,
however, is to expand the scope of its business to include Internet businesses,
as well as a broad range of other technology oriented businesses.
Through the collective experience of its management team, Stonepath
Group promotes the development of these businesses by offering business
development services that cover the core management disciplines of:
o Strategic Consulting;
o Operations;
o Finance;
o Business Development;
o Marketing/Public Relations; and
o Technology.
2
<PAGE>
Stonepath Group's operating strategy is to acquire a significant equity
interest in early stage technology companies and to provide the services listed
above to these companies. Stonepath Group intends to take an active role in the
management and development of these businesses. Each business will be managed as
part of an integrated supportive network of "affiliate companies" that build on
Stonepath Group's initial support and develop interrelationships among
themselves, thereby accelerating their growth and development. This network is
intended to leverage the collective financial, strategic, management and
industry experience of Stonepath Group's management team, which has over 30
years of collective experience in developing technology businesses. Stonepath
Group intends to establish relationships with companies outside of its network
that will enable it to deliver additional services to its affiliate companies
that they might not otherwise be able to obtain.
From October through November 1998, Stonepath Group acquired
approximately 66% of Net Value, Inc.'s outstanding common stock through share
exchange transactions with 20 of Net Value, Inc.'s largest stockholders. Through
the merger described in this proxy statement-prospectus Stonepath Group will
acquire the remaining minority interest in Net Value, Inc. The exchange ratio of
0.4 shares of Stonepath Group common stock for each share of Net Value, Inc.
common stock used to calculate the consideration to be paid in connection with
the merger is the same exchange ratio used to calculate the consideration
initially paid by Stonepath Group to acquire control of Net Value, Inc.
Stonepath Group's principal executive office is located at 1085
Mission Street, San Francisco, California 94103. The phone number of the
principal executive office is (415) 335-4700.
NET VALUE, INC.
Net Value, Inc. is currently a 14% owner of BrightStreet.com, Inc. and
has no current operations.
Net Value, Inc. was previously a development stage company whose
products incentivized consumers to purchase products and services sold across
all categories of trade. Net Value, Inc. developed a patent-pending process to
deliver coupons, discounts and other promotional incentives to Internet users.
Net Value, Inc. also developed a technology to address coupon industry concerns
regarding fraudulent coupon redemption.
In November 1999, the business and assets of Net Value, Inc. were sold
to Brightstreet.com, Inc., a new company formed by members of Net Value, Inc.'s
then senior management team and a group of third party investors. In exchange
for substantially all of its assets, Net Value, Inc. received, among other
things, 2,958,819 shares of BrightStreet.com, Inc. common stock equal to an
approximate 14% ownership interest in BrightStreet.com, Inc.
Net Value, Inc.'s principal executive office is located at 1085 Mission
Street, San Francisco, California 94103. The phone number of the principal
executive office is (415) 335-4700.
NET VALUE ACQUISITION
Net Value Acquisition is a newly-formed Delaware corporation organized
by Stonepath Group for the sole purpose of effecting the merger. Net Value
Acquisition has not conducted any prior business.
3
<PAGE>
Net Value Acquisition's principal executive office is located at 1085
Mission Street, San Francisco, California 94103. The phone number of the
principal executive office is (415) 335-4700.
THE MERGER
The Board of Directors of Net Value, Inc. appointed an independent
special committee to review the proposed merger on behalf of its stockholders.
The special committee determined that the merger is fair and recommended that
the Board of Directors approve the merger and recommend the merger agreement to
stockholders for adoption.
The primary reason for the merger is to complete the final stage of a
two-step process begun in 1998 to acquire all of the outstanding shares of
common stock of Net Value, Inc. Since Net Value, Inc. has no current operations
and there is no trading market in the shares of Net Value, Inc. common stock,
the special committee believes that the merger is advantageous to Net Value,
Inc. stockholders primarily because of the valuation being accorded to Net
Value, Inc. common stock in the merger and the possible greater market liquidity
of the Stonepath Group common stock, although there can be no assurances that
such liquidity will continue.
The Board of Directors of Net Value, Inc. believes that the merger is
in the best interest of Net Value, Inc. and its stockholders, and it recommends
that the Net Value, Inc. stockholders vote for the approval of the merger
agreement and the transactions contemplated thereby.
Upon the effective date of the merger, each outstanding share of Net
Value, Inc. common stock will be converted into and exchangeable for 0.4 shares
of Stonepath Group common stock. Subsequent to the merger, a holder of Net
Value, Inc. common stock will not be able to receive dividends or other
distributions on Stonepath Group common stock or to vote those shares until
the holder exchanges the holder's Net Value, Inc. common stock certificate for a
Stonepath Group common stock certificate. After the effective date,
StockTrans, Inc., Ardmore, Pennsylvania, the Company's transfer agent, will send
transmittal forms to Net Value, Inc. stockholders for their use in exchanging
these certificates. The Stonepath Group common stock issued by virtue of the
merger will be subject to restrictions upon resale as more fully described in
"RESTRICTIONS ON SALES OF SHARES" on page 30.
The current Board of Directors of Net Value, Inc. consists of Andrew P.
Panzo, Steven B. Rosner and Michael Cirillo. Messrs. Panzo, Rosner and Cirillo
own no shares and options to purchase 60,000, 90,000 and 90,000 shares of Net
Value, Inc., respectively. Mr. Panzo also serves as Chairman of the Board of
Directors and Chief Executive Officer of Stonepath Group. The merger
consideration was not determined by arm's length negotiation, and there was no
formal valuation of Stonepath Group and Net Value, Inc., either by Stonepath
Group or Net Value, Inc. or an independent third party. Neither Stonepath Group
nor Net Value, Inc. has obtained a fairness opinion by an investment banking
firm or other qualified appraiser.
FEDERAL INCOME TAX CONSEQUENCES
The merger will be treated as a taxable exchange by the Net Value, Inc.
stockholders of their shares of Net Value, Inc. common stock for shares of Net
Value Holdings common stock. Each Net Value, Inc. stockholder will realize
taxable gain, or loss, to the extent that the fair market value of the Stonepath
Group common stock received by the stockholder in the merger exceeds, or is less
than, the stockholder's basis in the Net Value, Inc. common stock exchanged in
the merger. You should consult your own tax advisor for a full understanding of
the merger's tax consequences. Additionally, no gain or loss will generally be
recognized by Net Value, Inc., Stonepath Group or Net Value Acquisition as a
result of the merger. Please read the section called "FEDERAL INCOME TAX
CONSEQUENCES" for a fuller discussion of the tax consequences of the merger.
RISK FACTORS
The securities offered hereby involve a high degree of risk, and
prospective investors should carefully consider the factors specified under
"RISK FACTORS" before electing to invest. See "RISK FACTORS" on page 8.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF STONEPATH GROUP
You should read the following selected consolidated financial
information of Stonepath Group in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto included elsewhere in this
proxy statement-prospectus. The following selected data as of and for each of
the years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived
from Stonepath Group's audited consolidated financial statements. The
consolidated statement of operations data for each of the six-month periods
ended June 30, 1999 and 2000, and the consolidated balance sheet data at June
30, 2000 are derived from Stonepath Group's unaudited interim financial
statements included elsewhere in this proxy statement-prospectus. In
management's opinion, the unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. The result of
operations for the six month period ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year or future periods.
<TABLE>
<CAPTION>
Summary of Selected Consolidated Financial Data
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues $ - $ - $ - $ - $ - $ - $ -
Operating
expenses - - - 140,484 11,040,192 1,032,996 17,783,952
----------- ----------- ----------- ------------ ------------ ----------- ------------
Loss from operations - - - (140,484) (11,040,192) (1,032,996) (17,783,952)
Equity in losses of
affiliate companies - - - - (79,559) - (2,665,756)
Other income
(expense) - - - (1,489,835) (12,843,232) (2,554,339) (125,782)
----------- ---------- ----------- ------------ ------------ ----------- ------------
Net loss from continuing
operations - - - (1,630,319) (23,962,983) (3,587,335) (20,575,490)
----------- ----------- ----------- ------------ ------------ ----------- ------------
Loss from discontinued
operations (747,560) (3,314,094) (11,235,237) (11,106,826) (6,370,776) (3,005,632) (554,676)
Gain on disposal of
discontinued
operations - - - - 6,502,663 - -
----------- ----------- ----------- ------------ ------------ ----------- ------------
Net loss (747,560) (3,314,094) (11,235,237) (12,737,145) (23,831,096) (6,592,967) (21,130,166)
Preferred stock
dividend-continuing
operations - - - - (6,605,261) - (44,012,625)
Preferred stock
dividend-discontinued
operations - - (1,181,250) (15,250,500) - - -
----------- ----------- ----------- ------------ ------------ ----------- ------------
Net loss to common
Stockholders $ (747,560) $(3,314,094) $(12,416,487) $(27,987,645) $(30,436,357) $(6,592,967) $(65,142,791)
=========== ========== ============ ============ ============ =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net
(loss) per common
share-continuing
operations n/a $ - $ - $ (0.35) $ (2.90) $ (0.41) $ (3.91)
=========== =========== =========== ============ ============ =========== ============
Basic and diluted net
earnings (loss) per
common
share-discontinued
operations n/a $ (3.55) $ (6.88) $ (5.59) $ 0.01 $ (0.35) $ (0.03)
=========== =========== =========== ============ ============ ========== ===========
Basic and diluted
weighted average
common shares
outstanding n/a 934,810 1,804,700 4,711,351 10,557,953 8,645,151 16,521,162
=========== =========== =========== ============ ============ ========== ===========
Balance Sheet Data December 31, June 30, 2000
---------------------------------------------------------- -------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Cash and cash equivalents $ -- $ -- $ -- $ 1,466 $3,127,232 $38,674,084
Ownership interests in and advances -- -- -- -- 7,065,557 14,583,040
to Affiliate Companies
Total assets -- -- -- 371,648 13,989,368 56,990,084
Current liabilities - continuing -- -- -- 2,690,921 5,998,363 281,756
operations
Current liabilities - discontinued 279,702 305,092 2,426,656 6,430,891 1,773,591 1,014,526
operations, net
Non-current liabilities -- -- -- -- 67,302 --
Total liabilities 279,702 305,092 2,426,656 9,121,812 7,839,258 1,296,102
Redeemable convertible preferred -- -- -- -- 4,448,872 --
stock, Series B
Stockholders' equity (deficit) (279,702) (305,092) (2,426,656) (8,750,164) 1,701,240 54,398,148
Working capital (deficit) (279,702) (305,092) (2,426,656) (8,750,164) (4,212,869) 38,186,765
</TABLE>
5
<PAGE>
SELECTED FINANCIAL INFORMATION OF NET VALUE, INC.
You should read the following selected financial information of Net
Value, Inc. in conjunction with the financial statements and notes thereto
included elsewhere in this proxy statement-prospectus. The following selected
data as of and for each of the years ended December 31, 1995, 1996, 1997, 1998
and 1999 have been derived from Net Value, Inc.'s audited financial statements.
The statement of operations data for each of the six-month periods ended June
30, 1999 and 2000, and the balance data sheet at June 30, 2000 are derived from
Net Value, Inc.'s unaudited interim financial statements included elsewhere in
this proxy statement-prospectus. In management's opinion, the unaudited
financial statements have been prepared on substantially the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for such periods. The result of operations for the six month
period June 30, 2000 are not necessarily indicative of the results to be
expected for the full year or future periods.
<TABLE>
<CAPTION>
Summary of Selected Financial Data
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------------------------------------------- ---------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues $ - $ - $ - $ 1,330,367 $ 20,000 $ - $ -
Operating
Expenses 746,945 3,316,522 9,364,898 9,115,291 6,525,267 3,011,506 --
----------- ----------- ------------ ------------ ----------- ----------- -----------
(746,945) (3,316,522) (9,364,898) (7,784,924) (6,505,267) (3,011,506) --
Loss from operations
Other income
(expense) (615) 2,428 (1,870,339) (3,382,087) 5,422,918 (493,946) (521,630)
----------- ----------- ------------ ------------ ----------- ----------- -----------
Net loss (747,560) (3,314,094) (11,235,237) (11,167,011) (1,082,349) (3,505,452) (521,630)
Preferred stock dividends -- -- (1,181,250) (15,250,500) -- -- --
----------- ----------- ------------ ------------ ----------- ----------- -----------
Net loss before
extraordinary loss (747,560) (3,314,094) (12,416,487) (26,417,511) (1,082,349) (3,505,452) (521,630)
Extraordinary loss on
Extinguishment of debt - - - - -- - (554,676)
----------- ----------- ------------ ------------ ----------- ----------- -----------
Net loss to common
Stockholders $ (747,560) $(3,314,094) $(12,416,487) $(26,417,511) $(1,082,349) $(3,505,452) $(1,076,306)
=========== =========== ============ ============ =========== =========== ===========
Basic and diluted net
loss per common
share before
extraordinary item n/a $ (0.89) $ (1.78) $ (2.32) $ (0.09) $ (0.29) $ (0.04)
=========== =========== ============ ============ =========== =========== ===========
Basic and diluted
extraordinary
loss per common share -- -- -- -- -- -- $ (0.05)
=========== =========== ============ ============ =========== =========== ===========
Basic and diluted
net loss per common
share n/a $ (0.89) $ (1.78) $ (2.32) $ (0.09) $ (0.29) $ (0.09)
=========== =========== ============ ============ =========== =========== ===========
Basic and diluted
weighted average
common shares
outstanding n/a 3,739,236 6,962,826 11,368,535 12,228,756 12,228,756 12,148,344
=========== =========== ============ ============ =========== =========== ===========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data December 31, June 30, 2000
------------------------------------------------------------------- -------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 2,407 $ 299,351 $ 671,508 $ 222,165 $ -- $ --
Total assets 29,615 794,592 1,800,402 1,050,871 5,483,637 5,299,320
Current liabilities 309,317 1,099,684 4,227,058 10,081,297 13,722,478 13,506,128
Non-current liabilities -- -- -- 79,034 -- --
Total liabilities 309,317 1,099,684 4,227,058 10,160,331 13,722,478 13,506,128
Stockholders' deficit 279,702 305,092 2,426,656 9,109,460 8,238,841 8,206,808
Working capital (deficit) (306,910) (792,841) (3,427,635) (9,746,175) (12,233,247) (12,201,214)
</TABLE>
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information is not presented since, for accounting
purposes, the combination is treated as the completion of an in-process
recapitalization and not as a business combination. In October 1998, Stonepath
Group acquired approximately 66% of Net Value, Inc.'s outstanding common stock
through share exchange transactions with 20 of Net Value, Inc.'s largest
stockholders. Since as a result of these transactions the former Net Value, Inc.
shareholders obtained a majority ownership interest of Stonepath Group, the
transaction was accounted for as a recapitalization. Under a recapitalization,
the historical financial statements presented are those of the company acquired,
not those of the legal acquiror. Accordingly, the Stonepath Group financial
information included in this proxy statement-prospectus prior to October 1998 is
that of Net Value, Inc. The financial information subsequent to October 1998
reflects the consolidated financial statements of Stonepath Group and Net Value,
Inc. Through the merger described in this proxy statement-prospectus Stonepath
Group will acquire the remaining minority interest in Net Value, Inc. The only
effect to the consolidated financial statements of Stonepath Group as a result
of completing this in-process recapitalization will be the re-allocation of
approximately $1,100 from the stockholders' equity of Net Value, Inc. to the
stockholders' equity of Stonepath Group, which will not change consolidated
stockholders' equity.
FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT-PROSPECTUS
This proxy statement-prospectus and the documents incorporated by
reference into this proxy statement-prospectus contain forward-looking
statements within the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify forward-looking statements. These forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties in the section entitled "RISK
FACTORS."
7
<PAGE>
RISK FACTORS
If you hold your shares of Net Value, Inc. common stock until the
merger, you will be investing in Stonepath Group common stock. The following
important factors, among others, in some cases have affected, and in the future
could affect, Stonepath Group's financial position and results of operations
and could cause its financial position and results of operations to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, Stonepath Group. In addition to the other information contained in
or incorporated by reference into this proxy statement-prospectus, you should
carefully consider the following risk factors in deciding whether to vote for
the merger.
RISK FACTORS RELATED TO THE MERGER
There was no formal valuation determining the fairness of the merger
consideration.
The merger consideration was not determined by arm's length
negotiation, and there was no formal valuation of Stonepath Group and Net
Value, Inc., either by Stonepath Group or Net Value, Inc. or an independent
third party. Neither Stonepath Group nor Net Value, Inc. has obtained a
fairness opinion by an investment banking firm or other qualified appraiser.
The shares to be received in the merger will be subject to restrictions on
resale.
Certain shares of Stonepath Group common stock which will be received
pursuant to the merger will be subject to restrictions upon resale through
December 15, 2000, as more fully described in this proxy statement-prospectus.
The merger may result in taxable gain or loss to the Net Value, Inc.
stockholders.
The merger will be treated as a taxable exchange by the Net Value,
Inc. stockholders of their shares of Net Value, Inc. common stock for shares
of Stonepath Group common stock. Accordingly, each Net Value, Inc.
stockholder will realize taxable gain, or loss, to the extent that the fair
market value of the Stonepath Group common stock received by the stockholder
in the merger exceeds, or is less than, the stockholder's basis in the Net
Value, Inc. common stock exchanged in the merger.
RISKS RELATED TO STONEPATH GROUP
Stonepath Group has a very limited operating history upon which you may
evaluate an investment in Stonepath Group.
Stonepath Group did not begin to implement its current business plan
until July 1999 and therefore has a very limited operating history upon which
you may evaluate making an investment in Stonepath Group. In addition, all
Stonepath Group's current affiliate companies are early stage companies that
have limited operating histories and have generated very limited, if any,
revenues or earnings from operations since inception. Accordingly, you will only
be able to examine a limited history of operating results of Stonepath Group's
affiliate companies in making your investment decision.
Stonepath Group proposed operations are speculative in nature and may not
ever result in any operating revenues or profits.
Stonepath Group is not certain that its business model, even if
successful, will result in operating revenues or profits. Stonepath Group's
success depends upon its ability to develop or select affiliate companies that
are ultimately successful. As a holding company without significant income from
operations, Stonepath Group expects to ultimately derive the cash flow
necessary to fund its operations from the operations and/or sale of its
affiliate companies. As of the date of this proxy statement-prospectus, none of
Stonepath Group's affiliate companies have generated operating revenues
sufficient to pay dividends to Stonepath Group. Furthermore, Net Value
Holdings has not generated any significant revenues from the sale of its equity
interests in its affiliate companies. Accordingly, Stonepath Group does not
have an established history of selecting and developing successful affiliate
companies. Economic, governmental, regulatory and industry factors outside Net
Value Holdings' control affect each of its affiliate companies. If Net Value
Holdings' affiliate companies do not successfully implement their business
plans, then Stonepath Group will not be able to achieve its business plan.
Accordingly, if these events occur, then Stonepath Group will not generate
any revenues and the value of its assets and the market price of its common
stock will decline. There are also material risks relating to the businesses of
Stonepath Group's affiliate companies. Accordingly, the success of Net Value
Holdings' operations will be dependent upon the management and operations of its
affiliate companies, the timing of the marketing of its affiliate companies'
products and numerous other factors beyond its control.
8
<PAGE>
Stonepath Group has had a history of losses and expects continued losses in
the foreseeable future.
For the six months ended June 30, 2000 and the year ended December 31,
1999, Stonepath Group experienced net losses to common stockholders of $65.1
million and $30.4 million respectively. Stonepath Group does not know if it
will report net income in any period, and expects that it will report net losses
in many quarters for the foreseeable future. Because Stonepath Group acquires
significant interests in early-stage companies, many of which generate net
losses, Stonepath Group has experienced, and expects to continue to
experience, significant volatility in its results of operations. While Net
Value Holdings' affiliate companies have consistently reported losses, Net Value
Holdings may have net income in certain periods and may experience significant
volatility from period to period due to non-recurring transactions and other
events incidental to its ownership interests in and advances to affiliate
companies. These transactions include dispositions of, and changes to, our
affiliate company ownership interests, and impairment charges.
Stonepath Group success could be impaired by valuations placed on
Internet-related companies by the investment community.
Stonepath Group's strategy involves creating value for its
stockholders by developing its affiliate companies and helping them to gain
access to the capital markets so that they can raise additional funds to satisfy
their business plans. Since Stonepath Group's initial acquisitions have been
equity interests in Internet companies, Stonepath Group is dependent on the
success of the market for Internet-related companies in general and for initial
public offerings of those companies in particular. Until March 2000, there had
been a substantial number of Internet-related initial public offerings and
private venture financings. Commencing during the second half of March 2000, the
domestic and international stock markets have generally experienced a
significant correction and the public trading prices, market capitalizations and
valuations of many technology and Internet-related companies have significantly
decreased. During this period, Internet-related initial public offerings and
private venture financings have decreased in both number and size. If present
market conditions continue for the near term, then the ability of Net Value
Holdings' affiliate companies to grow and access the capital markets may be
impaired and Stonepath Group may need to provide additional capital to its
affiliate companies in support of their business objectives and to protect the
value of its equity holdings. Furthermore, if present market conditions continue
for an extended period of time, then Stonepath Group may be unable to access
the capital markets to raise sufficient funds to enable it to provide additional
capital to its affiliate companies on a timely basis. If Stonepath Group is
unable to provide additional capital to its affiliate companies in these
circumstances on a timely basis, then its affiliate companies' operations may
suffer, Stonepath Group will not successfully implement its business plan and
the value of its common stock may decrease.
9
<PAGE>
In a volatile market, the common stock of Stonepath Group may experience wide
fluctuations.
In a volatile market, Stonepath Group may experience wide
fluctuations in the market price of its securities. These fluctuations may have
an extremely negative effect on the market price of its securities and may
prevent you from obtaining a market price equal to the prevailing market price
at the time of this merger when you attempt to sell Stonepath Group's
securities in the open market. In these situations, you may be required to
either sell Stonepath Group's securities at a market price which is lower than
the prevailing market price at the time of this merger, or to hold your
investment in Stonepath Group's securities for a longer period of time than
you planned to hold this investment.
Stonepath Group existing stockholders may experience dilution of their
ownership interests due to the issuance of additional shares of its common
stock.
Stonepath Group may in the future issue its previously authorized
and unissued securities which will result in the dilution of the ownership
interests of its present stockholders. Stonepath Group currently has 100
million shares of common stock that are authorized for issuance, of which it has
issued approximately 17.7 million shares as of June 30, 2000. At June 30, 2000
Stonepath Group had issued and outstanding warrants, stock options and shares
of preferred stock which are potentially convertible into approximately 12.2
million shares of common stock, and Stonepath Group recently settled a legal
proceeding under which an additional 0.4 million shares of common stock will be
issued. Stonepath Group also intends to complete this proposed merger with
Net Value, Inc. pursuant to which Stonepath Group will issue approximately
1.8 million shares of its common stock to the stockholders of Net Value, Inc.
and approximately 1.2 million warrants and stock options to the holders of Net
Value, Inc.'s issued and outstanding warrants and vested stock options.
Additionally, Stonepath Group may issue additional shares of its common stock
in connection with:
o the hiring of additional personnel;
o future acquisitions; and
o for other valid business purposes within the discretion of its Board
of Directors.
Stonepath Group's issuance of these shares of common stock will also
dilute the ownership interests of its existing stockholders.
10
<PAGE>
The influx of additional shares of Stonepath Group common stock onto the
market may create downward pressure on the trading price of its common stock.
The initial sale or secondary resale of substantial amounts of
Stonepath Group common stock in the public markets can have an adverse effect on
the market price of its common stock and make it more difficult for Stonepath
Group to sell its equity securities in the future at prices which Stonepath
Group deems appropriate. Since Stonepath Group's operations have been funded
primarily through the sale of restricted securities, a significant amount of its
issued and outstanding securities have not been eligible for public resale.
Stonepath Group's current public float plus the shares eligible for resale under
Rule 144 is approximately 14 million shares, including 4.1 million shares
issuable upon conversion, if at all, of Stonepath's Series C preferred stock.
Including the shares issuable in this merger during the next twelve months,
Stonepath Group estimates that an additional 10 million shares will become
eligible for resale into the public market, of which approximately 6 million
will become eligible for resale on December 15, 2000. The resale of shares into
the public market, or the mere perception that these resales could occur, could
adversely affect the market price of Stonepath Group's common stock and could
impair its ability to obtain capital through securities offerings.
There is a scarcity of and competition for acquisition opportunities.
There are a limited number of technology-based businesses seeking
investment capital which Stonepath Group deems 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. Stonepath Group is
and will continue to be a very minor participant in the business of seeking
business relationships with, and acquisitions of interests in early stage
technology businesses of which Internet companies presently constitute the
largest concentration. A large number of established and well-financed entities,
including venture capital firms, are active in acquiring interests in companies
which Stonepath Group may find desirable as affiliate company candidates.
Many of these investment-oriented entities have significantly greater financial
resources, technical expertise and managerial depth than Stonepath Group.
Consequently, Stonepath Group will be at a competitive disadvantage in
negotiating and executing possible investments in these entities as they
generally have easier access to capital, which entrepreneurs of development
stage companies generally place greater emphasis on than obtaining the
management skills and networking services that Stonepath Group provides to
its affiliate companies. Even if Stonepath Group is able to successfully
compete with these venture capital entities, this competition may affect the
terms of completed transactions and, as a result, Stonepath Group may have to
pay more than expected for interests in affiliate companies. Stonepath Group
may not be able to identify companies that complement its strategy, and even if
Stonepath Group identifies a company that complements its strategy, Net Value
Holdings 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 Stonepath Group's equity interest;
o incompatibility between its 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
Stonepath Group or its other affiliate companies.
If Stonepath Group is unable to successfully compete with other
entities in identifying and executing possible business opportunities, then
Stonepath Group will not be able to successfully implement its business plan.
11
<PAGE>
Stonepath Group may be classified as an investment company under the
Investment Company Act of 1940.
Although Stonepath Group is primarily engaged in the business of
e-commerce through its affiliate companies, its ownership of equity interests in
its affiliate companies that are not deemed controlled interests by the
Securities and Exchange Commission could result in Stonepath Group's
classification as an investment company under the Investment Company Act of
1940. If Stonepath Group is required to register as an investment company, it
will incur substantial additional expense as the result of the Investment
Company Act of 1940's record keeping, reporting, voting, proxy disclosure and
other requirements. In addition, restrictions on transactions between an
investment company and its affiliates under the Investment Company Act of 1940
would make it difficult, if not impossible, for it to fully implement Net Value
Holdings' strategy of actively managing, operating and promoting collaboration
among its network of affiliate companies. As a result, Stonepath Group
intends to take whatever steps are necessary in order not to be required to
register as an investment company, and may be forced to sell interests in
affiliate companies which it otherwise might continue to hold. Such sales may be
for less than fair market value due to its 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, Stonepath Group is
considered to primarily control a company if it owns more than 25% of that
company's voting securities and has more control than any other single owner.
Stonepath Group believes that it currently meets the foregoing tests.
However, changes in the value of its ownership interests in its affiliate
companies and the income/loss and revenue attributable to its affiliate
companies could require Stonepath Group to register as an investment company
under the Investment Company Act of 1940 unless it takes action to avoid
registration requirements. For example, Stonepath Group may be forced to sell
its minority ownership interests in some of its affiliate companies which it
does not want to sell and any sale may be at less than fair market value as Net
Value Holdings will be selling restricted securities in privately negotiated
transactions. Stonepath Group may also have to ensure that it retains at
least a 25% voting ownership interest in its majority-owned affiliate companies
after their initial public offerings, if any. In addition, Stonepath Group
may have to acquire additional income or loss generating assets that it might
not otherwise have acquired or may have to forego opportunities to acquire
interests in companies that it would otherwise want to acquire in connection
with executing its business strategy.
Despite its best efforts, there is the risk that the Securities and
Exchange Commission will find that Stonepath Group is in the business of
investing, reinvesting, or trading in securities and therefore an investment
company under the Investment Company Act of 1940. In order to be certain of its
status, Stonepath Group may apply to the Securities and Exchange Commission
for an order finding that it is primarily engaged in a business other than
investing in securities. Stonepath Group can give no assurance that such an
order, if applied for, will be granted.
12
<PAGE>
Stonepath Group is 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 it has described.
To date, Stonepath Group has focused its acquisition and affiliating
efforts on technology businesses whose operations are focused in the Internet
industry and generally meet the following criteria:
o early stage entity;
o seeking less than $2.5 million in capital;
o management that is experienced in the industry in which the affiliate
company will operate; and
o offers compelling market opportunities.
However, Stonepath Group is not obligated to follow any particular
operating, financial, geographic or other criteria in evaluating candidates for
potential business combinations. In addition, Stonepath Group is 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. Stonepath Group will determine which target
companies provide the best potential financial return for its stockholders and
it will determine the amount of equity and other terms and conditions of
investments. Stockholders will not have the opportunity to evaluate the relevant
economic, financial and other information that Stonepath Group's 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. Stonepath Group is not certain that it will be
successful in identifying and evaluating suitable business opportunities and
consummating business combinations with or acquiring interests in additional
affiliate companies. Stonepath Group does not anticipate that its affiliate
companies' operations will have a short-term positive impact on its operations.
Thus, Stonepath Group continues to seek additional target companies and is
continuing to develop companies based on its internally conceived business
ideas. These companies may operate in industries in which members of Net Value
Holdings' management team has little or no prior experience.
Stonepath Group expects its affiliate companies to grow rapidly and if it is
unable to assist them in sustaining and managing their growth, its affiliate
companies' businesses will suffer, which will adversely affect the business of
Stonepath Group.
Stonepath Group's 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 and cash
flows, this growth is likely to place significant strain on their resources and
on the resources Stonepath Group allocates to assist its affiliate companies.
In addition, its management may be unable to convince its affiliate companies to
adopt its ideas effectively, and the affiliate companies may fail in their
attempt to execute Stonepath Group's ideas or successfully manage their
growth. If Stonepath Group is unable to effectively assist its affiliate
companies in managing their growth, then they may not attain or sustain
profitable operations and the value of Stonepath Group's common stock may
decrease.
13
<PAGE>
Stonepath Group's Officers and Directors have acquired personal interests in
its affiliate companies which may create conflicts of interest that may
adversely affect its stockholders' best interests.
Darr Aley, Stephen George, Andrew P. Panzo and Lee C. Hansen, who are
among Stonepath Group's officers and directors, personally own interests or
rights to purchase interests in YesAsia, Inc. Tom Aley, an officer of Stonepath
Group, personally owns an interest in SwapIt.com. This may cause the interests
of these individuals to conflict with the best interests of Stonepath Group. If
the operations of YesAsia, Inc. or SwapIt.com are unsuccessful, it may be in the
best interests of Stonepath Group for it to either divest its ownership interest
in these affiliate companies or devote a smaller percentage of its management
and financial resources to assisting in the development of these affiliate
companies. In addition, in order to avoid registration under the Investment
Company Act of 1940, Stonepath Group may have to divest its ownership interest
in a particular affiliate company. However, the officer(s) or director(s) who
own a personal interest in these affiliate companies may vote not to take this
action or may seek to continue to devote management and financial resources to
these affiliate companies due to his personal interest. Stonepath Group's Board
of Directors has implemented a policy prohibiting its officers and directors
from acquiring personal interests in its affiliate companies in the future.
If Stonepath Group is unable to obtain additional financing, then its
business will suffer.
Stonepath Group will need to raise substantial additional financing
in the future to support its working capital needs or its affiliate companies'
working capital needs and to provide Stonepath Group with sufficient funding
to enter into additional business relationships and start additional early stage
companies. As of June 30, 2000, Stonepath Group had on hand existing cash and
cash equivalents of approximately $38.7 million. Based on its projected level of
operations and funding requirements, these funds should be sufficient to sustain
its operations for at least the next twelve months. However, should the level of
Stonepath Group's operations or funding requirements increase, it will require
additional capital sooner than it expects. This could occur for a number of
reasons, including:
o Stonepath Group purchases of an interest in a greater number of
affiliate companies than it presently anticipates;
o Stonepath Group's level of investment in affiliate companies is
greater than it presently anticipates; or
o Stonepath Group participates in subsequent rounds of financing
conducted by its affiliate companies to a greater extent than it
presently anticipates; or
o Future acquisitions.
If Stonepath Group is unable to secure additional financing on acceptable
terms, then it will not be able to fully implement its business plan.
14
<PAGE>
Stonepath Group's success is dependent on its continued employment of Andrew
P. Panzo and Lee C. Hansen, and the continued employment by its affiliate
companies of their key personnel. If Stonepath Group were to lose the
services of these individuals, its business and the businesses of its affiliate
companies would be negatively affected.
Stonepath Group believes that its success will depend on continued
employment by Stonepath Group and its affiliate companies of senior
management and key technical personnel. If one or more members of its management
team or the management teams of any of its affiliate companies are unable or
unwilling to continue in their present positions, then Stonepath Group's
business and operations could be disrupted.
As of June 30, 2000, Stonepath Group's entire management team, other
than Andrew P. Panzo, has worked for it for less than one year. Mr. Panzo
joined Stonepath Group's management team in January 1999. Other than Lee C.
Hansen, its President who joined it on October 1, 1999, the remainder of Net
Value Holdings' management team and directors joined Stonepath Group in July
1999 in connection with its merger with Strategicus Partners, Inc. and
thereafter. Stonepath Group's efficiency may be limited while these employees,
directors and future employees are being integrated into its operations. In
addition, Stonepath Group may be unable to identify and hire additional
qualified management and professional personnel to help lead it and its
affiliate companies.
Stonepath Group's 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
its affiliate companies to increase the sales of their existing products and
services and launch new product offerings.
Stonepath Group has issued a significant amount of stock-based compensation
to its employees, consultants and members of its Board of Directors, and this
compensation has significantly decreased and will continue to significantly
decrease its earnings.
At June 30, 2000, Stonepath Group has recorded deferred compensation of
$19.8 million related to compensatory stock options and restricted stock awards
to its employees, consultants and members of its Board of Directors. As a result
of these compensatory option grants and restricted stock awards, Stonepath Group
has recognized stock-based compensation of $13.4 million through June 30, 2000.
Stonepath Group will continue to recognize stock-based compensation as these
option and stock awards vest, thus reducing its earnings in future years.
Stonepath Group will incur a significant expense in each of the next three
years as a result of amortization of goodwill.
Stonepath Group will incur amortization expense of approximately
$7.7 million from June 30, 2000 through 2003 and its earnings will be reduced by
this expense in each year that it is recorded. This expense is the result of:
o the amortization of the goodwill which Stonepath Group has
recorded in connection with its acquisition of Strategicus Partners,
Inc.; and
o the amortization of the amount by which the purchase price of each of
Stonepath Group's equity interests accounted for under the equity
method of accounting exceeds its proportionate share of the
underlying net assets of each of these affiliate companies.
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Pursuant to its business plan, Stonepath Group contemplates acquiring
equity interests in additional affiliate companies over the next several years.
If these acquisitions result in additional goodwill, Stonepath Group will record
additional amortization expense in future years. Sales of investments for which
goodwill was recorded will reduce amortization expense in future years.
Fluctuations in Stonepath Group's quarterly results may adversely affect its
stock price.
Because Stonepath Group acquires significant interests in early
stage companies, many of which generate net losses, it has experienced, and
expects to continue to experience, significant volatility in its quarterly
results. Stonepath Group does not know if it will report net income in any
period, and it expects that it will report net losses in many quarters for the
foreseeable future. While its affiliate companies have consistently reported
losses, Stonepath Group may have net income in certain periods and may
experience significant volatility from period to period due to non-recurring
transactions and other events incidental to its ownership interests in and
advances to affiliate companies. These transactions include dispositions of, and
changes to, Stonepath Group's affiliate company ownership interests, and
impairment charges.
Stonepath Group does not anticipate paying dividends.
Stonepath Group has not paid any cash dividends on its common stock
since its inception and it does not anticipate paying cash dividends in the
foreseeable future. Any dividends which Stonepath Group may pay in the future
will be at the discretion of its Board of Directors and will depend on its
future earnings, any applicable regulatory considerations, its financial
requirements and other similarly unpredictable factors. For the foreseeable
future, Stonepath Group anticipates that it will retain any earnings which it
may generate from its operations to finance and develop its growth and that
Stonepath Group will not pay cash dividends to its stockholders.
RISKS PARTICULAR TO STONEPATH GROUP'S AFFILIATE COMPANIES.
Each of Stonepath Group's affiliate companies is subject to the risks
described below. In addition, Stonepath Group has set forth below the risks
which Webmodal and SwapIt.com, the affiliate companies which it deems to be
material to its operations as of the date of this proxy statement-prospectus,
are presently subject to at this early stage of their development.
Each of Stonepath Group's affiliate companies has a very limited operating
history and has generated very limited, if any, revenues.
Other than BrightStreet.com, Inc., Stonepath Group's affiliate
companies were all formed less than two years ago. Each of its affiliate
companies is in the development stage and has generated very limited, if any,
revenues. Accordingly, Stonepath Group has no historical basis on which to
evaluate the future success of any of its affiliate companies.
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Most of Stonepath Group's affiliate companies will require significant
additional financing to execute their business plans.
Other than BrightStreet and YesAsia, each of Stonepath Group's
affiliate companies only has sufficient capital resources to meet operating
expenses for less than one year. Accordingly, most of its affiliate companies
will require significant additional financing to execute their business plans.
Although Stonepath Group intends to assist its 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. It is Net Value
Holdings' understanding that SwapIt.com and AssetExchange have either consumed
all or substantially all of the funds which they have raised in their initial
rounds of capital financing. If any of its affiliate companies are unable to
obtain the required financing on a timely basis, then they may not be able to
execute their business plans, and Net Value may record impairment of their
investment in these companies.
The success of Stonepath Group's affiliate companies presently depends on the
development of the e-commerce market, which is uncertain.
All of Stonepath Group's 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 its affiliate companies may not succeed. For
example, YesAsia and SwapIt.com 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 its affiliate companies may
not develop an adequate customer base to execute their business plans.
A number of factors could prevent the long-term acceptance of
e-commerce business, including the following:
o the unwillingness of businesses to shift from traditional business
processes to e-commerce processes;
o the necessary network infrastructure for substantial growth in usage
of e-commerce may not be adequately developed;
o increased government and securities regulation or taxation may
adversely affect the viability of e-commerce;
o insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times for
the users of e-commerce; and
o concern and adverse publicity about the security of e-commerce
transactions.
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Stonepath Group's affiliate companies may fail if their competitors provide
superior Internet-related products or continue to have greater resources than
its affiliate companies.
Competition for Internet products and services is intense and grows on
a daily basis. As the market for e-commerce grows, Stonepath Group expects
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, its affiliate companies'
competitors may emerge without the same degree of warning that competitors who
are traditional brick and mortar businesses would provide to those businesses.
Stonepath Group's affiliate companies compete for a share of a customer's:
o purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels; and
o advertising budget with online services and traditional off-line
media, such as print and trade associations.
Many of Stonepath Group's affiliate companies' existing competitors
have greater brand recognition and greater financial, marketing and other
resources than Stonepath Group's affiliate companies. This may place its
affiliate companies at a competitive disadvantage in responding to other
companies' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives.
In addition, Stonepath Group's affiliate companies compete to attract
and retain a critical mass of buyers and sellers. Stonepath Group's affiliate
companies' competitors may develop Internet products or services that are
superior to, or have greater market acceptance than, those offered by Net Value
Holdings' affiliate companies. If its affiliate companies are unable to compete
successfully against their existing and developing competitors, then Net Value
Holdings' affiliate companies may fail.
Changes in Federal and state tax treatment of Internet sales could result in
decreased revenues for some of Stonepath Group's affiliate companies.
The imposition of sales taxes on Internet sales would increase the
effective cost of goods to purchasers from metacat.com, YesAsia and SwapIt.com
and may result in lower sales. Currently, these affiliate companies are not
required to charge any customer sales and usage tax, and there is a Federally
imposed moratorium on taxation of Internet transactions. However, the growth of
Internet commerce is likely to lead state revenue agencies to pursue taxation on
Internet sales. To the extent that states are successful in imposing taxes on
Internet sales, the result will be an effective increase in the cost of goods
purchased through internet web sites. 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.
Failure to manage rapid growth could adversely affect operations of the
Stonepath Group affiliates.
Should they experience rapid growth, the affiliates of Stonepath Group
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 Webmodal, Inc.
If intermodal carriers are unwilling to maintain relationships with Webmodal,
the attractiveness of Webmodal's products and services will be reduced.
Webmodal's business plan is dependent on maintaining 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 maintain
relationships with the railroads. Webmodal has established agreements with a
number of the major U.S. railroads, a large Canadian/U.S. railroad, a large U.S.
passenger railroad and a large stack-train company. A failure to maintain these
relationships on a consistent basis will reduce the attractiveness of Webmodal's
products and services.
If Webmodal is unable to maintain relationships with trucking companies in hub
cities, the attractiveness of Webmodal's products and services will be reduced.
Webmodal's business plan requires that it establish relationships for
online pricing and operation 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, then Webmodal's ability
to offer services in the applicable hub cities will be adversely affected until
such relationships can be established. Webmodal has established contractual
relationships with a number of leading intermodal trucking companies covering
the geographic markets which are targeted for Webmodal's launch.
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. To
the extent that Webmodal is unsuccessful in this educational effort, its
business will suffer.
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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 applying 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
Carriers 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. In addition, six truckload trucking companies
merged their logistics business units into a commonly owned, Internet-based
global transportation logistics company called Transplace.com. This company's
initial focus will reportedly include a number of areas such as over the road
truckload and intermodal capabilities. Railroads, trucking companies and other
independent entities similar to Webmodal also could enter this market. Four
railroads announced an investment in "Arzoon," which reportedly is developing an
Internet-based multi-modal transportation services company. BNSF Railroad has
formed a company called "Freightwise" which reportedly is developing an online
multi-modal transportation exchange. Also, an AAR organization called
"Steelroads" is reportedly developing Internet-based rail transportation
services. 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 Celarix, 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 or greater difficulty winning customers as a result of
this increased level of competition. This increase in expenses or greater
difficulty winning customers will adversely affect Webmodal's operating results.
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 goods
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 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. 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 their books, due to valuation considerations.
Competition from a variety of online trading services will be intense and
SwapIt.com may not be able to compete successfully.
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 Half.com, Switchouse, Mr.
Swap, Spun.com and a number of other small services. 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 via a
national warehouse operation and who could rapidly develop and launch services
similar to SwapIt.com's 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 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 and financing
sources may be able to devote more resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to Web site and systems development than SwapIt.com. Increased
competition may result in reduced operating margins, inability to capture
sufficient 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.
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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 shared 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.
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THE SPECIAL MEETING
PROXY SOLICITATION
This proxy statement-prospectus is being delivered to you in connection
with the solicitation by the Board of Directors of Net Value, Inc. of proxies to
be voted at the special meeting to be held on Tuesday, November 7, 2000 at
10:00 a.m., local time, at the law offices of Buchanan Ingersoll Professional
Corporation, Eleven Penn Center, 14th Floor, 1835 Market Street, Philadelphia,
PA 19103. Net Value Holdings will pay all expenses in connection with
solicitation of the proxy statement-prospectus. Officers, directors and regular
employees of Net Value, Inc., who will receive no additional compensation for
their services, may solicit proxies by telephone or personal call. Net Value,
Inc. has asked brokers and nominees who hold stock in their names to give the
proxy statement-prospectus to their customers. This proxy statement-prospectus
is first being mailed on or about October 11, 2000.
RECORD DATE AND QUORUM REQUIREMENT
Stockholders of record at the close of business on September 29, 2000
are entitled to notice of, and to vote at, the special meeting. Each holder of
record of Net Value, Inc. common stock at the close of business on the record
date is entitled to one vote for each share then held on each matter voted on by
stockholders. At the close of business on the record date, there were 12,469,756
shares of Net Value, Inc. common stock issued and 12,464,756 outstanding held by
approximately 273 holders of record.
The holders of a majority of the outstanding shares entitled to vote at
the special meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. Abstentions are counted for
purposes of determining whether a quorum exists. If you hold your shares of Net
Value, Inc. common stock through a broker, bank or other nominee, generally the
nominee may only vote your Net Value, Inc. common stock in accordance with your
instructions. However, if it has not timely received your instructions, the
nominee may vote on matters for which it has discretionary voting authority.
Brokers generally will not have discretionary voting authority to vote on the
proposal to adopt the merger agreement. If a nominee cannot vote on a matter
because it does not have discretionary voting authority, this is a "broker
non-vote" on that matter. Broker non-votes are counted as shares present or
represented at the special meeting for purposes of determining whether a quorum
exists.
VOTING PROCEDURES
Under Delaware law, holders of a majority of the outstanding shares of
Net Value, Inc. common stock entitled to vote at the special meeting must vote
to adopt the merger agreement. For purposes of the vote required under Delaware
law, a failure to vote, a vote to abstain and a broker non-vote will each have
the same legal effect as a vote against adoption of the merger agreement. Net
Value Holdings, which owns approximately 65% of the outstanding Net Value, Inc.
common stock, owns enough shares to adopt the merger agreement without the vote
of the stockholders and has agreed to vote in favor of the merger agreement.
If you execute a proxy card without giving instructions, the shares of
Net Value, Inc. common stock represented by that proxy card will be voted "FOR"
adoption of the proposed merger agreement.
The Board of Net Value, Inc. is not aware of any other matters to be
voted on at the special meeting. If any other matters properly come before the
special meeting, including a motion to adjourn the special meeting in order to
solicit additional proxies, the persons named on the proxy card will vote the
shares represented by all properly executed proxies on those matters in their
discretion, except that shares represented by proxies that have been voted
"AGAINST" adoption of the merger agreement will not be used to vote "FOR"
adjournment of the special meeting to allow additional time to solicit
additional votes "FOR" the merger agreement.
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VOTING AND REVOCATION OF PROXIES
You may revoke your proxy at any time before it is exercised by one of
the following means:
o sending the secretary of Net Value, Inc. a notice revoking it;
o submitting a duly executed proxy with a later date; or
o voting in person at the special meeting.
All shares represented by each properly executed and not revoked proxy
received by the secretary of Net Value, Inc. prior to the special meeting will
be voted in accordance with the instructions given on the proxy. If no
instructions are indicated, the proxy will be voted to adopt the merger
agreement.
DISSENTERS' AND APPRAISAL RIGHTS
Stockholders have the right to seek a determination of the "fair value"
of their shares (exclusive of any element of value arising from the
accomplishment or expectation of the merger) if they (i) deliver a written
demand for appraisal of their shares to Net Value, Inc. prior to the effective
date of the merger, (ii) do not vote their shares in favor of the merger, and
(iii) otherwise comply with the provisions of Section 262 of the Delaware
General Corporation Law ("GCL") regarding appraisal rights.
The following is a brief summary of Section 262 which sets forth the
procedures for dissenting from the merger and demanding statutory appraisal
rights. This summary is qualified in its entirety by reference to Section 262,
the text of which is attached hereto as Exhibit B.
Stockholders of record who desire to exercise their appraisal rights
must satisfy all of the conditions contained in Section 262. A written demand
for appraisal must be delivered to Net Value, Inc. before the taking of the vote
on the merger agreement. This written demand for appraisal must be in addition
to and separate from any proxy or vote abstaining from or against the merger.
Neither voting against, nor abstaining from voting nor failing to vote on the
merger will constitute a demand for appraisal within the meaning of Section 262.
Stockholders electing to exercise their appraisal rights under Section 262 must
not vote for approval and adoption of the merger agreement.
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A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on his or her
Net Value, Inc. common stock certificates. If the shares of Net Value, Inc.
common stock are owned of record in a fiduciary capacity, such as by a trustee,
guardian, or custodian, such demand must be executed by the fiduciary. If the
shares of Net Value, Inc. common stock are owned of record by more than one
person, as in a joint tenancy or tenancy in common, such demand must be executed
by all joint owners. An authorized agent, including an agent for two or more
joint owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that in exercising the demand, he or she is acting as agent for the record
owner.
A record owner, such as a broker, who holds shares of Net Value, Inc.
common stock as a nominee for others may exercise his or her right of appraisal
with respect to the shares held for all or less than all the beneficial owners
of shares as to which he or she is the record owner. In such case, the written
demand must set forth the number of shares covered by such demand. Where the
number of shares is not expressly stated, the demand will be presumed to cover
all shares of Net Value, Inc. common stock outstanding in the same name of such
record owner.
Stockholders who elect to exercise appraisal rights should mail or
deliver their written demands to the Secretary of Net Value, Inc. at 1085
Mission Street, San Francisco, California 94103. The written demand for
appraisal should specify the stockholder's name and mailing address, the number
of shares owned, and that the stockholder is thereby demanding appraisal of his
or her shares. It is the responsibility of each stockholder electing appraisal
rights to ensure that the written demand is received by Net Value, Inc. before
the taking of the vote at the special meeting. Within ten (10) days after the
effective date of the merger, Net Value, Inc. must provide notice of the
effective date of the merger to all stockholders who have complied with Section
262 and have not voted for adoption of the merger agreement.
Within 120 days after the effective date of the merger, any stockholder
who has complied with the required conditions of Section 262 may file a petition
in the Delaware Court demanding a determination of the fair value of the shares
of the dissenting stockholders. If a petition for appraisal is timely filed,
after a hearing on such petition, the Delaware Court will determine which
stockholders are entitled to appraisal rights and will appraise the shares owned
by such stockholders, determining the fair value of such shares, exclusive of
any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest to be paid, if any, upon the
amount determined to be the fair value. In determining fair value, the Court is
to take into account all relevant factors. In Weinberger v. UOP, Inc. et al.,
decided February 1, 1983, the Delaware Supreme Court expanded the considerations
that could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company...."
Accordingly, the Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts
which would be ascertained as of the date of the merger which throw any light on
future prospects of the merged corporation. Section 262 provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger." In Weinberger, the Delaware Supreme Court held that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered."
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Stockholders considering seeking appraisal should keep in mind that the
fair value of their shares determined under Section 262 could be more, the same
or less than the merger consideration they are entitled to receive pursuant to
the merger agreement. The cost of the appraisal proceeding may be determined by
the Delaware Court and assessed against the parties as the Delaware Court deems
equitable in the circumstances. Upon application of a dissenting stockholder,
the Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares entitled to
appraisal. In the absence of such a determination or assessment, each party
bears its own expenses.
Any stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the effective date, be entitled to vote for any
purpose the shares subject to such demand or to receive payment of dividends or
other distributions on such shares, except for dividends or distributions
payable to stockholders of record at a date prior to the effective date.
At any time within 60 days after the effective date, any former holder
of shares of Net Value, Inc. common stock shall have the right to withdraw his
or her demand for appraisal and to accept the terms offered in the merger; after
this period such holder may withdraw his or her demand for appraisal only with
the consent of Net Value, Inc. If no petition for appraisal is filed with the
Delaware Court within 120 days after the effective date, stockholders, rights to
appraisal shall cease and all stockholders shall be entitled to receive the
merger consideration as provided for in the merger agreement. Inasmuch as Net
Value, Inc. has no obligation to file such a petition, and has no present
intention to do so, any stockholder who desires such a petition to be filed is
advised to file it on a timely basis. However, no petition timely filed in the
Delaware Court demanding appraisal shall be dismissed as to any stockholder
without the approval of the Delaware Court, and such approval may be conditioned
upon such terms as the Delaware Court deems just.
The provisions of Section 262 are technical in nature and complex.
Stockholders desiring to exercise appraisal rights and to obtain appraisal of
the fair value of their shares should consult counsel, since the failure to
comply strictly with the provisions of Section 262 may defeat their appraisal
rights.
EFFECTIVE TIME
The merger will be effective as soon as practicable following
stockholder adoption of the merger agreement and the satisfaction or waiver of
the terms and conditions set forth in the merger agreement, and upon the filing
of a certificate of merger with the secretary of state of the State of Delaware.
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THE MERGER
GENERAL
Set forth below is a brief description of the material provisions of
the merger agreement and the merger. This description does not purport to be
complete and is qualified in its entirety by reference to the merger agreement.
The full text of the merger agreement is attached as Exhibit A to this proxy
statement-prospectus and is incorporated herein by reference.
The merger agreement provides that Net Value Acquisition, a
wholly-owned subsidiary of Stonepath Group, will be merged with and into Net
Value, Inc. At the effective time of the merger, each share of Net Value, Inc.
common stock, other than shares held by Net Value, Inc. in treasury and shares
held by Stonepath Group, will be canceled and converted into the right to
receive 0.4 shares of Stonepath Group's common stock. After the merger, Net
Value, Inc. will become a wholly-owned subsidiary of Stonepath Group.
PURPOSE AND REASONS FOR THE MERGER
In 1998, Stonepath Group acquired approximately 66% of Net Value,
Inc.'s outstanding common stock through share exchange transactions with 20 of
Net Value, Inc.'s largest stockholders, whereby such stockholders received
shares of Stonepath Group common stock for each of their shares of Net Value,
Inc. common stock. Those share exchange transactions represented the first of a
two-step process pursuant to which the remaining minority stockholders of Net
Value, Inc. would be acquired by Stonepath Group. The merger described in
this proxy statement-prospectus represents the second stage of the acquisition.
In deciding to undertake the merger, Stonepath Group considered the
following factors, among others:
o the complexity associated with having multiple corporations with
varying degrees of overlapping minority interest;
o the fact that Net Value, Inc. is essentially a discontinued
operation;
o the relative lack of liquidity for the Net Value, Inc. common stock;
o the impact on its own common stock of the issuance of shares to the
Net Value, Inc. stockholders; and
o the advancement of Stonepath Group's corporate strategy in
obtaining further investors.
Stonepath Group also considered the advantages and disadvantages of some
alternatives to merging Net Value, Inc., including leaving Net Value, Inc. as a
private majority-owned subsidiary.
Net Value, Inc. considered substantially the same factors that
Stonepath Group did, as described above, in deciding to undertake the merger at
the time the merger agreement was signed.
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THE BOARD'S RECOMMENDATIONS
The Board of Directors of Net Value, Inc. appointed a special committee
of Messrs. Steven B. Rosner and Michael Cirillo, directors of Net Value, Inc.
who are not officers or directors of Stonepath Group or Net Value
Acquisition, to review the proposed merger on behalf of Net Value, Inc.
stockholders. Messrs. Rosner and Crillo each own options to purchase 90,000
shares of Net Value, Inc. Their review excluded Stonepath Group, the officers
and directors of Stonepath Group and Net Value, Inc. as stockholders of Net
Value, Inc. After careful consideration, the special committee determined that
the merger is fair to the stockholders. The special committee also recommended
that the Board of Directors approve the merger agreement and recommend the
merger agreement to the Net Value, Inc. stockholders for adoption. The Board of
Directors of Net Value, Inc. recommends that the Net Value, Inc. stockholders
adopt the merger agreement. Net Value, Inc. has not retained an investment
banking firm to evaluate the fairness of the merger.
POSITION OF STONEPATH GROUP
The Board of Directors of Stonepath Group has approved the merger
agreement. Stonepath Group, however, has not retained an investment banking
firm to evaluate the fairness of the merger. Stonepath Group is not making
any recommendation as to how the stockholders of Net Value, Inc. should vote on
the merger agreement.
CONFLICTS OF INTEREST
In considering the recommendation of the Net Value, Inc. Board with
respect to the merger, the stockholders of Net Value, Inc. should be aware that
certain of its officers and directors of Net Value, Inc. have interests in
connection with the merger that present them with actual or potential conflicts
of interest, as summarized below. The Net Value, Inc. Board was aware of these
interests and considered them.
Net Value, Inc.'s Directors and Executive Officers
Net Value, Inc. Board members and executive officers hold options to
acquire an aggregate of 240,000 shares of Net Value, Inc. common stock, with
exercise prices ranging from $1.00 to $6.00. These options will be treated on
the same terms as other Net Value, Inc. stock options and therefore will be
assumed by Stonepath Group and converted into options to acquire shares of
Stonepath Group's common stock as more fully explained in "EFFECT OF THE
MERGER ON NET VALUE, INC. STOCK OPTIONS AND WARRANTS" on page 29.
Further, Andrew P. Panzo, director and President of Net Value, Inc.,
also serves as Chairman of the Board of Directors and Chief Executive Officer of
Stonepath Group.
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EFFECTS OF THE MERGER
As a result of the merger, any outstanding loans between Net Value,
Inc. and Stonepath Group shall be immediately forgiven, and Stonepath Group will
beneficially own the entire equity interest in Net Value, Inc. Stonepath Group
will have complete control over the conduct of Net Value, Inc.'s business and
will have a 100% interest in the net book value and operating results of Net
Value, Inc. and any future increases in the value of Net Value, Inc. You will no
longer have any interest in, and will not be a stockholder of, Net Value, Inc.
and therefore will not directly participate in Net Value, Inc.'s future earnings
and potential growth. In addition, you will no longer bear the direct risk of
any decreases in the value of Net Value, Inc. Instead, the stockholders of Net
Value, Inc. other than Stonepath Group will have the right to receive 0.4 shares
of Stonepath Group common stock for each share held.
CONVERSION OF SECURITIES
At the effective time of the merger, each share of Net Value, Inc.
common stock, other than shares held in treasury by Net Value, Inc. and shares
held by Stonepath Group, will be automatically converted into the right to
receive 0.4 shares of Stonepath Group common stock. Except for the right to
receive shares of Stonepath Group common stock, from and after the effective
time, all shares of Net Value, Inc. common stock will no longer be outstanding
and will be canceled and retired and will cease to exist. Each holder of a stock
certificate formerly representing shares of Net Value, Inc. common stock will
after the effective time cease to have any rights with respect to the shares,
other than the right to receive shares of Stonepath Group common stock for
their shares of Net Value, Inc. common stock upon surrender of the stock
certificate.
In the merger, Net Value, Inc. stockholders will receive 0.4 shares of
Stonepath Group common stock for each share of Net Value, Inc. common stock
owned by them, rounded down to the nearest whole share, without interest, plus a
check for any fractional share of Stonepath Group common stock. Holders of
what would have been a fractional share of Stonepath Group common stock will
receive cash (rounded to the nearest cent) equal to the high bid price per share
of Stonepath Group's common stock on the trading day immediately preceding the
closing date, multiplied by the fraction of the share (rounded to the nearest
hundredth of a share) of Stonepath Group common stock that they would have
received.
Including the shares originally received in the exchange transactions
during October through November 1998, the former Net Value, Inc. stockholders
would hold approximately 32% of the outstanding Stonepath Group common stock
following the merger. Assuming the exercise or conversion of all outstanding Net
Value, Inc. stock options, which will, after the merger, be exercisable for or
convertible into Stonepath Group common stock, Net Value, Inc. stockholders
would hold approximately 38% of Stonepath Group outstanding common stock
following the merger.
You will not receive interest on the consideration payable upon the
surrender of your stock certificates. Payment of the exchange ratio to a person
who is not the registered holder of a stock certificate is conditioned upon the
surrendered certificate being properly endorsed and otherwise in proper form for
transfer, as determined by the exchange agent. Further, the person requesting
payment will be required to pay any transfer or other taxes required because of
the payment to a person other than the registered holder of the stock
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<PAGE>
certificate, or establish to the satisfaction of the exchange agent that any
necessary tax has been paid or is not payable. Six months after the effective
time, Stonepath Group may require the exchange agent to deliver to it any
shares of Stonepath Group common stock and any cash in lieu of fractional
shares made available to the exchange agent which have not been disbursed to Net
Value, Inc. common stockholders. Neither the exchange agent nor any party to the
merger agreement will be liable to any holder of stock certificates formerly
representing shares for any amount paid pursuant to any applicable abandoned
property, escheat or similar law.
At the effective time, each share of common stock of Net Value
Acquisition will automatically be converted into one share of common stock of
the surviving corporation. All shares held in treasury by Net Value, Inc. will,
at the effective time, cease to exist.
EFFECT OF THE MERGER ON NET VALUE, INC. STOCK OPTIONS AND WARRANTS
Net Value, Inc. has, from time to time, issued options to acquire Net
Value, Inc. common stock under its nonqualified stock option plan, as amended,
and warrants to acquire Net Value, Inc. common stock. At the effective time of
the merger, each outstanding Net Value, Inc. stock option under the Net Value,
Inc. stock option plan and each warrant, whether or not exercisable, will be
assumed by Stonepath Group. Each Net Value, Inc. stock option and warrant
will continue to have, and be subject to, the same terms and conditions that it
had immediately prior to the effective time, except that:
o each Net Value, Inc. stock option and warrant will be exercisable
for a number of shares of Stonepath Group common stock determined
by multiplying the number of shares of Net Value, Inc. common stock
issuable upon exercise of the option or warrant immediately prior to
the effective time of the merger by 0.4, rounded to the nearest
whole share; and
o the exercise price for the shares of Stonepath Group common stock
issuable upon exercise of the option or warrant will be determined
by dividing the exercise price per share of Net Value, Inc. common
stock at which the option or warrant was exercisable immediately
prior to the effective time by 0.4, rounded to the nearest whole
cent.
EXCHANGE OF SHARES
You will receive detailed instructions regarding the surrender of your
stock certificates from Stonepath Group's exchange agent, promptly following the
effective time of the merger. You will receive certificates for Stonepath
Group's common stock as soon as practicable after the exchange agent receives
your Net Value, Inc. stock certificates and other required documents. Please do
not send any stock certificates to Stonepath Group, Net Value, Inc. or the
exchange agent until you receive these instructions. If you are the record owner
of your shares, you will not have to pay brokerage fees or incur similar
expenses. If you own your shares through a broker or other nominee, your broker
may charge you a fee. You should consult your broker or nominee to determine
whether any charges will apply.
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<PAGE>
TRANSFER OF SHARES
Shares of Net Value, Inc. common stock will not be transferred on the
stock transfer books at or after the effective time. If certificates
representing such shares are presented to Net Value, Inc. after the effective
time, the shares will be canceled and exchanged for shares of Stonepath Group
common stock and cash in lieu of fractional shares.
EXPENSES
Stonepath Group will pay the costs and expenses in connection with
the merger agreement, whether or not the merger is consummated.
ACCOUNTING TREATMENT
The merger will be accounted for as the completion of an in-process
recapitalization that was originally begun in December 1998. Because the
consolidated financial statements of Stonepath Group already include those of
Net Value, Inc., the only effect of completing this in-process recapitalization
will be the reallocation of approximately $1,100 from Net Value, Inc.'s capital
accounts to Stonepath Group capital accounts, which will not change
stockholder's equity in the aggregate.
REGULATORY APPROVALS
There are no Federal or state regulatory approvals required that have
not already been obtained in order for it to complete the merger, except for (1)
the requirements of the Delaware General Corporation Law relating to stockholder
approval and completion of the merger and (2) the requirements of the securities
laws.
RESTRICTIONS ON SALES OF SHARES
General Restrictions
The shares of common stock which Stonepath Group issued to the 20
largest stockholders pursuant to the 1998 share exchange transactions are
subject to a transfer restriction providing that only five percent of the shares
may be resold commencing as of the closing of the merger and during the
remainder of the month in which the merger closed. This transfer restriction
expires on December 15, 2000, at which time the remaining shares may be resold.
In order to ensure that all of the former Net Value, Inc. stockholders are
treated generally in the same manner, as a condition to the merger, all shares
of Stonepath Group common stock which will be received by stockholders of Net
Value, Inc. pursuant to the merger will be subject to the same restrictions upon
resale through December 15, 2000.
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<PAGE>
Affiliate Restrictions
The shares of Stonepath Group's common stock to be issued in the merger
will be registered under the Securities Act of 1933, as amended, and will be
freely transferable under the Securities Act, except for shares of Stonepath
Group's common stock issued to any person who is deemed to be an "affiliate" of
either Stonepath Group or Net Value, Inc. at the time of the special meeting.
Persons who may be deemed to be affiliates include individuals or entities that
control, are controlled by, or are under the common control of either of it and
may include some of Stonepath Group's respective officers and directors, as well
as the principal stockholders of each of it. Affiliates may not sell their
shares of Stonepath Group common stock acquired in the merger except pursuant
to:
o an effective registration statement under the Securities Act
covering the resale of those shares;
o an exemption under paragraph (d) of Rule 145 under the Securities
Act; or
o any other applicable exemption under the Securities Act.
Stonepath Group's registration statement on Form S-4, of which this
proxy statement-prospectus forms a part, does not cover the resale of shares of
Stonepath Group's common stock to be received by affiliates in the merger.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax considerations relevant to the merger that are applicable to holders
of Net Value, Inc. common stock. This discussion is based on currently existing
provisions of the Internal Revenue Code, existing Treasury Regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences to Stonepath Group, Net Value, Inc. or Net
Value, Inc. stockholders as described herein.
Net Value, Inc. stockholders should be aware that this discussion does
not deal with all federal income tax considerations that may be relevant to
particular Net Value, Inc. stockholders in light of their particular
circumstances, including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign persons, stockholders who own
their stock as part of a hedge, appreciated financial position, straddle or
conversion transaction, stockholders who do not own their stock as a capital
asset and stockholders who have acquired their stock upon the exercise of
employee options or otherwise as compensation. In addition, this discussion does
not address the following topics:
o the tax consequences of the merger under foreign, state or local tax
laws;
o the tax consequences of transactions effectuated before or after, or
concurrently with, the merger, whether or not any such transactions
are undertaken in connection with the merger, including without
limitation any transaction in which shares of Net Value, Inc. common
stock are acquired or shares of Stonepath Group common stock are
disposed of; or
o the tax consequences of the assumption by Stonepath Group of
outstanding options to acquire Net Value, Inc. common stock.
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<PAGE>
ACCORDINGLY, NET VALUE, INC. STOCKHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING
THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER.
The merger will be treated as a taxable exchange by the Net Value, Inc.
stockholders of their shares of Net Value, Inc. common stock for shares of
Stonepath Group common stock. As a result, each Net Value, Inc. stockholder will
realize taxable gain or loss to the extent that the fair market value of the
Stonepath Group common stock, plus any cash in lieu of fractional shares,
received by the stockholder in the merger exceeds, or is less than, the
stockholder's basis in the Net Value, Inc. stock surrendered. Such gain or loss
will be capital in nature so long as the Net Value, Inc. common stock
surrendered is a capital asset in the hands of the exchanging Net Value, Inc.
stockholder and will be long term gain or loss if the exchanging Net Value, Inc.
stockholder has a holding period exceeding one year in the Net Value, Inc.
common stock surrendered. The stockholder's basis in the Stonepath Group common
stock received in the merger will equal its fair market value at the time of the
merger and the holding period will commence on the day following the merger.
DESCRIPTION OF CAPITAL STOCK OF STONEPATH GROUP
General
Stonepath Group is authorized to issue 100,000,000 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
Stonepath Group's capital stock, is qualified in its entirety by reference to
the certificate of incorporation and bylaws of Stonepath Group, copies of which
are filed as exhibits to the registration statement of which this proxy
statement-prospectus is a part.
Common Stock
The holders of Stonepath Group's 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 Stonepath
Group's common stock can elect all members of Stonepath Group's Board of
Directors, and holders of the remaining shares by themselves cannot elect any
member of the Board of Directors.
The holders of its common stock are entitled to receive dividends in
the discretion of the Stonepath Group Board of Directors. Stonepath Group
may only pay dividends out of funds legally available for this purpose. In the
event of the liquidation, dissolution or winding up of Stonepath Group, the
holders of its 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 its common stock. Holders of shares of Stonepath Group's common stock, as
such, have no conversion, preemptive or other subscription rights, and there are
no redemptive provisions applicable to its common stock. All of the outstanding
shares of Stonepath Group's common stock are fully paid and nonassessable.
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<PAGE>
Preferred Stock
The certificate of incorporation of Stonepath Group provides that its
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 Stonepath
Group's preferred stock may be entitled to preferences over common stockholders
with respect to distributions from dividends, liquidation, dissolution or
winding up, in such amounts as are established by its Board of Directors .
In March 2000, Stonepath Group sold 4,166,667 shares of its Series C
Preferred Stock to a group of institutional investors and their affiliates led
by Tudor Investment Corporation, Brown Simpson Asset Management and BNY Capital
Markets, Inc. for aggregate proceeds of $50 million.
Each share of Stonepath Group's Series C Preferred Stock is
convertible into one share of common stock. This conversion ratio is subject to
adjustment under certain circumstances to protect the holders of the Series C
Preferred Stock against future dilutive transactions. The holders may convert
their shares of Series C Preferred Stock into shares of Stonepath Group's
common stock at any time. The Series C Preferred Stock shall automatically be
converted into shares of common stock upon:
o the affirmative vote of holders of 80% of the outstanding shares of
Series C Preferred Stock;
o the closing of a public offering of common stock pursuant to which
the offering price is at least $30 per share; and
o upon election of Stonepath Group, provided that a registration
statement registering the resale of the shares of common stock
issuable upon conversion of the Series C Preferred Stock has been
declared effective by the Securities and Exchange Commission and
remains effective and the closing market price of its common stock
has been equal to at least $18 per share for a period of at least 20
consecutive business days.
The Series C Preferred Stock accrues a dividend of 8% per annum which
is required to be paid on a quarterly basis in kind in the form of additional
shares of Series C Preferred Stock. This dividend rate shall increase by 1% on
October 3, 2000 and by an additional 1% on the 90th day of each 90-day period
thereafter if Stonepath Group's application to list its shares of common stock
on the NASDAQ SmallCap Market or another national exchange has not been approved
prior to such dates.
Stonepath Group is obligated to redeem the issued and outstanding
shares of its Series C Preferred Stock within 60 days of receiving written
notice from holders of at least 80% of the issued and outstanding shares of the
Series C Preferred Stock upon:
o any voluntary or involuntary bankruptcy, receivership, assignment
for the benefit of creditors, liquidation or acceleration of any
third party obligations;
o any payment default continuing for at least 120 days where the
aggregate amount in default is greater than $750,000; and
o any use of the proceeds of the offering in a manner which is not
permitted by the Series C Preferred Stock Purchase Agreement.
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<PAGE>
Any such redemption shall be at a price per share equal to the greater of (i)
the liquidation value the Series C Preferred Stock of $12.00 per share plus all
accrued and unpaid dividends, or (ii) the fair market value per share of the Net
Value Holdings' common stock on the redemption date.
Stonepath Group also issued warrants to purchase an aggregate of
416,667 shares of its common stock to the purchasers of its Series C Preferred
Stock. The warrants are exercisable until March 2, 2003 at an exercise price of
$26.58 per share of common stock (subject to adjustment in certain
circumstances), provided that if while this registration statement is effective,
the closing market price of its common stock is at least $39.87 per share for at
least 30 consecutive days, then Stonepath Group may terminate the warrants
upon 30 days prior written notice.
Until the earlier of March 3, 2001 or the date on which Net Value
Holdings closes a public offering of its common stock at an offering price of at
least $30 per share and pursuant to which it receives gross proceeds of at least
$20,000,000, each holder of the Series C Preferred Stock has the right to
purchase that number of shares of Stonepath Group's capital stock sold in a
private placement offering which Stonepath Group completes for financing
purposes equal to its pro rata ownership interest in Stonepath Group,
calculated on a fully diluted, as converted basis. This right does not apply to
any shares of capital stock issued pursuant to any stock option, incentive, or
benefit plan or in connection with any merger, acquisition or other strategic
purpose which is not primarily to raise equity capital.
Common Stock Purchase Warrants
As of the date of this proxy statement-prospectus, there are 2,897,960
common stock purchase warrants of Stonepath Group outstanding, as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Exercise Price
Holder Date of Issuance # of Shares Per Share Expiration Date
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Founders Equity Group, March 1999 90,000 $2.50 February 2002
Inc.
--------------------------------------------------------------------------------------------------------------------
Founders Equity Group, March 1999 90,000 $5.00 February 2002
Inc.
--------------------------------------------------------------------------------------------------------------------
Various Investors Various, from May 1,143,968 $6.00 Various, from May
1999 to April 2000 2002 to April 2003
--------------------------------------------------------------------------------------------------------------------
Private Capital October 1999 110,077 $5.00 October 2002
Source, Ltd.
--------------------------------------------------------------------------------------------------------------------
Series C Preferred March 2000 416,667 $26.58 March 2003
Stockholders
--------------------------------------------------------------------------------------------------------------------
Consultants May 2000 1,047,248 $1.00 May 2005
--------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
The exercise price for each of these warrants is subject to
proportionate adjustment in the event of:
o a recapitalization, reorganization, reclassification, merger of Net
Value Holdings' company or the sale of substantially all of Net
Value Holdings' assets;
o a subdivision or combination of shares of Stonepath Group's common
stock; and
o a stock dividend.
DELAWARE ANTI-TAKEOVER LAW
Stonepath Group is governed by the provisions of Section 203 of the
General Corporation Law of the State of Delaware. In general, the law prohibits
a public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business Combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock.
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<PAGE>
MARKET PRICE OF STONEPATH GROUP
Stonepath Group common stock began trading on The American Stock
Exchange ("AMEX") under the symbol "STG on September 28, 2000. Prior to that,
and since November 24, 1998, the Stonepath Group common stock was traded on the
NASDAQ Over-the-Counter Bulletin Board Trading System under the symbol "NETV."
The following table sets forth, for the periods indicated, the range of high and
low bid prices of the common stock of Stonepath Group as reported by the
applicable exchange. These quotations represent prices between dealers and do
not include retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
The number of record holders of Stonepath Group's common stock as of September
28, 2000 was approximately 273.
Average Daily
High Low Volume (Shares)
---- --- ---------------
Year Ended December 31, 1998
Fourth Quarter $ 5.7500 $4.0000 31,539
Year Ended December 31, 1999
First Quarter 6.3750 4.7500 38,393
55,695
Second Quarter 7.6875 4.5000
Third Quarter 6.3125 3.8125 49,461
Fourth Quarter 13.4375 3.5625 120,817
Year Ending December 31, 2000
First Quarter 35.7500 7.1250 237,180
Second Quarter 17.7500 3.8125 113,007
Third Quarter 5.50 1.875 68,447
Stonepath Group has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future.
Stonepath Group plans to retain any earnings for use in the operation of its
business and to fund future growth.
BUSINESS OF STONEPATH GROUP, NET VALUE, INC., AND NET VALUE ACQUISITION
BUSINESS OF STONEPATH GROUP
Stonepath Group is actively engaged in building a network of
technology businesses which management believes offer significant growth
opportunities. To date, Stonepath Group has focused on technology businesses
with significant Internet features and applications. Its operating strategy,
however, is to expand the scope of its business to include Internet businesses,
as well as a broad range of other technology oriented businesses.
Through the collective experience of its management team, Stonepath
Group promotes the development of these businesses by offering business
development services that cover the core management disciplines of:
o Strategic Consulting;
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o Operations;
o Finance;
o Business Development;
o Marketing/Public Relations; and
o Technology.
Additionally, Stonepath Group is able to apply the experience of
both its management team and network of affiliate companies to:
o Review and formulate business models;
o Create specific performance benchmarks;
o Provide introductions to strategic partners;
o Advise on, and facilitate the completion of secondary rounds of
financing; and
o Develop Internet businesses in joint ventures with non-technology
companies.
Stonepath Group's operating strategy is to acquire a significant equity
interest in early stage technology companies and to provide the services listed
above to these companies. Stonepath Group believes this will accelerate the
achievement of their business goals and objectives. Stonepath Group intends to
take an active role in the management and development of these businesses. Each
business will be managed as part of an integrated supportive network of
"affiliate companies" that build on its initial support and develop
interrelationships among themselves, thereby accelerating their growth and
development. This network is intended to leverage the collective financial,
strategic, management and industry experience of its management team, which has
over 30 years of collective experience in developing technology businesses.
Stonepath Group also intends to establish relationships with companies outside
of its network that will enable it to deliver additional services to its
affiliate companies that they might not otherwise be able to obtain.
Stonepath Group also expects to create a business that provides
information technology consulting services. This would enable Stonepath Group
to expand the services which it offers internally to its affiliate companies,
and to establish a separate business unit that provides a broad range of
technology solutions to third parties. These services may be internally
developed by Stonepath Group through training and hiring of qualified and
experienced staff. Alternatively, Stonepath Group is exploring the
feasibility of acquiring an established business with demonstrated capabilities
in the information technology/consulting field.
Generally, Stonepath Group will be identifying early stage
businesses that have been started by others and that have sought financial and
management assistance. Stonepath Group will also fund business models that
its management team conceives which fit within its business model. Its target
level of investment will generally be $2,500,000 or less per initial round of
financing. It may also participate in subsequent rounds of financing, involving
potentially larger investments.
Generally, its capital and services will enable Stonepath Group to
secure a significant interest in the affiliate company. While Stonepath Group
remains a significant stockholder of an affiliate company, it intends to
exercise varying degrees of control over the affiliate company's operations by
retaining:
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<PAGE>
o approval rights over significant corporate decisions such as annual
budgets, executive compensation, indebtedness, capital expenditures
and new securities issuances;
o the right to establish and maintain the size of the Board of
Directors;
o the right to elect one or more members to the Board of Directors;
o the right to participate in future fundings;
o certain enhanced voting rights; and
o the right to designate outside accountants and approval rights over
attorneys, public relations firms and other outside consultants.
Although Stonepath Group recognizes that the development of early
stage businesses are subject to material risks, Stonepath Group expects its
value in the affiliate companies to increase when they:
o commence initial stage operations and begin to execute on their
business plans;
o enter later stages of operations and begin to realize significant
revenues and capture meaningful market share;
o secure subsequent rounds of venture funding at higher levels of
valuation;
o complete initial public offerings; or
o are sold to a third party.
As of June 30, 2000, Stonepath Group's affiliate companies included:
AlarmX.com, Inc. (www.alarmx.com). AlarmX.com is developing a full
service vertical portal for the security alarm and low voltage systems
industries. The portal will provide one-stop shopping, content and services to
improve operational efficiencies for both industry buyers and sellers. Through
various vendors, AlarmX.com offers low voltage control equipment, intrusion
devices, wire, audio, video and communicator products. AlarmX.com commenced
operations in March 2000 and launched its Internet Web site in August 2000.
AssetExchange, Inc. (www.AssetExchange.com). 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 Web site in August 1999.
BrightStreet.com, Inc. (www.brightstreet.com). BrightStreet.com, an
application service provider, offers a promotions operating system that allows
companies to create, target, deliver, and manage multiple promotional campaigns
via the Internet that can be targeted and tracked to the individual consumer.
BrightStreet commenced business upon the purchase of the former assets and
business of Net Value, Inc. Simultaneous with this transaction, BrightStreet
completed a $17 million equity financing provided by Cox Enterprises, Inc., the
McClatchy Company (NYSE:MNI), CNI Ventures, and Sandler Capital Management.
Through Net Value, Inc., Stonepath Group owns a 14% interest in BrightStreet.
metacat.com, Inc. (www.metacat.com). metacat is designing a full
spectrum of managed services that suppliers need to integrate their products
with eMarketplaces and digital trading partners. Designed as a "single source
solution", metacat will offer services covering catalog data aggregation, data
transformation, digital catalog creation, content management and hosting.
Metacat's intended offering is currently in the development stage.
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SwapIt.com Inc. (www.swapit.com). SwapIt.com, Inc. has developed an
application service provider/infrastructure business that enables portals to
generate substantial, recurring non-advertising based revenues through the
trading of pre-owned entertainment products (CDs; DVDs & Games). Based in
Maynard, Ma. SwapIt.com currently has 26 full time employees.
Webmodal, Inc. (www.webmodal.com). Webmodal has developed an Internet
application for use by shippers in purchasing and executing domestic full
truckload intermodal freight shipments. This application allows 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 launched its Internet Web site in June 2000.
YesAsia, Inc. (www.yesasia.com). YesAsia, Inc. is a leading e-commerce
company for the Asian community in the United States as well as throughout Asia.
YesAsia provides easy access to a broad range of media titles at competitive
prices which include local rather than international shipping costs. YesAsia's
Internet Web site is fully functional.
Stonepath Group's principal executive office is located at 1085
Mission Street, San Francisco, California 94103. The phone number of its
principal executive office is (415) 335-4700. Stonepath Group also maintains
offices at the following locations:
Address Phone Number
------- ------------
Two Penn Center Plaza 215-564-9190
Suite 605
Philadelphia, PA 19102
601 West 26th Street 646-486-6000
11 South
New York, NY 10001
1000 Winter Street 781-895-1663
Suite 1100
Waltham, MA 02451
Stonepath Group maintains an Internet Web site at www.stonepath.com.
The information on Stonepath Group's Web site is not part of this prospectus.
For informational purposes, Stonepath Group has listed the Web site addresses of
its affiliate companies in this prospectus. The information on the Web sites of
Stonepath Group's affiliate companies is not part of this proxy
statement-prospectus.
Identifying Affiliate Companies
Stonepath Group seeks to acquire an interest in early stage
technology companies that offer a combination of a compelling market
opportunity, a strategic plan for maximizing the opportunity, and a management
team with domain experience capable of executing that plan.
Early stage companies. Venture capital transactions dramatically
increased both in number and size over the last four years. Increasingly,
traditional venture capital firms seek to invest approximately $2.5 million to
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$5 million in the early stage financing of early stage technology companies. The
size of these investments significantly dilutes the ownership interest of the
founders of the issuing company. In addition, traditional venture capital firms
provide little assistance in areas such as marketing, public relations,
technology, recruiting and business development. As a result, most venture
capital firms are an unattractive source of capital for companies that require
less than several million dollars of capital to build the foundation of a new
business. Accordingly, these companies often turn to "friends and family"
investors, usually consisting of a patchwork of friends, family and high net
worth investors who accept the risks associated with investing in development
stage companies. These "friends and family" and "angel" investors typically
provide funding and generally do not provide any of the management and strategic
services which Stonepath Group can provide. With a significant equity
position, board representation and voting rights, Stonepath Group can play a
substantial role in directing the course of a company's development with
resources not otherwise available to the company. Thus, Stonepath Group
believes that its services and business model will be attractive to such
early-stage businesses.
Stonepath Group views the penetration of the Internet and its
information capabilities into business to still be in its earliest stage.
Compelling opportunities exist in markets within virtually all industries. The
true investment challenge is to identify the markets within an industry which
are best suited to the Internet's capabilities.
Desirable markets can be characterized by one or more of the following:
o Many disconnected participants;
o High transaction volume or high transaction costs;
o Inefficient flow of information;
o Relatively price sensitive customers; and
o Traditional broker intermediaries.
Business plans targeting these characteristics are the most likely to add value
to both buyers and sellers in their respective markets all the while creating a
significant revenue opportunity for the new business.
Stonepath Group looks for well crafted plans designed to create
value for the end users of the products or services offered, that demonstrate a
clear road to profitability. The design of a strong plan is likely to be focused
on "owning" customers and or "owning" the transactions in a given market. Net
Value Holdings believes that the value that a company creates for users will
provide long term revenue opportunities and high switching costs.
Stonepath Group seeks long-term relationships with entrepreneurs who
recognize that it takes more than capital to develop a successful business. Net
Value Holdings targets companies managed by individuals who recognize that
creating a technology business requires a focus on teamwork and operational
excellence, developing relationships with other technology-based companies, both
within and outside of the company's industry, and managing processes in areas as
diverse as brand development, sales, marketing, management and technology.
Stonepath Group generally seeks individuals with management experience in the
industry in which their company will operate. Stonepath Group believes that
industry experience is a key differentiating factor, enabling Stonepath Group's
affiliate companies to enter industries with the established reputation and
experience to effectively operate and grow through their extensive network of
contacts.
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In those instances in which Stonepath Group identifies a concept and
form and funds a company to develop the concept, Stonepath Group will recruit
entrepreneurial management for the company that has these characteristics.
Joint Venture Opportunities. In addition to early-stage opportunities,
Stonepath Group is also seeking to create joint ventures with non-technology
companies that wish to migrate components of their business to the Internet.
Information Technology/Consulting. Stonepath Group also expects to
create a business that provides e-business consulting services to its affiliate
companies and third parties. This business will focus on providing strategy, web
design and integration solutions to both online and traditional businesses.
Benefits Of Stonepath Group's Services
Affiliation with Stonepath Group will provide Stonepath Group's
affiliate companies the following benefits:
o Hands-on strategic, operational and technology expertise. Stonepath
Group's management team is experienced in assisting technology
companies in the implementation and understanding of areas such as
strategic planning, sales, marketing, partnership strategy, capital
planning, brand development, management, technology implementation,
negotiations and divestiture/acquisition planning. Companies which
they have assisted in addition to Stonepath Group's affiliate
companies include:
o AdAuction.com
o Agency.com
o AuctionNet.com
o Epylon
o HealthyPlanet.com
o HomePortfolio.com
o iconjohn.com
o Intervista
o Interworld
o Noosh
By sharing the lessons learned from these experiences, Stonepath
Group believes that it can help companies efficiently implement and
improve their business plans.
o Speed and flexibility. As entrepreneurs who are experienced in the
capital raising process, Stonepath Group's management team
recognizes the importance of rapid yet prudent funding decisions.
Stonepath Group's goal is to make funding decisions and to deliver
funds to those companies which it chooses to fund within several
weeks of receiving a business plan and completing their due diligence
review of the prospective candidate. In addition to acting quickly
and prudently, Stonepath Group believes in providing a high degree of
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flexibility to Stonepath Group's affiliate companies. For example,
although Stonepath Group will encourage Stonepath Group's affiliate
companies to take full advantage of Stonepath Group's resources,
Stonepath Group will not require the management teams of Stonepath
Group's affiliate companies to move their operations to be near
Stonepath Group's offices, as is common in the case of most
incubators. Although it may be easier for it to assist Stonepath
Group's affiliate companies if they are located nearby, Stonepath
Group believes that it can efficiently communicate its ideas and
knowledge to its affiliate companies located throughout the country.
o Network of companies and people. In a time where marketing, capital,
technology and partnerships are critical, Stonepath Group believes
that people and relationships remain the most important elements of
success for development stage enterprises. The members of Stonepath
Group's management team sit on either the board of directors or board
of advisers of public and private technology companies. As a result
of these activities, Stonepath Group's management team has
participated in transactions involving alliances among technology
companies and possess an extensive contact list consisting of
individuals who work in the technology industry. Through this network
of relationships and experiences, Stonepath Group's management team
can provide superior business assistance to its affiliate companies.
For example, Stonepath Group has established a marketing relationship
with an online and catalog marketer of audio books, tapes and related
products pursuant to which Stonepath Group will provide a variety of
consulting services to that company and pursuant to which that
company and other consumer-oriented affiliate companies will
establish Internet links to each other's Internet Web sites.
o Business experience. Members of Stonepath Group's management team
are part of a generation that has spent its entire professional
career using computers and technology. Collectively, Stonepath
Group's directors and management team have over thirty years of
Internet industry experience. Stonepath Group believes that the
Internet and the digital economy reflect an evolutionary way of life.
This vision helps in identifying business models and early stage
companies that leverage technology to create value for the customer,
whether it is a business or consumer. In addition, members of
Stonepath Group's board of directors, management team and consultants
are seasoned in fundamental business principles due to their
experience at firms such as:
o Bank of America o LaForce & Stevens
o Bankers Trust o Lycos
o Buchanan Ingersoll Professional o Merrill Lynch, Pierce, Fenner &
Corporation Smith, Inc.
o CNBC o Venture Partners
o Ernst & Young, LLP o Wild Wild Web
o Goldman, Sachs & Co. o WhoWhere.com
o JobDirect.com o Ziff Davis & Publishing (ZD Net)
o KPMG LLP
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Stonepath Group believes that this combination of vision and
business acumen will enable it to efficiently develop an understanding of the
seemingly chaotic digital economy and capitalize upon significant opportunities
presented by the Internet.
Stonepath Group's Affiliation Process
Stonepath Group intends to follow a four-step process for selecting and
acquiring interests in affiliate companies. First, Stonepath Group identifies
and evaluates potential affiliate companies which meet its fundamental criteria,
strategy and product commercialization potential. Once a target company is
identified, Stonepath Group performs due diligence on the target opportunity and
its senior management team. Once Stonepath Group determines to proceed, it
develops a management and operating plan with that team. After closing,
Stonepath Group provides support both at a management and operational advisory
level and from a board of directors level. Stonepath Group offers services that
cover the core disciplines of strategic consulting, operations, finance,
business development, market/public relations and technology.
1. Transaction Sourcing
Stonepath Group believes that the following factors have and will
continue to enable it to identify high-quality potential affiliate companies:
o Industry Relationships. Stonepath Group intends to maintain and
further develop relationships with industry leaders in the high
technology and Internet communities. Stonepath Group's 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. Stonepath Group's management team has relationships
with senior executives at successful high technology, private equity
and investment banking companies who Stonepath Group believes
will refer opportunities to it and provide it with their own
perspectives and market intelligence on the Internet industry.
o Industry Consultants. The management of Stonepath Group has and
will continue to have working relationships with many specialized
industry consultants who refer business opportunities to Stonepath
Group.
o Ability to Internally Generate Opportunities. Stonepath Group
intends to identify and explore potential e-commerce business ideas
that have the potential to complement its business strategy. As
members of its management team develop these ideas, Stonepath Group
will provide necessary capital, management and operational services
and recruit managers to execute the developed operating strategies.
2. Due Diligence
Once a target company or opportunity has been identified for its
network, Stonepath Group will perform an extensive due diligence review on
the target company.
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Throughout the due diligence process, Stonepath Group's 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 Stonepath Group's management team.
o Thorough Analysis. Stonepath Group's 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,
Stonepath Group conducts extensive interviews with all members of the
potential affiliate company's management team and perform market
research covering the industry in which the potential affiliate
company operates.
o Assessment of Operations. An important component of Stonepath Group's
due diligence process is to assess the assumptions underlying a
potential affiliate company's business model and growth strategy.
Stonepath Group evaluates each assumption to determine whether the
potential affiliate company's business model presents a viable
business opportunity. In addition, Stonepath Group determines whether
the potential affiliate company's business model is capable of being
efficiently implemented in the e-commerce field.
o Utilizing Management's Network. Stonepath Group's management team's
relationships and experiences will help it 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, Stonepath Group may extend short
term secured and unsecured loans to potential affiliate companies to satisfy
their short term financing needs while it performs due diligence review of the
candidate company.
3. Development of the Operating Plan
Concurrent with its due diligence review, Stonepath Group will begin
to develop a working relationship with the management team of the potential
affiliate company and assist them in or expand the development of an operating
plan for the affiliate company.
o Develop Realistic Budgets and Operating Assumptions. Stonepath Group
intends to pursue relationships with affiliate companies where it 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, Stonepath Group expects to develop
realistic budgets and operating assumptions and to design and develop
an operating plan based on its experience with Internet start-up
companies in areas such as marketing, technology, financial,
partnership and operations.
o Equity Participation. Stonepath Group intends to take an active
role in structuring equity-based incentives for members of the
management team of affiliate companies. It expects that senior
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management of all affiliate companies will own significant equity in
their company. Stonepath Group believes that it is crucial for
all members of the affiliate company's management to have an equity
stake in their company in order to support a team approach to the
project.
4. Development and Ongoing Support
Following Stonepath Group's decision to acquire an interest in a
target company or develop an internally generated opportunity, its management
team will work closely with senior management of the affiliate company in the
implementation of an operating plan. Stonepath Group expects that this
mentoring process will be integral to the success of each of its affiliate
companies. This process will consist of the following components:
o Broaden and Develop Management Teams. Stonepath Group intends 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.
Stonepath Group has 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. Stonepath Group believes that it will be able to assist
its 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. Stonepath Group's 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. Stonepath Group will use its management
team's experience to strategically align its affiliate companies with
other Internet companies that will allow them to realize their full
growth potential. For example, Stonepath Group has established a
mutual marketing relationship between its consumer-oriented affiliate
companies and an established online and catalog marketer of audio
book tapes and related products.
Disposition of Interests
Although it intends to acquire and hold equity interests in affiliate
companies on a long-term basis, Stonepath Group will negotiate rights that will
enable it to dispose of all or a portion of its interest in an affiliate
company. The decision to sell an equity interest in an affiliate company will be
based on a number of factors, including (i) whether the affiliate company
continues to fit within Stonepath Group's business strategy and complements its
network of affiliate companies; (ii) whether the assets represented by Stonepath
Group's interest in the affiliate company can be better applied to benefit other
affiliate companies or to fund new investments; and (iii) whether Stonepath
Group needs to dispose of an interest in order not to be required to register as
an investment company.
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In May 2000, College411 was merged into a wholly-owned subsidiary of
Student Advantage, Inc. whereby the College411 stockholders received 0.0144
shares of Student Advantage common stock for every share of College411 common
stock which they owned on the date of the merger. As a result of this merger,
Stonepath Group received 55,621 shares of Student Advantage's common stock. The
fair market value of Student Advantage's common stock received, based on
publicly quoted market prices, was $245,077, which exceeded the carrying value
of Stonepath Group's investment in College411 by $195,088. Accordingly,
Stonepath Group recorded a $195,088 gain as a result of this transaction.
Stonepath Group's Affiliate Companies
As of June 30, 2000, Stonepath Group owned equity in each of the
following affiliate companies:
Affiliate Company Voting
Affiliate Company Location Since: Ownership
----------------- -------- ----------------- ---------
AlarmX.com San Francisco, CA 2000 61%
AssetExchange Portland, OR 1999 20%
BrightStreet.com(1) Sunnyvale, CA 1999 14%
metacat.com Portland, OR 1999 100%
SwapIt.com Maynard, MA 1999 30%
Webmodal Lombard, IL 1999 39%
YesAsia San Francisco, CA 1999 9%
(1) Stonepath Group owns this interest indirectly through Net Value, Inc., a
65% owned subsidiary at June 30, 2000.
AlarmX.com
AlarmX.com is developing an e-commerce center to streamline the
ordering process for the security alarm industry. This industry is highly
fragmented, with over 1,000 suppliers (including manufacturers and distributors)
in the United States alone selling to over 16,000 alarm companies. Today, the
purchasing process for an alarm company has embedded inefficiencies due to the
lack of accurate information, uniform pricing, and product knowledge among order
takers, all of which results in high transaction costs. For example, a typical
medium-size alarm company that sells approximately 300-400 new systems per year
will purchase the majority of its products from roughly 50 different suppliers.
Each company has its own ordering process, requires a separate phone call or fax
request sheet, maintains numerous pricing levels, and ships in different
manners.
AlarmX.com is a business-to-business e-commerce center that has been
established to streamline the ordering process of alarm companies. AlarmX.com is
currently developing an Internet application that aggregates the product
offerings and pricing policies of a large majority of alarm suppliers into a
central commerce center. By enabling electronic exchange with their customers,
suppliers benefit from:
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o reduced costs involved with paper-based purchasing, invoicing and
payment;
o reduced collections activities;
o greater exposure to potential customers;
o increased marketing opportunities; and
o shorter supply chain management links.
By allowing buyers access to a broad range of suppliers and by
streamlining the ordering process, AlarmX.com expects to greatly reduce the
costs associated with an alarm company's purchasing process. Additionally,
AlarmX.com enhances the businesses of buyers by:
o allowing single point of electronic purchasing--placing multiple
orders from any location at one Internet website;
o creating a searchable database of products and suppliers;
o automating the ordering, tracking and reordering capabilities;
o enforcing compliance of spending limits and ordering guidelines; and
o creating real-time reports of parts shipped for management analysis.
In addition to developing an e-commerce engine for buyers and
suppliers, AlarmX.com plans to develop a resource library of current and older
equipment technology information. In order to supplement Stonepath Group's
Internet website content with value added applications, AlarmX.com plans to post
the technical specifications for various products of manufacturers that use its
Internet website, thereby providing a valued resource for technicians, customer
service representatives, and owners.
AlarmX.com expects to generate revenues from three primary sources:
o supplier transaction fees;
o services in support of customization and advanced functions for
sellers and buyers;
o affiliate fees from third party providers, such as insurance
providers; and
o listing and advertising fees from banners and product showcasing.
AlarmX.com commenced operations in March 2000. Allison Stollmeyer,
Stonepath Group's Director of Business Development, and Lee C. Hansen, Stonepath
Group's President, current serve on AlarmX.com's Board of Directors. At June 30,
2000, AlarmX.com had total assets of $661,379, total liabilities of $10,000, and
total equity of $651,379. AlarmX.com had total losses of $659,454 for the six
months ended June 30, 2000.
AssetExchange, Inc.
AssetExchange, Inc. has developed a network of financial institutions
to create an efficient and active loan portfolio exchange. AssetExchange
supports this network by providing an Internet-based listing service of
financial assets. Although AssetExchange initially focused on credit card
portfolios, it is presently offering listings in additional asset classes
including automobile loans, mortgages, small business loans and other consumer
loans. AssetExchange's Internet website was launched in September 1999.
Currently, AssetExchange's network consists of over 550 registered members who
combined hold approximately 90% of all U.S. credit card assets including nine of
the ten biggest issuers. The registered members are entities that are generally
in the market to buy and sell portfolios.
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Financial institutions regularly buy and sell a variety of loan
portfolios from each other. These loan portfolios include credit card accounts,
automobile loans, mortgages, small business loans and student loans. Financial
institutions purchase and sell these assets for both strategic and tactical
purposes. The volume of these transactions among financial institutions has been
increasing. The banking and financial industry's trend toward specialization,
consolidation and increased risk management have driven the increase in
transaction volume.
The markets for the purchase and sale of these assets are currently
fragmented and inefficient. Many transactions are completed based on personal
contacts made by brokers or investment bankers. Transaction costs are
substantial and matches between buyers and sellers are unlikely to be the best
available matches in the financial markets. Subsequently, small and medium sized
banks are deterred from participating in these markets.
AssetExchange addresses the inefficiencies which are inherent in these
markets by providing a secure and confidential Internet-based listing and e-mail
notification service for financial institutions. AssetExchange's Internet
website supports posting, browsing and searching for assets. E-mail notification
alerts buyers of new listings of loan portfolios. AssetExchange's primary role
is "matchmaking" between sellers and buyers of loan portfolios. Outside vendors
provide valuations of loan portfolios, legal advice and credit analysis.
AssetExchange may later elect to provide these services based on customer
demand. These vendors currently may purchase advertising and links to their own
Internet websites from AssetExchange. AssetExchange's goal is to provide an
efficient conduit for transacting a broad range of financial assets among
financial institutions.
AssetExchange is currently focusing on transactions involving credit
card portfolios. Credit card portfolios generally consist of consumer accounts
associated with a particular financial institution's credit card program. These
portfolios typically include total outstanding balances ranging from less than
$1 million to over $1 billion. In 1998, credit card portfolio transactions
totaled approximately $32 billion in asset value. This represented an
approximate 55% increase over 1997 transactions. AssetExchange is currently
targeting loan portfolios valued at between $1,000,000 and $200,000,000 for
listing on its Internet-based service. AssetExchange believes that this is an
appropriate portfolio value to target because investment bankers and brokers
generally charge expensive fees that make selling portfolios in this valuation
range cost prohibitive to the selling financial institution. AssetExchange
believes that financial institutions will view its Internet-based service as a
viable alternative for selling credit card portfolios in this value range.
AssetExchange believes that the total value of credit card portfolios in this
range is approximately $5 billion. Other classes of loan portfolios, such as
mortgage loans, auto loans and student loans, create an overall accessible loan
portfolio transaction market of approximately $50 billion.
AssetExchange anticipates that its primary customers will include
banks, finance companies, thrifts, community banks, credit unions and other
financial institutions. Brokers and investment bankers may also use
AssetExchange's services to expand their transaction base and reduce their
transaction costs. AssetExchange is unaffiliated with existing market
participants. This practice allows AssetExchange to provide an impartial and
powerful tool for gaining market exposure.
AssetExchange anticipates that its primary source of revenues will be
commissions on completed transactions. Based on discussions with financial
institutions and brokers, in today's market, commissions typically range from 50
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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 15-150 basis points of a transaction's value and
this fee may be divided between the buyer and seller. 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 launched its Internet website in August 1999. Lee Hansen,
Stonepath Group's President, currently sits on the Board of Directors of
AssetExchange, Inc. At June 30, 2000, AssetExchange, Inc. had total assets of
$46,520, total liabilities of $30,999, and total equity of $15,521.
AssetExchange, Inc. had total losses of $349,964 for the six months ended June
30, 2000.
BrightStreet.com, Inc.
BrightStreet enables manufacturers, retailers and other Internet
websites to deliver, track, and measure the effectiveness of promotions targeted
to Internet users. The BrightStreet system is permission-based and 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. BrightStreet also offers a
network of affiliated Internet websites that distributes promotional offers for
manufacturers and retailers.
The types of promotions best suited to the BrightStreet system include
secure coupons, free samples, rebates, loyalty programs, and sweepstakes. The
BrightStreet system allows clients to deliver these offers on their own website,
via direct email, or from banners, buttons, and links. In doing so, these
businesses develop a rich consumer database, built from registration data that
consumers provide as a prerequisite to receiving valuable promotions.
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.
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At June 30, 2000, BrightStreet.com, Inc. had total assets of
$14,559,035, total liabilities of $1,445,995, and total equity of $13,113,040.
BrightStreet.com, Inc. had total losses of $4,880,182 for the six months ended
June 30, 2000.
metacat.com, Inc.
metacat.com, Inc. was an Internet-based, e-commerce boutique that
aggregated the product content of specialty retail, catalog and mail order
businesses. This aggregated product set was then offered for sale to consumers
through the metacat Internet web site. metacat launched its web site in December
1999.
In April 2000, after careful consideration regarding the limited market
opportunity of metacat's business-to-consumer (B2C) e-commerce offering and a
change in the capital market that precluded additional financing, the company
decided to refocus its attention to enabling business-to-business (B2B)
e-commerce. By leveraging knowledge of supplier relations and digital catalog
creation and management gained in its original business model, metacat is
developing a strategy to become an enabling service provider that will offer
suppliers easy access to eMarketplaces. Designed as a "single source solution,"
metacat will offer the full spectrum of managed services that suppliers need to
integrate their products with eMarketplaces and digital trading partners. These
services include catalog data aggregation, data transformation, digital catalog
creation, content management and hosting services. Through a combination of high
value-add partnerships and its own technology, metacat aims to create the
standard for supplier enablement by providing a common interface for suppliers
and eMarketplaces to connect with each other.
metacat anticipates to begin offering its new services during the
fourth quarter of 2000. metacat expects to realize revenues from monthly
subscription fees based upon annual contracts with suppliers and eMarketplaces
in addition to incremental transactional revenue. metacat's new business
strategy is still in the development stage.
At June 30, 2000, metacat.com, Inc. had total assets of $59,466, total
liabilities of $444,144, and total stockholders' deficit of $384,678.
metacat.com, Inc. had total losses of $218,520 for the six months ended June 30,
2000.
SwapIt.com
SwapIt.com, Inc. has developed an application service
provider/infrastructure business that enables portals to generate substantial,
recurring non-advertising based revenues through the trading of pre-owned
entertainment products (CDs; DVDs & Games). Based in Maynard, Ma., SwapIt.com
currently has 26 full time employees.
Currently there are over 7 billion music CDs, video games and DVDs
sitting on U.S. consumers' shelves with a retail value of over $95 billion.
SwapIt.com enables consumers to recapture the value invested in these pre-owned
entertainment products through their national Internet and warehouse-based
exchange system. SwapIt.com's friction free, efficient process allows consumers
to "swap in" CDs, games and DVDs they no longer use, and by using SwapIt.com
credits, they can "swap out" (or purchase) the CDs, games and/or DVDs they do
want. Regardless of the purchase method, the customer is charged a cash
transaction fee on each unit ranging from $2 for CDs to $5 for games to $10 for
DVDs. Based on this model, SwapIt.com projects it will be cash flow positive in
the fourth quarter of 2001. Since their targeted launch in April, 1999, the
SwapIt.com site has registered over 95,000 members, processed over 125,000 music
CDs in and out of it's system, has over $425,000 in gross revenues and received
over 4.7 million page views to it's site at www.swapit.com.
SwapIt.com has proven the concept for a national, warehouse based
electronic barter exchange for used entertainment products. Building on this
concept, SwapIt.com plans on launching a Application Service Provider (ASP)
program with portal partners in the fourth quarter of 2000. Under the ASP
partnership, general and vertical portals will offer a fully integrated,
co-branded swap service "powered by SwapIt" on a revenue sharing basis. These
partnerships allow SwapIt.com to inject millions of customers from the portals
into their trading network without having to expend significant marketing
resources to acquire those customers if they were simply a stand alone branded
site.
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Additionally, the company is building a trading infrastructure for
portals to enable fee-based digital audio (MP3) and video file trading. This
segment is projected to be a multi-billion dollar marketplace as the
entertainment industry begins to transition from hard-goods (CDs, DVDs, etc) to
fee-based digital trading around the globe.
SwapIt.com's management team includes Howard Schneider and Kevin Wells
who were founders of ZDNet and led the launch of computershopper.com (a $4
billion dollar revenue channel for ZDNet). Additional senior management
influence and experience spans the following companies: Reebok, Deloitte &
Touche, EastPak, Stride Rite, WildWeb, Bright Tiger Technologies, Newbury Comics
and Atomic Pop.
Thomas Aley, Stonepath Group's Managing Director - Business Development
and Michael C. Bird, Stonepath Group's Vice President, Business Development
serve on SwapIt.com's Board of Directors.
Webmodal, Inc.
Webmodal has developed an Internet application for use by shippers in
purchasing and executing domestic full-truckload intermodal freight shipments.
Domestic intermodal shipping involves the movement of freight over long
distances in the following manner:
o via truck from an origin point to the nearest railroad hub;
o then via railroad for a majority of the trip; and
o via truck from the destination railroad hub to the freight's final
destination.
Intermodal shipping provides shippers with an opportunity to achieve
significant cost reductions in comparison to shipping freight via highway-only
trucking. However, intermodal shipping is presently characterized by a complex
and inefficient purchasing and execution process.
Webmodal has recently launched an Internet application that improves
the process of evaluating and purchasing intermodal transportation services.
This interface allows 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 allow shippers to replace their dependence on
these traditional marketing intermediaries with an on-line solution which
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provides complete information regarding carrier rates, schedules and service
performance records. Analogous to an online travel agent, Webmodal eliminates
the need for cumbersome research and negotiation with marketing intermediaries
by collecting all relevant information into a single user-friendly database.
Webmodal also reduces the manpower costs associated with traditional marketing
intermediaries. Webmodal's service replaces 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 simplifies 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 rail carload shipping; and
o international container shipping.
Webmodal also offers related technology and order fulfillment services
for transportation services companies including:
o 3PLs
o carriers
o truck brokers and other firms needing a fast comprehensive solution
for ordering and managing intermodal services.
By replacing labor-intensive marketing and carrier coordination
functions with a simple Internet application, Webmodal hopes to streamline the
relationship between shippers and carriers and lower the costs associated with
intermodal freight transportation.
As of June 30, 2000, Webmodal had total assets of $6,705,919, total
liabilities of $1,297,875, and total equity and redeemable preferred stock of
$5,408,044. For the six months ended June 30, 2000, Webmodal had total losses of
$1,385,690.
YesAsia, Inc.
YesAsia is an e-commerce company catering to individuals of Asian
descent located throughout the world who either lack easy access to a broad
range of media titles when living outside their native country or who simply
enjoy media from other cultures. With over 60,000 product offerings, YesAsia's
revenues and customer base have grown by more than 80% per calendar quarter
since its inception. Management believes that YesAsia is poised to expand its
United States based e-commerce business model into new international markets and
to take advantage of the rapidly growing Asian online presence in the United
States and worldwide. YesAsia was founded in January 1998 and launched its
Internet website, www.YesAsia.com, in May 1998. YesAsia currently has offices in
San Francisco, Hong Kong, Taiwan and Japan.
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YesAsia has over 50,000 customers who have purchased products from its
Internet website. Approximately 44% of these customers have returned to
YesAsia's Internet website and made at least one additional purchase. The
average order size for each YesAsia customer is approximately $40. YesAsia
expects to experience continued sales growth as a result of its aggressive
marketing in the United States. YesAsia currently plans to initiate a marketing
campaign that will include:
o Television and radio commercials;
o Print advertisements;
o Public relations and event sponsorships; and
o Internet advertisements.
YesAsia also plans to expand into other Asian markets where it will
apply its concept of "cross-cultural sales." By establishing business
infrastructure across multiple markets across Asia and with Hong Kong as its
strategic hub, YesAsia will extend its geographic reach to various Asian markets
while diversifying its product selection. By providing convenient, inexpensive
access to a broad range of titles "foreign" to a given market, YesAsia taps into
the increasingly global nature of mass media and uses the Internet to fulfill a
need that is not adequately serviced in the traditional bricks and mortar world.
In the United States, YesAsia's Internet website offers access to Cantonese,
Mandarin, Japanese and Korean products. In Hong Kong and Taiwan, it intends to
offer convenient access to European, Japanese and American titles, at
competitive prices which include local rather than international shipping costs.
YesAsia has established accounts with three major record companies and five
movie production companies in Hong Kong. YesAsia purchases all products which it
sells in Hong Kong and Taiwan either directly from these companies or from
authorized distributors of these companies. YesAsia intends to utilize its
presence in multiple nations to increase distribution and purchasing power.
YesAsia currently sells compact discs, digital video discs, electronic video
games, karaoke, videocassettes and related electronics. YesAsia recently
completed a private placement offering pursuant to which it raised approximately
$11.7 million. This placement was provided by Walden International Investment
Group, Morgan Stanley Dean Witter Private Equity and Hong Kong
Telecommunications. YesAsia plans to use the proceeds of this offering to expand
its Asian online business and plans to open offices in China, Singapore and
Korea by December 31, 2000.
Stephen George, a member of Stonepath Group's Board of Directors,
currently serves on YesAsia's board of directors. At June 30, 2000, YesAsia,
Inc. had total assets of $11,965,121, total liabilities of $587,982, and total
equity of $11,377,138. YesAsia, Inc. had total losses of $1,768,215 for the six
months ended June 30, 2000.
Competition
Stonepath Group faces 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 Stonepath Group does. These competitors may limit
Stonepath Group's opportunity to acquire interests in new affiliate companies.
If Stonepath Group cannot acquire interests in or internally develop
promising companies, then Stonepath Group's strategy to develop and build a
collaborative network of affiliate companies may not succeed.
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Competition for Internet products and services is intense. As the
market for e-commerce products and services grows, Stonepath Group expects
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 Stonepath Group's 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 Stonepath Group's
affiliate companies. Stonepath Group expects that additional companies will
offer competing solutions on a stand-alone or combined basis in the future.
Furthermore, Stonepath Group's affiliate companies' competitors may develop
Internet products or services that are superior to, or have greater market
acceptance than, the solutions offered by Stonepath Group's affiliate
companies. If Stonepath Group's affiliate companies are unable to compete
successfully against its competitors, then Stonepath Group's affiliate
companies may fail.
Many of Stonepath Group's affiliate companies' competitors have
greater brand recognition and greater financial, marketing and other resources
than Stonepath Group's affiliate companies. This may place Stonepath Group's
affiliate companies at a disadvantage in responding to their competitors'
pricing strategies, technological advances, advertising campaigns, strategic
partnerships and other initiatives.
AlarmX.com expects to face competition for online ordering of security
alarm and low voltage products from various industry manufacturers and
distributors. As the business-to-business marketplace grows, and manufacturers
and distributors look for new channels of business, online ordering will likely
be a natural progression for them. For example, ADI, the security alarm
industry's largest distributor, recently launched online ordering for its
customer base www.adilink.com. Another industry distributor, Supply Dog
(www.supplydog.com), is an inventory shipping company that accepts security
alarm product orders online. Additionally, www.orderzone.com is serving the
electrical supply market and carries some low voltage products. While some niche
market companies may establish e-commerce ordering markets targeted by
AlarmX.com, none have attempted to aggregate all of the security and low voltage
products industries. This is the market in which AlarmX.com plans to
participate. In addition, AlarmX.com will also compete with bricks and mortar
locations, which have traditionally serviced the security and low voltage
products industry.
AssetExchange competes for financial asset transaction business with an
existing highly fragmented marketplace of buyers and sellers working directly or
through a variety of intermediaries to complete transactions. AssetExchange
allows members to transact a variety of types of loan portfolios, with an
initial focus on credit card portfolios. There are competitors supporting
transactions of residential and commercial mortgages, but none offering credit
card portfolios or multiple asset classes. The online asset brokerage business
is new and rapidly evolving and it is likely that other entities will emerge and
attempt to compete in this market. It is feasible for buyers and sellers to make
direct contact to negotiate transactions without using AssetExchange or a
competing service, and buyers and sellers may also continue to use existing
brokers. However, AssetExchange believes that the demonstrated efficiencies such
as improved price and deal discovery, the ability to quickly access and analyze
data and cost savings associated with its service will be attractive even to
sophisticated buyers and sellers. Potential competitors include businesses
currently conducting online mortgage portfolio auctions and existing brokers who
may enter the market for credit card portfolio transactions or otherwise broaden
their offerings.
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BrightStreet has a unique operating system application that can be used
by manufacturers and retailers, or by existing promotions companies who provide
services to manufacturers and retailers to create, target, deliver, and manage
multiple promotional campaigns via the Internet. While no distinct competitive
system is currently in the marketplace, BrightStreet would face competition from
any company that licensed an internet infrastructure technology for the
delivery of promotions.
metacat.com, Inc. currently does not have any competitors who offer
metacat's intended full spectrum of managed services that suppliers need to
integrate their products with eMarketplaces and digital trading partners,
however there are several companies who compete in selected areas of metacat's
intended service offerings. For example, there are companies offering software
packages for catalog management such as CardoNet, Cohera and POET Software, and
companies that anticipate offering managed, hosted catalogs such as Requisite
Technology and SAQQARA Systems, but none that offer the combined data
aggregation, data transformation, digital catalog creation, content management
and hosting services that metacat intends to offer. In the longer term, metacat
is aware of several ASP-type solutions being assembled by Internet consulting
companies that have the potential to be competitive to metacat. However, metacat
believes it will have the critical advantage of executing and delivering
valuable supplier services many months before other potential competitors.
Moreover, given the difficult nature of the problem and the range of skills and
partnerships needed to assemble an effective solution, there is no guarantee
that these companies will be successful in putting together a competitive
offering.
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 Half.com, Mr. Swap,
Switchouse & Spun. And a number of other small swapping services. 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
via a national warehouse operation 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.
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 Arzoon, Freightwise,
Steelroads, Transplace.com, The National Transportation Exchange, Inc.,
FreightQuote and Celarix. Many actual and potential competitors possess
advantages such as existing business relationships and substantially greater
financial resources. Some of these companies have introduced on-line
capabilities which offer some of the services offered by Webmodal or which offer
services which are similar to Webmodal's services to customers outside of
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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 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 product capabilities. Webmodal
believes it will have operational advantages that will allow it to compete
effectively. For example, Webmodal expects to realize considerably greater
marketing and customer service staff productivity than traditional
transportation and transportation marketing companies. Webmodal believes an
existing transportation intermediary interested in deploying a similar business
model would risk significant profit margin erosion and disruption of existing
selling processes.
YesAsia competes generally with all retailers of entertainment media
titles that include Asian selections. Most mass market retailers, including
bricks and mortar retailers such as Walmart, HMV and Borders, and online
retailers such as Amazon.com, carry a limited number of Asian titles and
therefore compete only slightly with YesAsia. If a large, well-funded company
launches an Internet website directed at sales of Asian media titles to the
Asian population in the United States, it will compete directly with YesAsia and
could reduce YesAsia's revenues and cause an increase in YesAsia's marketing
expenses in response. However, YesAsia is not aware of any Internet website that
is proposing to materially increase its Asian media offerings or launch an
Asia-specific Internet website. As YesAsia becomes a more prominent player in
the online Asian video and music space, it is likely to experience increased
competition, either from larger entities with broad offerings that include Asian
titles or from other Asia-specific Internet websites. YesAsia believes that it
will have a significant competitive advantage due to its status as the first
such Internet website and its use of local language that captures and enhances
the visitor's experience.
Investment Company Act of 1940
Stonepath Group is primarily engaged in the building of technology
companies that Stonepath Group manages as part of an integrated supportive
network of "affiliate companies". However, due to its ownership of equity
securities of Stonepath Group's affiliate companies, Stonepath Group could
be considered an "investment company" under the Investment Company Act of 1940,
which regulates mutual funds and other entities which meet the definition of an
"investment company." An "investment company" generally includes any entity that
is engaged primarily in the business of investing, reinvesting and trading in
securities. As the regulations governing the relationship between an investment
company and the entities in which it invests are inconsistent with the manner in
which Stonepath Group intends to provide services to its affiliate companies,
it is critical to its business plan that Stonepath Group not be an investment
company subject to the Investment Company Act.
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. Stonepath Group will be considered
to primarily control an entity if it owns more than 25% of its voting securities
and have more control than any other single owner. Accordingly, at June 30,
2000, Stonepath Group is considered to control metacat.com, SwapIt.com,
AlarmX.com and Webmodal, Inc. Stonepath Group believes that it currently
meets the foregoing tests.
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For the past nine months Stonepath Group has been operating under a one
year "safe harbor" period during which Stonepath Group will not be considered an
investment company, provided that Stonepath Group has 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. Stonepath Group's Board of
Directors has adopted a resolution confirming this intent. Stonepath Group
intends to meet this standard by providing substantial services to Stonepath
Group's affiliate companies and, to the extent possible, structuring future
affiliate company investments to include at least a 25% voting percentage, board
representation, approval rights over material decisions and other features that
will give Stonepath Group "primary control" for purposes of the Investment
Company Act. In this manner, Stonepath Group will maintain the assets of and
income derived from Stonepath Group's non-primarily controlled affiliate
companies below 45% of Stonepath Group's total assets and income. However,
fluctuations in the value of Stonepath Group's interests in Stonepath Group's
affiliate companies may make it difficult for it to accomplish and maintain this
goal. Accordingly, in order to satisfy this goal Stonepath Group may from time
to time dispose of interests in some of Stonepath Group's 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. Stonepath Group may apply to the Securities and
Exchange Commission for this exemption. If Stonepath Group is granted this
exemption, Stonepath Group 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 Stonepath Group's
non-investment company status.
Employees
As of August 31, 2000, excluding its affiliate companies, Stonepath
Group had 24 full-time employees. None of its employees are currently covered by
collective bargaining agreements and Stonepath Group considers its relations
with its employees to be satisfactory.
History
Stonepath Group was formed as a Florida corporation in 1991. Stonepath
Group did not have any operations until its acquisition of a controlling
interest in Net Value, Inc. during the fourth quarter of 1998. This occurred in
conjunction with a change of domicile into Delaware in October 1998.
The operation of Net Value, Inc. was the primary focus of Stonepath
Group's activities during the first half of 1999. In recognition, however, of
the evolving growth opportunities within the Internet industry, during the
second half of 1999, Stonepath Group shifted the focus of its business strategy
to the development and management of a network of early stage technology
businesses. Stonepath Group commenced this business by acquiring Stonepath
Group's equity interests in metacat.com, Inc., YesAsia, Inc. and College411.com,
Inc. in July 1999, when Stonepath Group merged with Strategicus Partners, Inc.
Stonepath Group acquired the remainder of Stonepath Group's affiliate companies
thereafter in 1999 and 2000 in separately negotiated independent transactions.
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Facilities
In February 2000, Stonepath Group entered into a lease agreement for
its executive offices located at 1085 Mission Street, San Francisco, California.
The office space consists of approximately 5,000 square feet at a monthly rental
of $17,383. The lease agreement terminates on March 31, 2004. In addition,
Stonepath Group also leases an aggregate of approximately 5,000 square feet of
office space for offices located in Philadelphia, Pennsylvania, New York, New
York and Waltham, Massachusetts, at a combined monthly rental of approximately
$17,000.
Legal Proceedings
States District Court for the Northern District of Illinois, Eastern
Division. Pursuant to the Asset Purchase Agreement which Net Value, Inc. entered
into with BrightStreet.com, inc. (f/k/a Promotion Acquisition, Inc.)
BrightStreet has agreed to assume all liabilities related to this lawsuit,
including all legal expenses incurred in defending against these claims. The
complaint alleges that Net Value, Inc. infringed upon United States Letters
Patent No. 5,761,648 entitled "Interactive Marketing Network and Process Using
Electronic Certificates" held by coolsavings. The complaint alleges that Net
Value, Inc., through its Internet Web site and products, has committed acts of
infringement by:
o performing or completing steps of the methods and processes described
and claimed in Patent No. 5,761,648;
o by actively inducing others to practice the methods and processes
described and claimed in Patent No. 5,761,648 by, among other things,
performing or completing steps of such methods and processes; and
o by offering to sell or selling a system or service for offering and
providing targeted electronic certificates such as coupons, for use
in practicing the methods and processes described and claimed in
Patent No. 5,761,648.
The complaint seeks both a preliminary and permanent injunction
prohibiting Net Value, Inc. from further acts of infringement, as well as
damages. On November 23, 1999, Net Value, Inc. filed its answer to this
complaint as well as a counterclaim against coolsavings.com, Inc. seeking a
declaratory judgment of invalidity and noninfringement of Patent No. 5,761,648.
Neither a discovery schedule nor a trial have been set in this matter.
BrightStreet cannot estimate the amount of damages that it may incur if the
court issues a final judgment concluding that Net Value, Inc. has infringed on
coolsavings' patent. In addition, based on its estimate of the cost of defending
this type of litigation, BrightStreet may decide to settle this case for an
amount that, although substantially less than the damages sought by coolsavings,
may be significant.
On or about August 22, 2000, Austost Anstalt Schaan, Balmore Funds,
S.A. and Amro International, S.A., purchasers of the company's Series A
convertible notes, filed a suit against Stonepath Group in the United States
District Court for the District of Delaware. The plaintiffs allege that,
contrary to the obligation in the agreement pursuant to which the plaintiffs
purchased the Series A notes that Stonepath Group would "use reasonable
commercial efforts to register" the stock underlying the notes "at some future
date," Stonepath Group was obligated, and failed, to register stock in the next
registration statement that it filed. The plaintiffs assert claims for breaches
of contract and the duty of good faith and fair dealing, fraud, violation of
federal securities laws, estoppel, and reformaton and seek damages in excess of
$20 million, plus attorneys' fees and costs. Based upon Stonepath Group's
preliminary review of the facts and without conducting discovery, it does not
believe that the complaint presents a significant claim against Stonepath Group.
Stonepath Group has not yet responded to the complaint, but intends to defend
it vigorously.
Stonepath Group is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
Stonepath Group's consolidated financial position, results of operations or
liquidity.
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BUSINESS OF NET VALUE, INC.
Net Value, Inc. was engaged in the development and distribution of
online promotional campaigns. Net Value, Inc. currently has no operations and is
in the process of settling its outstanding liabilities and completing the merger
described in this proxy statement-prospectus.
History Of Net Value, Inc.
Net Value, Inc. was a development stage company whose products
incentivized consumers to purchase products and services sold across all
categories of trade. Net Value, Inc. developed a patent-pending process to
deliver coupons, discounts and other promotional incentives to Internet users.
The Net Value system utilized various sophisticated and unique targeting engines
to deliver these purchase incentives. Net Value, Inc. also developed a
technology to address coupon industry concerns regarding fraudulent coupon
redemption.
Net Value, Inc. provided software and backend systems that allowed its
wholesale business partners to market their own uniquely branded promotional
commerce service.
Net Value, Inc.'s Coupons OnlineSM product allowed manufacturers and
service providers to deliver targeted, secure coupons and other incentives to
consumers from any Internet Web site. Consumers would use Net Value, Inc.'s web
browser plug-in software to access and print coupon offers and other promotions
from the Web sites of manufacturers and marketers desiring to feature single
product promotional offers. Net Value, Inc.'s systems provided online targeting
and validation for each consumer as well as delivery and validation of coupons
and other targeted offers.
Net Value, Inc.'s PromoCache SM product was wholesaled to a broad range
of manufacturers, retailers and distributors as well as more traditional Web
site publishers and Internet Service Providers. PromoCache SM created themed
promotional offers, in short time spans, from any Web site. It automatically
aggregated national and local offers from multiple databases using a series of
simultaneous targeting engines and criteria. Consumers would then view their own
unique offer site, which was the equivalent of a personalized discount catalog.
Net Value, Inc.'s I-ValueSM product created a desktop channel on the
personal computers of consumers who subscribed to the service. It allowed
retailers, manufacturers and web site publishers to deliver targeted, secure
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coupons and other incentives to these consumers. Consumers would subscribe to
the service and receive electronic coupons and promotional incentives which were
updated on a regular basis. Promotional offers were individually tailored to
meet each consumer's product category and brand shopping preferences.
Net Value, Inc. was incorporated as a Delaware corporation on July 16,
1996 and is the successor by merger (the "Merger") to Coupons Online, L.L.C.
("COL"), a New Jersey limited liability company formed in December 1994 ("COL").
In October 1998, Stonepath Group acquired a controlling interest in
Net Value, Inc. when it acquired 66% of Net Value, Inc.'s outstanding common
stock through share exchange transactions with 20 of its largest stockholders.
The result of these transactions was that the former Net Value, Inc.
stockholders obtained a majority ownership interest of Stonepath Group.
In November 1999, Stonepath Group made the strategic decision to
exit the development and distribution of online promotional campaigns operations
of Net Value, Inc., and in December 1999, Stonepath Group sold the business
and assets of Net Value, Inc. to Brightstreet.com, Inc., a new company formed by
members of Net Value, Inc.'s then senior management team and a group of third
party investors.
Asset Sale Transaction With BrightStreet.com
On December 3, 1999, Net Value, Inc. sold substantially all of its
assets to BrightStreet.com, Inc. (f/k/a Promotions Acquisition, Inc.), a
Delaware corporation formed by the former management team of Net Value, Inc. for
the purpose of acquiring the assets of Net Value, Inc. and succeeding to its
business. In exchange for substantially all of its assets, Net Value, Inc.
received:
o cash of $2,000,000;
o the assumption of Net Value, Inc. liabilities valued at approximately
$1,600,000;
o the release of all of Net Value, Inc.'s obligations under employment
agreements;
o the cancellation of the majority of the issued and outstanding Net
Value, Inc. stock options held by Net Value, Inc.'s employees; and
o 2,958,819 shares of BrightStreet common stock equal to an approximate
14% ownership interest in BrightStreet.
Simultaneous with this transaction, BrightStreet completed a
$17,000,000 equity financing of Series A Preferred Stock representing a 63%
interest in its stock, on a fully-diluted basis. The financing was provided by
Cox Enterprises, Inc., McClatchy Company (NYSE:MNI), CNI Ventures (NYSE:ECP) and
Sandler Capital Management.
Following the transaction, Net Value, Inc. loaned Stonepath Group
the $2,000,000 it received in this transaction. Stonepath Group has agreed to
use this cash to satisfy Net Value, Inc.'s existing obligations which were not
assumed by BrightStreet. Any payments which Stonepath Group makes 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. Stonepath Group currently
owns approximately 65% of the issued and outstanding shares of Net Value, Inc.'s
common stock and 100% of the 178,700 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:
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o Liquidation preference of $1.00 per share;
o Convertible at the option of either Net Value, Inc. or the holder
into 12.5 shares of Net Value, Inc.'s common stock; and
o No dividends or voting rights.
Through the merger described in this proxy statement-prospectus
Stonepath Group will acquire the remaining minority interest in Net Value, Inc.
Net Value, Inc.'s principal executive offices are located at 1085
Mission Street, San Francisco, California 94103, and its telephone number is
(415) 335-4700.
BUSINESS OF NET VALUE ACQUISITION
Net Value Acquisition is a newly-formed Delaware corporation organized
by Stonepath Group for the sole purpose of effecting the merger. Net Value
Acquisition has not conducted any prior business.
Net Value Acquisition's principal executive offices are located at 1085
Mission Street, San Francisco, California 94103, and its telephone number is
(415) 335-4700.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF STONEPATH GROUP
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Stonepath Group was originally formed as a Florida corporation in
1991. Stonepath Group did not have any operations until its change of
domicile into Delaware in October 1998. This occurred in conjunction with Net
Value Holdings' acquisition of a controlling interest in Net Value, Inc. which
commenced in October 1998. Net Value, Inc. was engaged in the development and
distribution of online promotional campaigns.
Stonepath Group obtained control of Net Value, Inc. when Stonepath
Group acquired 66% of its outstanding common stock through share exchange
transactions with 20 of its largest stockholders. Since as a result of these
transactions the former Net Value, Inc. stockholders obtained a majority
ownership interest of Stonepath Group, the transaction was accounted for as a
recapitalization. Under a recapitalization, the historical financial statements
presented are those of the company acquired, not those of the legal acquiror.
Accordingly, the financial information included in Stonepath Group's financial
statements prior to October 1998 is that of Net Value, Inc.
Stonepath Group is in the process of completing a merger with Net
Value, Inc. pursuant to which Stonepath Group intends to offer 0.4 shares of its
common stock for every share of Net Value, Inc. common stock tendered to
Stonepath Group by the existing Net Value, Inc. stockholders. This is being done
in order to acquire the remaining minority interest in Net Value, Inc.
Additionally, Stonepath Group will issue common stock purchase warrants and
stock options to the holders of Net Value, Inc.'s common stock purchase warrants
and vested stock options at the same exchange ratio. Since Stonepath Group
already owns a majority of Net Value, Inc.'s capital stock, Stonepath Group can
assure that the merger will be completed. Accordingly, Stonepath Group's 1999
and 2000 financial statements reflect the results of its in-process merger with
Net Value, Inc.
At June 30, 2000, Stonepath Group owned approximately 65% of the
outstanding common stock of Net Value, Inc. Because the total net assets of Net
Value, Inc. are negative and because it is unlikely that the minority
shareholders of Net Value, Inc. will make additional capital contributions to
erase subsequent Net Value, Inc. losses, no amount has been ascribed to the 35%
minority interest.
Stonepath Group's financial statements also reflect the operations of
Net Value, Inc. as a discontinued operation. This was necessitated when, in
November 1999, Stonepath Group made the strategic decision to exit the
development and distribution of online promotional campaign operations of Net
Value, Inc. In December 1999, Stonepath Group sold the business and assets of
Net Value, Inc. to BrightStreet.com, Inc., a new company formed by members of
Net Value, Inc.'s then senior management team and a group of third party
investors. Through Net Value, Inc., Stonepath Group retained a 14% interest
in the common stock of BrightStreet.com.
Stonepath Group has segregated the operating results of the
discontinued operations of Net Value, Inc. from continuing operations and has
reported these operating results as a separate line item on the statements of
operations. Upon the completion of Stonepath Group's merger with Net Value,
Inc., Stonepath Group will own all of Net Value, Inc.'s assets and
liabilities. This will not change Stonepath Group's
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financial statement presentation as these items are already
reflected on Stonepath Group's balance sheet.
Because Stonepath Group acquires significant interests in early-stage
companies, many of which generate net losses, Stonepath Group has experienced,
and expects to continue to experience, significant volatility in its quarterly
results. Stonepath Group does not know if it will report net income in any
period, and Stonepath Group expects that it will report net losses in many
quarters for the foreseeable future. While Stonepath Group's affiliate companies
have consistently reported losses, Stonepath Group may have net income in
certain periods and may experience significant volatility from period to period
due to non-recurring transactions and other events incidental to Stonepath
Group's ownership interests in and advances to affiliate companies. These
transactions include dispositions of, and changes to, Stonepath Group's
affiliate company ownership interests, and impairment charges.
On a continuous basis, but no less frequently than at the end of each
reporting period, Stonepath Group evaluates:
o the carrying value of Stonepath Group's ownership interest in and
advances to each of Stonepath Group's affiliate companies for possible
impairment based on achievement of business plan objectives and milestones;
o the value of each ownership interest in the affiliate company relative to
carrying value;
o the financial condition and prospects of the affiliate company; and
o other relevant factors.
The business plan objectives and milestones Stonepath Group
considers includes those related to financial performance such as achievement of
planned financial results or completion of capital raising activities, and those
that are not primarily financial in nature such as the launching of an Internet
website or the hiring of key employees. The fair value of Stonepath Group's
ownership interests in and advances to privately held affiliate companies is
generally determined based on the value at which independent third parties have
or have committed to invest in Stonepath Group's affiliate companies.
Effect of Various Accounting Methods on Stonepath Group's Results of
Continuing Operations
Accounting for Stock-Based Compensation.
Stock-based compensation is a non-cash charge relating to the
amortization of deferred compensation. Stonepath Group records deferred
compensation when it makes restricted stock awards or compensatory stock option
or warrant grants to employees, consultants or advisory board members. In the
case of stock option grants to employees, the amount of deferred compensation
initially recorded is the difference between the exercise price and fair market
value of Stonepath Group's common stock on the date of grant. In the case of
options granted to consultants or advisory board members, the amount of deferred
compensation recorded is the fair value of the stock options on the grant date
as determined using a Black-Scholes option pricing model. Stonepath Group
records deferred compensation as a reduction to stockholders' equity and an
offsetting increase to additional paid-in capital. Stonepath Group then
amortizes deferred compensation into stock-based compensation over the
performance period, which typically coincides with the vesting period of the
stock-based award of 3 to 4 years.
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Grants to Employees. All awards to employees are fixed awards. This
means that the number and exercise price of the stock options are known
on the date of grant. Under these fixed awards, the amount of deferred
compensation which Stonepath Group records is similarly fixed and
represents the total amount of future amortization to stock-based
compensation.
Grants to Consultants and Advisory Board. In accordance with the
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling Goods or Services, stock-based awards to
consultants and advisory board members for future professional services
are considered variable. This means that the amount of deferred
compensation is periodically adjusted to the current fair value of the
unvested awards as determined using a Black-Scholes option pricing
model. Similarly, the amortization to stock-based compensation for
variable awards also fluctuates in direct proportion to the increase or
decrease in deferred compensation resulting from changes in fair value.
These fluctuations are largely dependent on the fair market value of
Stonepath Group's common stock, which therefore makes future
prediction or estimate of the amortization charge to stock-based
compensation extremely difficult.
Accounting for Affiliate Company Ownership
The various interests that Stonepath Group acquires in its affiliate
companies are accounted for under three broad methods: consolidation, equity
method and cost method. The applicable accounting method is generally determined
based on Stonepath Group's voting ownership in an affiliate company.
Consolidation. Affiliate companies in which Stonepath Group directly or
indirectly owns more than 50% of the outstanding voting securities is
generally accounted for under the consolidation method of accounting.
Under this method, an affiliate company's financial statements are
reflected within Stonepath Group's Consolidated Statements of
Operations. As of June 30, 2000, metacat.com, Inc. is Stonepath Group's
only consolidated affiliate company.
The effect of an affiliate company's net results of operations on
Stonepath Group's 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 Stonepath Group's
share of the earnings or losses of an affiliate company is reflected in
its results of operations in the Consolidated Statements of Operations.
Equity Method. Affiliate companies whose results Stonepath Group does
not consolidate, but over whom Stonepath Group exercises significant
influence, is generally accounted for under the equity method of
accounting. Whether or not Stonepath Group exercised 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 its holdings
in common stock and preferred stock in the affiliate company. Under the
equity method of accounting, Stonepath Group's shares of the earnings
or losses of the affiliate company is reflected in the caption "Equity
in Losses of Affiliate Companies" in the Consolidated Statements of
Operations. Additionally, Stonepath Group's excess investment cost over
equity in each affiliate company's net assets is amortized over three
years to "Equity in Losses of Affiliate Companies." As of June 30, 2000
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and December 31, 1999 Stonepath Group accounted for the following affiliate
companies under this method:
Voting Ownership
Affiliate
Company Since June 30, 2000 December 31, 1999
------------- ------------- -----------------
AlarmX.com 2000 61%(1) --
Asset Exchange, Inc. 1999 20% 20%
SwapIt.com 1999 30% 11%
Webmodal, Inc. 1999 39% 12%
(1) AlarmX.com is not consolidated because Stonepath Group
anticipates that its majority ownership is temporary and will be
reduced below 50% within 12 months of Stonepath Group's
initial investment.
Stonepath Group has representation on the board of directors of all
of the above affiliate companies. Most of its equity method affiliate
companies are in a very early stage of development and have not
generated any revenues. All of Stonepath Group's equity method
affiliate companies were formed less than two years ago and are
expected to incur substantial losses in 2000.
Cost Method. Affiliate companies not accounted for under either the
consolidation or the equity methods of accounting are accounted for
under the cost method of accounting. Under this method, Stonepath
Group's shares of the earnings or losses of these companies is not
included in its Consolidated Statements of Operations. Stonepath
Group's affiliate companies accounted for under the cost method of
accounting at June 30, 2000 and December 31, 1999 included:
Voting Ownership
Affiliate
Company Since June 30, 2000 December 31, 1999
------------- ------------- -----------------
Brightstreet.com 1999 14%(2) 14%
YesAsia 1999 9% 11%
(2) Stonepath Group owns this interest indirectly through Net
Value, Inc., Stonepath Group's 65% owned subsidiary at June
30, 2000.
Stonepath Group's cost method affiliate companies are in a very early
stage of development and have not generated significant revenues. In
addition, its cost method affiliate companies have incurred substantial
losses and are expected to continue to incur substantial losses in
2000.
Results of Operations
Six months ended June 30, 2000 compared to the six months ended June 30, 1999
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Continuing Operations
Stock-Based Compensation. Stock-based compensation totaled $13,366,749 for the
six months ended June 30, 2000, compared to $86,000 for the corresponding period
in 1999. The increase in stock-based compensation is due to the fact that
Stonepath Group began building its management team in June 1999. Stock-based
compensation is a non-cash expense resulting from the amortization of deferred
compensation and the issuance of stock for services. The following table shows
the components of deferred compensation and related amortization to stock-based
compensation for the six months ended June 30, 2000:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance at beginning of year $ 7,137,600 $ 20,180,172 $ 27,317,772
Additions to deferred compensation 20,037,675 4,151,735 24,189,410
Cancellations and fair value adjustments (3,367,619) (15,641,628) (19,009,247)
Amortization to stock-based compensation (5,169,652) (7,487,722) (12,657,374)
-------------- ------------- -------------
Balance at June 30, 2000 $ 18,638,004 $ 1,202,557 $ 19,840,561
============== ============ =============
</TABLE>
During the six months ended June 30, 2000, Stonepath Group also
recorded stock-based compensation of $709,375 relating to investment banking
services that were paid via the issuance of 25,000 shares of Stonepath Group's
common stock. It valued these services based on its closing stock market price
of $28.375 on the date of issuance.
Of the total unamortized deferred compensation relating to employees of
$18,638,004, Stonepath Group expects to amortize into stock-based
compensation $3,143,284, $6,286,569, $4,973,519, $3,483,619 and $751,013 during
the remainder of 2000, 2001, 2002, 2003 and 2004, respectively. These amounts
correspond to the vesting schedule of the underlying stock-based award. The
amount of deferred compensation recorded and related amortization to stock-based
compensation will increase with any future compensatory grants and decrease with
any cancellations.
As discussed above in "Effects of Various Accounting Methods on
Stonepath Group's Results of Continuing Operations," stock-based awards to
consultants and advisory board members for future professional services are
considered variable, meaning the amount of the unamortized deferred compensation
is periodically adjusted to the fair market value of the unvested awards. The
fair market value adjustments are determined using a Black-Scholes option
pricing model and generally increase or decrease with corresponding increases
and decreases in the market price of Stonepath Group's common stock. Due to this
market variability, Stonepath Group cannot accurately predict the future
amortization to stock-based compensation associated with these awards.
General and Administrative Expenses. Stonepath Group's general and
administrative expenses have increased to $4,417,203 for the six months ended
June 30, 2000, compared to $946,996 for the corresponding period in 1999. This
increase is due to the execution of Stonepath Group's operating plan and the
expansion of Stonepath Group's operations which began in mid-1999 and
continues through June 2000. Stonepath Group expect its general and
administrative expenses to stabilize now that it has solidified its corporate
infrastructure and met its immediate hiring needs. The following is a schedule
of the significant components that comprise general and administrative expense:
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Six Months Ended
----------------
June 30, June 30,
2000 1999
-------------- ------------
Professional fees $ 1,784,150 $ 383,299
Salaries and benefits 1,001,986 23,062
Depreciation and amortization 663,136 --
Other general and administrative 967,931 540,635
------------ ------------
Total $ 4,417,203 $ 946,996
============ ============
Professional fees consist primarily of legal and accounting fees
associated with Stonepath Group's SEC filings, annual and interim audit
services, and general corporate matters.
The increase in salaries and benefits expense over the prior year
period is due to its active recruitment of executive personnel throughout the
first six months of 2000. Stonepath Group had 24 more employees at June 30,
2000 than the prior year. Salaries and benefits include employee cash
compensation and medical and dental coverage.
Depreciation and amortization consists of depreciation associated with
Stonepath Group's furniture and equipment and the amortization of goodwill
attributable to its acquisition of Strategicus Partners, Inc. in July 1999.
Total goodwill for the Strategicus transaction was approximately $3.8 million,
which is being amortized on a straight-line basis over three years.
Other general and administrative consists primarily of marketing,
travel-related, office, and other operating expenses.
Interest Income. Stonepath Group's interest income totaled $915,946 for the
six months ended June 30, 2000, compared to $4,816 for the corresponding period
in 1999. Interest income consists of the interest earned on its cash and cash
equivalents balances, with the change period over period due to significant
increases in its cash balances resulting from its equity financings.
Interest Expense. Interest expense consists of:
Six Months Ended
----------------
June 30, June 30,
2000 1999
------------- -------------
Interest expense based on stated
interest rates $ 84,627 $ 393,397
Non-cash charge: beneficial conversion
features on convertible promissory
notes and debentures -- 2,165,758
----------- -------------
Total $ 84,627 $ 2,559,155
=========== =============
The non-cash charge is the result of beneficial conversion features
attached to Stonepath Group's convertible promissory notes and convertible
debentures issued in 1999 that allowed the holders to convert their notes and
debentures into shares of Stonepath Group's common stock at below
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market rates. These promissory notes and debentures were repaid in full in 2000
through cash payments or the issuance of stock pursuant to the original
conversion terms. Stonepath Group expects to fund its future operations
through the use of equity financings and does not anticipate that it will incur
these interest expense charges in the future.
Other loss. Other loss consists of:
Six months ended
June 30,
---------------------------------
2000 1999
-------------- ------------
Gain on sale of College411 holdings $ (195,088) $ --
Affiliate Company impairment charge 1,152,189 --
-------------- ------------
$ 957,101 $ --
============== ============
In May 2000, College411 was merged into a wholly owned subsidiary of
Student Advantage, Inc. whereby the College411 stockholders received .0144
shares of Student Advantage common stock for every share of College411 common
stock which they owned on the date of the merger. As a result of this merger,
Net Value received 55,621 shares of Student Advantage's common stock. The fair
market value of Student Advantage's common stock received, based on publicly
quoted market prices, was $245,077, which exceeded the carrying value of Net
Value Holdings' investment in College411 by $195,088. Accordingly, Net Value
Holdings recorded a $195,088 gain as a result of this transaction.
Stonepath Group recorded an impairment charge of $1,152,189 for the
other than temporary decline in carrying value of one of its Affiliate Companies
accounted for under the equity method. Stonepath Group acquired its ownership
interest in this Affiliate Company in 2000 for $1 million and advanced loans
totaling $650,000. From the time of Stonepath Group's initial investment and
through June 30, 2000, its funding to this company represented all of the
outside financing it had available to fund its operations. When Net Value
Holdings determined that this company was unable to obtain further rounds of
financing necessary to sustain operations, it recorded impairment charges to
reduce the remaining carrying value of this company to zero.
Equity in losses of affiliate companies. Equity in losses of affiliate companies
for the six months ended June 30, 2000 amounted to $2,665,756, compared to $0
for the corresponding period in 1999. These amounts represent Stonepath Group's
proportionate share of the losses of its affiliate companies and the
amortization of the excess of the cost of its investment over its equity
interest in the net assets of the affiliate companies accounted for under the
equity method of accounting. During the six months ended June 30, 2000,
College411.com, AssetExchange, Inc., AlarmX.com, IndustrialVortex.com, Webmodal,
Inc. and SwapIt.com were accounted for under the equity method of accounting.
During the six months ended June 30, 1999, Stonepath Group did not account for
any of its ownership interests in its affiliate companies under the equity
method. Stonepath Group's equity in losses will increase as it purchases equity
interests in early stage technology companies that typically incur losses in
their development stage and for which Stonepath Group's equity in the net assets
of company exceeds the cost of its investment. Conversely, its equity in losses
will decrease when its affiliate companies report earnings and as the excess of
its investment over its equity interest in the net assets of the affiliate
companies is amortized to zero. Stonepath Group expects to continue to incur
equity losses given the early stage development of its affiliate companies.
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Net Loss From Continuing Operations
Stonepath Group has had net losses from continuing operations for
each period since inception. This amount could fluctuate significantly from
period to period, depending on the operating results of its affiliate companies
and other non-recurring transactions. For the six months ended June 30, 2000,
Stonepath Group's net loss from continuing operations was $20,575,490,
compared to $3,587,335 for the corresponding period in 1999. Stonepath Group
is generally aggregating this amount into Stonepath Group's federal and state
net loss carry forwards to be available to offset future taxable income, if any.
Discontinued Operations
In December 1999, Stonepath Group completed the sale of
substantially all of the assets of Net Value, Inc. to BrightStreet.com (f/k/a
Promotions Acquisitions, Inc.), a newly formed corporation formed by the former
management team of Net Value, Inc. With the sale of Net Value, Inc. to
BrightStreet.com, all operations relating to the discontinued operations
effectively ceased.
Stonepath Group is currently in the process of merging with Net Value,
Inc., after which Stonepath Group will own all of Net Value, Inc.'s assets and
liabilities. In preparation for the merger, Net Stonepath Group is negotiating
with former creditors to settle various outstanding debt instruments and
liabilities that remain obligations of Net Value, Inc. Depending on the
circumstances for each of these liabilities, Stonepath Group may record a gain
or loss upon settlement. During the six months ended June 30, 2000, Stonepath
Group recorded a loss from extinguishment of Net Value, Inc.'s debt of $554,676
as a result of these ongoing negotiations.
Preferred Stock Dividends
The components of the preferred stock dividends are as follows:
Six Months Ended
---------------------------------
June 30, 2000 June 30, 1999
--------------- --------------
Series B preferred stock dividend $ 108,464 $ --
Series C preferred stock dividend 1,295,834 --
Non-cash charge: beneficial conversion
feature on Series C Shares 42,608,327 --
--------------- --------------
Total $ 44,012,625 $ --
============== ==============
The Series B preferred stock dividend was paid in cash in February
2000, when the holders converted their Series B Shares into shares of Stonepath
Group's common stock. It will not incur this dividend in future periods as the
Series B Shares has been entirely converted into common shares.
The Series C preferred stock dividend is payable in additional Series C
Shares on a quarterly basis and therefore does not represent a cash obligation.
At the time of issuance of Stonepath Group's Series C Preferred
Stock, the fair market value of its common stock was higher than the offering
price of its Series C Preferred Stock of $12 per share. This
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differential in price constitutes a beneficial conversion as defined in the
Emerging Issues Task Force Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" (EITF 98-5). Accordingly, Stonepath Group recorded
$42,608,327 as additional paid in capital for the discount deemed related to a
preferential dividend for the beneficial conversion feature. In accordance with
EITF 98-5, this discount was limited to the proceeds allocated to the Series C
Preferred Stock and was recognized immediately as a preferred stock dividend as
the Series C Preferred Stock is convertible into shares of common stock at any
time at the election of the shareholder. This preferred stock dividend did not
represent a cash obligation.
Changes in Financial Position, Liquidity and Capital Resources
Stonepath Group's current operations does not generate sufficient
operating funds to meet its cash needs and, as a result, it has funded its
operations with a combination of equity and debt proceeds. Stonepath Group
ultimately expects to fund its operations from the cash flows of its affiliate
companies. Currently however, its affiliate companies does not generate
sufficient earnings to pay dividends or otherwise distribute amounts which are
sufficient to cover its operating expenses. Furthermore, Stonepath Group does
not expect to receive such dividends within the next twelve months due to the
fact that each of its affiliate companies is in the developmental stage of
operations. Stonepath Group may also generate cash proceeds from the sale of
interests in its affiliate companies. Until it receives dividends from its
affiliate companies or realize cash proceeds from the sale of interests in its
affiliate companies, if at all, Stonepath Group will remain dependant on
outside sources of capital to fund its operations. Stonepath Group is not
certain that such funds will be available on terms that are satisfactory to it
or at all.
In March 2000, Stonepath Group sold 4,166,667 shares of its Series C
Preferred Stock and warrants to purchase 416,667 shares of its common stock for
net proceeds of approximately $48.3 million after payment of offering costs.
Each share of Series C Preferred Stock is convertible into one share of its
common stock at any time at the election of the shareholder. Series C Preferred
Stock bears a cumulative dividend of 8% per annum payable in kind on a quarterly
basis and has a liquidation preference of $12 per share.
In June 2000, Stonepath Group received repayment in full, plus
accrued interest, of its advances to College411 totaling $75,000 in connection
with their merger into a wholly owned subsidiary of Student Advantage, Inc.
During the six months ended June 30, 2000, Stonepath Group used
approximately $4.5 million to fund its general corporate expenses, including
salaries and wages, professional and consulting fees and interest expense. In
addition, Stonepath Group repaid in full all of its outstanding convertible
debentures and convertible promissory notes through payments of $72,431 and the
issuance of 2,338,633 shares of its common stock and warrants to purchase
273,390 shares of its common stock.
During the six months ended June 30, 2000, Stonepath Group made the
following investments and advances to affiliate companies:
o On January 31, 2000, Stonepath Group acquired a 31% voting interest in
IndustrialVortex.com, Inc. for $1 million.
o On March 14, 2000, Stonepath Group acquired a 69% voting interest in
AlarmX.com, Inc. for $1 million.
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o On May 9, 2000, Stonepath Group invested $4 million cash and issued
113,174 shares of its common stock to Webmodal, thus increasing its voting
interest from 12% to 39%. The common stock Stonepath Group issued had an
approximate value of $877,000 on the date of investment.
o Stonepath Group advanced in total $2,725,000 to SwapIt.com, Inc. Stonepath
Group may request payment on these advances at any time or it may elect to
convert a portion of these advances into capital stock of SwapIt.com, Inc.
on the same terms and conditions as any subsequent offering of securities
made by SwapIt.com, Inc. that generates proceeds of at least $3 million.
o Stonepath Group advanced approximately $1.1 million to its other
affiliate companies.
As of June 30, 2000, Stonepath Group has on hand existing cash and cash
equivalents of approximately $38.7 million. It believes that its cash and cash
equivalents will be sufficient to meet its operating expenses and investment
requirements for at least the next twelve months. However, Stonepath Group's
long-term liquidity needs are dependant primarily on the number of future
acquisitions of equity interests in new affiliate companies and the extent to
which it participates in subsequent rounds of financings of its existing
affiliate companies. Stonepath Group may be required to curtail or reduce the
scope of its future investment activities to satisfy these long-term liquidity
needs. Alternatively, Stonepath Group would be required to seek additional funds
through the sale of its securities to outside sources of capital, which could
result in substantial dilution to stockholders. Net Value Holdings is not
certain that these funds would be available on terms that are satisfactory to
it, or at all. If Stonepath Group is unable to obtain these funds, then it would
be required to reduce its acquisitions of equity interests in affiliate
companies and reduce Stonepath Group's operating activities.
Quantitative and Qualitative Disclosures About Market Risk
Stonepath Group's exposure to market risk relates primarily to changes
in interest rates and the resulting impact on its invested cash. Stonepath Group
places its cash with high credit quality financial institutions and invest that
cash in short term fixed income investments with remaining maturities of less
than 90 days. Stonepath Group is averse to principal loss and ensure the safety
and preservation of its invested funds by investing in only highly rated
investments and by limiting its exposure in any one issuance. If market interest
rates were to increase immediately and uniformly by 10% from levels at June 30,
2000, the fair value of Stonepath Group's portfolio would decline by an
immaterial amount. Stonepath Group does not invest in derivative financial
instruments.
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MANAGEMENT OF STONEPATH GROUP
Directors and Executive Officers of Stonepath Group
The directors and executive officers of Stonepath Group, their ages and
positions are set forth below:
Andrew P. Panzo 35 Chairman of the Board of Directors and Chief
Executive Officer
Lee C. Hansen 33 President and Director
Stephen M. Cohen 43 Managing Director, General Counsel and
Secretary
Thomas Aley 35 Managing Director - Business Development
James F. Elwell 33 Vice President-Finance, Controller and
Treasurer/Principal Accounting Officer
Darr Aley 35 Director
Stephen George 32 Director
David Jones 51 Director
Michela O'Connor Abrams 42 Director
The following is a brief summary of the business experience of Net
Value Holdings' executive officers and directors:
Andrew P. Panzo has served as Stonepath Group's Chairman and Chief
Executive Officer since January 1999. From October 1993 to June 1999, Mr. Panzo
was a managing director at American Maple Leaf Financial Corporation, a boutique
investment banking firm located in Philadelphia, Pennsylvania. Mr. Panzo was one
of the original founders of Net Value, Inc. in September 1996. Mr. Panzo
currently serves on the Board of Directors of Net Value, Inc. and the Board of
Directors of metacat.com, Inc. Mr. Panzo received a Masters degree in
International Business and Finance from Temple University.
Lee C. Hansen has served as Stonepath Group's President since October
1, 1999 and as one of Stonepath Group's directors since April 2000. Prior to
joining Stonepath Group's management team, Mr. Hansen was Senior Vice
President of Corporate Strategy and Development at Bank of America Corporation
from May 1997 to September 1999, where he managed strategic projects and merger
and acquisition activities. From July 1993 to April 1997, Mr. Hansen served as a
Vice President in the International Capital Raising Group and an Associate in
the Lease Finance, Private Placement and High Yield Groups at Banc of America
Securities. Mr. Hansen currently serves on the Board of Directors of
AssetExchange, Inc. and AlarmX.com, Inc. Mr. Hansen received an MBA from the
J.L. Kellogg Graduate School at Northwestern University and a BSBA from Bucknell
University.
Stephen M. Cohen has served as Stonepath Group's Managing Director,
General Counsel and Secretary since June 2000. Prior to that, Mr. Cohen served
as Senior Vice President since April 2000. Since 1980, Mr. Cohen has been
engaged in the practice of law, having most recently been a shareholder of
Buchanan Ingersoll Professional Corporation from March 1996 to April 2000 and a
partner of Clark Ladner, Fortenbaugh & Young from March 1990 to March 1996. Mr.
Cohen's practice focused on corporate finance and Federal securities matters. He
received a B.S. from the School of Commerce and Finance of Villanova University,
a J.D. from Temple University and a L.L.M. in Taxation from Villanova University
School of Law.
Thomas Aley has served as Stonepath Group's Managing Director -
Business Development since June 2000. Prior to that, Mr. Aley served as
Executive Vice President for Business Development since November 22, 1999. Prior
to joining Stonepath Group's management team, Mr.
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Aley was Executive Vice President of Marketing at Wild Wild Web, Inc. from June
1997 through November 1999 where he oversaw business development including
operations, marketing and sales for Wild Wild Web's online and television
divisions. In November 1998, Mr. Aley played an instrumental role in the sale of
Wild Wild Web to GT Interactive Software. From June 1995 to June 1997, Mr. Aley
was Director of Electronic Commerce at Ziff-Davis where he managed the Company's
Net Buyer initiatives and ZDNet service. From January 1994 to June 1995, Mr.
Aley was the Director of Marketing for Eliza Corporation, where he sold speech
recognition technology to cable and television companies in the interactive
television industry. From January 1992 to January 1994, Mr. Aley worked at
Ono-Sendai Corporation. From October 1990 to January 1992, Mr. Aley worked at
Shiva Corporation. Mr. Aley currently serves on the Board of Directors of
SwapIt.com, Inc. Mr. Aley received an MBA in High Technology Marketing and
Operations from Northeastern University.
James F. Elwell has served as Stonepath Group's Vice
President-Finance and Controller since February 2000 and as Stonepath Group's
Treasurer since June 2000. Prior to joining Stonepath Group's management team,
Mr. Elwell was a Senior Manager at Ernst & Young, LLP from October 1990 through
February 2000, where he practiced public accounting and led engagements over
securities offerings, acquisitions, dispositions and financial audits for
clients within the financial services industry. Mr. Elwell received a BA in
Economics from the University of California at Berkeley.
Darr Aley has served as a member of Stonepath Group's Board of
Directors since July 1999. Mr. Aley is also the chief technology officer of
Epylon.com, Inc. Prior to joining Stonepath Group's management team, Mr. Aley
was Vice President of Corporate Development at Lycos, Inc. from August 1998 to
August 1999, where he was responsible for developing Internet joint ventures and
strategic alliances. From December 1997 to August 1998, Mr. Aley worked at
WhoWhere.com, a search engine that enables users to locate a person's home and
e-mail address. From December 1996 to December 1997, Mr. Aley worked at Zip Two,
a venture capital firm. From December 1994 to December 1996, Mr. Aley worked at
Soft Bank, a venture capital firm. Mr. Aley currently serves on the Board of
Directors of College411.com, Inc. Mr. Aley received a BA from the University of
New Hampshire.
Stephen George has served as a member of Stonepath Group's Board of
Directors since July 1999. Mr. George is also the chief executive officer of
Epylon.com, Inc., a business to business San Francisco Bay-area e-commerce
company. Prior to forming Epylon.com, Inc., Mr. George was a Vice President in
the San Francisco office of Goldman Sachs & Co., from January 1996 to May 1999
where he provided a broad range of financial services to emerging technology
companies, entrepreneurs, management teams and venture capitalists with a
specialization in the Internet industry. From April 1992 through January 1996,
Mr. George worked as an investment banker for Merrill Lynch, Pierce, Fenner &
Smith, Inc. Mr. George currently serves on the Board of Directors of YesAsia,
Inc. Mr. George received a BA in Government from Cornell University.
David Jones has served as a member of the Stonepath Group's Board of
Directors since September 2000. Mr. Jones has been President of DR Jones
Financial, Inc., a privately-held consulting firm since its formation in
September 1995. He is presently a directly of Financial Asset Securities
Corporation, an affiliate of Greenwich Capital Markets, Inc. Prior to forming DR
Jones Financial, Inc., Mr. Jones was Senior Vice President-Asset Backed Finance
of Greenwich Capital Markets, Inc. from 1989 to 1995. Mr. Jones served as a Vice
President, and subsequently as a Managing Director of The First Boston
Corporation, an investment banking firm, from 1982 to 1989 and as
Manager-Product Development of General Electric Credit Corp., an asset-based
lender and financial services company, from 1981 to 1982. Mr. Jones is a
graduate of Harvard College and has a Masters Degree in business administration
from the Amos Tuck School of Business Administration.
Michela O'Connor Abrams has served as a member of the Stonepath Group's
Board of Directors since September 2000 and has served as a member of the Board
of Advisors since January 2000. Ms. O'Connor Abrams has served as President of
the Business Division of Imagine Media, Inc. and Publisher of Business 2.0 since
November 1999. Ms. O'Connor Abrams has over 16 years of experience in
publishing, trade show management, Internet strategies, online branding and
strategic business development. Prior to joining Imagine Media, Inc., Ms.
O'Connor Abrams served as President and Chief Executive Officer of Computerworld
from March 1999 to November 1999. From January 1996 to January 1999, Ms.
O'Connor Abrams was Chief Operating Officer of ZD Events which produces
industry-leading expositions and conferences. From 1991 to 1996, Ms. O'Connor
Abrams was a Publisher and Group Vice President of McGraw Hill. Ms. O'Connor
Abrams is currently a member of the Board of Directors for Bow Street Software,
Clickability and AuctioNet.com. She holds a BS in Journalism from California
Polytechnic University at San Luis Obispo.
Director's Compensation
Currently, neither Stonepath Group nor Net Value, Inc. have a policy
with respect to the granting of fees to directors in connection with their
service to Stonepath Group or Net Value, Inc. However, Stonepath Group and
Net Value, Inc. may reimburse directors for their cost of travel and lodging to
attend meetings of the Board of Directors or committees thereof.
73
<PAGE>
EXECUTIVE COMPENSATION
The table below sets forth information concerning the compensation
Stonepath Group paid in 1999 to the chief executive officer and each executive
officer who was paid compensation during his tenure with Stonepath Group at an
annual rate of greater than $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
Name and ------------------------- -------------------
Principal Position Salary Bonus Number of Options
------------------ ------ ------ -----------------
<S> <C> <C> <C>
Andrew P. Panzo, $87,500 -0- 1,020,000
Chairman of the Board and
Chief Executive Officer
Lee C. Hansen, $34,615 -0- 900,000
President
Thomas Aley, $23,077 $50,000 -0-
Managing Director - Business Development
</TABLE>
From September 4, 1998 through January 6, 1999, Alexis Christodoulou
served as the sole officer and director. During this period, Mr. Christodoulou
did not receive any compensation in exchange for his services.
Employment Agreements
In June 1999, Stonepath Group entered into a three year employment
agreement with Mr. Panzo. In addition to an annual salary of $150,000, Mr.
Panzo's employment agreement provides for bonus compensation at the discretion
of the Board of Directors. Pursuant to the employment agreement, Mr. Panzo is
entitled to fringe benefits including participation in pension, profit sharing
and bonus plans, as applicable, and life insurance, hospitalization, major
medical, paid vacation and expense reimbursement. Mr. Panzo's employment
agreement provides he is entitled to receive options to purchase 1,200,000
shares of common stock. Options to purchase 120,000 shares of common stock
vested immediately and the remainder of the options will vest pro rata on a
monthly basis over a three year period. Mr. Panzo may exercise these options for
five years following their vesting date at an exercise price of $1.00 per share.
In September 1999, Mr. Panzo agreed to reduce his option award and surrendered
180,000 options. Mr. Panzo now holds options to purchase 1,020,000 shares of
common stock.
In September 1999, Stonepath Group entered into a three year
employment agreement with Lee Hansen. 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.
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<PAGE>
Stonepath Group awarded Mr. Hansen options to purchase 900,000 shares of common
stock. Options to purchase 90,000 shares of common stock vested immediately and
the remainder of the options will vest pro rata on a monthly basis over a three
year period. As long as he is a Company employee, Mr. Hansen may exercise these
options at an exercise price of $1.00 per share until the later of:
o the fifth anniversary of their vesting date; or
o one year after the effective date of a registration statement
registering the resale of the shares of common stock issuable upon
exercise of the options.
If Mr. Hansen's employment is terminated, then the exercise period of his
options may be reduced.
In November 1999, Stonepath Group entered into a one year employment
agreement with Mr. Thomas Aley. In addition to an annual salary of $150,000, Mr.
Thomas Aley's employment agreement provides for bonus compensation at the
discretion of the Board of Directors. Pursuant to his employment agreement, Mr.
Thomas Aley is entitled to fringe benefits including participation in pension,
profit sharing and bonus plans, as applicable, and life insurance,
hospitalization, major medical, paid vacation and expense reimbursement. In
April 2000, Stonepath Group amended Mr. Thomas Aley's employment agreement to
award him options to purchase 900,000 shares of common stock. Options to
purchase 150,000 shares of common stock vested immediately and the remainder of
the options will vest pro rata on a monthly basis over a three year period. Mr.
Thomas Aley may exercise these options at an exercise price of $1.00 per share
until the later of:
o the fifth anniversary of their vesting date; or
o one year after the effective date of a registration statement
registering the resale of the shares of common stock issuable upon
exercise of the options.
In April 2000, Stonepath Group entered into a three year employment
agreement with Stephen M. Cohen. In addition to an annual salary of $150,000,
Mr. Cohen's employment agreement provides for bonus compensation at the
discretion of the Board of Directors. Pursuant to his employment agreement, Mr.
Cohen is entitled to fringe benefits including participation in pension, profit
sharing and bonus plans, as applicable, and life insurance, hospitalization,
major medical, paid vacation and expense reimbursement. Stonepath Group
awarded Mr. Cohen options to purchase 300,000 shares of common stock at an
exercise price of $6.75 per share. Options to purchase 50,000 shares of common
stock vested immediately, options to purchase 62,500 shares of common stock vest
on April 17, 2001, and the remaining options to purchase 187,500 shares of
common stock vest pro rata on a monthly basis from April 18, 2001 through April
17, 2004, provided that if after the expiration of the initial term of the
employment agreement Stonepath Group elects not to extend Mr. Cohen's
employment for an additional one year for reasons other than a "for cause"
termination as defined in the employment agreement, then Mr. Cohen shall vest
fully in all of his options at the end of his initial term of employment as if
he had remained a Company employee for a full term of four years.
Pursuant to his employment agreement, Stonepath Group has agreed to
provide Mr. Cohen with a loan in the principal amount of $100,000 at the
beginning of each of the first two years of the term of his employment
agreement. Each of the loans shall accrue interest at the rate of 8% per annum
and shall be due on April 17, 2004 or such earlier date that Mr. Cohen shall
have received aggregate proceeds of $5,000,000 from the sale of his options or
the shares of common stock underlying his options. However, Mr. Cohen is not
required to repay the loans if by April 17, 2004, the sum of the proceeds which
he has received from the sale of his options or the shares of common stock
underlying his options and the remaining equity in the options as of April 17,
2004 does not equal or exceed $5,000,000.
75
<PAGE>
In February 2000, Stonepath Group entered into a letter agreement
with James F. Elwell pursuant to which Mr. Elwell will serve as Vice
President-Finance and Controller. This agreement provides Mr. Elwell with an
annual salary of $120,000. Stonepath Group awarded Mr. Elwell options to
purchase 120,000 shares of common stock at an exercise price of $10.032 per
share. Options to purchase 30,000 shares of common stock vest on February 28,
2001, and the remaining options to purchase 90,000 shares of common stock vest
pro rata on a monthly basis from March 1, 2001 through February 28, 2004. This
agreement may be terminated at any time by Stonepath Group or Mr. Elwell
without advance notice. Additional options have been granted to Mr. Elwell under
the Plan. See "Security Ownership of Executive Officers, Directors and
Beneficial Owners of Greater than 5% of Stonepath Group's Voting Securities."
Change in Control Arrangements
Each of the aforementioned employment agreements provides the employee
with the following rights upon a change of control:
Andrew Panzo: If Mr. Panzo terminates his employment agreement due to a
change in control, then Stonepath Group must continue to pay him his salary
and bonus, based upon the average annual bonus paid to him prior to termination
of his employment, for the lesser of one year from the date of termination of
his employment agreement or the remaining original three year term of his
employment agreement. In addition, all of Mr. Panzo's unvested stock options
shall immediately vest as of the termination date of his employment agreement
due to a change in control.
Lee Hansen: If Mr. Hansen terminates his employment agreement due to a
change in control, then Stonepath Group must continue to pay him his salary
and bonus, based upon the average annual bonus paid to him prior to termination
of his employment, for the lesser of one year from the date of termination of
his employment agreement or the remaining original three year term of his
employment agreement.
Thomas Aley: If Mr. Aley terminates his employment agreement due to a
change in control, then Stonepath Group must continue to pay him his salary
and bonus, based upon the average annual bonus paid to him prior to termination
of his employment, for the lesser of one year from the date of termination of
his employment agreement or the remaining original term of his employment
agreement.
Stephen Cohen: If Mr. Cohen terminates his employment agreement due to
a change in control that occurs after September 21, 2000, then Stonepath Group
must continue to pay him his salary and bonus, based upon the average annual
bonus paid to him prior to termination of his employment, for the lesser of one
year from the date of termination of his employment agreement or the remaining
original term of his employment agreement. In addition, all of Mr. Cohen's
unvested stock options shall immediately vest as of the termination date of his
employment agreement.
James F. Elwell: If Stonepath Group terminates Mr. Elwell upon a
change in control that occurs on or before February 28, 2001, then his stock
options which were scheduled to vest on February 28, 2001 shall vest at the rate
of 2,500 options per month from February 28, 2000 until Mr. Elwell's termination
date.
In each of these employment agreements, a change in control is defined
as the occurrence of any one of the following:
76
<PAGE>
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 the
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; and
o the majority of the members of the Board of Directors consists of
individuals other than members of the Board of Directors on the date
of the employment agreement, provided that persons elected to the
Board of Directors whose election or nomination was supported by
one-half of the directors at the date of the employment agreement
shall be considered a member of the Board of Directors as of the date
of the employment agreement.
Consulting Agreements
In connection with the merger on July 31, 1999 with Strategicus
Partners, Inc. ("Strategicus Partners") Stonepath Group entered into consulting
agreements with each of Stephen George and Darr Aley, current directors, as well
as Barry Uphoff, a former director. Each of Messrs. George, Darr Aley and Uphoff
were former principal shareholders of Strategicus Partners. Pursuant to the
terms of the consulting agreements, Stonepath Group issued options to purchase
an aggregate of 6,255,876 shares of common stock to Messrs. Uphoff, Darr Aley
and George and agreed to pay each of them a monthly retainer of $500. Messrs.
Uphoff, Darr Aley and George have subsequently agreed to surrender a substantial
portion of these options. In May 2000, Stonepath Group finalized the terms of
these options in warrant agreements in which Stonepath Group issued to each of
Messrs. Uphoff and Darr Aley warrants to purchase 332,416 shares of common
stock, of which warrants to purchase 192,275 shares vested immediately and
warrants to purchase 140,141 shares remain subject to vesting provisions, and
Stonepath Group issued Mr. George warrants to purchase 382,416 shares of common
stock, of which warrants to purchase 192,275 shares vested immediately and
warrants to purchase 190,141 shares remain subject to vesting provisions. The
unvested shares issued pursuant to each of these warrant agreements will vest
monthly on a pro rata basis over a period of 36 months from the date of the
warrant agreements. In connection with his resignation from the Board of
Directors in May 2000, Mr. Uphoff terminated his consulting agreement.
Mr. Darr Aley's consulting agreement also provides for the forgiveness
of a loan in the principal amount of $267,000 as follows:
o one-third of the principal amount of this loan, plus accrued interest
thereon, if Mr. Darr Aley remains engaged by Stonepath Group 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. Darr Aley remains engaged by Stonepath Group
on the second anniversary of the effective date of the merger with
Strategicus Partners; and
o one-third of the principal amount of this loan, plus accrued interest
thereon, if Mr. Darr Aley remains engaged by Stonepath Group on
the third anniversary of the effective date of the merger with
Strategicus Partners.
77
<PAGE>
On October 1, 1999 Stonepath Group 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 a newly created Advisory Board. In this
capacity, Mr. Stephens will review and advise Stonepath Group regarding
Stonepath Group's business and prospects and the business and prospects of the
affiliate companies. He will also assist Stonepath Group in completing
acquisitions of and making investments in other businesses and will assist
Stonepath Group 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, Stonepath Group
sold a total of 676,374 shares of 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 Series B Preferred Stock and warrants
to purchase 80,976 shares of common stock in an 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. Net Value
Holdings 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 Stonepath Group or Mr.
Stephens may terminate this agreement upon one month's notice to the other
party.
Stock Options
Effective as of June 1, 2000 (with amendments effective as of July 31,
2000), Stonepath Group adopted and implemented the "Amended and Restated Net
Value Holdings, Inc. 2000 Stock Incentive Plan," (the "Plan") which covers
5,000,000 shares of common stock. Under its terms, employees, officers and
directors of Stonepath Group and its subsidiaries are currently eligible to
receive non-qualified stock options, restricted stock awards, and, upon approval
of the Proposal by stockholders, will be eligible to receive incentive stock
options within the meaning of Section 422 of the Code. In addition, advisors and
consultants who perform services for Stonepath Group or its subsidiaries are
eligible to receive non-qualified stock options under the Plan. The Plan is
administered by the Board of Directors or a committee designated by the Board of
Directors. All stock options granted under the Plan are exercisable for a period
of up to ten (10) years from the date of grant. Stonepath Group may not grant
incentive stock options pursuant to the Plan at exercise prices which are less
than the fair market value of common stock on the date of grant. The term of an
incentive stock option granted under the Plan to a stockholder owning more than
10% of the issued and outstanding common stock may not exceed five years and the
exercise price of an incentive stock option granted to such stockholder may not
be less than 110% of the fair market value of common stock on the date of grant.
The Plan contains certain limitations on the maximum number of shares of common
stock that may be awarded in any calendar year to any one individual for the
purposes of Section 162(m) of the Code. As of August 31, 2000, options to
purchase 326,000 shares of common stock were outstanding under the Plan. Each of
these stock options has an exercise price of $4.00 per share.
78
<PAGE>
In addition to the stock options covered by the Plan, Stonepath Group
has outstanding options to purchase 4,693,333 shares of common stock. These
options were issued in private transactions prior to the adoption of the Plan by
the Board of Directors. At June 30, 2000, these options were outstanding at the
following exercise prices:
Number of Stock Options Exercise Price
----------------------- --------------
2,820,000 $1.00
260,000 $3.75 - $4.88
340,000 $6.25 - $6.75
420,000 $7.75 - $7.99
60,000 $8.00 - $8.56
193,333 $9.13 - $11.03
105,000 $13.00 - $14.00
290,000 $16.38
205,000 $19.25 - $19.64
---------
4,693,333
=========
The following table sets forth information regarding options granted in
1999 to the executive officers named in the Summary Compensation table above.
Amounts represent the hypothetical gains that could be achieved from the
respective options if exercised at the end of the option term. These gains are
based on assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration date based
upon the grant price.
Individual Grants
<TABLE>
<CAPTION>
% of Total Potential Realizable Value at
Options Assumed Annual Rates of Stock
Granted to Market Price Appreciation for Option
Number of Employees Price on Term (4)
Options in Fiscal Exercise Date of Expiration
Name Granted Year Price Grant Date 5% 10%
---- ------- ---- ----- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew P. Panzo 120,000 5.5% $1.00 $7.13 June 1, 2004 $971,987 $1,257,952
Andrew P. Panzo 300,000(1) 13.8% $1.00 $7.13 June 30, 2005 $2,566,465 $3,489,369
Andrew P. Panzo 300,000(2) 13.8% $1.00 $7.13 June 30, 2006 $2,709,788 $3,868,306
Andrew P. Panzo 300,000(3) 13.8% $1.00 $7.13 June 30, 2007 $2,860,277 $4,285,136
Lee C. Hansen 90,000 4.1% $1.00 $4.56 Oct. 1, 2004 $434,073 $571,316
Lee C. Hansen 270,000(1) 12.4% $1.00 $4.56 Oct. 31, 2005 $1,380,830 $1,912,342
Lee C. Hansen 270,000(2) 12.4% $1.00 $4.56 Oct. 31, 2006 $1,463,372 $2,130,576
Lee C. Hansen 270,000(3) 12.4% $1.00 $4.56 Oct. 31, 2007 $1,550,040 $2,370,633
</TABLE>
(1) The options included in this grant vest pro rata on a monthly basis
throughout the twelve month period commencing on the date of grant.
(2) The options included in this grant vest pro rata during the 12 month period
commencing on the first anniversary of the date of grant.
(3) The options included in this grant vest pro rata during the 12 month period
commencing on the second anniversary of the date of grant.
79
<PAGE>
(4) As required by the rules of the Securities and Exchange Commission, the
dollar amounts reflected represent the hypothetical gain that would exist
for the options based on assumed 5% and 10% annual compound rates of stock
price appreciation over the full option term. These prescribed rates are not
intended to forecast possible future appreciation, if any, of the common
stock.
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in the Summary
Compensation Table above. The value of unexercised in-the-money options is
calculated based on the closing bid price of common stock on December 31, 1999
of $11.00.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised
At Fiscal Year End In-The-Money Options
----------------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew P. Panzo 300,000 720,000 $3,000,000 $7,200,000
Lee C. Hansen 157,500 742,500 $1,575,000 $7,425,000
</TABLE>
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS AND BENEFICIAL
OWNERS OF GREATER THAN 5% OF STONEPATH GROUP'S VOTING SECURITIES
The following tables sets forth information with respect to the
beneficial ownership of Stonepath Group common stock and Preferred Stock
owned, as of August 31, 2000, by:
o the holders of more than 5% of any class of Stonepath Group's
voting securities;
o each of the directors;
o each of the executive officers; and,
o all directors and executive officers of Stonepath Group as a
group.
As of August 31, 2000, an aggregate of 18,180,106 shares of Stonepath
Group common stock and 4,041,667 shares of Series C Preferred Stock were issued
and outstanding. For purposes of computing the percentages under the following
tables, it is assumed that all options and warrants to acquire common or
Preferred Stock which have been issued to the directors, executive officers and
the holders of more than 5% of common or Preferred Stock and are fully vested or
will become fully vested within 60 days of the date of this proxy
statement-prospectus have been exercised by these individuals and the
appropriate number of shares of common and Preferred Stock have been issued to
these individuals.
80
<PAGE>
COMMON STOCK
<TABLE>
<CAPTION>
Shares Owned
Beneficially and
Name of Beneficial Owner Position of Record (1) Percentage of Class
------------------------ -------- ------------- -------------------
<S> <C> <C> <C>
Rozel International Holdings, Ltd. Beneficial Owner 2,819,852 15.5
Whitehill House
Newby Road, Industrial Estate
Hazel Grove, Stockport
Cheshire, United Kingdom
SK7 5DA
Andrew P. Panzo (2) Officer, Director 665,312 3.6
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
Darr Aley (3) Director 347,670 1.9
C/o Epylon Corporation
645 Harrison Street, Suite 200
San Francisco, CA 94107
Stephen George (4) Director 353,225 1.9
C/o Epylon Corporation
645 Harrison Street, Suite 200
San Francisco, CA 94107
Lee C. Hansen (5) Officer, Director 337,500 1.8
1085 Mission Street
San Francisco, CA 94103
Thomas Aley (6) Officer 233,333 1.3
1000 Winter Street, Suite 1100
Waltham, MA 02451
Stephen M. Cohen (7) Officer 50,000 *
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
James F. Elwell (8) Officer 0 *
1085 Mission Street
San Francisco, CA 94103
David Jones(9) Director 0 *
2 Ocean Avenue
Scituate, MA 02066
Michela O'Connor Abrams(10) Director 3,889 *
c/o Imagine Media
150 North Hill Drive
Brisbayne, CA 94005
All directors and executive officers as a 1,990,929 10.1
group (9 people)
</TABLE>
81
<PAGE>
(*) 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, Net
Value Holdings believes that all persons named in the table have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them.
(2) Includes 520,589 shares of common stock issuable upon exercise of vested
options. Does not include 499,411 shares of common stock issuable pursuant
to options not presently exercisable and not exercisable within 60 days of
the date of this proxy statement-prospectus. Also includes 75,200 shares of
common stock which Mr. Panzo owns with his spouse as joint tenants with the
right of survivorship.
(3) Includes 205,086 shares of common stock issuable upon exercise of vested
warrants. Does not include 127,330 shares of common stock issuable pursuant
to options not presently exercisable and not exercisable within 60 days of
the date of this proxy statement-prospectus.
(4) Includes 210,641 shares of common stock issuable upon exercise of vested
warrants. Does not include 171,775 shares of common stock issuable pursuant
to options not presently exercisable and not exercisable within 60 days of
this date of this proxy statement-prospectus.
(5) Includes 337,500 shares of common stock issuable upon exercise of vested
warrants. Does not include 562,500 shares of common stock issuable pursuant
to options not presently exercisable and not exercisable within 60 days of
the date of this proxy statement-prospectus.
(6) Includes 233,333 shares of common stock issuable upon exercise of vested
warrants. Does not include 666,667 shares of common stock issuable pursuant
to options not presently exercisable and not exercisable within 60 days of
the date of this proxy statement-prospectus.
(7) Includes 50,000 shares of common stock issuable upon exercise of vested
options. Does not include 250,000 shares of common stock issuable pursuant
to options not presently exercisable within 60 days of the date of this
proxy statement-prospectus.
(8) Does not include 150,000 shares of common stock issuable pursuant to
options not presently exercisable and not exercisable within 60 days of the
date of this proxy statement-prospectus.
(9) Does not include 20,000 shares of common stock issuable pursuant to options
not presently exercisable and not exercisable within 60 days of the date of
this proxy statement-prospectus.
(10) Includes 3,889 shares of common stock issuable upon exercise of vested
options. Does not include 20,000 shares of common stock issuable pursuant
to options not presently exercisable and not exercisable within 60 days of
the date of this proxy statement-prospectus.
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<PAGE>
SERIES C PREFERRED STOCK
<TABLE>
<CAPTION>
Shares of
Series C Preferred Stock
Owned Beneficially and
Name of Beneficial Owner of Record (1) Percentage of Class
------------------------ ------------- -------------------
<S> <C> <C>
Brown Simpson Partners I, Ltd. 833,336 20.0
Carnegie Hall Tower
152 West 57th Street, 40th Fl.
New York, NY 10019
Montrose Investments Ltd. 583,333 14.0
300 Crescent Ct., Suite 700
Dallas TX 75201
The Raptor Global Portfolio, Ltd. 414,833 10.0
40 Rowes Wharf, 2nd Fl.
Boston, MA 02110
</TABLE>
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934. Unless otherwise noted, Stonepath Group
believes that all persons named in the table have sole voting and investment
power with respect to all shares of Series C Preferred Stock beneficially
owned by them.
83
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Share Exchange Transactions with Rozel International Holdings, Ltd.
In October 1998, Stonepath Group completed a share exchange
transaction with Rozel International Holdings, Ltd. in which Stonepath Group
issued 1,000,000 shares of common stock valued at $4,630,000 and 500,000 shares
of Series A Preferred Stock valued at $40,000 in exchange for 178,700 shares of
the Series A Preferred Stock of Net Value, Inc. This represented 100% of the
issued and outstanding shares of Series A Preferred Stock of Net Value, Inc. In
October 1998, Stonepath Group also completed a share exchange transaction
with Rozel International Holdings, Ltd. in which Stonepath Group issued
1,145,594 shares of common stock valued at $4,628,200 and 1,145,594 shares of
Series A Preferred Stock valued at $91,648 in exchange for 4,582,377 shares of
common stock of Net Value, Inc. Rozel International Holdings, Ltd. is a
beneficial owner of approximately 15.5% of common stock.
Recapitalization of Securities Issued in Strategicus Merger
Stonepath Group completed the merger with Strategicus Partners on
July 30, 1999. Subject to vesting provisions described in the merger agreement,
Stonepath Group issued the following shares of capital stock to the
stockholders of Strategicus Partners:
<TABLE>
<CAPTION>
Vested Shares of Unvested Shares of
Vested Shares of Unvested Shares of Series A Series A
Name common stock common stock Preferred Stock Preferred Stock
---- ---------------- ------------ --------------- ------------------
<S> <C> <C> <C> <C>
Douglas Spink 239,847 1,641,310 73,678 504,187
Barry Uphoff 120,394 1,760,763 36,983 540,882
Darr Aley 120,394 1,760,763 36,983 540,882
Stephen George 120,394 1,760,763 36,983 540,882
---------- ----------- -------- ----------
TOTAL 601,029 6,923,599 184,627 2,126,833
TOTAL VALUE $3,638,084 $21,458,719 $142,163 $1,637,661
</TABLE>
Following the completion of the merger, Messrs. Spink, Uphoff, Aley and
George joined the Board of Directors. Subsequently, Mr. Spink resigned from the
Board of Directors during the first quarter of 2000 and Mr. Uphoff resigned from
the Board of Directors in May 2000.
The unvested shares of capital stock listed above were intended to vest
ratably on a monthly basis over periods ranging from 24 months to 48 months
based on the individual stockholder's continued employment or engagement as a
consultant with Stonepath Group.
Following the merger with Strategicus Partners, the securities issued
in the merger were recapitalized in several stages as follows:
84
<PAGE>
o In September 1999, Stonepath Group issued 2,898,788 shares of
common stock in exchange for all 4,831,312 issued and outstanding
shares of Series A Preferred Stock. Of this amount, Messrs. Spink,
Uphoff, Aley and George received a total of 1,386,876 shares of
common stock valued at $6,012,738 in exchange for the cancellation of
all of their 2,311,460 shares of Series A Preferred Stock.
o On August 31, 1999, each of Messrs. Uphoff, Aley and George agreed to
immediately cancel all of their 6,255,876 unvested shares of common
stock valued at $37,927,669 (consisting of 5,282,289 unvested shares
of common stock pursuant to the merger with Strategicus Partners, and
973,587 unvested shares of common stock in the Series A Preferred
Stock described above) in exchange for options to purchase a total of
6,255,876 shares of common stock valued at $11,889,024. Each of these
options has an exercise price of $1.00 per share and will be subject
to the same vesting provisions that applied to the unvested shares of
common stock as described in the merger agreement with Strategicus
Partners.
o During September 1999, each of Messrs. Uphoff, Aley, George and Panzo
agreed to surrender options to purchase 180,000 shares of common
stock valued at $646,884. On September 13, 1999, Mr. Spink agreed to
cancel 180,000 of his unvested shares of common stock valued at
$1,148,727.
o During January 2000, each of Messrs. Uphoff, Aley and George agreed
to surrender options to purchase 1,217,876 shares of common stock
valued at $4,376,803.
o During May 2000, each of Messrs. Uphoff and Aley agreed to surrender
options to purchase 355,000 shares of common stock. During May 2000,
Mr. George agreed to surrender options to purchase 305,000 shares of
common stock.
o During August 2000, Mr. Spink agreed to surrender 1,212,856 shares in
connection with a settlement of all outstanding legal proceedings
between him and Stonepath Group.
Recapitalized as set forth above, the securities which Stonepath Group
issued pursuant to the merger with Strategicus Partners were issued and
outstanding as of August 31, 2000, as follows:
Vested Shares Warrants to Purchase
Name of common stock Shares of common stock
---- --------------- ----------------------
Douglas Spink 835,000 -0-
Barry Uphoff 142,584 332,416
Darr Aley 142,584 332,416
Stephen George 142,584 382,416
--------- ---------
TOTAL 1,262,752 1,047,248
========= =========
85
<PAGE>
Loans Made in Connection With The Merger With Strategicus Partners
In connection with its merger with Strategicus Partners, Stonepath
Group agreed to assume a loan outstanding to Douglas Spink in the principal
amount of $310,000. Mr. Spink became the Chief Technology Officer of Net Value
Holdings following the merger. The collection of the loan was to be deferred and
forgiven by Stonepath Group provided that Mr. Spink remained employed by
Stonepath Group for a period of three years. Mr. Spink and Stonepath Group
thereafter became involved in legal proceedings against each other arising out
of Stonepath Group's termination of Mr. Spink's employment. The parties recently
entered into a settlement agreement pursuant to which Stonepath Group agreed,
among other things, to forgive the loan as if Mr. Spink completed his term of
employment.
In June 1999, Stonepath Group extended a loan to Mr. Darr Aley in
the principal amount of $267,000. This amount was extended to Mr. Aley as an
inducement for him to leave his prior employment. This transaction was
structured as a loan to induce Mr. Aley to remain Stonepath Group's 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 the merger with
Strategicus Partners, Stonepath Group entered into a consulting agreement
with Mr. Aley in which Stonepath Group agreed not to take any actions to
demand repayment or to collect this loan during the term of the consulting
agreement. Stonepath Group also agreed to forgive Mr. Aley's obligation to
repay a portion of this loan if he remains engaged as a consultant to Net Value
Holdings on each of the first three anniversaries of the date of his consulting
agreement.
Personal Investments of Members of The Management Team in The Affiliate
Companies
Members of the management team have made personal investments in some
of the affiliate companies. As of August 31, 2000, members of Stonepath Group's
management team either own or have in the past owned the following equity
interests in the affiliate companies:
<TABLE>
<CAPTION>
Name Affiliate company Equity Interest
---- ----------------- ---------------
<S> <C> <C>
Andrew P. Panzo YesAsia, Inc. 12,000 shares of common stock
Barry Uphoff (former director) YesAsia, Inc. 12,000 shares of common stock
Darr Aley YesAsia, Inc. 12,000 shares of common stock
Stephen George YesAsia, Inc. 12,000 shares of common stock
Thomas Aley SwapIt.com Inc. 30,072 shares of common stock
Lee C. Hansen YesAsia, Inc. 3,430 shares of Series B preferred
Douglas Spink (former director) YesAsia, Inc. 12,000 shares of common stock
Douglas Spink (former director) WebModal, Inc. 400 shares of common stock
</TABLE>
86
<PAGE>
Contribution of Shares of SwapIt.com, Inc. common stock From Thomas Aley
In November 1999, Stonepath Group purchased a 10% equity ownership
interest in SwapIt.com, Inc. for $500,000. Thomas Aley, Executive Vice
President, Business Development, was a founder of this company and owned
1,140,000 shares of its common stock as of the date Stonepath Group completed
its purchase of this equity ownership interest. In connection with this
transaction, Mr. Aley contributed 1,109,928 of these shares of SwapIt.com's
common stock to Stonepath Group.
LEGAL OPINION
The validity of the shares of Stonepath Group common stock offered
by this proxy statement-prospectus will be passed upon for Stonepath Group by
Buchanan Ingersoll Professional Corporation.
EXPERTS
The consolidated financial statements of Net Value Holdings, Inc.
(renamed Stonepath Group, Inc. effective September 25, 2000) as of December 31,
1999 and for the year ended December 31, 1999 have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of Net Value Holdings, Inc. as of
December 31, 1998 and for each of the years in the two-year period ended
December 31, 1998 have been included herein and in the registration statement in
reliance upon the report of LJ Soldinger Associates, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Net Value, Inc. as of December 31, 1999 and
for each of the years in the three year period ended December 31, 1999 have been
included herein and in the registration statement in reliance upon the report of
L J Soldinger Associates, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of SwapIt.com as of December 31, 1999 and for
the period from October 28, 1999 (inception) through December 31, 1999 have been
included herein and in the registration statement in reliance upon the report of
Morgenstern & Associates, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Webmodal, Inc. as of December 31, 1999 and
for the period from July 28, 1999 (inception) through December 31, 1999, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
87
<PAGE>
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
LJ Soldinger Associates completed the audit of Net Value Holdings,
Inc.'s consolidated financial statements for the years ended December 31, 1997
and 1998. In February 2000, Net Value Holdings, Inc. dismissed LJ Soldinger
Associates as its independent accounting firm and engaged KPMG LLP as its
independent accounting firm. KPMG LLP completed the audit of Net Value Holdings,
Inc.'s consolidated financial statements for the year ended December 31, 1999.
LJ Soldinger Associates has confirmed that they did not have any disputes or
disagreements with Net Value Holdings, Inc.'s management regarding accounting
principles or practices, financial disclosure or auditing scope of procedures.
For periods in which Net Value Holdings, Inc. was inactive prior to its
acquisition of a controlling interest in Net Value, Inc., Barry L. Friedman,
P.C. completed audits of Net Value Holdings, Inc.'s financial statements and was
subsequently dismissed when Net Value Holdings, Inc. engaged LJ Soldinger
Associates in 1998. Barry L. Friedman, P.C. confirmed that they did not have any
disputes or disagreements with management regarding accounting principles or
practices, financial disclosure or auditing scope or procedures.
88
<PAGE>
FINANCIAL STATEMENTS AND AUDITOR REPORTS
Index to Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS OF THE NET VALUE HOLDINGS, INC.: Reference
<S> <C>
Independent Auditors' Report - KPMG LLP F1
Independent Auditors' Report - L J Soldinger Associates F2
Consolidated Balance Sheets as of December 31, 1998 and 1999 and June 30, 2000 (unaudited) F3
Consolidated Statements of Operations for the three years ended December 31, 1999 and the six
months ended June 30, 1999 and 2000 (unaudited) F4
Consolidated Statements of Stockholders' Equity for the three years ended December 31,
1999 and the six months ended June 30, 2000 (unaudited) F5
Consolidated Statements of Cash Flows for the three years ended December 31, 1999 and the six
months ended June 30, 1999 and 2000 (unaudited) F6
Notes to Consolidated Financial Statements F7
FINANCIAL STATEMENTS OF NET VALUE, INC.:
Independent Auditors' Report F32
Balance Sheets as of December 31, 1998 and 1999 and June 30, 2000 (unaudited) F33
Statements of Operations for the three years ended December 31, 1999 and the six
months ended June 30, 1999 and 2000 (unaudited) F34
Statements of Stockholders' Deficit for the three years ended December 31, 1999 and the
six months ended June 30, 2000 (unaudited) F35
Statements of Cash Flows for the three years ended December 31, 1999 and the six months ended
June 30, 1999 and 2000 (unaudited) F36
Notes to Consolidated Financial Statements F37
FINANCIAL STATEMENTS OF AFFILIATE COMPANIES:
Webmodal, Inc.
Independent Auditors' Report F50
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited) F51
Statements of Operations for the period from July 28, 1999 (inception) through
December 31, 1999 and the six months ended June 30, 2000 (unaudited) F52
Statements of Stockholders' Equity for the period from July 28, 1999 (date of inception) through
December 31, 1999 and the six months ended June 30, 2000 (unaudited) F53
Statements of Cash Flows for the period from July 28, 1999 (inception) through
December 31, 1999 and the six months ended June 30, 2000 (unaudited) F54
Notes to Financial Statements F55
Swapit.com, Inc.
Independent Auditors' Report F64
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited) F65
Statements of Operations for the period October 28, 1999 from (inception) through
December 31, 1999 and the six months ended June 30, 2000 (unaudited) F66
Statements of Stockholders' Equity for the period from October 28, 1999 (inception) through
December 31, 1999 and the six months ended June 30, 2000 (unaudited) F67
Statements of Cash Flows for the period from October 28, 1999 (inception) through
December 31, 1999 and the six months ended June 30, 2000 (unaudited) F68
Notes to Financial Statements F69
</TABLE>
F-i
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Net Value Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Net Value
Holdings, Inc. and subsidiaries (the Company) as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Net Value Holdings,
Inc. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
March 31, 2000
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Net Value Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Net Value
Holdings, Inc. as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Net Value Holdings,
Inc. as of December 31, 1998, and the results of its operations, stockholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's negative
working capital position, substantial losses incurred since inception, and
dependence on outside financing raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
April 30, 1999
F-2
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31, June 30,
Assets 1998 1999 2000
------------ -------------- -------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,466 $ 3,127,232 $ 38,674,084
Available-for-sale securities -- -- 406,728
Interest receivable -- 28,176 99,785
Loans receivable 200,000 218,808 170,645
Capitalized financing fees, net 170,182 142,958 --
Prepaid expenses and other current assets -- 41,911 131,625
------------ ------------ -------------
Total current assets 371,648 3,559,085 39,482,867
Ownership interests in and advances to Affiliate Companies -- 7,065,557 14,583,040
Goodwill, net of accumulated amortization of $0, $578,906 and
$1,194,482 in 1998, 1999 and 2000 -- 3,227,298 2,611,647
Furniture and equipment, net -- 70,082 183,607
Other assets -- 67,346 128,923
------------ ------------ -------------
$ 371,648 $ 13,989,368 $ 56,990,084
============ ============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 148,421 $ 802,202 $ 281,576
Note and loans payable 1,140,000 12,000 --
Convertible promissory notes -- 1,921,929 --
Convertible debentures 1,402,500 3,250,500 --
Long-term debt due within one year -- 11,732 --
Net liabilities of discontinued operations 6,430,891 1,773,591 1,014,526
------------ ------------ -------------
Total current liabilities 9,121,812 7,771,954 1,296,102
------------ ------------ -------------
Noncurrent liabilities:
Long-term debt, less amounts due within one year -- 67,302 --
------------ ------------ -------------
Total noncurrent liabilities -- 67,302 --
------------ ------------ -------------
Redeemable convertible preferred stock, Series B, $.001 par value
(4,824 shares authorized, issued and outstanding at 1999), net of
costs of issuance. Liquidation preference: $4,824,000 at 1999 -- 4,448,872 --
Preferred stock dividend, Series C -- -- 1,295,834
------------ ------------ -------------
-- 4,448,872 1,295,834
Stockholders' equity:
Convertible preferred stock, Series C, $.001 par value
(4,166,667 shares authorized, issued and outstanding at 2000),
Liquidation preference: $50,000,000 at 2000 -- -- 4,167
Convertible preferred stock, Series A, $.001 par
value (2,519,852 shares authorized, issued and
outstanding at 1998), net of costs of issuance 2,520 -- --
Common stock, Net Value Inc. $.001 par value
(49,000,000 shares authorized at 1998,
100,000,000 authorized at 1999 and 2000;
1,037,338 shares issued and outstanding at 1998
and 1999; 1,097,588 shares issued and 1,096,338 1,038 1,038 1,098
outstanding at 2000)
Common stock, $.001 par value (50,000,000 shares authorized at
1998, 1999, 2000; 6,969,852, 15,522,807 and 19,281,193
shares issued and outstanding at 1998 at 1998 and 1999,
respectively, 19,410,681 issued and 19,356,681 outstanding
at 2000) 6,970 15,523 19,411
Additional paid-in capital 39,005,768 103,946,136 214,442,605
Accumulated deficit (44,482,928) (74,919,285) (140,062,076)
Deferred compensation (3,283,532) (27,342,172) (19,840,561)
Unrealized gains on available-for-sale securities -- -- 161,651
Treasury stock, Net Value Inc., at cost (1,250 shares) -- -- (17,500)
Treasury stock, at cost (54,000 shares) -- -- (310,647)
------------ ------------ -------------
Total stockholders' equity (deficit) (8,750,164) 1,701,240 54,398,148
------------ ------------ -------------
$ 371,648 $ 13,989,368 $ 56,990,084
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Net Value Holdings, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31 Six months ended June 30
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ -- $ --
Operating expenses:
Stock-based compensation -- -- 7,320,695 86,000 13,366,749
General and administrative -- 140,484 3,719,497 946,996 4,417,203
------------ ------------ ------------ ----------- ------------
Total operating expenses -- 140,484 11,040,192 1,032,996 17,783,952
Interest income -- -- 60,526 4,816 915,946
Interest expense -- 1,441,399 12,380,157 2,559,155 84,627
Financing fees -- 48,436 523,601 -- --
Other loss -- -- -- -- 957,101
------------ ------------ ------------ ----------- ------------
Loss before equity in losses -- 1,630,319 23,883,424 3,587,335 17,909,734
of Affiliate Companies
Equity in losses of Affiliate Companies -- -- 79,559 -- 2,665,756
------------ ------------ ------------ ----------- ------------
Net loss from continuing
operations -- 1,630,319 23,962,983 3,587,335 20,575,490
------------ ------------ ------------ ----------- ------------
Discontinued operations:
Loss from discontinued operations 11,235,237 11,106,826 6,370,776 3,005,632 --
Gain on disposal of discontinued -- -- 6,502,663 -- --
operations
Loss on extinguishment of debt -- -- -- -- 554,676
------------ ------------ ------------ ----------- ------------
Net loss 11,235,237 12,737,145 23,831,096 6,592,967 21,130,166
Preferred stock dividends
Continuing operations -- -- 6,605,261 -- 44,012,625
Discontinued operations 1,181,250 15,250,500 -- -- --
------------ ------------ ------------ ----------- ------------
Net loss to common shareholders $ 12,416,487 $ 27,987,645 $ 30,436,357 $ 6,592,967 $ 65,142,791
============ ============ ============ =========== ============
Basic and diluted net (loss) per
common share- continuing operations $ -- $ (0.35) $ (2.90) $ (0.41) $ (3.91)
============ ============ ============ =========== ============
Basic and diluted net earnings (loss)
per common share - discontinued
operations $ (6.88) $ (5.59) $ 0.01 $ (0.35) $ (0.03)
============ ============ ============ =========== ============
Basic and diluted weighted average
common shares outstanding 1,804,700 4,711,351 10,557,953 8,645,151 16,521,162
============ ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Stockholders Equity
<TABLE>
<CAPTION>
Preferred stock Common stock
--------------------------------------------- -------------------------------------------------
Net Value, Inc. Net Value Holdings, Inc. Net Value, Inc. Net Value Holdings, Inc.
----------------- ------------------------ -------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ --------- ------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31,1996 -- $ -- 1,567,607 $1,568 -- $ -- 1,567,607 $ 1,568
Net loss -- -- -- -- -- -- -- --
Issuance of
preferred stock 22,500 23 -- -- -- -- -- --
Preferred stock
dividend -- -- -- -- -- -- -- --
Issuance of common
stock, net -- -- -- -- 73,750 74 -- --
Earned common stock
for consulting
services -- -- -- -- 43,750 44 -- --
Common stock issued
as consideration
for notes and
loans payable -- -- -- -- 885,770 886 -- --
Common stock and
warrants issued
in connection
with short-term
bridge financing,
net -- -- -- -- 100,625 101 -- --
Compensatory common
stock options
issued -- -- -- -- -- -- -- --
Amortization of
deferred
compensation -
discontinued
operations -- -- -- -- -- -- -- --
Effects of common
stock exchanged -- -- 452,245 452 (452,245) (452) 452,245 452
-------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1997 22,500 23 2,019,852 2,020 651,650 652 2,019,852 2,020
Net loss -- -- -- -- -- -- -- --
Issuance of
preferred stock 276,200 276 -- -- -- -- -- --
Preferred stock
conversion (258,700) (259) 500,000 500 250,000 250 1,000,000 1,000
Preferred stock
repurchase (40,000) (40) -- -- -- -- -- --
Preferred stock
dividend -- -- -- -- -- -- -- --
Issuance of warrants -- -- -- -- -- -- -- --
Issuance of common
stock, net -- -- -- -- 7,500 8 2,950,000 2,950
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Preferred stock Common stock
--------------------------------------------- -------------------------------------------------
Net Value, Inc. Net Value Holdings, Inc. Net Value, Inc. Net Value Holdings, Inc.
----------------- ------------------------ -------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ --------- ------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued
as consideration
for satisfaction
of preferred
stock purchase
commitment -- -- -- -- 37,500 38 -- --
Common stock issued
as consideration
for interest
payable -- -- -- -- 688 1 -- --
Issuance of common
stock for
consulting
services -- -- -- -- 90,000 90 -- --
Acquisition of
assets of Holdings -- -- -- -- -- -- 1,000,000 1,000
Compensatory common
stock options
issued -- -- -- -- -- -- -- --
Amortization of
deferred
compensation -
discontinued
operations -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31,1998 -- -- 2,519,852 2,520 1,037,338 1,038 6,969,852 6,970
Net loss -- -- -- -- -- -- -- --
Issuance of warrants -- -- -- -- -- -- -- --
Issuance of common
stock, net -- -- -- -- -- -- 80,388 80
Common stock issued
in connection
with conversion
of convertible
debentures and
interest -- -- -- -- -- -- 2,076,589 2,077
Common stock issued
in connection
with conversion
of notes payable
and interest -- -- -- -- -- -- 1,732,066 1,732
Common and
preferred stock
issued in
connection with
Strategicus merger -- -- 184,627 185 -- -- 601,029 601
Common stock issued
for consulting
services -- -- -- -- -- -- 676,374 676
Contributed capital -- -- -- -- -- -- -- --
Beneficial
conversion
features on
convertible notes
and debentures -- -- -- -- -- -- -- --
Series A preferred
stock conversion -- -- (2,704,479) (2,705) -- -- 1,622,687 1,623
Preferred stock
dividend -- -- -- -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Preferred stock Common stock
--------------------------------------------- ------------------------------------------------
Net Value, Inc. Net Value Holdings, Inc. Net Value, Inc. Net Value Holdings, Inc.
----------------- ------------------------ ------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ --------- ------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Compensatory common
stock and common
stock options
issued, net of
cancellations -- -- -- -- -- -- 1,763,822 1,764
Amortization of
deferred stock
based
compensation -
continuing
operations -- -- -- -- -- -- -- --
Amortization of
deferred stock
based
compensation -
discontinued
operations -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1999 -- -- -- -- 1,037,338 1,038 15,522,807 15,523
Net loss:
Net loss (unaudited) -- -- -- -- -- -- -- --
Other
comprehensive
income:
Unrealized
gain on
securities (unaudited) -- -- -- -- -- -- -- --
Comprehensive
income (loss) (unaudited) -- -- -- -- -- -- -- --
Issuance of Warrants (unaudited) -- -- -- -- -- -- -- --
Issuance of common
stock, net of
cancellations (unaudited) -- -- -- -- 60,250 60 2,707,694 2,708
Issuance of
preferred stock,
Series C, net (unaudited) -- -- 4,166,667 4,167 -- -- -- --
Contributed capital (unaudited) -- -- -- -- -- -- -- --
Series B preferred
stock conversion (unaudited) -- -- -- -- -- -- 1,180,180 1,180
Preferred stock
dividends (unaudited) -- -- -- -- -- -- -- --
Treasury stock (unaudited) -- -- -- -- -- -- -- --
Compensatory common
stock, common
stock options and
warrants issued,
net of
cancellations (unaudited) -- -- -- -- -- -- -- --
Amortization of
deferred stock
based
compensation -
continuing
operations (unaudited) -- -- -- -- -- -- -- --
Amortization of
deferred stock
based
compensation -
discontinued
operations (unaudited) -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Balances at June
30, 2000
(unaudited) -- $ -- 4,166,667 $ 4,167 1,097,588 $ 1,098 19,410,681 $19,411
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Additional Other Treasury
paid-in Accumulative Comprehensive Stock Treasury
capital deficit Income NV Inc. Stock
----------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December
31,1996 $ 3,770,568 $ (4,078,796) $ -- $ -- $ --
Net loss -- (11,235,237) -- -- --
Issuance of
preferred stock 224,978 -- -- -- --
Preferred stock
dividend 1,181,250 (1,181,250) -- -- --
Issuance of common
stock, net 551,760 -- -- -- --
Earned common stock
for consulting
services 612,453 -- -- -- --
Common stock issued
as consideration
for notes and
loans payable 3,878,415 -- -- -- --
Common stock and
warrants issued
in connection
with short-term
bridge financing,
net 2,410,541 -- -- -- --
Compensatory common
stock options
issued 1,932,150 -- -- -- --
Amortization of
deferred
compensation -
discontinued
operations -- -- -- -- --
Effects of common
stock exchanged (452) -- -- -- --
-----------------------------------------------------------------------------------------------------------
Balances at
December 31, 1997 14,561,663 (16,495,283) -- -- --
Net loss -- (12,737,145) -- -- --
Issuance of
preferred stock 2,761,724 -- -- -- --
Preferred stock
conversion (1,491) -- -- -- --
Preferred stock
repurchase (399,960) -- -- -- --
Preferred stock
dividend 15,250,500 (15,250,500) -- -- --
Issuance of warrants 49,200 -- -- -- --
Issuance of common
stock, net 2,151,473 -- -- -- --
Common stock issued
as consideration
for satisfaction
of preferred
stock purchase
commitment (38) -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Additional Other Treasury
paid-in Accumulative Comprehensive Stock Treasury
capital deficit Income NV Inc. Stock
----------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Common stock issued
as consideration
for interest
payable 13,749 -- -- -- --
Issuance of common
stock for
consulting
services 251,910 -- -- -- --
Acquisition of
assets of Holdings (1,000) -- -- -- --
Compensatory common
stock options
issued 4,368,039 -- -- -- --
Amortization of
deferred
compensation -
discontinued
operations -- -- -- -- --
-----------------------------------------------------------------------------------------------------------
Balances at
December 31,1998 39,005,768 (44,482,928) -- -- --
Net loss -- (23,831,096) -- -- --
Issuance of warrants 454,000 -- -- -- --
Issuance of common
stock, net 356,536 -- -- -- --
Common stock issued
in connection
with conversion
of convertible
debentures and
interest 4,774,444 -- -- -- --
Common stock issued
in connection
with conversion
of notes payable
and interest 3,462,402 -- -- -- --
Common and
preferred stock
issued in
connection with
Strategicus merger 3,637,298 -- -- -- --
Common stock issued
for consulting
services 2,965,698 -- -- -- --
Contributed capital 659,087 -- -- -- --
Beneficial
conversion
features on
convertible notes
and debentures 11,165,145 -- -- -- --
Series A preferred
stock conversion 1,082 -- -- -- --
Preferred stock
dividend 6,605,261 (6,605,261) -- -- --
Compensatory common
stock and common
stock options
issued, net of
cancellations 30,859,415 -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Additional Other Treasury
paid-in Accumulative Comprehensive Stock Treasury
capital deficit Income NV Inc. Stock
----------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Amortization of
deferred stock
based
compensation -
continuing
operations -- -- -- -- --
Amortization of
deferred stock
based
compensation -
discontinued
operations -- -- -- -- --
-----------------------------------------------------------------------------------------------------------
Balances at
December 31, 1999 103,946,136 (74,919,285) -- -- --
Net loss:
Net loss (unaudited) -- (21,130,166) -- -- --
Other
comprehensive
income:
Unrealized
gain on
securities (unaudited) -- -- 161,651 -- --
Comprehensive
income (loss)
(unaudited) -- -- -- -- --
Issuance of Warrants
(unaudited) 7,391,673 -- -- -- --
Issuance of common
stock, net of
cancellations
(unaudited) 9,279,333 -- -- -- --
Issuance of
preferred stock,
Series C, net
(unaudited) 40,878,920 -- -- -- --
Contributed capital
(unaudited) 853,319 -- -- -- --
Series B preferred
stock conversion
(unaudited) 4,304,734 -- -- -- --
Preferred stock
dividends
(unaudited) 42,608,327 (44,012,625) -- -- --
Treasury stock
(unaudited) -- -- -- (17,500) (310,647)
Compensatory common
stock, common
stock options and
warrants issued,
net of
cancellations
(unaudited) 5,180,163 -- -- -- --
Amortization of
deferred stock
based
compensation -
continuing
operations (unaudited) -- -- -- -- --
Amortization of
deferred stock
based
compensation -
discontinued
operations (unaudited) -- -- -- -- --
-----------------------------------------------------------------------------------------------------------
Balances at June
30, 2000
(unaudited) $214,442,605 $(140,062,076) $ 161,651 $ (17,500) $(310,647)
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred
stock-based
compensation Total
------------- -----------
<S> <C> <C>
Balance at December
31,1996 $ -- $ (305,093)
Net loss -- (11,235,237)
Issuance of
preferred stock -- 225,001
Preferred stock
dividend -- --
Issuance of common
stock, net -- 551,834
Earned common stock
for consulting
services -- 612,497
Common stock issued
as consideration
for notes and
loans payable -- 3,879,301
Common stock and
warrants issued
in connection
with short-term
bridge financing,
net -- 2,410,642
Compensatory common
stock options
issued (1,932,150) --
Amortization of
deferred
compensation -
discontinued
operations 1,434,400 1,434,400
Effects of common
stock exchanged -- --
-------------------------------------------------------
Balances at
December 31, 1997 (497,750) (2,426,656)
Net loss -- (12,737,145)
Issuance of
preferred stock -- 2,762,000
Preferred stock
conversion -- --
Preferred stock
repurchase -- (400,000)
Preferred stock
dividend -- --
Issuance of warrants -- 49,200
Issuance of common
stock, net -- 2,154,430
Common stock issued
as consideration
for satisfaction
of preferred
stock purchase
commitment -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred
stock-based
compensation Total
------------- -----------
<S> <C> <C>
Common stock issued
as consideration
for interest
payable -- 13,750
Issuance of common
stock for
consulting
services -- 252,000
Acquisition of
assets of Holdings -- --
Compensatory common
stock options
issued (4,368,039) --
Amortization of
deferred
compensation -
discontinued
operations 1,582,257 1,582,257
-------------------------------------------------------
Balances at
December 31,1998 (3,283,532) (8,750,164)
Net loss -- (23,831,096)
Issuance of warrants -- 454,000
Issuance of common
stock, net -- 356,616
Common stock issued
in connection
with conversion
of convertible
debentures and
interest -- 4,776,521
Common stock issued
in connection
with conversion
of notes payable
and interest -- 3,464,134
Common and
preferred stock
issued in
connection with
Strategicus merger -- 3,638,084
Common stock issued
for consulting
services -- 2,966,374
Contributed capital -- 659,087
Beneficial
conversion
features on
convertible notes
and debentures -- 11,165,145
Series A preferred
stock conversion -- --
Preferred stock
dividend -- --
Compensatory common
stock and common
stock options
issued, net of
cancellations (30,861,179) --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deferred
stock-based
compensation Total
------------- -----------
<S> <C> <C>
Amortization of
deferred stock
based
compensation -
continuing
operations 5,031,371 5,031,371
Amortization of
deferred stock
based
compensation -
discontinued
operations 1,771,168 1,771,168
-------------------------------------------------------
Balances at
December 31, 1999 (27,342,172) 1,701,240
Net loss:
Net loss (unaudited) -- (21,130,166)
Other
comprehensive
income:
Unrealized
gain on
securities (unaudited) -- 161,651
-------------------------------------------------------
Comprehensive
income (loss) (unaudited) -- (20,968,515)
Issuance of Warrants
(unaudited) -- 7,391,673
Issuance of common
stock, net of
cancellations (unaudited) -- 9,282,101
Issuance of
preferred stock,
Series C, net (unaudited) -- 40,883,087
Contributed capital (unaudited) -- 853,319
Series B preferred
stock conversion (unaudited) -- 4,305,914
Preferred stock
dividends (unaudited) -- (1,404,298)
Treasury stock (unaudited) -- (328,147)
Compensatory common
stock, common
stock options and
warrants issued,
net of
cancellations
(unaudited) (5,180,163) --
Amortization of
deferred stock
based
compensation -
continuing
operations (unaudited) 12,657,374 12,657,374
Amortization of
deferred stock
based
compensation -
discontinued
operations (unaudited) 24,400 24,400
--------------------------------------------------------
Balances at June
30, 2000
(unaudited) $ (19,840,561) $54,398,148
========================================================
</TABLE>
F-5
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31 Six months ended June 30
----------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------- ------------- ------------- ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Loss $(11,235,237) $(12,737,145) $(23,831,096) $(6,592,967) $(21,130,166)
Adjustments to reconcile to net cash used
in operation activities:
Depreciation and amortization 1,445,956 3,602,776 2,061,609 2,042,708 663,136
Stock-based compensation - continuing
operations -- -- 7,320,695 86,000 13,366,749
Stock-based compensation - discontinuing
operations 1,434,400 1,582,257 1,771,168 823,484 --
Interest paid with stock issuance 1,129,301 13,750 395,348 120,014 75,619
Other loss -- -- -- -- 957,101
Equity in losses of Affiliate Companies -- -- 79,559 -- 2,665,756
Gain on sale of assets - discontinued
operations -- -- (6,502,663) -- --
Loss from extinguishment of debt
-discontinued operations -- -- -- -- 554,676
Beneficial conversion features on
convertible notes and debenture -- 1,400,000 11,165,145 -- --
Changes in assets and liabilities
Interest receivable -- -- (28,176) (4,162) (71,609)
Prepaid expenses and other current assets (416,302) 774,197 (41,911) (70,000) (89,714)
Other assets -- (21,107) (67,346) -- (61,577)
Accounts payable and accrued expenses 1,286,616 15,708 653,781 (98,364) (245,788)
Discontinued operations -- -- -- -- (187,902)
------------ ------------ ------------ ----------- -----------
Net cash used in operating
activities (6,355,266) (5,369,564) (7,023,887) (3,693,287) (3,503,719)
Cash flows from investing activities:
Disbursements of loans -- (200,000) (1,164,000) -- --
Collections on loans -- -- 767,000 200,000 --
Collections on advances to Affiliate
Companies -- -- -- -- 75,000
Proceeds from sale of assets -
discontinued operations -- -- 2,000,000 -- --
Acquisition of ownership interests in
Affiliate Companies -- -- (2,500,000) (270,000) (6,300,000)
Advances to Affiliate Companies -- -- (50,000) (360,000) (3,430,000)
Purchases of furniture and equipment (544,618) (57,478) (74,977) -- (124,847)
------------ ------------ ------------ ----------- -----------
Net cash (used in) provided by
investing activities (544,618) (257,478) (1,021,977) (430,000) (9,779,847)
Cash flows from financing activities:
Proceeds from notes payable 5,329,250 3,418,000 12,000 -- --
Repayments of notes payable (1,501,000) (1,495,000) (240,000) (240,000) (28,281)
Long-term debt borrowings -- 1,402,500 6,455,000 6,455,000 --
Long-term debt payments -- (34,173) (35,675) -- (79,034)
Issuance of common stock 3,112,474 529,430 1,032,910 -- --
Issuance of preferred stock 225,000 2,762,000 4,448,872 -- 48,274,760
Issuance of warrants -- -- -- -- 1,099,584
Repurchase of preferred stock -- (400,000) -- -- --
Purchase of treasury stock -- -- -- -- (328,147)
Payment of preferred stock dividend,
Series B -- -- -- -- (108,464)
Payment of financing fees (140,919) (80,000) (501,477) (460,600) --
Registration costs (124,921) (474,249) -- -- --
------------ ------------ ------------ ----------- -----------
Net cash provided by financing
activities 6,899,884 5,628,508 11,171,630 5,754,400 48,830,418
Net increase in cash and cash
equivalents -- 1,466 3,125,766 1,631,113 35,546,852
Cash and cash equivalents at beginning of
period -- -- 1,466 1,466 3,127,232
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents at end of period $ -- $ 1,466 $ 3,127,232 $ 1,632,579 $38,674,084
============ ============ ============ =========== ===========
Cash paid for interest $ 3,200 $ 93,537 $ 76,974 $ 43,866 $ 29,153
============ ============ ============ =========== ===========
Cash paid for taxes $ -- $ -- $ -- $ -- $ --
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(1) Nature of Operations and Basis of Presentation
Net Value Holdings, Inc. (Net Value or the Company) is actively engaged
in identifying, financing, and providing business development services
for a network of early-stage technology businesses that possess
significant growth potential. Net Value's operating strategy is to
acquire a significant equity interest in development stage technology
companies, which Net Value calls its "Affiliate Companies", and to
provide financial, management, and technical support to accelerate the
achievement of the Affiliate Companies' business goals and objectives. To
date, Net Value has focused on technology businesses with significant
Internet features and applications. As of December 31, 1999, Net Value
owned interests in seven Affiliate companies. Net Value is based in San
Francisco with offices in New York, Boston and Philadelphia.
Net Value was formed in December 1991 and had no operations until October
1998, when Net Value acquired a majority interest in an Internet software
developer named Net Value, Inc. (NV Inc.). This merger was accounted for
as a recapitalization of Net Value because NV Inc. shareholders acquired
a majority ownership in Net Value. Under a recapitalization, the
historical financial statements presented are those of the company
acquired, not those of the legal acquiror. Accordingly, the financial
information included in these financial statements prior to the merger in
October 1998 is that of NV Inc.
The 1999 financial statements of Net Value reflect the results of the
in-process merger with NV Inc. At December 31, 1999, Net Value owned 66%
of the outstanding common stock of NV Inc. Because it is unlikely that
the minority shareholders will make additional capital contributions to
erase subsequent NV Inc. losses, no amount has been ascribed to the 34%
minority interest. Net Value plans on acquiring the remaining shares that
it does not own by completing the merger in 2000 pursuant to which NV
Inc. shareholders will receive .4 Net Value common shares for every one
NV Inc. share tendered. Additionally, we will issue common stock purchase
warrants and stock options to the holders of NV, Inc.'s common stock
purchase warrants and vested stock options at the same exchange ratio.
As further described in Note 18, in November 1999, the Board of Directors
approved a formal plan to sell substantially all the assets of NV Inc,
and to discontinue the operations of NV Inc's Internet software
development operations. Accordingly, the operating results of the
discontinued Internet software operations of NV Inc. have been segregated
from continuing operations and reported as a separate line item on the
statements of operations. The assets and liabilities of NV Inc's software
development operations have been recorded as net liabilities of
discontinued operations in the accompanying balance sheets.
Net Value has a limited operating history under its current business
model and was in the development stage prior to the commencement of its
principal business operations in 1999. Net Value's prospects are subject
to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products
and services. In addition, all of our current Affiliate Companies are
early stage companies that have limited operating histories and have
generated very limited, if any, revenues or earnings from operations
since inception. Since Net Value's inception, the Company has generated
operating funds primarily through the sale of equity and debt securities.
Future capital requirements depend on many factors including Net Value's
ability to execute its business plan. Failure by Net Value to raise
additional funding when or if needed could have a material adverse effect
on its business, results of operations and financial condition.
F-7
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in
money market funds. Net Value considers all highly liquid
instruments with a remaining maturity of 90 days or less at the
time of purchase to be cash equivalents.
Financial instruments that potentially subject Net Value to
concentrations of credit risk consist principally of cash deposits
at financial institutions. To mitigate this risk, Net Value places
its cash deposits only with high credit quality institutions.
(b) Principles of Consolidation and Ownership Interests in and
advances to Affiliate Companies
The consolidated financial statements of Net Value include its
wholly-owned subsidiary, metacat.com, and its majority owned
subsidiary, NV Inc. The various interests that Net Value acquires
in its Affiliate Companies are accounted for under three broad
methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on Net
Value's voting interest in the Affiliate Company.
o Consolidation - Affiliate Companies in which Net Value
directly or indirectly owns more than 50% of the outstanding
voting securities are accounted for under the consolidation
method of accounting. Under this method, an Affiliate
Company's results of operations are reflected within Net
Value's Consolidated Statements of Operations. All
significant intercompany accounts and transactions have been
eliminated.
o Equity Method - Affiliate Companies whose results are not
consolidated, but over whom Net Value exercises significant
influence, are accounted for under the equity method of
accounting. Whether or not Net Value exercises significant
influence with respect to the Affiliate Company depends on
an evaluation of several factors including, among others,
representation on the Affiliate Company's Board of
Directors and Net Value's ownership level, which is
generally a 20% to 50% interest in the voting securities of
the Affiliate Company, including voting rights associated
with Net Value's holdings in common, preferred and other
convertible instruments in the Affiliate Company. Under the
equity method of accounting, Net Value's proportionate
share of each affiliate's net income or loss and
amortization of Net Value's excess investment cost over its
equity in each affiliate's net assets is included in
"Equity in losses of Affiliate Companies" in the
Consolidated Statements of Operations. Amortization of the
excess investment is recorded on a straight-line basis over
3 years.
o Cost Method - All other investments for which Net Value does
not have the ability to exercise significant influence and
for which there is not a readily determinable market value,
are accounted for under the cost method of accounting. Under
this method, Net Value's share of each affiliate's net
income or loss is not included in the Consolidated
Statements of Operations. Cost basis represents Net Value's
original acquisition cost less any impairment charges in
such companies.
F-8
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies (continued)
(b) Principles of Consolidation and Ownership Interests in and
advances to Affiliate Companies (continued)
o Advances to Affiliate Companies - In addition to the
Company's investments in voting and non-voting equity and
debt securities, it also periodically makes advances to its
Affiliate Companies in the form of short term loans which
are evidenced by demand notes. These are accounted for in
accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan.
o Evaluations of Interests in Affiliate Companies - Net Value
continually evaluates the carrying value of its ownership
interests in and advances to each of its Affiliate
Companies for possible impairment based on achievement of
business plan objectives and milestones, the value of each
ownership interest in the Affiliate Company relative to
carrying value, the financial condition and prospects of
the Affiliate Company, and other relevant factors. The
business plan objectives and milestones considered by Net
Value include, among others, those related to financial
performance such as achievement of planned financial
results or completion of capital raising activities, and
those that are not primarily financial in nature such as
the launching of an Internet web site or the hiring of key
employees. The fair value of Net Value's ownership
interests in and advances to privately held Affiliate
Companies is generally determined based on the value at
which independent third parties have or have committed to
invest in its Affiliate Companies. If impairment is
determined, the carrying value is adjusted to fair value.
(c) Capitalized Financing Fees
The Company capitalizes the direct costs incurred with the
issuance of long term debt as capitalized financing fees. Net
Value amortizes these fees using an effective interest method over
the life of the related debt. Upon conversion of the related debt
into Net Value's common shares, the related unamortized balance of
capitalized financing fees is eliminated against additional
paid-in capital.
(d) Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the assets acquired less liabilities assumed of the
acquired businesses. Net Value amortizes goodwill on a
straight-line basis over three-years. As more fully described in
Note 7, goodwill at December 31, 1999 of $3,227,298, net of
accumulated amortization of $578,906, was attributable to Net
Value's acquisition of Strategicus Partners, Inc.
(e) Furniture and Equipment
Furniture and equipment are carried at cost, less accumulated
depreciation computed on a straight-line basis over the estimated
useful lives of the respective assets. Depreciation is computed
using a four-year life for computer equipment and a five-year life
for furniture and office equipment.
F-9
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies (continued)
(f) Gain or Loss on Issuances of Stock By Affiliate Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time an
Affiliate Company accounted for under the consolidation or equity
method of accounting issues its common stock at a price per share
different from Net Value's per share carrying amount for that
Affiliate Company, then Net Value's share of the Affiliate
Company's net equity changes. If at that time, the Affiliate
Company is not a newly-formed, non-operating entity, nor a
research and development, start-up or development stage company,
nor is there question as to the company's ability to continue in
existence, then Net Value records the change in its share of the
Affiliate Company's net equity as a gain or loss in its
Consolidated Statements of Operations.
(g) Income Taxes
Net Value uses the liability method of accounting for income
taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the expected future tax
consequences of existing differences between financial reporting
and tax reporting basis of assets and liabilities, as well as for
operating losses and tax credit carryforwards, using enacted tax
laws and rates. Deferred tax expense represents the net change in
the deferred tax asset or liability balance during the year. This
amount, together with income taxes currently payable or refundable
for the current year, represents the total income tax for the
year.
(h) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (FAS
123) and Emerging Issues Task Force Issue No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services". As
permitted under FAS 123, Net Value has continued to follow
Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees (APB 25) in accounting for its stock-based compensation.
Under APB 25, no accounting recognition is given to stock options
issued to employees that are granted with exercise prices at fair
market value. Stock options issued to non-employees are recorded
at fair value at the date of grant and are subsequently remeasured
as counterparty performance is complete, which typically
corresponds to the vesting period.
(i) Loss Per Share
Basic net loss per common share and diluted net loss per common
share are presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share (FAS 128), for
all periods presented. In accordance with FAS 128, basic and
diluted net loss per common share have been computed using the
weighted-average number of shares of common stock outstanding
during the period. Shares associated with stock options,
convertible debt, stock warrants, and convertible preferred stock
are not included because their inclusion would be antidilutive
(i.e., reduce the net loss per share). The total numbers of such
shares excluded from diluted net loss per common share are
12,184,725, 5,297,180, 9,276,476, 2,213,161, and 0 at June 30,
2000 and 1999, and December 31, 1999, 1998, and 1997,
respectively. Such securities, had they been dilutive, would have
been included in the computations of diluted loss per share using
the treasury stock method.
F-10
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies (continued)
(j) Statements of Stockholders' Deficit
The 1998 recapitalization of Net Value described in Note 1
resulted in Net Value's equity accounts being restated whereby
every four NV Inc. shares are reflected as one Net Value common
share and one Net Value preferred share. This restatement had the
effect of changing the allocation of capital between par value and
additional paid in capital. There was no effect on aggregate
stockholders deficit as a result of this allocation.
(k) Segment Information
Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" establishes
standards for the way public companies report operating segments
in annual financial statements and interim reporting to
shareholders. Net Value has determined that it has one operating
and reportable segment: incubating development stage Internet
companies as described in Note 1. The chief operating decision
maker evaluates performance and makes decisions based on financial
data consistent with the presentation in the accompanying
financial statements.
(l) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the accompanying notes.
These estimates are based on information available as of the date
of the consolidated financial statements; therefore, actual
results could differ from those estimates. Certain amounts
recorded to reflect our share of losses of Affiliate Companies
accounted for under the equity method are based on unaudited
results of operations of those affiliate companies and may require
adjustments in the future when audits of these entities are made
final.
(m) Recent Accounting Pronouncements
Net Value does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on its
results of operations, financial position or cash flows.
(n) Reclassifications
Certain prior year amounts in the consolidated financial
statements have been reclassified in accordance with generally
accepted accounting principles to conform to the current year
presentation. The impact of these changes did not affect net loss.
F-11
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(3) Interim Financial Information (Unaudited)
The accompanying consolidated balance sheet as of June 30, 2000, the
consolidated statements of operations and cash flows for the six months
ended June 30, 1999 and 2000 and the consolidated statement of changes in
stockholders' equity for the six months ended June 30, 2000 are
unaudited. The data disclosed in these notes to the consolidated
financial statements for these periods is also unaudited. In the opinion
of management, these financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary to present fairly
the financial position of the interim period. Interim operating results
are not necessarily indicative of results for a full year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations relating to the interim financial statements.
(4) Available-For-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a
component of other comprehensive income in stockholders' equity. At
December 31, 1999, the Company did not hold any available-for-sale
securities. At June 30, 2000, available-for-sale securities consist of
the following equity security:
<TABLE>
<CAPTION>
Unrealized Unrealized
Cost Loss Gain Fair Value
------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Student Advantage, Inc. $ 245,077 $ -- 161,651 406,728
---------- ---------- ---------- ----------
$ 245,077 $ -- 161,651 406,728
========== ========== ========== ==========
</TABLE>
F-12
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(5) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Net Value's ownership interests in and advances
to Affiliate Companies accounted for under the equity method and cost
method of accounting. All of the Affiliate Companies were privately held
companies as of December 31, 1999 and June 30, 2000. Net Value had no
interests in or advances to Affiliate Companies at December 31, 1998.
<TABLE>
<CAPTION>
June 30, 2000
December 31, 1999 (unaudited)
---------------------------------------- ----------------------------------------
Excess of Excess of
carrying value carrying value
Carrying value over net assets Carrying value over net assets
------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Equity method:
AlarmX.com(1) $ -- $ -- $ 670,936 307,614
AssetExchange 366,192 285,698 273,188 241,602
College 411.com 221,950 123,440 -- --
Swapit.com 473,922 421,481 3,092,755 316,053
Webmodal -- -- 5,251,755 3,723,644
------------ ------------ ------------ ---------
$ 1,062,064 $ 830,619 $ 9,288,634 4,588,913
============ ============ ============= =========
Cost method:
BrightStreet.com(2) $ 3,994,406 $ 3,994,406
Webmodal 1,009,087 --
YesAsia 1,000,000 1,300,000
------------ -------------
6,003,493 5,294,406
------------ -------------
$ 7,065,557 $ 14,583,040
============ =============
</TABLE>
(1) AlarmX is not consolidated because Net Value anticipates that its
majority ownership is temporary and will be reduced below 50%
within the next 12 months.
(2) Net Value owns this interest indirectly through Net Value, Inc., a
65% owned subsidiary at June 30, 2000.
F-13
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(5) Ownership Interests in and Advances to Affiliate Companies (continued)
The following summarized financial information for Affiliate Companies
accounted for under the equity method of accounting at December 31, 1999
and May 31, 2000 has been compiled from the financial statements of the
respective companies:
<TABLE>
<CAPTION>
May 31, 2000
Balance sheets: December 31, 1999 (unaudited)
--------------- ------------------ ----------------
<S> <C> <C>
Current assets $ 1,629,349 $ 5,895,631
Noncurrent assets 190,554 2,771,658
-------------- ---------------
Total assets $ 1,819,903 $ 8,667,290
============== ===============
Current liabilities $ 249,860 $ 1,758,625
Noncurrent liabilities -- 313,809
Stockholders' equity 1,570,043 6,594,856
-------------- ---------------
Total liabilities and stockholders' equity $ 1,819,903 $ 8,667,290
============== ===============
Five Months Ended
Year Ended May 31, 2000
Results of operations: December 31, 1999 (unaudited)
---------------------- ------------------ ----------------
Revenues $ 823 $ 14,336
Net loss $ (653,538) $ (4,618,958)
</TABLE>
(6) Furniture and Equipment
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
December 31, 2000
1999 (unaudited)
--------------- --------------
<S> <C> <C>
Computer equipment $ 56,491 $ 174,251
Furniture and office equipment 18,486 30,090
-------------- ---------------
74,977 204,341
Less accumulated depreciation (4,895) (20,734)
-------------- ---------------
$ 70,082 $ 183,607
============== ===============
</TABLE>
(7) Acquisitions
On June 21, 1999, Net Value entered into a merger agreement pursuant to
which it acquired Strategicus Partners Inc. (Strategicus) in exchange for
$1,555,000 in cash and 601,029 shares of common stock and 184,627 shares
of Series A convertible preferred stock collectively valued at
$3,638,084. In connection with this transaction, Net Value also entered
into consulting agreements with the three principal stockholders and an
employment agreement with a principal officer of Strategicus (Note 17).
F-14
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(7) Acquisitions (continued)
Strategicus was developing Internet operations through a wholly owned
subsidiary and was in the process of investing in two other Internet
companies which Net Value desired to acquire. Net Value accounted for
this acquisition as a purchase. The total purchase price was $5,364,423,
of which $1,100,000, $458,030, and $3,806,204 was allocated to ownership
interests in Affiliate Companies, various assets, and goodwill,
respectively. The goodwill represents the excess of the purchase price
over the fair value of the assets acquired less the liabilities assumed.
The results of the acquired company are included in Net Value's
operations as of the completion of the merger on July 30, 1999. Net Value
evaluates the carrying value of this goodwill based on achievement of
business plan objectives and milestones, the financial condition and
prospects of the acquired operations, and other relevant factors. If
impairment exists, the carrying amount of the goodwill will be reduced by
the estimated shortfall of discounted cash flows. Amortization of
goodwill totaled $578,906 for the year ended December 31, 1999 and is
included in General and administrative expense in the Consolidated
Statements of Operations.
The following unaudited pro forma financial information presents the
combined results of operations as if Net Value had owned Strategicus
since the beginning of its operations in 1999, after giving effect to the
amortization of goodwill. The unaudited pro forma financial information
is provided for informational purposes only and should not be construed
to be indicative of Net Value's consolidated results of operations had
the acquisitions been consummated on the dates assumed and do not project
Net Value's results of operations for any future period:
Year ended
December 31, 1999
-----------------
Revenue $ --
Pro forma net loss to common shareholders 30,671,504
=============
Pro forma net loss per common share $ 2.91
=============
On May 9, 2000, Net Value acquired an additional equity interest in
Webmodal for total consideration of $4,877,099 consisting of $4,000,000
cash and 113,174 shares of Net Value common stock valued at $877,099.
This acquisition increased Net Value's approximate voting ownership from
10% to 39% and necessitated a change from the cost method to the equity
method of accounting for the investment in Webmodal.
The following unaudited pro forma financial information presents the
combined results of operations as if Net Value had owned its 39%
ownership interest since the beginning of 2000, and includes the effect
of Net Value's proportionate share of Webmodal's net losses and
amortization of the investment cost over the equity in Webmodal's net
assets. The unaudited pro forma financial information is provided for
informational purposes only and should not be construed to be indicative
of Net Value's consolidated results of operations had the acquisitions
been consummated on the dates assumed and do not project Net Value's
results of operations for any future period:
Six months ended
June 30, 2000
----------------
Revenue $ --
Pro forma net loss to common shareholders 66,115,661
=============
Pro forma net loss per common share $ 4.00
=============
F-15
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(8) Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the financial statement carrying amounts of assets
and liabilities and the amounts used for income tax purposes. The tax
effects of temporary differences that give rise to significant portions
of Net Value's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1998 1999
------------ ----------
<S> <C> <C>
Temporary differences:
Accruals and reserves $ -- $ 355,000
Amortization of financing fees 16,000 --
Deferred compensation and warrants -- 2,194,000
Temporary differences discontinued operations:
Vesting of nonqualified stock options 82,000 --
Accrued salaries and compensation 37,000 --
Amortization of discounts 132,000 --
Common stock and warrants issued 20,000 --
Depreciation (29,000) --
------------ ------------
Total temporary differences 258,000 2,549,000
Carryforwards and credits:
Federal and state deferred tax benefits arising from net
operating loss carryforwards 66,000 6,004,000
Federal and state deferred tax benefits arising from net
operating loss carryforwards of discontinued operations 6,692,000 --
Research and development credits from discontinued
operations 278,000 --
------------ ------------
7,294,000 8,553,000
Less valuation allowance (7,294,000) (8,553,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
F-16
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
(8) Income Taxes (continued)
The following table presents the principal reasons for the differences
between the amount computed by applying the U.S. federal statutory tax
rate of 35% to the net loss from continuing operations and the actual
provision for income taxes for the years ended December 31, 1997, 1998,
and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $ -- $ (571,000) $ (8,387,044)
State and local income tax expense (benefit) -- (82,000) 2,375
Nondeductible goodwill amortization -- -- 202,617
Other non-deductible expense -- 560,000 83,715
Loss from operations not benefited -- 93,000 8,100,712
----------- ------------ ------------
Total tax expense $ -- $ -- $ 2,375
=========== ============ ============
</TABLE>
Prior to September 18, 1996, Net Value was a limited liability company,
and accordingly, losses were passed through to its members. For the year
ended December 31, 1999, Net Value had losses from continuing operations
which resulted in net operating loss carryforwards for federal and state
income tax purposes amounting to approximately $15,976,000 and
$7,940,000, respectively. The federal net operating loss carryforwards
expire beginning 2018 through 2019. The state net operating loss
carryforwards expire beginning in 2004. However, these carryforwards may
be significantly limited due to changes in the ownership of Net Value as
a result of future equity offerings.
As of December 31, 1998, NV, Inc. had net operating loss carryforwards of
$16,730,000, of which a portion was utilized during 1999. As of December
31, 1998, Net Value, Inc. had generated research and development credits
of approximately $328,000. As of December 31, 1999, due to Federal tax
law, NV, Inc. no longer has net operating loss carryforwards and credits
available to utilize as a result of the company selling substantially all
of its assets in 1999.
Recognition of the benefits of the net deferred tax assets and
liabilities will require that Net Value generate future taxable income.
It is more likely than not that Net Value will not generate sufficient
taxable income during the 15-year carryforward period. Therefore, Net
Value has established valuation allowances for deferred tax assets (net
of liabilities) of $8,553,000 as of December 31, 1999. The net change in
the total valuation allowance for the year ended December 31, 1997, 1998
and 1999 was an increase of $3,511,000, $3,016,000, and $1,259,000,
respectively.
F-17
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(9) Borrowing Arrangements
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------------- 2000
1998 1999 (unaudited)
---------------- --------------- -----------------
<S> <C> <C> <C>
8% Convertible debentures $ 1,402,500 3,250,500 $ --
12% Convertible promissory notes -- 1,021,929 --
Convertible promissory note, bearing interest at 10% -- 900,000 --
Installment loan payable, bearing interest at 7.76% -- 79,034 --
Promissory note, bearing interest at 10% 900,000 -- --
Loan payable to related party, bearing interest at 0% 200,000 -- --
Loan payable, bearing interest at 10% 40,000 -- --
Other -- 12,000 --
------------- ----------- -----------
2,542,500 5,263,463 --
Less amount due within one year 2,542,500 5,196,161 --
------------- ----------- -----------
Noncurrent portion $ -- 67,302 $ --
============= =========== ============
</TABLE>
(a) 8% Convertible Debentures
Net Value issued 8% Convertible Debentures (Debentures) in the
aggregate amount of $7,857,000 in a private placement offering. These
Debentures were issued in two separate tranches with the first tranche
totaling $1,642,500 and the second tranche totaling $6,215,000. The
first and second tranches of Debentures together with accrued interest
thereon were convertible into Net Value's common stock at any time by
the holders at a conversion price of $2.00 and $2.50 per share,
respectively. The Debentures matured at the earlier of (i) the date on
which the holder elects to convert into shares of common stock; (ii)
the date upon which Net Value elects to cause a mandatory conversion;
or (iii) two years from the date of the issuance of the Debentures.
Net Value recorded $1,400,000 and $6,457,500 as additional paid in
capital in 1998 and 1999, respectively, for the discount deemed related
to imputed interest for the preferential conversion features on the
Debentures. In accordance with the Emerging Issues Task Force Issue No.
98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" (EITF 98-5),
these discounts were limited to the principal amount of the Debentures
and were charged immediately to interest expense as the holders had the
right to convert upon issuance. Net Value issued 2,076,589 shares of
common stock in 1999 in connection with conversion requests from
holders of outstanding Debenture principal and accrued interest. Net
Value repaid in full the 8% Convertible Debentures plus accrued
interest in 2000 through the payment of $15,869 and the issuance of
1,391,853 shares of common stock pursuant to the original conversion
terms of the Debentures.
F-18
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(9) Borrowing Arrangements (continued)
(b) 12% Convertible Promissory Notes
On January 7, 1999, Net Value issued $4,270,125 Convertible Promissory
Notes (Convertible Notes) with interest payable at 12% per annum in
exchange for the outstanding promissory notes plus accrued interest of
NV Inc. The noteholders are entitled at any time to convert the
outstanding principal plus accrued interest thereon into Net Value's
common stock at a conversion rate of $2.00 per share. The Convertible
Notes mature at the earlier of (i) the date on which either the holder
or Net Value exercise their respective conversion rights under the
Convertible Notes; or (ii) the one-year anniversary of the closing of
the pending merger between Net Value and NV Inc. (see Note 1).
Additionally, the terms of conversion obligate Net Value to issue a
warrant to purchase one-half of one share of Net Value's common stock
for each share purchased through conversion. These warrants are
exercisable over a three-year period from the date of issuance at a $6
per share exercise price.
The Company recorded $4,270,125 as additional paid in capital in 1999
for the discount deemed related to imputed interest for the
preferential conversion features on the Convertible Notes. In
accordance with EITF 98-5, these discounts were limited to the
principal amount of the Convertible Notes and were charged immediately
to interest expense as the holders had the right to convert upon
issuance. Net Value issued 1,732,066 shares of common stock in 1999 in
connection with conversion requests from holders of outstanding
Convertible Notes principal and accrued interest. The Company repaid in
full the 12% Convertible Notes in 2000 through the payment of $28,281
and the issuance of 563,094 shares of common stock pursuant to the
original terms of the notes. The terms of the conversion obligated Net
Value to issue warrants to purchase one-half of one share of Net Value
common stock for each share issued upon conversion. Accordingly, Net
Value issued 866,033 and 281,547 warrants to purchase common stock in
1999 and 2000, respectively, in connection with the conversions.
(c) Promissory Note
In September 1998, Net Value issued a $900,000 promissory note with
interest payable at 10% per annum. On the scheduled maturity date of
March 1, 1999, Net Value issued the Convertible Note described below as
payment in full on the $900,000 promissory note.
(d) Convertible Promissory Note
On March 1, 1999, in exchange for the outstanding promissory note, Net
Value issued a $900,000 convertible promissory note (Convertible Note)
with interest payable quarterly in cash or in shares of Net Value's
common stock at the election of the lender. The Convertible Note, as
amended, is convertible at any time by the noteholder into Net Value's
common stock at a conversion rate of $2.25 per share. Net Value also
issued to the lender immediately exercisable warrants to purchase
180,000 shares of Net Value's common stock in connection with the
Convertible Note issuance. The warrants have exercise prices ranging
from $2.50 to $5.00 per share and expire on February 28, 2002.
F-19
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(9) Borrowing Arrangements (continued)
(d) Convertible Promissory Note (continued)
The Company recorded $446,000 as additional paid in capital for the
discount deemed related to imputed interest for the preferential
conversion feature on the Convertible Note and recorded $454,000 as
additional paid in capital for the discount deemed related to the
detachable warrants as determined by an independent valuation. In
accordance with EITF 98-5, these discounts were limited to the
principal amount of the Convertible Note and were charged immediately
to interest expense as the holder had the right to convert upon
issuance and the warrants were immediately exercisable.
Net Value repaid in full the 10% Convertible Promissory Note plus
accrued interest in 2000 through the issuance of 400,000 shares of
common stock pursuant to the original conversion terms of the note.
(10) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------------- 2000
1998 1999 (unaudited)
---------------- --------------- -----------------
<S> <C> <C> <C>
Accounting fees $ -- $ 272,806 92,987
Legal fees 20,000 200,000 55,534
Other accounts payable 87,022 14,225 90,551
Accrued interest 41,399 301,077 --
Accrued salaries and benefits -- 14,094 42,504
--------- ----------- ---------
$ 148,421 $ 802,202 281,576
========= =========== =========
</TABLE>
(11) Stockholders' Equity
The Company has two classes of authorized stock: common stock and preferred
stock.
(a) Common Stock
Net Value is authorized to issue 50,000,000 shares of common stock, par
value $.001 per share. The holders of common stock are entitled to one
vote per share and are entitled to dividends as declared. Dividends may
be restricted by the inability to liquidate ownership interests in
Affiliate Companies to fund cash dividends and are subject to the
preferential rights of the holders of Net Value's preferred stock. We
have never declared dividends nor do we intend to for the foreseeable
future. Certain shareholders have registration rights and piggy-back
rights that require Net Value to register the underlying shares with
the Securities and Exchange Commission.
F-20
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(11) Stockholders' Equity (continued)
(a) Common Stock (continued)
Common stock is reserved for issuances as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
<S> <C> <C>
Conversion of convertible debentures and notes 2,370,960 --
Conversion of preferred stock, series B 1,180,180 --
Conversion of preferred stock, series C -- 4,166,667
Preferred stock dividend, Series C, payable in kind -- 107,986
Completion of in-process merger with NV Inc. (see Note 1) 1,659,740 1,754,140
Exercise of outstanding warrants 1,448,088 2,982,058
Exercise of outstanding options 4,277,248 5,036,000
----------- -----------
10,936,216 14,046,851
=========== ===========
</TABLE>
(b) Preferred Stock
Net Value is authorized to issue 10,000,000 shares of undesignated
preferred stock, par value $.001 per share. Net Value may establish one
or more classes or series of preferred stock having such number of
shares and relative voting rights, designation, dividend rates,
liquidation rights and preferences as may be fixed by them without
further shareholder approval. The holders of preferred stock may be
entitled to preferences over common stockholders with respect to
dividends, liquidation, or dissolution in such amounts as established
by Net Value's board of directors.
Preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
June 30, 2000
December 31, 1998 December 31, 1999 (unaudited)
--------------------------------- -------------------------------- ------------------------------
Shares Shares Shares
outstanding Amount (1) outstanding Amount (1) outstanding Amount (2)
--------------- --------------- ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Series A 2,519,852 $ 2,520 -- $ -- -- $ --
Series B -- -- 4,824 4,448,872 -- --
Series C -- -- -- -- 4,166,667 40,883,087
------------ ---------- --------- ------------ ---------- ------------
2,519,852 $ 2,520 4,824 $ 4,448,872 4,166,667 40,883,087
============ ========== ========= ============ ========== ============
</TABLE>
(1) Amount is net of issuance costs.
(2) Amount is net of issuance costs and proceeds allocated to Series C Warrants.
F-21
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(11) Stockholders' Equity (continued)
(b) Preferred Stock (continued)
Series A Preferred Stock
The Company's Series A Preferred Stock (Series A Shares) was
convertible up to one share of Net Value's common stock upon Net
Value's achievement of specified performance objectives. In 1999,
pursuant to a private offering, Net Value issued 1,622,687 shares of
common stock in exchange for all issued and outstanding Series A Shares
based on a negotiated exchange ratio of .6 shares of common stock for
every one Series A Share. Net Value recorded a preferred stock dividend
of $5,955,261 representing the excess of the fair value of the common
stock issued over the fair value of the Series A Shares redeemed.
Accordingly, at December 31, 1999 there were no longer any issued and
outstanding Series A Shares.
Series B Preferred Stock
In September 1999, Net Value issued 4,824 shares of Series B Preferred
Stock (Series B Shares) for aggregate proceeds of $4,824,000. These
Series B Shares were subsequently converted into 1,180,180 shares of
common stock in February 2000 pursuant to the original terms of the
issuance. The Series B Shares had a liquidation preference of $1,000,
bore a noncumulative dividend rate of 5%, and were redeemable at $1,250
per share in the event Net Value failed to achieve certain performance
objectives.
In connection with the issuance of the Series B Shares, Net Value
issued warrants to purchase 295,040 shares of common stock (Series B
Warrants). These warrants were exercisable at prices equivalent to a
range between 110% to 140% of the conversion price of the Series B
Shares. Net Value allocated $650,000 to the cost of the Series B
Warrants based on an independent valuation, which was recorded as a
preferred stock dividend and offsetting increase to additional paid in
capital. Through June 30, 2000, the warrant holders exercised 210,944
Series B Warrants with cash proceeds to the Company of $1,077,792. The
remaining 132,260 Series B Warrants expired on August 1, 2000.
Series C Preferred Stock
In March 2000, the Company sold 4,166,667 shares of its Redeemable
Convertible Series C Preferred Stock (Series C Shares) at $12 per share
for net proceeds of $48,274,760 after payment of issuing costs of
$1,305,240 and 35,000 Series C Shares valued at $420,000. The Series C
Shares are convertible into one share of the Company's common stock at
any time at the election of the shareholder, bear a cumulative dividend
of 8% per annum payable in kind on a quarterly basis and have a
liquidation preference of $12 per share. The dividend rate shall
increase by 1% in October 2000 if the Company's listing application for
a nationally recognized securities exchange has not been approved and
by an additional 1% on the 90th day of each 90-day period thereafter on
which a listing application for a nationally recognized securities
exchange has not been approved.
Net Value issued warrants to purchase an aggregate of 416,667 shares of
common stock (Series C Warrants) in connection with the issuance of the
Series C Shares. The Series C Warrants are exercisable until March 2,
2003 at an exercise price of $26.58 per share of common stock. Net
Value allocated $7,391,673 of the net proceeds received from this
offering to the cost of the Series C Warrants as determined by a
Black-Scholes option-pricing model.
F-22
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(11) Stockholders' Equity (continued)
(b) Preferred Stock (continued)
Preferred Stock Dividends
The components of the preferred stock dividends are as follows:
<TABLE>
<CAPTION>
For the year For the six
ended months ended
December 31, June 30, 2000
1999 (unaudited)
------------------- ---------------
<S> <C> <C>
Series B Preferred Stock dividend $ -- $ 108,464
Series C Preferred Stock dividend -- 1,295,834
Non-cash charge: beneficial conversion feature on Series
A Shares 5,955,261 --
Non-cash charge: beneficial conversion feature on Series
B Shares 650,000 --
Non-cash charge: beneficial conversion feature on Series
C Shares -- 42,608,327
-------------- -------------
$ 6,605,261 $ 44,012,625
============== =============
</TABLE>
Net Value paid the Series B Preferred Stock dividend in cash as the
holders converted their Series B Shares into shares of Net Value's
common stock. The Series C Preferred Stock dividend is payable in
additional Series C Shares on a quarterly basis.
At the time of issuance of the Series C Shares, the then fair market
value of Net Value's common stock was higher than the Series C Shares
selling price of $12 per share. As the Series C Shares are convertible
into shares of Net Value's common stock, this differential in price
constitutes a beneficial conversion feature as defined in the Emerging
Issues Task Force Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" (EITF 98-5). Accordingly, Net Value
recorded $42,608,327 as additional paid in capital for the discount
deemed related to a preferential dividend for the beneficial conversion
feature. In accordance with EITF 98-5, this discount was limited to the
proceeds allocated to the Series C Shares and was recognized
immediately as a preferred stock dividend as the Series C Shares are
immediately convertible.
During the year ended December 31, 1999, Net Value recorded beneficial
conversion features of $5,955,261, representing the excess of the fair
value of the common stock issued over the fair value of the Series A
Shares redeemed and $650,000, representing the fair value of the Series
B Warrants issued.
F-23
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(12) Stock Options and Warrants
(a) Stock Options
Under the stock option plan adopted by Net Value's Board of Directors,
options to purchase shares of Net Value common stock may be granted to
officers, directors, employees, consultants and independent
contractors. Options granted under this plan will expire no more than
ten years following the date of vesting, will have limited
transferability, and will be subject to various vesting provisions. The
Board of Directors or a committee thereof will determine the exercise
price of options granted under this plan. The Board has the ability to
amend, suspend or terminate this plan at any time, subject to
restrictions imposed by applicable law.
As part of the in-process merger with NV Inc. discussed in note 1, Net
Value plans on converting the outstanding options under the existing NV
Inc. stock option plan into options to purchase Net Value common stock
using a conversion ratio of .4 Net Value options for every 1 NV Inc
option. On an as converted basis, NV Inc. had 558,500 and 490,900
options outstanding at December 31, 1999 and June 30, 2000,
respectively, with exercise prices ranging from $1.58 to $17.50.
Metacat.com, Net Value's wholly owned consolidated subsidiary,
maintains a separate stock option plan for which 27,025 options to
purchase metacat.com Series A preferred stock were outstanding at
December 31, 1999. Affiliate Companies maintain their own stock plans.
The following summarizes Net Value's stock option activity and related
information during the year ended December 31, 1999 and the period
ended June 30, 2000:
<TABLE>
<CAPTION>
Weighted
average
Range of exercise
Shares exercise prices price
----------------- ---------------- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1998 -- -- --
Granted 8,650,876 $ 1.00 - 10.13 $ 1.14
Cancelled (4,373,628) $ 1.00 $ 1.00
-----------
Outstanding at December 31, 1999 4,277,248 $ 1.00 - 10.13 $ 1.28
Granted (unaudited) 3,096,000 $ 4.00 - 19.64 $ 7.27
Cancelled (unaudited) (2,337,248) $ 1.00 - 9.88 $ 1.92
-----------
Outstanding at June 30, 2000 (unaudited) 5,036,000 $ 1.00 - 19.64 $ 4.67
===========
Options contractually exercisable at December
31, 1999 886,384
Options contractually exercisable at June 30,
2000 (unaudited) 1,047,236
</TABLE>
F-24
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(12) Stock Options and Warrants (continued)
(a) Stock Options (continued)
Exercise prices for stock options outstanding as of December 31, 1999
and June 30, 2000 and the weighted average remaining contractual life
are as follows:
<TABLE>
<CAPTION>
Weighted
average
remaining Number Weighted Average
Exercise prices Shares Outstanding contractual life exercisable Exercise Price
----------------- ------------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
December 31, 1999
$1.00 2,782,248 9.41 years 886,384 $ 1.00
$3.75 - $10.13 1,495,000 9.74 years -- $ 5.12
----------- ----------
$1.00 - $10.13 4,277,248 9.53 years 886,384
=========== ==========
June 30, 2000 (unaudited)
$1.00 2,820,000 8.11 years 951,815 $ 1.00
$1.01 - $4.00 511,000 9.56 years 5,000 $ 3.90
$4.01 - $8.00 835,000 9.67 years 55,280 $ 7.12
$8.01 - 10.00 90,000 8.73 years 7,362 $ 8.59
$10.01 - $12.00 180,000 9.56 years 5,557 $ 10.15
$12.01 - $17.00 395,000 9.63 years -- $ 15.53
$17.01 - $19.64 205,000 9.59 years 22,222 $ 19.63
----------- ----------
$1.00 - $19.64 5,036,000 8.82 years 1,047,236
=========== ==========
</TABLE>
As discussed in Note 2, Net Value has elected to follow APB 25 in
accounting for its employee and director stock-based awards. Under APB
25, Net Value does not recognize compensation expense with respect to
such awards if the exercise price equals or exceeds the fair value of
the underlying security on the date of grant and other terms are fixed.
The fair values of these awards for the purpose of the alternative fair
value disclosures required by FAS 123 were estimated as of the date of
the grant using a Black Scholes option-pricing model. For purposes of
Net Value's pro forma disclosures, the fair value of options granted
during the year ended December 31, 1999, was determined using a Black
Scholes option pricing model with a volatility of 87%, a risk-free
interest rate of approximately 6.3%, an expected life of 5 years, and a
dividend yield of zero.
F-25
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(12) Stock Options and Warrants (continued)
(a) Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Net
Value's pro forma information follows:
Year ended: December 31, 1999
-----------------------
Net loss to common shareholders:
As reported $ 30,436,357
Pro forma $ 32,149,155
Basic and diluted net loss per common share:
As reported $ 2.90
Pro forma $ 3.05
Future pro forma results may be materially different from actual
amounts reported. The weighted average fair value of employee
options granted during 1999 was $5.17. Net Value issued no options
in 1998 or 1997.
(b) Deferred Stock Based Compensation
Net Value records deferred compensation when it makes restricted stock
awards or compensatory stock option grants to employees, members of the
Board of Directors, consultants or advisory board members. In the case
of stock option grants to employees and Board of Directors, the amount
of deferred compensation initially recorded is the difference between
the exercise price and fair market value of the common stock on the
date of grant. In the case of options granted to consultants or
advisory board members, the amount of deferred compensation recorded is
the fair value of the stock options on the grant date as determined
using a Black-Scholes option pricing model. Net Value records deferred
compensation as a reduction to shareholders' equity and an offsetting
increase to additional paid-in capital. Net Value then amortizes
deferred compensation into stock based compensation over the
performance period, which typically coincides with the vesting period
of the stock based award of 3 to 4 years.
F-26
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(12) Stock Options and Warrants (continued)
(b) Deferred Stock Based Compensation (continued)
The components of deferred compensation from continuing operations are
as follows:
<TABLE>
<CAPTION>
Consultants
and
Advisory
Employees Board Total
-------------- ----------------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ -- $ -- $ --
Deferred compensation recorded 10,916,048 21,433,095 32,349,143
Amortization to stock-based compensation (3,778,448) (1,252,923) (5,031,371)
------------- -------------- --------------
Balance at December 31, 1999 7,137,600 20,180,172 27,317,772
Additions to deferred compensation (unaudited) 20,037,675 4,151,735 24,189,410
Cancellations and fair value adjustments (unaudited) (3,367,619) (15,641,628) (19,009,247)
Amortization to stock-based compensation (unaudited) (5,169,652) (7,487,722) (12,657,374)
------------- -------------- --------------
Balance at June 30, 2000 (unaudited) $ 18,638,004 1,202,557 $ 19,840,561
============== ============== ==============
</TABLE>
(c) Warrants
The Company had outstanding the following warrants to purchase its
securities:
<TABLE>
<CAPTION>
June 30, 2000
December 31, 1999 (unaudited)
-------------------------------------- -------------------------------------
Description of Number of Exercise price Number of Exercise price
series warrants issued per share warrants issued per share
-------------------- ---------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Common Stock 1,448,088 $2.50 - $6.00 2,982,058 $1.00 - $26.58
================ =================== ================ ==================
</TABLE>
As described further in Notes 9 and 11, these warrants were issued in
connection with Net Value's borrowing arrangements and Series B and
Series C Preferred Stock issuances. Net Value recorded interest expense
on warrants issued in connection with borrowing arrangements equal to
the warrants then fair value as determined by independent valuations.
Net Value recorded a preferred stock dividend on warrants issued in
connection with the Series B Preferred Stock issuance equal to the
warrants then fair value as determined by independent valuations. Net
Value allocated a portion of the net proceeds received from the Series
C Preferred Stock issuance to the cost of the Series C Warrants as
determined using a Black-Scholes option-pricing model.
As part of the in-process merger with NV Inc. discussed in Note 1, Net
Value plans on converting the outstanding NV Inc. warrants into
warrants to purchase Net Value common stock using a conversion ratio of
.4 Net Value warrants for every 1 NV Inc. warrant. On an as converted
basis, NV Inc. had 675,089 warrants outstanding at June 30, 2000 with
exercise prices ranging from $6.00 to $10.00.
F-27
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(13) Other Loss
Other loss consists of the following:
<TABLE>
<CAPTION>
June 30,
December 31, 2000
1999 (Unaudited)
------------------ ------------------
<S> <C> <C>
Gain on sale of College411 holdings $ -- $ (195,088)
Affiliate Company impairment charge -- 1,152,189
---------------- --------------
$ -- $ 957,101
================ ==============
</TABLE>
In May 2000, College411 was merged into a wholly owned subsidiary of
Student Advantage, Inc. whereby the College411 stockholders received .0144
shares of Student Advantage common stock for every share of College411
common stock which they owned on the date of the merger. As a result of
this merger, Net Value received 55,621 shares of Student Advantage's common
stock. The fair market value of Student Advantage's common stock received,
based on publicly quoted market prices, was $245,077, which exceeded the
carrying value of our investment in College411 by $195,088. Accordingly,
we recorded a $195,088 gain as a result of this transaction.
In June 2000 the Company recorded an impairment charge of $1,152,189 for
the other than temporary decline in the carrying value of one of its
Affiliate Companies accounted for under the equity method. The Company
acquired its ownership interest in the Affiliate Company in 2000 for
$1,000,000 and advanced loans of $650,000. From the date of the Company's
initial acquisition of ownership interest through June 30, 2000, the
Company's funding to this Affiliate Company represented all of the outside
capital the company had available to fund its operations. Once it was
determined that this company was unable to obtain further rounds of
financing necessary to sustain operations, Net Value recorded an impairment
charge to reduce the remaining carrying value of this company to zero.
(14) Comprehensive Income (Loss)
Excluding net loss, the Company's source of comprehensive income is from
the unrealized gain on its equity holdings of Student Advantage, Inc.,
which is classified as available-for-sale. The Company has not provided for
a deferred tax liability relating to this unrealized gain as the Company
expects to have sufficient net operating losses to offset any potential tax
liability resulting from the sale of its equity holdings. The following
summarizes the components of comprehensive income:
<TABLE>
<CAPTION>
June 30,
December 31, 2000
1999 (Unaudited)
-------------------- ---------------------
<S> <C> <C>
Net loss $ (23,831,096) $ (21,130,166)
Other comprehensive income:
Unrealized gain -- 161,651
--------------- --------------
Comprehensive income (loss) $ (23,831,096) $ (20,968,515)
=============== ==============
</TABLE>
F-28
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(15) Commitments and Contingencies
Net Value leases office space for its principal executive offices in San
Francisco, California at a rate of $17,383 per month. In addition, the
Company also leases office space in Philadelphia, Pennsylvania, New York,
New York, and Boston, Massachusetts at a combined monthly rental of
approximately $17,000.
In August 1999, coolsavings.com filed an action against NV Inc. alleging
that NV Inc. through its Internet website and products had committed
various acts of patent infringement. NV Inc. filed its answer to the patent
infringement action in November 1999 seeking a declaratory judgment of
invalidity and non-infringement of the patent. Brightstreet.com has agreed
to assume all liabilities related to this lawsuit, including all legal
expenses incurred in defending against these claims, as part of their
purchase of substantially all of the assets of NV Inc. Accordingly, Net
Value does not believe that the resolution of this action will have a
material adverse effect on its financial position.
Net Value was involved in an action brought by Douglas Spink, the Company's
former Chief Technology Officer, alleging breach of an employment contract
and seeking damages and performance under the employment agreement. In
August 2000, Net Value entered into a settlement agreement with Douglas
Spink. Pursuant to the terms of the agreement, all matters between the
Company and Mr. Spink were settled, on terms that are mutually agreeable
and that resolve all open issues between the parties, and under which any
allegations of wrongdoing have been withdrawn. Pursuant to the settlement
agreement, the Company agreed to settle all claims on the following basis:
1) Mr. Spink has agreed to allow the Company to re-acquire for cancellation
1,212,876 shares of his stock which leaves him with 835,000 shares of the
Company's stock in place of 2,047,856 shares originally issued to him; 2)
Mr. Spink's salary will be paid for the last three months of 1999; 3) Mr.
Spink has agreed to lock up a portion of his shares for a one-year period;
4) The Company has agreed to lend Mr. Spink $250,000, repayable either
three years from issue date or out of half the proceeds from the sale of
any shares of the Company's stock from the locked-up shares; 5) Mr. Spink
has agreed to add to the note for the funds advanced the sum of $60,000 to
cover certain advances previously made; and 6) Mr. Spink has agreed to hold
the Company harmless and defend the Company in a lawsuit filed by Greg
Biggs, also noted in the Company's various SEC filings.
On or about August 22, 2000, Austost Anstalt Schaan, Balmore Funds, S.A.
and Amro International, S.A., purchasers of the company's Series A
convertible notes, filed a suit against Net Value in the United States
District Court for the District of Delaware. The plaintiffs allege that,
contrary to the obligation in the agreement pursuant to which the
plaintiffs purchased the Series A notes that Net Value would "use
reasonable commercial efforts to register" the stock underlying the notes
"at some future date," Net Value was obligated, and failed, to register
stock in its next filed registration statement. The plaintiffs assert
claims for breaches of contract and the duty of good faith and fair
dealing, fraud, violation of federal securities laws, estoppel, and
reformaton and seek damages in excess of $20 million, plus attorneys' fees
and costs. Based upon Net Value's preliminary review of the facts and
without conducting discovery, it does not believe that the complaint
presents a significant claim against Net Value. Net Value has not yet
responded to the complaint, but intends to defend it vigorously.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
F-29
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(16) Fair Value of Financial Instruments
Carrying values for cash and cash equivalents, loans receivable, accounts
payable, accrued expenses, and notes and loans payable were estimated to
approximate fair values for these financial instruments as they are short
term in nature and are generally receivable or payable on demand. The fair
value of Net Value's convertible promissory notes and convertible
debentures were estimated assuming full conversion into common shares and
using the closing the price of Net Value common stock on December 31, 1999.
The resulting fair value computes to $26,080,560, which exceeds the
carrying value of the convertible promissory notes and debentures of
$5,172,429.
(17) Related Party Transactions
Net Value provides strategic and operational support to its Affiliate
Companies in the normal course of its business. These services are
generally provided by Net Value's employees, members of its Advisory Board
and Board of Directors and outside consultants. Net Value pays the costs
related to employees. Members of Net Value's Advisory Board and Board of
Directors are generally compensated with stock options or warrants to
purchase Net Value common shares which are accounted for in accordance with
FAS 123 and EITF 96-18. The costs of outside consultants are generally paid
directly by the Affiliate Company.
In March 2000, an officer of Net Value contributed his shares of an
Affiliate Company to Net Value. The Company recorded the shares as
contributed capital equal to their estimated fair value of $853,319.
In June 1999, Net Value entered into a consulting agreement with and loaned
$267,000 to an officer of a company that Net Value acquired (see Note 7).
The loan is forgiven in 33% increments on the first, second and third year
anniversary dates of the consulting agreement. For accounting purposes, Net
Value amortizes the loan to consulting expense evenly over the three-year
loan period and recorded $51,917 during the year ended December 31, 1999 in
connection with such loan amortization. The unamortized loan balance at
December 31, 1999 was $215,083.
In October 1999, Net Value entered into a consulting agreement with an
Advisory Board member. Under the terms of the consulting agreement, an
affiliated company of the Advisory Board member was granted and exercised
the right to purchase 676,374 shares of Net Value common stock at a
discount to its then fair market value. Net Value recorded consulting
expense of $2,289,324 equal to the discount of the exercise price to the
closing stock price on the date of grant.
In October 1999, a former officer and director of Net Value agreed to sell
his shares of an affiliate company to Net Value at a price which was less
than the then deemed fair value of the stock. Accordingly, Net Value
recorded contributed capital of $659,087 for the difference.
In December 1998, Net Value made a non-interest bearing, unsecured loan of
$200,000 to a stockholder which was subsequently repaid during March and
April of 1999.
F-30
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
(18) Discontinued Operations
In November 1999, Net Value made the strategic decision to exit the online
software development operations of NV Inc. and on December 3, 1999
completed a sale of substantially all of the assets of the discontinued
operations to Promotions Acquisitions, Inc. (Promotions), a corporation
formed by the former management team of NV Inc. in connection with a $17
million investment in Promotions by outside investors. Net Value received
$2 million in cash and 2,958,819 shares of Promotions' common stock in
exchange for substantially all of NV Inc.'s assets and assumption by
Promotions of approximately $1.6 million of liabilities. The value ascribed
to the Promotions common stock was based on the value of the shares issued
to outside investors. Furthermore, the majority of stock options held by
former NV Inc. employees were cancelled resulting in a reduction of
$1,487,964 to deferred stock-based compensation. Net Value recognized a
gain on the sale of the assets of the discontinued operations of $6,502,663
representing the excess of the fair value of the Promotions stock and cash
received over the carrying value of the assets sold and liabilities
assumed. The loss from operations during between the decision to exit the
online software development operations and the sale of these operations was
not material. At December 31, 1999, the remaining liabilities of the
discontinued software development operations that were not assumed by
Promotions consist of payables to several vendors and professional service
providers used throughout 1999 and are included in net liabilities of
discontinued operations on the consolidated balance sheet.
F-31
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Net Value, Inc.
We have audited the accompanying balance sheets of Net Value, Inc. as of
December 31, 1998 and 1999, and the related statements of operations, changes in
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, Inc. as of December
31, 1998 and 1999, and the results of its operations, changes in stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
July 7, 2000
F-32
<PAGE>
NET VALUE, INC.
Balance Sheets
<TABLE>
<CAPTION>
As of December 31, June 30,
Assets 1998 1999 2000
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 222,165 $ -- $ --
Note receivable - related party -- 1,483,136 1,257,735
Loans receivable 14,010 -- --
Interest receivable 1,623 6,095 47,179
Prepaid expenses and other current assets 97,324 -- --
------------ ------------ ------------
Total current assets 335,122 1,489,231 1,304,914
Investment in Brightstreet.com -- 3,994,406 3,994,406
Furniture and equipment, net 517,360 -- --
Deferred registration costs 95,282 -- --
Deposits 103,107 -- --
------------ ------------ ------------
$1,050,871 $ 5,483,637 $5,299,320
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $1,291,534 $ 346,328 $ 297,562
Accrued expenses 1,051,087 1,945,583 2,298,209
Notes payable - related parties 3,401,383 11,430,567 10,910,357
Convertible promissory notes 4,275,000 -- --
Long-term debt due within one year 62,293 -- --
------------ ------------ ------------
Total current liabilities 10,081,297 13,722,478 13,506,128
------------ ------------ ------------
Noncurrent liabilities:
Long-term debt, less amounts due within one year 79,034 -- --
------------ ------------ ------------
Total noncurrent liabilities 79,034 -- --
------------ ------------ ------------
Stockholders' deficit:
Preferred stock, Series A, $.001 par value (178,700
shares issued and outstanding) 179 179 179
Common stock, $.001 par value (49,000,000 shares authorized;
12,228,756 shares issued and outstanding at 1998 and 1999;
12,469,756 shares issued and 12,464,756 outstanding at 2000) 12,229 12,229 12,470
Additional paid-in capital 37,074,458 35,768,294 36,869,492
Deferred compensation (3,283,532) (24,400) --
Accumulated deficit (42,912,794) (43,995,143) (45,071,449)
Treasury stock, at cost (5,000 shares) -- -- (17,500)
------------ ------------ ------------
Total stockholders' deficit (9,109,460) (8,238,841) (8,206,808)
------------ ------------ ------------
$ 1,050,871 $ 5,483,637 $ 5,299,320
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
NET VALUE, INC.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended December 31 Six months ended June 30
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue $ -- $ 1,330,367 $ 20,000 $ -- $ --
Operating expenses:
Compensation and related expenses 3,589,616 4,073,060 3,392,870 1,536,400 --
Professional fees 405,193 1,016,199 674,413 332,321 --
Advertising 832,340 287,222 228,915 118,435 --
Consulting 984,590 934,162 242,200 142,230 --
Research and development expenses 2,588,748 1,694,498 638,001 260,124 --
Depreciation and amortization 179,304 228,033 211,720 115,767 --
Selling, general and administrative 785,107 882,117 1,137,148 506,229 --
----------- ----------- ----------- ----------- -----------
Total operating expenses 9,364,898 9,115,291 6,525,267 3,011,506 --
----------- ----------- ----------- ----------- -----------
Loss from operations 9,364,898 7,784,924 6,505,267 3,011,506
Interest income (5,627) (10,493) (8,406) (1,524) (41,084)
Interest expense 1,805,470 3,117,157 1,088,151 495,470 562,714
Gain on sale of assets -- -- (6,502,663) -- --
Financing fees 70,496 275,423 -- -- --
----------- ----------- ----------- ----------- -----------
Net loss 11,235,237 11,167,011 1,082,349 3,505,452 521,630
Preferred stock dividends 1,181,250 15,250,500 -- -- --
----------- ----------- ----------- ----------- -----------
Net loss before extraordinary loss 12,416,487 26,417,511 1,082,349 3,505,452 521,630
Extraordinary loss on extinguishment
of debt -- -- -- -- 554,676
----------- ----------- ----------- ----------- -----------
Net loss to common shareholders $12,416,487 $26,417,511 $ 1,082,349 $ 3,505,452 $ 1,076,306
=========== =========== =========== =========== ===========
Basic and diluted net loss from
operations per common share before
extraordinary item $ 1.78 $ 2.32 $ 0.09 $ 0.29 $ 0.04
Basic and diluted extraordinary loss
per common share $ -- $ -- $ -- $ -- $ 0.05
----------- ----------- ----------- ----------- -----------
Basic and diluted net loss per common
share $ 1.78 $ 2.32 $ 0.09 $ 0.29 $ 0.09
=========== =========== =========== =========== ===========
Basic and diluted weighted average
common shares outstanding 6,962,826 11,368,535 12,228,756 12,228,756 12,148,344
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
NET VALUE, INC.
Statements of Changes in Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred stock
----------------------------------------
Net Value, Inc. Net Value Holdings, Inc. Additional
--------------- ------------------------ paid-in Deferred Treasury Accumulated
Shares Amount Shares Amount capital Compensation Stock Deficit Total
------- ----- --------- ------- ---------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December -- $ -- 6,270,430 $6,270 $3,767,434 $ -- $ -- $ (4,078,796) $ (305,092)
Issuance of preferred
stock 22,500 22 -- -- 224,978 -- -- - 225,000
Preferred stock dividend -- -- -- -- 1,181,250 -- -- (1,181,250) --
Issuance of common stock,
net -- -- 295,000 295 551,538 -- -- -- 551,833
Common stock granted for
consulting services -- -- 174,999 175 612,322 -- -- -- 612,497
Common stock issued for
settlement of debt -- -- 320,200 320 1,300,680 -- -- -- 1,301,000
Common stock and warrants
issued in connection
with short-term bridge
financing (net of
offering costs) -- -- 402,500 403 2,410,239 -- -- -- 2,410,642
Common stock issued in
conversion of notes and
interest -- -- 3,222,877 3,223 2,575,078 -- -- -- 2,578,301
Compensatory common stock
options issued -- -- -- -- 1,932,150 (1,932,150) -- -- --
Amortization of deferred
compensation -- -- -- -- -- 1,434,400 -- -- 1,434,400
Net loss for year -- -- -- -- -- -- -- (11,235,237) (11,235,237)
-------------------------------------------------------------------------------------------------------
Balances at
December 31, 1997 22,500 22 10,686,006 10,686 14,555,669 (497,750) -- (16,495,283) (2,426,656)
Issuance of preferred
stock 276,200 277 -- -- 2,761,723 -- -- -- 2,762,000
Preferred stock conversion (80,000) (80) 1,150,000 1,150 (1,070) -- -- -- --
Preferred stock repurchase (40,000) (40) -- -- (399,960) -- -- -- (400,000)
Preferred stock dividend -- -- -- -- 15,250,500 -- -- (15,250,500) --
Issuance of common stock,
net -- -- 30,000 30 149,970 -- -- 150,000
Common stock issued in
connection with
conversion of interest -- -- 2,750 3 13,747 -- -- -- 13,750
Issuance of common stock
and warrants for
termination of license
agreement -- -- 360,000 360 300,840 -- -- -- 301,200
Financing fee -- -- -- -- 75,000 -- -- -- 75,000
Compensatory common stock
options issued -- -- -- -- 4,368,039 (4,368,039) -- -- --
Amortization of deferred
compensation -- -- -- -- -- 1,582,257 -- -- 1,582,257
Net loss for year -- -- -- -- -- -- -- (11,167,011) (11,167,011)
-------------------------------------------------------------------------------------------------------
Balances at December 31,
1998 178,700 179 12,228,756 12,229 37,074,458 (3,283,532) -- (42,912,794) (9,109,460)
Compensatory common stock
options issued -- -- -- -- 306,000 (306,000) -- -- --
Cancellation of common
stock options -- -- -- -- (1,612,164) 1,612,164 -- -- --
Amortization of deferred
compensation -- -- -- -- -- 1,952,968 -- -- 1,952,968
Net loss for year -- -- -- -- -- -- -- (1,082,349) (1,082,349)
-------------------------------------------------------------------------------------------------------
Balances at December 31,
1999 178,700 179 12,228,756 12,229 35,768,294 (24,400) -- (43,995,143) (8,238,841)
Issuance of common stock,
net of cancellations -- -- (134,000) (134) 4,698 -- -- -- 4,564
Common stock issued in
connection with debt
extinguishment -- -- 375,000 375 1,096,500 -- -- -- 1,096,875
Treasury stock -- -- -- -- -- -- (17,500) -- (17,500)
Amortization of deferred
compensation -- -- -- -- -- 24,400 -- -- 24,400
Net loss for period -- -- -- -- -- -- -- (1,076,306) (1,076,306)
Balances at June 30, 2000 -------------------------------------------------------------------------------------------------------
(unaudited) 178,700 $179 12,469,756 $12,470 $36,869,492 $ -- $(17,500) $(45,071,449) $(8,206,808)
=======================================================================================================
</TABLE>
See accompanying notes to financial statements
F-35
<PAGE>
NET VALUE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
As of December 31 Six months ended June 30
----------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------- ------------- ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,235,237) $(11,167,011) $(1,082,349) $(3,505,452) $(1,076,306)
Adjustments to reconcile to net cash used in
operation activities:
Depreciation and amortization 833,460 996,197 234,697 135,451 --
Amortization of deferred stock based
compensation 2,046,896 1,582,257 1,952,968 823,484 24,400
Beneficial conversion features on
convertible notes and debentures -- 2,463,090 -- -- --
Gain on sale of assets -- -- (6,502,663) -- --
Common stock issued for consulting
services -- 301,200 -- -- --
Interest paid with stock issuance 1,129,301 13,750 -- -- --
Loss on debt extinguishment -- -- -- -- 554,676
Other -- -- 236,061 -- 24,563
Changes in assets and liabilities
Interest receivable -- (1,623) (5,562) (356) (41,084)
Prepaid expenses (44,145) 153,176 17,801 (25,304) --
Other noncurrent assets -- (15,335) 75,290 9,446 --
Accounts payable 1,344,949 (598,659) 284,278 17,061 (110,950)
Accrued expenses (58,333) 676,132 1,658,167 586,070 624,701
Deferred revenue -- -- 15,000 -- --
------------ ------------ ----------- ----------- -----------
Net cash used in operating
activities (5,983,109) (5,596,826) (3,116,312) (1,959,600) --
Cash flows from investing activities:
Acquisition of ownership interests in
affiliated companies -- -- (7,927) -- --
Purchases of furniture and equipment (544,618) (57,478) (44,357) (29,988) --
------------ ------------ ----------- ----------- -----------
Net cash used in investing
activities (544,618) (57,478) (52,284) (29,988) --
Cash flows from financing activities:
Proceeds from notes payable 5,329,250 4,636,000 70,000 -- --
Repayments of notes payable (1,501,000) (1,098,000) (432,000) (300,000) --
Proceeds from note payable - related
party -- -- 3,344,182 2,450,182 --
Long -term debt payments -- (34,173) (35,751) (30,544) --
Issuance of common stock 3,112,474 -- -- -- --
Issuance of preferred stock 225,000 2,762,000 -- -- --
Repurchase of preferred stock -- (400,000) -- -- --
Payment of financing fees (140,919) (50,000) -- -- --
Registration costs (124,921) (610,866) -- -- --
------------ ------------ ----------- ----------- -----------
Net cash provided by financing
activities 6,899,884 5,204,961 2,946,431 2,119,638 --
Net increase (decrease) in cash and
cash equivalents 372,157 (449,343) (222,165) 130,050 --
Cash and cash equivalents at beginning of
year 299,351 671,508 222,165 222,165 --
------------ ------------ ----------- ---------- -----------
Cash and cash equivalents at end of period $ 671,508 $ 222,165 $ -- $ 352,215 $ --
============ ============ =========== =========== ===========
Cash paid for interest $ 3,200 $ 93,537 $ 85,020 $ 12,784 $ 20,000
============ ============ =========== =========== ===========
Cash paid for taxes $ -- $ -- $ -- $ -- $ --
============ ============ =========== =========== ===========
</TABLE>
F-36
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 1 - History and Description of the Business
Net Value, Inc. (the "Company"), formerly BrightStreet.com, Inc. was formed on
July 16, 1996 for the purpose of 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.
On August 31, 1998, the Company entered into a letter of intent to merge with
SUNCL, Inc., 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. In contemplation of this merger, the shareholders of SUNCL, Inc.
agreed to change their 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 from the merger.
As of December 31, 1998, twenty Net Value, Inc. shareholders had entered into
share exchange agreements with Holdings ("Share Exchanges") whereby they would
receive one share of Holdings common stock and one share of Holdings Series A
convertible preferred stock for every four shares of Net Value, Inc. common
stock tendered. Pursuant to the terms of the Shares Exchanges, Net Value, Inc.
shareholders tendered approximately 66% of the issued and outstanding shares of
the Company's common stock and 100% of the Company's issued and outstanding
preferred stock in exchange for Holdings common and preferred stock.
Accordingly, Holdings owns 66% of the Company as a result of these Share
Exchanges. The Company plans to complete its merger with Holdings during 2000
whereby the remaining Company shareholders will receive .4 shares of Holdings
common stock for each share of common stock tendered in the merger. Upon
completion of the merger, the Company will be dissolved into Net Value Holdings,
Inc.
On December 3, 1999, the Company sold substantially all of its assets and its
business including the name BrightStreet.com, Inc. to a third party (see Note
5). Subsequent to the sale, the Company ceased business operations and is
currently in the process of settling its outstanding liabilities and completing
its in process merger with Holdings.
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 completion of the
in process merger with Holdings and subsequent realization of assets and the
satisfaction of liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a maturity of
90 days or less at the time of purchase to be cash equivalents.
F-37
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 2 - Significant Accounting Policies (continued)
Prepaid Expenses
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.
Investment in BrightStreet.com
The Company accounts for its investment in Brightstreet.com stock under the cost
method because the Company does not have the ability to exercise significant
influence over Brightstreet.com, nor is there a readily determinable market
value for the stock. Cost basis represents the Company's original acquisition
cost less any impairment charges. Under this method, the Company's share of
Brightstreet.com's net income or loss is not included in the Statements of
Operations. The Company continually evaluates the carrying value of its
investment in BrightStreet.com for possible impairment based on the achievement
of business plan objectives and milestones, the financial condition and
prospects of BrightStreet.com, and other relevant factors. If impairment is
determined, the cost basis is adjusted to the deemed fair value. There was no
indicated impairment at December 31, 1999 or June 30, 2000.
Furniture and Equipment
Furniture 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
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of existing differences between financial
reporting and tax reporting basis of assets and liabilities, as well as for
operating losses and tax credit carryforwards, using enacted tax laws and rates.
Deferred tax expense represents the net change in the deferred tax asset or
liability balance during the year. This amount, together with income taxes
currently payable or refundable for the current year, represents the total
income tax for the year.
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.
F-38
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 2 - Significant Accounting Policies (continued)
Loss Per Share
Basic net loss per common share and diluted net loss per common share are
presented in accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share (FAS 128), for all periods presented. In accordance with
FAS 128, basic and diluted net loss per common share have been computed using
the weighted-average number of shares of common stock outstanding during the
period. Shares associated with stock options, convertible preferred stock, stock
warrants, and convertible preferred debt are not included because their
inclusion would be antidilutive (i.e., reduce the net loss per share). The total
numbers of such shares excluded from diluted net loss per common share are
805,500, 2,600,139, 2,645,472, 1,971,472, and 2,495,472 for December 31, 1997,
1998, and 1999, and for the June 30, 1999 and 2000, respectively. Such
securities, had they been dilutive, would have been included in the computations
of diluted loss per share using the treasury stock method.
Revenue Recognition
Revenues are recognized when earned, which occurs when delivery of the product
has been made, the fee is fixed or determinable, and collectibility is
reasonably assured.
Research and Development Costs
Research and development expenditures are charged to operations as incurred. The
Company follows Statement of Financial Accounting Standards No. 86 ("SFAS 86"),
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, which requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. As of December 31,
1999 and June 30, 2000, no research and development costs have been capitalized
under SFAS 86.
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. These estimates are based on information available as of the date of the
financial statements; therefore actual results could differ from those
estimates.
Reclassifications
Certain prior year amounts have been reclassified in accordance with generally
accepted accounting principles to conform to the current year presentation. The
impact of these changes did not affect net loss.
Note 3 - Interim Financial Information (Unaudited)
The accompanying balance sheet as of June 30, 2000, the statements of operations
and cash flows for the three months ended June 30, 1999 and 2000 and the
statement of changes in stockholders' deficit for the three months ended June
30, 2000 are unaudited. The data disclosed in these notes to the financial
statements for these periods is also unaudited. In the opinion of management,
these financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position of the interim
period. Interim operating results are not necessarily indicative of results for
a full year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations relating to the interim financial
statements.
F-39
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 4 - Note Receivable - Related Party
On December 20, 1999, the Company received a $2 million promissory note from
Holdings bearing interest at 6% per annum. This note is payable on demand.
Holdings used the funds to satisfy the Company's pre-existing obligations and
agreed to utilize the remaining funds to satisfy any future obligations of the
Company and to pay the Company's exit costs resulting from the discontinuance of
its operations. As these obligations and exit costs are paid, the outstanding
balance of the note is decreased by the amount of payment.
Note 5 - Investment in BrightStreet.com and Asset Sale
On December 3, 1999, the Company sold substantially all of its assets to
BrightStreet.com, Inc. (f/k/a Promotions Acquisition, Inc.), a Delaware
corporation formed by the former management team of Net Value, Inc., in
connection with a $17 million investment in BrightStreet.com ("BrightStreet") by
outside investors. Net Value, Inc. received $2 million in cash and 2,958,819
shares of BrightStreet's common stock in exchange for substantially all of the
Company's assets and assumption by BrightStreet of approximately $1.6 million of
liabilities. Furthermore, the majority of stock options held by former Company
employees were cancelled resulting in a reduction of $1,612,164 to deferred
stock-based compensation.
The Company recognized a gain on the sale of the assets of $6,502,663
representing the excess of the fair value of the BrightStreet stock and cash
received over the carrying value of the assets sold and liabilities assumed. The
value ascribed to the BrightStreet common stock was based on the value of the
shares issued to the outside investors of BrightStreet. As a result of this
transaction, Net Value, Inc. no longer had any business operations other than
the satisfaction of its outstanding liabilities and completion of its in process
merger with Holdings.
Note 6 - Furniture and Equipment
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------- 2000
1998 1999 (unaudited)
----------------- ----------------- -------------------
<S> <C> <C> <C>
Computer Equipment $ 792,554 $ -- $ --
Office Equipment 51,034 -- --
Office Furniture 86,699 -- --
Leasehold Improvements 6,066 -- --
------------ --------- ----------
936,353 -- --
Less Accumulated Depreciation 418,993 -- --
------------ --------- ----------
$ 517,360 $ -- $ --
============ ========= ==========
</TABLE>
F-40
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 7 - 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,
--------------------------------------
1998 1999
------------------ ----------------
<S> <C> <C>
Deferred tax assets (liabilities)
Temporary differences:
Amortization of discount $ 148,000 $ --
Vesting of non-qualified stock options 82,000 205,000
Accrued salaries and compensation to related parties 37,000 --
Deferred compensation -- --
Common stock and warrants issued 20,000 20,000
Depreciation (29,000) --
------------ -----------
Total temporary differences 258,000 225,000
Federal and state deferred tax benefits arising from
net operating loss carryforwards 6,764,000 6,453,000
Research and development credits 278,000 369,000
Less valuation allowance (7,300,000) (7,047,000)
------------ -----------
Net deferred tax asset $ -- $ --
============ ===========
</TABLE>
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>
Years Ended December 31,
-------------------------------------------------
1997 1998 1999
---------------- --------------- ---------------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $ 3,932,000 $ 3,908,500 $ 379,000
State and local income tax benefits, net
of effect of federal income tax benefit 561,000 558,500 35,000
Nondeductible research and development costs 101,000 66,000 77,000
Nondeductible stock-based compensation and interest (1,083,000) (1,511,000) (744,000)
------------ ------------ ----------
3,511,000 3,022,000 (253,000)
Valuation allowance for deferred income tax benefit (3,511,000) (3,022,000) 253,000
------------ ------------ ----------
Income tax benefit $ -- $ -- $ --
============ ============ ==========
</TABLE>
Through December 31, 1999, the Company had losses which resulted in net
operating loss carryforwards for income tax purposes amounting to approximately
$16,000,000, that expire in 2011 through 2019. However, the Company expects this
carryforward to be significantly limited upon completion of the merger with
Holdings. The Company has also generated research and development credits
approximating $319,000 that expire in 2012 through 2020.
F-41
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 7 - Income Taxes (continued)
Recognition of the benefits of the net deferred tax assets and liabilities will
require that the Company generate future taxable income. It is unlikely 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, $7,300,000 and
$7,069,000 as of December 31, 1997, 1998, and 1999, respectively.
Note 8 - Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------- June 30, 2000
1998 1999 (unaudited)
------------------- ------------------ ------------------
<S> <C> <C> <C>
Accounting fees $ 101,500 $ -- $ --
Legal fees 46,000 50,000 --
Accrued interest 634,031 1,045,721 1,581,246
Accrued salaries and benefits 154,875 11,631 --
Litigation reserve -- 790,723 695,000
Other 114,681 47,508 21,963
------------- ------------ -----------
$ 1,051,087 $ 1,945,583 $ 2,298,209
============= ============ ===========
</TABLE>
Note 9 - Notes Payable and Long-Term Debt
Notes payable and long term debt consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------- June 30, 2000
1998 1999 (unaudited)
------------------- ------------------ ------------------
<S> <C> <C> <C>
Notes Payable - related parties
American Maple Leaf $ 783,000 $ 520,210 $ --
Net Value Holdings 2,618,383 10,910,357 10,910,357
Convertible promissory notes
Golden Eagle Partners 250,000 -- --
Bridge Offerings 4,025,000 -- --
Long term debt
Transamerica 141,327 -- --
------------- ------------ ------------
7,817,710 11,430,567 10,910,357
Less amount due within one year (7,738,676) (11,430,567) (10,910,357)
------------- ------------ ------------
Noncurrent portion $ 79,034 $ -- $ --
============= ============ ============
</TABLE>
American Maple Leaf
On June 26, 1998, the Company signed a $1,600,000 promissory note with
American Maple Leaf Corporation, a related party ("AML") that bears
interest at 8% per annum. The Company settled this debt with AML in May
2000.
To fully settle this obligation, the Company issued 375,000 shares of its
common stock in exchange for the forgiveness of the principal and
interest balances through the date of settlement. The excess of the fair
value of the stock issued on the date of settlement over the balance of
the principal and interest resulted in an extraordinary loss of $554,676
for the six months ended June 30, 2000.
F-42
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 9 - Notes Payable and Long -Term Debt (continued)
Net Value Holdings
This note consists of the funds advanced by Holdings to fund the
Company's operations and Holdings assumption of the Company's Bridge
Offering promissory notes and long-term debt. The note is payable upon
demand and bears an interest rate of 10%. The Company anticipates that
this note will be forgiven once the in-process merger with Holdings is
complete.
Golden Eagle
On June 17, 1997, the Company signed a $250,000 convertible promissory
note that accrued interest at the rate of 10% per annum. The Company
repaid this obligation in full in September 1999.
Bridge Offerings
During 1997, the Company completed a private placement whereby the
Company received aggregate proceeds of $4,025,000 in exchange for the
issuance of 161 "Units" as defined in the offering. Each Unit in this
private placement consisted of a promissory note in the principal amount
of $25,000, 2,500 shares of the Company's common stock, and a warrant to
purchase 2,500 shares of the Company's common stock. The promissory notes
bore interest at 10%, matured one year from the date of issuance, and
were subordinated to the claims of other creditors.
The aggregate proceeds of $4,025,000 were allocated among the promissory
notes, common stock and warrants based upon their relative fair values as
follows:
Promissory Notes $ 1,328,250
Common Stock 2,012,500
Warrants 684,250
-----------
$ 4,025,000
===========
The fair value allocation of the proceeds among the components of the
Units resulted in a $2,696,750 discount on the promissory notes. This
discount was amortized as interest expense over the one year term of the
promissory notes. On January 7, 1999, the Company's promissory notes were
exchanged for convertible promissory notes of Holdings and subsequently
repaid or converted to Holdings common stock.
Transamerica
In May 1998, the Company signed a three-year $175,500 promissory note
that accrued interest at the rate of 7.76% per annum. During 1999 the
note was assumed by Holdings and subsequently paid.
F-43
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 10 -- Stockholders' Equity
The Company has two classes of authorized stock: common stock and preferred
stock.
(a) Common Stock
Net Value, Inc. is authorized to issue 49,000,000 shares of common
stock, par value $.001 per share. The holders of common stock are
entitled to one vote per share and are entitled to dividends as
declared. The Company has never declared dividends.
(b) Preferred Stock
Net Value, Inc. is authorized to issue 1,000,000 shares of
undesignated preferred stock, par value $.001 per share. The
Company may establish one or more classes or series of preferred
stock having such number of shares and relative voting rights,
designation, dividend rates, liquidation rights and preferences as
may be fixed by them without further shareholder approval. The
holders of preferred stock may be entitled to preferences over
common stockholders with respect to dividends, liquidation, or
dissolution in such amounts as established by the Company's board
of directors.
Preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
Years ended
June 30, 2000
December 31, 1998 December 31, 1999 (unaudited)
---------------------------- -------------------------- -----------------------------
Shares Shares Shares
outstanding Amount outstanding Amount outstanding Amount
-------------- ----------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Series A 178,700 $ 179 178,700 $ 179 178,700 179
----------- ------- -------- ------- -------- ----
178,700 $ 179 178,700 $ 179 178,700 179
=========== ======= ======== ======= ======== ====
</TABLE>
Series A Preferred Stock
On December 15, 1997, the Board of Directors designated 300,000
shares of Preferred Stock as Series A convertible preferred stock
("Series A Shares") and issued 298,700 of these shares to a single
shareholder during 1997 and 1998. The Series A Shares have a
stated value of $10.00 per share, carry no voting or registration
rights, bear no dividends, and are convertible into 12 1/2 shares
of common stock at the option of the Company or the preferred
stockholder. In 1998, the Company repurchased 40,000 Series A
Shares from the stockholder, and the stockholder elected to
convert 80,000 of the Series A Shares into 1,000,000 shares of the
Company's common stock. On November 15, 1998, the preferred
stockholder transferred the remaining Series A Shares owned to
Holdings, in exchange for shares of Holdings common and preferred
stock.
F-44
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 10 -- Stockholders' Equity (continued)
(b) Preferred Stock (continued)
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
<TABLE>
<CAPTION>
Years ended December 31, Six months
--------------------------------------------------- ended
June 30, 2000
1997 1998 1999 (unaudited)
---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Series A Preferred Stock $ 1,181,250 15,250,500 -- --
------------- ----------- --------- ----------
$ 1,181,250 15,250,500 -- --
============= =========== ========= ==========
</TABLE>
At the time of issuance of the Series A Shares in 1997 and 1998,
the then fair market value of the common shares that the Series A
Shares were convertible into exceeded the $10 per share offering
price. This differential in price constituted a beneficial
conversion feature as defined in the Emerging Issues Task Force
Issue No. D-60, Accounting for the Issuance of Convertible
Preferred Stock and Debt Securities with a Nondetachable
Conversion Feature ("EITF D-60"). Accordingly, the Company
recorded $1,181,250 and $15,250,500 in 1997 and 1998,
respectively, as additional paid in capital for the discount
deemed related to a preferential dividend for the beneficial
conversion feature. In accordance with EITF D-60, this discount
was recognized immediately as a preferred stock dividend as the
Series A Shares were immediately convertible at the election of
the Company or the preferred stockholder.
Note 11 - Stock Options and Warrants
(a) Stock Options
Under the 1996 Non-Qualified Stock Option Plan, Net Value, Inc.
offered options to purchase shares of its common stock to
employees, including officers and directors of the Company. The
Board of Directors administers the plan. Option grants under the
plan are typically subject to vesting provisions and expire 5
years following the date of vesting. As part of the in-process
merger with Holdings discussed in Note 1, the Company plans on
converting the outstanding options under the existing stock option
plan into options to purchase Holdings common stock using a
conversion ratio of .4 Holdings options for every Net Value, Inc.
option and on maintaining the same vesting and other provision of
the original option grant.
F-45
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 11 - Stock Options and Warrants (continued)
(a) Stock Options (continued)
A summary of Net Value, Inc.'s stock option plan activity is as
follows:
<TABLE>
<CAPTION>
Weighted
average
Range of exercise
Shares exercise prices price
----------------- ------------------ -------------
<S> <C> <C> <C>
Outstanding at December 31, 1997 1,674,000 $ 0.63 - 7.00 $ 4.02
Granted 2,354,000 $ 0.20 - 7.00 $ 2.22
Cancelled (901,750) $ 0.80 - 7.00 $ 4.53
----------
Outstanding at December 31, 1998 3,126,250 $ 0.20 - 7.00 2.51
Granted 180,000 $ 1.00 $ 1.00
Cancelled (1,910,000) $ 0.20 - 2.50 $ 1.53
----------
Outstanding at December 31, 1999 1,396,250 $ 0.63 - 7.00 3.66
Exercised (1,000) $ 4.00 $ 4.00
Expired (168,000) $ 5.00 $ 5.00
----------
Outstanding at June 30, 2000 (unaudited) 1,227,250 $ 0.63 - 7.00 $ 3.54
==========
Options exercisable at December 31, 1998 1,314,917
Options exercisable at December 31, 1999 1,044,250
Options exercisable at June 30, 2000 (unaudited) 875,250
</TABLE>
F-46
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 11 - Stock Options and Warrants (continued)
(a) Stock Options (continued)
Exercise prices for stock options outstanding as of December 31,
1998, 1999 and June 30, 2000 and the weighted average remaining
contractual life are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted
Shares Contractual Number Average
Exercise Prices Outstanding Life exercisable Exercise Price
---------------------------------- --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
December 31, 1998
$0.20 to $0.80 598,500 4.44 years 428,500 $ 0.64
$1.20 to $2.50 1,655,000 9.72 years 551,667 1.74
$4.00 to $5.00 528,750 4.13 years 334,750 4.45
$6.00 to $7.00 344,000 7.21 years -- --
------------- -----------
$0.20 to $7.00 3,126,250 7.49 years 1,314,917 2.07
============= ===========
December 31, 1999
$0.63 to $0.80 343,500 2.38 years 343,500 $ 0.75
$1.00 180,000 4.93 years 180,000 1.00
$4.00 to $5.00 528,750 3.16 years 520,750 4.63
$6.00 to $7.00 344,000 6.21 years -- --
------------- -----------
$0.63 to $7.00 1,396,250 3.95 years 1,044,250 4.69
============= ===========
June 30, 2000 (unaudited)
$0.63 to $0.80 325,500 2.13 years 325,500 $ 0.75
$1.00 180,000 4.68 years 180,000 1.00
$4.00 to $5.00 377,750 3.90 years 369,750 4.48
$6.00 to $7.00 344,000 5.96 years -- --
------------- -----------
$0.63 to $7.00 1,227,250 4.13 years 875,250 $ 4.73
============= ===========
</TABLE>
As discussed in Note 2, the Company has elected to follow APB 25
in accounting for its stock-based compensation. Under APB 25, the
Company does not recognize compensation expense with respect to
such awards if the exercise price equals or exceeds the fair value
of the underlying security on the date of grant and other terms
are fixed. The fair values of these awards for the purpose of the
alternative fair value disclosures required by FAS 123 were
estimated as of the date of the grant using a Black Scholes
option-pricing model. For options granted in 1997 and 1998, the
fair value was calculated using the stock price of the freely
trading shares on that date, less a 5% restricted share discount,
the three month Treasury bill rate as the risk-free rate for that
date, and a volatility factor of 1.5. For options granted in 1999,
the fair value was calculated using a Black Scholes pricing model
with a risk-free rate of 6.16%, an expected life of 10 years, a
volatility factor of 87%, and a dividend yield of zero.
F-47
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 11 - Stock Options and Warrants (continued)
(a) Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
Year ended: 1997 1998 1999
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net loss to common shareholders:
As reported $ 12,416,487 $ 26,417,511 $ 1,082,349
Pro forma $ 14,036,064 $ 27,043,440 $ 1,228,149
Basic and diluted net loss per common share:
As reported $ 1.78 $ 2.32 $ 0.09
Pro forma $ 2.02 $ 2.38 $ 0.10
</TABLE>
Future pro forma results may be materially different from actual
amounts reported. The weighted average fair value of employee
options granted during 1997, 1998, and 1999 was $2.10, $1.61, and
$2.51, respectively.
(b) Deferred Stock-Based Compensation
The Company records deferred compensation when it makes
compensatory stock option grants to employees. No deferred
compensation is recorded for non-compensatory stock option grants
where the exercise price equals the fair market value on the date
of grant. For compensatory grants, the amount of deferred
compensation initially recorded is the difference between the
exercise price and fair market value of the common stock on the
date of grant. The Company records deferred compensation as a
reduction to shareholders' deficit and an offsetting increase to
additional paid-in capital. The Company then amortizes deferred
compensation into compensation and related expenses over the
performance period, which typically coincides with the vesting
period of the stock based award of 3 to 4 years.
The components of deferred compensation are as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $ 497,750
Additions 4,368,039
Cancellations --
Amortization to compensation and related expenses (1,582,257)
-------------
Balance at December 31, 1998 3,283,532
Additions 306,000
Cancellations (1,612,164)
Amortization to compensation and related expenses (1,952,968)
-------------
Balance at December 31, 1999 24,400
Amortization to compensation and related expenses (24,400)
-------------
Balance at June 30, 2000 (unaudited) $ --
=============
</TABLE>
F-48
<PAGE>
Net Value, Inc.
Notes to Financial Statements
(Information at June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Note 11 - Stock Options and Warrants (continued)
(c) Warrants
The Company had the following warrants to purchase its securities
outstanding at:
<TABLE>
<CAPTION>
June 30, 2000
December 31, 1999 (unaudited)
---------------------------------- ---------------------------------
Number of Number of
warrants Exercise Price warrants Exercise Price
Description of Series issued per Share issued per Share
--------------------------- ------------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock 1,687,723 $2.40 - $4.00 1,687,723 $2.40 - $4.00
=========================== ============= ================= ============ =================
</TABLE>
At December 31, 1999 and June 30, 2000, 1,285,223 warrants were
exercisable.
As part of the in-process merger with Holdings discussed in Note
1, the Company plans on converting its outstanding warrants into
warrants to purchase Holdings common stock at a ratio of .4
Holdings warrants for each Net Value, Inc. warrant.
Note 12 - Commitments and Contingencies
On November 23, 1999, the landlord of the Company's headquarters filed suit
against the Company seeking to recover damages and costs related to an alleged
breach of the lease. This litigation was subsequently settled in April 2000 for
$137,500 of which approximately $100,000 had been accrued at December 31, 1999
within accrued expenses.
During 1996, the Company entered into an agreement with a consulting firm
pursuant to which the consultants agreed to develop a material portion of the
Company's core software and to perform the Company's initial product systems
integration. The consulting firm was unable to develop the software as intended
and agreed to a settlement agreement on December 3, 1998, whereby the Company
would pay an aggregate of $695,000 for all services rendered to date. The
Company subsequently did not make the required payments under the terms of the
settlement agreement due to non-performance of the developed software. The total
liability of $695,000 has been accrued and is included in accrued expenses.
There has been no subsequent request for payment from the consulting firm and
the Company intends to vigorously contest any such requests should they occur.
In August, 1999, coolsavings.com, Inc. filed an action against the Company
alleging patent infringement and seeking a preliminary and permanent injunction
prohibiting the Company from further acts of alleged infringement, as well as
damages. BrightStreet.com has agreed to assume all liabilities related to this
lawsuit pursuant to the Asset Purchase Agreement which the Company and
BrightStreet.com, Inc. entered into in December, 1999 (see Note 5). On November
23, 1999, the Company filed an answer to this complaint as well as a
counterclaim against coolsavings.com, Inc. seeking a declaratory judgment of
invalidity and noninfringement of the patent. Although the outcome of this
action cannot be reasonably estimated at this time, the Company believes that
the resolution of this action will not have a material adverse effect on its
financial position.
F-49
<PAGE>
Independent Auditors' Report
The Board of Directors
Webmodal, Inc.:
We have audited the accompanying balance sheet of Webmodal, Inc., (a
development-stage enterprise) as of December 31, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the period
from July 28, 1999 (inception) through December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Webmodal, Inc. (a
development-stage enterprise) as of December 31, 1999, and the results of its
operations and its cash flows for the period from July 28, 1999 (inception)
through December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
June 20, 2000
F-50
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Balance Sheets
December 31, 1999 and June 30, 2000
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
Assets 1999 2000
---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,437,909 $ 4,156,283
Accounts receivable - 43,604
Prepaid expenses and other current assets 6,169 36,523
---------- -----------
Total current assets 1,444,078 4,236,410
Property and equipment, net of accumulated depreciation 16,255 204,952
Website development costs, net of accumulated ammortization - 1,387,458
Investment in Net Value Holdings, Inc. - 877,099
---------- -----------
Total assets $1,460,333 $ 6,705,919
========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 44,841 $ 274,772
Accrued expenses 143,649 759,506
---------- -----------
Total current liabilities 188,490 1,034,278
---------- -----------
Note payable 245,588 245,588
Accrued interest 8,186 18,009
---------- -----------
Total liabilities 442,264 1,297,875
---------- -----------
Redeemable preferred stock, $1.00 par value; 3,000,000 shares
authorized; 563,000 issued and outstanding ($4,877,099
aggregate redemption value as of June 30, 2000) - 4,134,007
Stockholders' equity:
Common stock, $.0001 par value; 10,000,000 shares
authorized; 1,174,900 and 1,214,000 issued and outstanding 117 121
Additional paid-in capital 2,427,407 3,935,923
Deferred compensation (905,209) (739,763)
Deficit accumulated during development stage (504,246) (1,922,244)
---------- -----------
Total stockholders' equity 1,018,069 1,274,037
---------- -----------
Total liabilities and stockholders' equity $1,460,333 $ 6,705,919
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Statements of Operations
Period from July 28, 1999 (inception) through December 31, 1999, six
months ended June 30, 2000, and period from July 28, 1999
(inception) through June 30, 2000
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
July 28, 1999 (Unaudited) July 28, 1999
(inception) Six months (inception)
through ended through
December 31, June 30, June 30,
1999 2000 2000
--------- ----------- -----------
<S> <C> <C> <C>
Revenues $ - $ 52,941 $ 52,941
Transportation expenses - 57,186 57,186
--------- ----------- -----------
Gross profit (loss) - (4,245) (4,245)
Operating expenses:
Administration 338,589 1,280,737 1,619,326
Website development costs 162,182 83,190 245,372
Depreciation 1,208 65,838 67,046
--------- ----------- -----------
Total operating expenses 501,979 1,429,765 1,931,744
--------- ----------- -----------
Other income (expense):
Interest income 5,919 58,143 64,062
Interest expense (8,186) (9,823) (18,009)
--------- ----------- -----------
Net loss $(504,246) $(1,385,690) $(1,889,936)
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Statements of Stockholders' Equity
Period from July 28, 1999 (inception) through December 31, 1999
and six months ended June 30, 2000
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock Additional during the Total
-------------------- paid-in development Deferred stockholders'
Shares Amount capital stage compensation equity
--------- ------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 28, 1999
(date of inception) $ - $ - $ - $ - $ - $ -
Issuance of common stock in
formation of the Company 1,000,000 100 29,312 - - 29,412
Issuance of common stock 174,900 17 1,445,443 - - 1,445,460
Deferred compensation related
to options - - 947,554 - (947,554) -
Compensation expense related
to options - - - - 42,345 42,345
Consulting expense related to options - - 5,098 - - 5,098
Net loss - - - (504,246) (504,246)
--------- ------- ----------- -------------- ----------- -------------
Balance at December 31, 1999 1,174,900 117 2,427,407 (504,246) (905,209) 1,018,069
--------- ------- ----------- -------------- ----------- -------------
Issuance of common stock in exchange
for services (unaudited) 13,200 1 109,090 - - 109,091
Issuance of common stock (unaudited) 75,900 8 627,249 - - 627,257
Issuance of warrants to
purchase common stock (unaudited) - - 755,400 - - 755,400
Accretion of redeemable preferred
stock (unaudited) - - - (32,308) - (32,308)
Contribution by stockholder (unaudited) (50,000) (5) 5 - - -
Compensation expense related - - - - 165,446 165,446
to options (unaudited)
Consulting expense related to
options (unaudited) - - 16,772 - - 16,772
Net loss (unaudited) - - - (1,385,690) - (1,385,690)
--------- ------- ----------- -------------- ----------- -------------
Balance at June 30, 2000 (unaudited) 1,214,000 $ 121 $ 3,935,923 $ (1,922,244) $ (739,763) $ 1,274,037
========= ======= =========== ============== =========== =============
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Statements of Cash Flows
Period from July 28, 1999 (inception) through December 31, 1999,
six months ended June 30, 2000, and period from July 28, 1999
(inception) through June 30, 2000
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
July 28, 1999 (Unaudited) July 28, 1999
(inception) Six months (inception)
through ended through
December 31, 1999 June 30, 2000 June 30, 2000
----------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (504,246) $ (1,385,690) $(1,889,936)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,208 65,838 67,046
Common stock/options issued in lieu of cash
payment for professional services 5,098 125,863 130,961
Compensation expense related to options 42,345 165,446 207,791
Changes in assets and liabilities:
Accounts receivable - (43,604) (43,604)
Prepaid assets and other current assets (6,169) (30,354) (36,523)
Accounts payable 44,841 229,931 274,772
Accrued expenses 143,649 615,857 759,506
Accrued interest 8,186 9,823 18,009
----------- ------------ -----------
Net cash provided by (used in)
operating activities (265,088) (246,890) (511,978)
----------- ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (17,463) (201,973) (219,436)
Website development costs capitalized - (1,440,020) (1,440,020)
----------- ------------ -----------
Net cash used in investing activities (17,463) (1,641,993) (1,659,456)
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of note payable 245,588 - 245,588
Proceeds from issuance of redeemable preferred stock - 3,980,000 3,980,000
Proceeds from issuance of common stock 1,474,872 627,257 2,102,129
----------- ------------ -----------
Net cash provided by financing activites 1,720,460 4,607,257 6,327,717
----------- ------------ -----------
Net increase in cash 1,437,909 2,718,374 4,156,283
Cash at beginning of period - 1,437,909 -
----------- ------------ -----------
Cash at end of period $ 1,437,909 $ 4,156,283 $ 4,156,283
=========== ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ - $ -
Cash paid for taxes - - -
Supplemental disclosures of noncash investing and
financing activities:
Exchange of equity with Net Value Holdings, Inc. - $ 877,099 $ 877,099
Accretion of redeemable preferred stock - 32,308 32,308
=========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
(1) Nature of the Business
Webmodal, Inc. (Webmodal or the Company) was incorporated on July 28,
1999. Upon completion of its website applications on June 1, 2000,
Webmodal is an Internet-based transportation company that gives shippers
the ability to identify, evaluate, and purchase intermodal
transportation services online. Webmodal uses a fast, data-driven,
online interface to dramatically improve upon traditional intermodal
marketing processes. Webmodal's Point-Click-ShipSM product gives
shippers the ability to input their specific transportation needs, view
a comprehensive list of relevant intermodal transportation alternatives,
and execute orders for transportation services entirely online at the
Company's website www.webmodal.com.
Since inception, the Company has devoted substantially all of its
efforts to business planning, product development, acquiring operating
assets, raising capital, marketing, and business development activities.
Accordingly, the Company is in the development stage, as defined by the
Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and
Reporting by Development Stage Enterprises.
The Company has incurred losses since inception and expects to incur a
loss in 2000. Should the Company be unable to generate revenue and
realize cash flows from operations in the near term, the Company may
require additional equity or debt financing to meet working capital
needs and to fund operating losses. Although management believes the
Company could obtain such financing, there can be no assurances that
such financing will be available in the future at terms acceptable to
the Company.
The Company is subject to risks and uncertainties common to growing
technology-based companies, including technological change, growth and
commercial acceptance of the Internet, dependence on principal products
and third party technology, new product development and performance, new
product introductions and other activities of competitors, and its
limited operating history.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
The Company considers all highly liquid instruments with an
original maturity of three months or less at the time of purchase
to be cash and cash equivalents. Cash equivalents at December 31,
1999 are invested in money market accounts.
(b) Impairment of Long-lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
the Company records impairment of losses on long-lived assets
used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated using
the straight-line method over the estimated useful lives of the
related assets, which range from three to five years.
(Continued)
F-55
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
(d) Computer Software and Website Development
The Company has adopted the provisions of Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use and Emerging Issues Task Force Issue
No. 00-2, Accounting for Web Site Development Costs. Accordingly,
certain costs in the planning development stage of internal-use
computer software, including website development, are expensed as
incurred. During the period from July 28, 1999 (inception)
through December 31, 1999, software development planning costs
related to website development of $162,182 were incurred and
expensed.
(e) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(f) Stock-Based Compensation
The Company applies the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and provide pro forma net income and
pro forma net income per share disclosures as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures required by SFAS
No. 123.
(g) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those
estimates.
(3) Interim Financial Information
The interim financial statements of the Company as of and for the six
months ended June 30, 2000, included herein, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations relating to
interim financial statements.
F-56
<PAGE>
In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows as of and for
the six months ended June 30, 2000. The accompanying unaudited interim
financial statements are not necessarily indicative of full-year results.
(4) Property and Equipment
Property and equipment consists of the following:
December 31,
1999
--------------
Property and equipment:
Office equipment and furniture $ 4,995
Computer equipment 12,468
---------
17,463
Less: accumulated depreciation (1,208)
---------
Property and equipment, net $ 16,255
=========
(5) Income Taxes
The provision for income taxes differs from the amounts which would
result by applying the applicable Federal income tax rate to loss before
provision for income taxes for the period from July 28, 1999 (inception)
to December 31, 1999 as follows:
Period from
July 28, 1999
(inception)
through
December 31,
1999
---------------
Expected income tax benefit at the statutory rate $(171,444)
State tax benefit, net of Federal taxes (21,342)
Nondeductible expenses 20,833
Increase in valuation allowance 171,953
---------
$ --
=========
F-57
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
The tax effect of temporary differences giving rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999
are as follows:
December 31,
1999
---------------
Deferred tax assets:
Capitalized start-up and organizational costs $ 156,456
Net operating loss carryforward 16,290
---------
Gross deferred tax assets 172,746
Less valuation allowance (171,953)
---------
Net deferred tax assets 793
---------
Deferred tax liabilities - depreciation (793)
---------
Net deferred income taxes $ --
=========
The Company has a net operating loss carryforward of approximately
$41,970 as of December 31, 1999, which can potentially be carried forward
twenty years and will expire in 2019.
The Company has recorded a full valuation allowance against its net
deferred tax assets since management believes that, after considering all
the available objective evidence, it is more likely than not that these
assets will not be realized.
(6) Note Payable
On August 2, 1999, the Company issued a note payable in the amount of
$245,588. The note is due on August 2, 2009. The unpaid principal
balance of the note bears interest at an annual rate of 8%, payable
annually on August 2 of each year commencing August 2, 2002.
(7) Capital Stock
Stock Split
On September 16, 1999, the Company affected a 100 to 1 stock split on its
then-outstanding shares of common stock. All share information included
in these financial statements has been retroactively adjusted to reflect
the revised authorized capital stock and stock split.
Authorization of Stock
In September 1999, the Company amended and restated its certificate of
incorporation thereby authorizing 100,000 shares of $.0001 par value
common stock (prior to further amendment as described in Note 10).
F-58
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
Equity Investments
On July 30, 1999, the Company entered into a shareholders agreement with
an investor. Under the terms of the agreement, the investor has the right
to purchase 180,000 additional shares of the Company's common stock for
total consideration of $1,245,588 which may partly be paid by the
surrender of the note payable discussed in Note (6) above. The right to
purchase these additional shares expired September 30, 1999.
On October 11, 1999, the Company entered into a stock purchase agreement
with an investor. Under the terms of the stock purchase agreement, the
Company issued 12,100 shares of common stock for total consideration of
$100,000.
On December 8, 1999 and December 17, 1999, the Company entered into stock
purchase agreements with investors. Under the terms of the agreements,
the Company issued 62,000 shares of common stock for total consideration
of $512,399 and 100,800 shares of common stock for total consideration of
$833,061, respectively.
(8) Stock Options
The Company has a Long-Term Stock Incentive Plan (the "Plan") for the
issuance of options to eligible employees, directors and consultants. The
Plan permits the Company to issue options on terms that the Company
determines appropriate, subject to a maximum life of 10 years. Such terms
include the exercise price, number of shares, vesting arrangements and
other terms. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Plan. Had compensation cost for the
Company's option plan been determined consistent with SFAS No. 123, the
net loss for the period from July 28, 1999 (inception) through December
31, 1999 would have been increased to the pro forma amount indicated
below:
Net income (loss):
As reported $ (504,246)
Pro forma (504,551)
===========
For purposes of calculating the compensation cost consistent with SFAS
No. 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999: dividend yield of
0%, nominal volatility, average risk free interest rate of 6.0%, and
expected lives of four years.
F-59
<PAGE>
The following is a summary of activity under the Plan:
<TABLE>
<CAPTION>
Weighted
Options average
outstanding price
----------- --------
<S> <C> <C>
Outstanding at July 28, 1999 -- $ --
Granted 129,900 0.28
Exercised -- --
Canceled -- --
--------- ----------
Outstanding at December 31, 1999 129,900 0.28
Granted 78,800 8.39
Exercised -- --
Canceled (2,000) 8.26
--------- ----------
Outstanding at June 30, 2000 (unaudited) 206,700 $ 3.30
========= ==========
</TABLE>
The following table summarizes information about stock options
outstanding:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------ ------------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Range of exercise prices of shares life price of shares price
------------------------ -------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1999
$0.28 129,900 9.86 $ 0.28 2,825 $ 0.28
============== =============== ========== ============== ==========
June 30, 2000 (unaudited)
$0.28 - $8.88 206,700 9.50 $ 3.30 24,475 $ 0.28
============== =============== ========== ============== ==========
</TABLE>
(9) Deferred Compensation
On November 1, 1999 and December 15, 1999, the Company granted employees
90,400 and 28,200 options, respectively. The aggregate amount of the
estimated fair value of the underlying stock in excess of the strike
price of the options on the dates of grant of $947,554 is being expensed
over the option vesting period, which is monthly vesting over three
years.
On November 1, 1999, the Company granted a consultant 11,300 options in
consideration for consulting services over a three-year period. The
consulting expense will be adjusted to the current estimated fair value
of the options.
F-60
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
(10) Subsequent Events
Effective January 1, 2000, the Company implemented a 401(k) savings plan
(the "Savings Plan"). Qualified employees may participate in the Savings
Plan by contributing up to 15% of their gross wages or $10,500 (subject
to change by statutory regulations). The Company may elect to make
matching contributions at the discretion of the Board of Directors of the
Company.
On January 12, 2000 and January 21, 2000, the Company entered into
several stock purchase agreements with investors. Under the terms of the
agreements, the Company issued 36,200 shares of common stock for total
consideration of $299,175 and 39,700 shares of common stock for total
consideration of $328,082, respectively.
On January 15, 2000, the Company entered into a technology development
and consulting services agreement with a third party. Under the terms of
the agreement, the first $400,000 of consulting services will be paid by
issuing Company common stock at a share price of $8.26. Consulting
services in excess of $400,000 will be paid 1/3 cash and 2/3 deferred
cash or 100% cash, at the election of the Company. This agreement may be
terminated by either party upon 14 days written notice.
On March 3, 2000, the Company entered into a lease agreement for office
space in Southlake, Texas. This agreement is a two-year lease with
monthly base rent of $4,900 plus a pro rata share of operating expenses
of approximately $1,050 per month.
On May 1, 2000, the Company entered into a domestic intermodal
transportation contract with a railway. The terms of the agreement
require $2.5 million of annual transportation services to be purchased
from the railway during the initial annual period. If the Company fails
to achieve this revenue requirement, the Company is liable for 25% of any
shortfall. In addition, in connection with this agreement, the Company
established a $250,000 letter of credit on behalf of the railway.
On May 8, 2000, the Company affected a 100 to 1 stock split on its
then-outstanding shares of common stock. All share information included
in these financial statements has been retroactively adjusted to reflect
the stock split.
On May 9, 2000, the Company amended and restated its certificate of
incorporation thereby authorizing 10,000,000 shares of $.0001 par value
common stock and 3,000,000 shares of $1.00 par value preferred stock, of
which 563,000 were designated as Series A preferred stock. Upon
liquidation, each holder of Series A preferred stock shall be entitled to
receive an amount equal to the original issue price of the Series A
preferred stock plus all accrued and unpaid dividends.
F-61
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
The Company shall pay preferential dividends to the holders of Series A
preferred stock, when and if declared, at an annual rate of 8% of the
original purchase. The dividends may be paid, at the discretion of the
Company, in cash or common stock at a price per share equal to the
conversion price of the Series A preferred stock on the payment date of
the dividend. Holders of the Series A preferred stock shall be entitled
to cumulative dividends prior and in preference to the payment of any
dividend or other distribution on the common stock. If after dividends in
the full preferential amount for the Series A preferred stock have been
paid or declared and set apart, then any additional dividends and
distributions declared, shall be declared among the holders of the then
outstanding common stock and Series A preferred stock pro rata according
to the number of shares of common stock held, where holders of shares of
Series A preferred stock will be deemed to hold the greatest whole number
of shares of common stock then issuable upon conversion in full of such
shares of Series A preferred stock.
In the event of liquidation, the holders of the Series A preferred stock
shall be entitled to be paid, prior and in preference to any payment or
distribution on any common stock, an amount per share equal to the
original issue price of the Series A preferred stock, plus all accrued
but unpaid dividends. If any funds remain after payment or distribution
to the holders of the Series A preferred stock, the remaining funds shall
be distributed among the holders of the then outstanding common stock and
the Series A preferred stock pro rata according to the number of shares
of common stock held, holders of shares of Series A preferred stock will
be deemed to hold the greatest whole number of shares of common stock
then issuable upon conversion in full of such shares of Series A
preferred stock.
Each holder of shares of Series A preferred stock shall be entitled to
the number of votes equal to the number of whole shares of common stock
into which such shares of Series A preferred stock could be converted.
Series A preferred stock may be converted at any time, at the election of
the holder, into the number of shares of common stock which results from
dividing the original issue price by the conversion price. The initial
conversion price is equal to the original issue price. The conversion
price shall be subject to adjustments upon (i) the issuance of additional
shares of common stock as a dividend or other distribution on outstanding
common stock, (ii) a subdivision of the outstanding shares of common
stock into a greater number of shares of common stock, (iii) a
combination of the outstanding shares of common stock into a smaller
number of shares of common stock, (iv) the company pays a dividend or
makes another distribution to the holders of the common stock payable in
securities of the Company other than shares of common stock, (v) the
Series A preferred stock is changed into the same or a different number
of shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise and (vi) the issuance or sale of additional
shares of common stock for a price that is less than the conversion price
for the Series A preferred stock in effect immediately prior to such
issue or sale.
Each share of Series A preferred stock shall automatically be converted
into fully paid and nonassessable shares of common stock, immediately
prior to the closing of the Company's first underwritten public offering
in which the aggregate gross proceeds received equals or exceeds $20
million at an offering price per share of common stock of not less than
four times the original conversion price per share.
F-62
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and June 30, 2000 (unaudited)
If a qualifying initial public offering (IPO) has not occurred as of the
fourth anniversary of the original issue date, each holder of outstanding
shares of Series A preferred stock may request redemption of all of the
outstanding shares of Series A preferred stock. The redemption price per
share of Series A preferred stock shall be equal to the original issue
price plus all accrued but unpaid dividends. The difference between the
value of the redeemable preferred stock and its aggregate redemption
value at the earliest redemption date is being accreted over the
redemption period.
On May 9, 2000, the Company issued 563,000 shares of Series A preferred
stock to a third party, pursuant to the terms of a Series A Convertible
Preferred Stock Purchase Agreement, and a warrant to purchase 170,000
shares of the Company's common stock. The aggregate purchase price for
the stock and the warrant was $4,877,099, comprised of $4,000,000 in cash
and 113,174 shares of the third party's common stock valued at $877,099.
The estimated fair value of the warrants was $755,400 on the date of
grant. The warrants are convertible into common stock at an exercise
price of $8.88. The warrant exercise period is May 9, 2000 through May 9,
2005 or upon the earlier of the third party's redemption of all shares of
the Company's Series A preferred stock, the last business day prior to a
qualified IPO, merger or consolidation of the Company and another entity
following which the shareholders of the Company control less than 50% of
the voting securities of the resulting entity or a sale of all or
substantially all of the Company's assets. In connection with the
consummation of the purchase agreement, the Company also entered into a
Stockholders' Agreement and an Investors Rights Agreement, dated as of
May 9, 2000. The Stockholders' Agreement and the Investors Rights
Agreement, taken in the aggregate, provide for, among other things,
restrictions on the transferability of securities, co-sale, preemptive
and registration rights. These agreements terminate upon a qualified
public offering of the Company's common stock.
On July 25, 2000, the Company entered into a lease agreement for office
space in Lombard, Illinois. This agreement is a five-year lease with
monthly base rent of $6,758.
On August 17, 2000, the Company entered into a two year accounts
receivable factoring agreement.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
SWAPIT.COM, INC.
We have audited the accompanying balance sheet of SwapIt.com, Inc. (A
Development Stage Company) as of December 31, 1999 and the related statement of
operations, stockholders' equity and cash flows for the period October 28, 1999
(Inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of SwapIt.com, Inc. (A Development
Stage Company) as of December 31, 1999, and the results of their operations and
their cash flows for the period October 28, 1999 (Inception) to December 31,
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.
/s/ MORGENSTERN & ASSOCIATES
Voorhees, NJ
February 10, 2000
F-64
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
BALANCE SHEETS
December 31, 1999 and June 30, 2000
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
December 31, June 30,
1999 2000
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,212,381 $ 45,692
Inventory -- 431,307
Prepaid expenses 56,106 29,950
----------- -----------
Total current assets 1,268,487 506,949
PROPERTY AND EQUIPMENT, NET 75,866 564,533
INTANGIBLE ASSET, NET OF AMORTIZATION 9,762 9,048
DEPOSITS 37,943 37,943
----------- -----------
TOTAL ASSETS $ 1,392,058 $ 1,118,473
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 69,378 $ 740,268
Notes payable - related party -- 2,725,000
Customer deposits -- 315,072
Accrued expenses 19,295 100,516
Accrued payroll tax liabilities 24,317 --
----------- -----------
Total current liabilities 112,990 3,880,856
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE E)
STOCKHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, $0.001 par value; 495,899 shares
authorized, 495,899 shares issued and outstanding 50 50
Common stock, $0.00025 par value; 6,504,101 shares authorized,
3,900,000 and 4,022,000 shares issued and outstanding 975 1,006
Additional paid-in capital 1,502,325 1,502,828
Deferred compensation (1,947) (2,218)
Deficit accumulated during the development stage (222,336) (4,264,049)
----------- -----------
Total stockholders' equity (deficit) 1,279,067 (2,762,383)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) $ 1,392,058 $ 1,118,473
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-65
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
From October 28, 1999 (Inception) to December 31, 1999,
Six months ended June 30, 2000,
and Period from October 28, 1999 (Inception) through June 30, 2000
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
October 28, 1999 (Unaudited) October 28, 1999
(Inception) Six months (Inception)
through ended through
December 31, 1999 June 30, 2000 June 30, 2000
----------------- -------------- ---------------
<S> <C> <C> <C>
REVENUES $ -- $ 227,070 $ 227,070
COST OF GOODS SOLD -- 706,508 706,508
------------ ------------ ------------
GROSS PROFIT -- (479,438) (479,438)
OPERATING EXPENSES
Amortization 238 714 952
Bank charges 152 3,624 3,776
Compensation and related expenses 89,431 999,364 1,088,795
Consulting -- 212,582 212,582
Depreciation 1,385 56,000 57,385
Dues and subscriptions 1,074 101,293 102,367
Employee benefits 2,700 49,569 52,269
Equipment rental 236 2,518 2,754
Insurance 671 4,373 5,044
Interest -- 85,656 85,656
Marketing 1,800 1,512,687 1,514,487
Office 5,592 105,382 110,974
Professional fees 103,275 245,974 349,249
Rent 10,383 69,664 80,047
Tax and licenses 2,264 891 3,155
Travel and entertainment 4,190 98,914 103,104
Telecommunications 2,110 27,413 29,523
------------ ------------ ------------
Total operating expenses 225,501 3,576,618 3,802,119
------------ ------------ ------------
LOSS FROM OPERATIONS (225,501) (4,056,056) (4,281,557)
------------ ------------ ------------
OTHER INCOME
Interest income 3,165 14,343 17,508
------------ ------------ ------------
NET LOSS $ (222,336) $ (4,041,713) $ (4,264,049)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-66
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
From October 28, 1999 (Inception) to December 31, 1999
and Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Additional During the
--------------- ---------------- Paid-In Deferred Development
Shares Amount Shares Amount Capital Compensation Stage Total
-------- ------ --------- ------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 28, 1999 -- -- -- -- -- -- -- --
Common stock issued to founders -- -- 3,420,000 $ 855 $ 14,145 -- -- $ 15,000
Common stock granted for services -- -- 480,000 120 1,980 $ (2,100) -- --
Amortization of deferred compensation -- -- -- -- -- 153 -- 153
Preferred stock issued 495,899 $ 50 -- -- 1,486,200 -- -- 1,486,250
Net loss for period from October 28, 1999
(Inception) to December 31, 1999 -- -- -- -- -- -- $ (222,336) (222,336)
-------- ------ --------- ------ ----------- ------------ ----------- -----------
Balance at December 31, 1999 495,899 $ 50 3,900,000 $ 975 $ 1,502,325 $ (1,947) $ (222,336) $ 1,279,067
======== ====== ========= ====== =========== ============ =========== ===========
Common stock granted for services
(unaudited) -- -- 122,000 31 503 (534) -- --
Amortization of deferred compensation
(unaudited) -- -- -- -- -- 263 -- 263
Net loss for period from January 1, 2000
to June 30, 2000 (unaudited) -- -- -- -- -- -- (4,041,713) (4,041,713)
-------- ------ --------- ------ ----------- ------------ ----------- -----------
Balance at June 30, 2000 (unaudited) 495,899 $ 50 4,022,000 $1,006 $ 1,502,828 $ (2,218) $(4,264,049) $(2,762,383)
======== ====== ========= ====== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-67
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Period from October 28, 1999 (Inception) to December 31, 1999,
Six months ended June 30, 2000,
and Period from October 28, 1999 (Inception) through June 30, 2000
<TABLE>
<CAPTION>
(Unaudited)
Period from Period from
October 28, 1999 (Unaudited) October 28, 1999
(Inception) Six months (Inception)
through ended through
December 31, 1999 June 30, 2000 June 30, 2000
----------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (222,336) $ (4,041,713) $ (4,264,049)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation/amortization 1,623 56,714 58,337
Compensatory common stock and stock
options issued 153 263 416
Changes in assets and liabilities:
Inventory -- (431,307) (431,307)
Prepaid expenses (56,106) 26,156 (29,950)
Intangible assets (10,000) -- (10,000)
Deposits (37,943) -- (37,943)
Accounts payable 69,378 670,890 740,268
Customer deposits -- 315,072 315,072
Accrued expenses 43,612 56,904 100,516
------------ ------------ ------------
Net cash used by operating activities (211,618) (3,347,021) (3,558,639)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (77,251) (544,667) (621,918)
------------ ------------ ------------
Net cash used by investing activities (77,251) (544,667) (621,918)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -- 2,725,000 2,725,000
Proceeds from the issuance of common stock 15,000 -- 15,000
Proceeds from the issuance of preferred stock 1,486,250 -- 1,486,250
------------ ------------ ------------
Net cash provided by financing activities 1,501,250 2,725,000 4,226,250
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,212,381 (1,166,688) 45,692
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0 1,212,381 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,212,381 $ 45,692 $ 45,692
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-68
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
From October 28, 1999 (Inception) to December 31, 1999
(Information Relating to June 30, 2000
And The Six Months Ended June 30, 2000 Is Unaudited)
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
SwapIt.com, Inc. (the "Company"), 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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 2000 and for the six
months ended June 30, 2000 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.
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 per account. At December 31, 1999, the Company had
an uninsured cash balance of $1,111,704.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash
equivalents, prepaid expenses, intangible assets, and accounts
payables, 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
Furniture and fixtures 7 years
F-69
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
From October 28, 1999 (Inception) to December 31, 1999
(Information Relating to June 30, 2000
And The Six Months Ended June 30, 2000 Is Unaudited)
(Continued)
INTANGIBLE ASSET
Intangible asset is comprised of a web site domain name, which will be
amortized over its estimated useful life of seven years.
REVENUE RECOGNITION
The Company recognizes revenues when earned or when services are
performed.
ADVERTISING AND MARKETING
The cost of advertising and marketing is expensed as incurred.
Advertising costs for the period from October 28, 1999 (Inception) to
December 31, 1999 amounted to $1,800.
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.
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.
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.
F-70
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
From October 28, 1999 (Inception) to December 31, 1999
(Information Relating to June 30, 2000
And The Six Months Ended June 30, 2000 Is Unaudited)
(Continued)
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Computer equipment $55,135
Furniture and fixtures 22,116
-------
77,251
Less accumulated depreciation (1,385)
-------
$75,866
=======
Depreciation expense for the period October 28, 1999 (Inception)
through December 31, 1999 was $1,385.
C. DEPOSITS
The Company has a rental deposit of $37,943 related to its office
lease.
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 more likely than not that the deferred tax
asset will not be utilized, management has established a reserve of
approximately $40,000.
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 December 31, 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.
The lease has a term of five years, expiring on December 31, 2004. The
monthly rental cost is approximately $12,700. Future minimum annual
lease payments for the next five years are as follows:
2000 $151,800
2001 $151,800
2002 $151,800
2003 $151,800
2004 $151,800
F-71
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
From October 28, 1999 (Inception) to December 31, 1999
(Information Relating to June 30, 2000
And The Six Months Ended June 30, 2000 Is Unaudited)
(Continued)
F. STOCKHOLDERS' EQUITY
STOCK SPLIT:
On January 14, 2000, the Company's Board of Directors approved a
four-for-one (4:1) common stock split. The effective date of the split
was January 20, 2000. All references in the financial statements to
shares issued, shares outstanding, and related prices in the
accompanying financial statements have been restated to reflect this
stock split.
SERIES A CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorizes the
issuance of 495,899 shares of "Series A Convertible Preferred Stock",
$0.001 par value per share, of which 495,899 shares were outstanding as
of December 31, 1999. The preferred shares are cumulative at an annual
dividend rate of 8%. Holders of each share of "Series A Convertible
Preferred Stock" are entitled to vote on all matters at stockholder's
meetings. Holders of each share of the "Series A Convertible 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
December 31, 1999 was $0.769.
The Company issued 132,941 shares of "Series A Convertible Preferred
Stock" at $3.761 per share on November 23, 1999 for a total purchase
price of $500,000. On December 20, 1999, at the conclusion of the first
round offering, the Company issued an additional 29,649 shares of
"Series A Convertible Preferred Stock" to an investor per their initial
10% fully diluted agreement. The additional issuance of stock changed
the per share purchase price to $3.075.
The Company issued 252,014 shares of "Series A Preferred Stock" at
$3.075 per share on December 17, 1999 for a total purchase price of
$775,000.
The Company issued 81,295 shares of "Series A Preferred Stock" at
$3.075 per share on December 20, 1999 for a total purchase price of
$250,000.
Cumulative preferred dividends at December 31, 1999 amounted to $7,145
or $0.014 per share.
Cumulative preferred dividends at June 30, 2000 (unaudited) amounted to
$67,978 or $0.045 per share.
COMMON STOCK:
The Company's Articles of Incorporation, as amended authorizes the
issuance of 6,504,101 shares of Common Stock, $0.00025 par value per
share, of which 3,900,000 were outstanding as of December 31, 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 3,420,000 shares of common stock at $0.0044 per
share on November 12, 1999 to its founders for an aggregate purchase
price of $15,000.
The Company issued 480,000 shares of common stock at $0.0044 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
$0.0044 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.
F-72
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
From October 28, 1999 (Inception) to December 31, 1999
(Information Relating to June 30, 2000
And The Six Months Ended June 30, 2000 Is Unaudited)
(Continued)
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
620,000 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. 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. The Company
estimates the fair value of stock options at the grant date by using
the minimum value method with the following assumptions used for the
grants in 1999: dividend yield of 0%; risk-free interest rate of 6.2%;
and an expected life of 10 years for all plan options.
Under the accounting provisions of SFAS 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
1999
As reported $ (222,336)
============
Pro forma $ (232,512)
============
The following summarizes information about the Company's stock options
at December 31, 1999 and June 30, 2000 (unaudited):
(a) EMPLOYEE OPTIONS
During the period from October 28, 1999 (Inception) to December 31,
1999 the Company granted options to employees. A summary of the status
of the Company's stock options as of December 31, 1999 and June 30,
2000, and changes during the period is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Outstanding at October 28, 1999 0 $ 0.00
Granted 20,000 $ 0.13
Exercised 0 $ 0.00
Forfeited 0 $ 0.00
-------- ------
Outstanding at December 31, 1999 20,000 $ 0.13
======== ======
Granted (unaudited) 151,450 $ 0.13
Exercised (unaudited) 0 $ 0.00
Forfeited (unaudited) (11,500) $ 0.13
-------- ------
Outstanding at June 30, 2000 (unaudited) 159,950 $ 0.13
======== ======
Options exercisable at December 31, 1999 0 $ 0
======== ======
Options exercisable at June 30, 2000 (unaudited) 0 $ 0
======== ======
</TABLE>
F-73
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
From October 28, 1999 (Inception) to December 31, 1999
(Information Relating to June 30, 2000
And The Six Months Ended June 30, 2000 Is Unaudited)
(Continued)
(b) NON-EMPLOYEE OPTIONS
During the period from October 28, 1999 (Inception) to December 31,
1999 the Company granted options to certain non-employees. A summary of
the status of the Company's stock options as of December 31, 1999 and
June 30, 2000, and changes during the period is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Outstanding at October 28, 1999 0 $ 0.00
Granted 169,600 $ 0.13
Exercised 0 $ 0.00
Forfeited 0 $ 0.00
-------- ------
Outstanding at December 31, 1999 169,600 $ 0.13
======== ======
Granted (unaudited) 20,000 $ 0.39
Exercised (unaudited) 0 $ 0.00
Forfeited (unaudited) 0 $ 0.00
-------- ------
Outstanding at June 30, 2000 (unaudited) 189,600 $ 0.15
======== ======
Options exercisable at December 31, 1999 169,600 $ 0.13
======== ======
Options exercisable at June 30, 2000 (unaudited) 189,600 $ 0.15
======== ======
</TABLE>
Stock Options during the period from October 28, 1999 (Inception) to
December 31, 1999; and June 30, 2000 (unaudited) are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Outstanding at October 28, 1999 0 $ 0.00
Granted 189,600 $ 0.13
Exercised 0 $ 0.00
Forfeited 0 $ 0.00
-------- ------
Outstanding at December 31, 1999 189,600 $ 0.13
======== ======
Granted (unaudited) 171,450 $ 0.16
Exercised (unaudited) 0 $ 0.00
Forfeited (unaudited) (11,500) $ 0.13
-------- ------
Outstanding at June 30, 2000 (unaudited) 349,550 $ 0.14
======== ======
Options exercisable at December 31, 1999 169,600 $ 0.13
======== ======
Options exercisable at June 30, 2000 (unaudited) 189,600 $ 0.15
======== ======
</TABLE>
F-74
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, approved as of August 28, 2000 in
sum and substance by STONEPATH GROUP, INC., a Delaware corporation ("STONEPATH
GROUP"), by resolution duly adopted by its Board of Directors on said date, and
by NET VALUE, INC., a Delaware corporation ("NET VALUE, INC."), approved on
August 28, 2000 by resolution duly adopted by its Board of Directors on said
date, and by NET VALUE ACQUISITION, INC., a Delaware corporation ("NET VALUE
ACQUISITION"), approved on August 28, 2000 by resolution duly adopted by its
Board of Directors on said date. This Agreement and Plan of Merger constitutes a
plan of merger and an agreement of merger pursuant to the provisions of the
Delaware General Corporation Law:
(1) Net Value Acquisition, a wholly owned subsidiary of Stonepath Group
shall, pursuant to the provisions of Section 251 of the Delaware General
Corporation Law, be merged into Net Value, Inc. ("Surviving Corporation"), which
shall be the surviving corporation upon the effective date of the merger and
which shall continue to exist under the provisions of the laws of the State of
Delaware. Upon the Effective Time of the merger, all assets and liabilities of
Net Value Acquisition shall become assets and liabilities of Net Value, Inc. and
the separate corporate existence of Net Value Acquistion shall cease. The
"Effective Time" shall be the date and time the Merger Agreement is filed with
the Secretary of State of the State of Delaware in accordance with the Delaware
General Corporation Law.
(2) The Certificate of Incorporation of Net Value, Inc. shall be the
Certificate of Incorporation of the Surviving Corporation.
(3) The present bylaws of Net Value, Inc. shall be the bylaws of the
Surviving Corporation and will continue in full force and effect until altered
or amended as therein provided under the authority of the laws of the State of
Delaware.
(4) The directors and officers of Net Value, Inc. upon the effective
date of the merger shall be Andrew Panzo and Lee Hansen, all of whom shall
hold their directorships and offices until the election and qualification of
their respective successors or until their tenure is otherwise terminated in
accordance with the bylaws of the Surviving Corporation.
(5) The manner of providing for the exchange and cancellation of all
the shares of stock of Net Value, Inc. issued and outstanding at the effective
date, by virtue of the merger, shall be as follows:
(a) At the Effective Time and only upon consummation of the merger,
each of the shares of common stock of Net Value, Inc. outstanding immediately
prior to the merger, other than shares of common stock to be cancelled pursuant
to Section 5(b) and Dissenting Shares (as such term is defined in Section 8),
shall be automatically converted and exchanged for 0.4 shares of common stock of
Stonepath Group, and thereupon all of the issued shares of Net Value, Inc.
shall be surrendered, cancelled and extinguished;
(b) At the Effective Time, each share of common stock of Net Value,
Inc. held, directly or indirectly, by Net Value Acquisition or Stonepath Group
or any direct or indirect subsidiary or parent of Net Value Acquisition or
Stonepath Group or held in Net Value, Inc.'s treasury shall be cancelled and
retired without payment of any consideration therefor; and
A-1
<PAGE>
(c) At the Effective Time, the shares of the Net Value Acquisition
shall not be converted, but each share of Net Value Acquisition which is issued
as of the effective date of the merger shall continue to represent one issued
share of the Surviving Corporation.
(6) At the Effective Time of the merger, each outstanding Net Value,
Inc. stock option and warrant, whether or not exercisable, will be assumed by
Stonepath Group. Each Net Value, Inc. stock option and warrant will continue
to have, and be subject to, the same terms and conditions that it had
immediately prior to the effective time, except that:
(a) each Net Value, Inc. stock option and warrant will be
exercisable for a number of shares of Stonepath Group common stock determined
by multiplying the number of shares of Net Value, Inc. common stock issuable
upon exercise of the option or warrant immediately prior to the Effective Time
of the merger by 0.4, rounded to the nearest whole share; and
(b) the exercise price for the shares of Stonepath Group common
stock issuable upon exercise of the option or warrant will be determined by
dividing the exercise price per share of Net Value, Inc. common stock at which
the option or warrant was exercisable immediately prior to the effective time by
0.4, rounded to the nearest whole cent.
(7) All shares of common stock of Stonepath Group issued by virtue
of the merger are subject to a transfer restriction providing that only five
percent of the shares may be resold commencing as of the closing of the merger
and during the remainder of the month in which the merger closed. This transfer
restriction expires on December 15, 2000, at which time the remaining shares may
be resold. The shares shall bear a legend to such effect.
(8) Notwithstanding anything in this Agreement to the contrary, Net
Value, Inc. shares that are outstanding immediately prior to the effective date
and are held by stockholders (other than Net Value Acquisition or Stonepath
Group) who shall not have voted such shares in favor of adoption of this
Agreement and who shall have delivered to the Company a written demand for
appraisal of such shares in the manner provided in Section 262 of the Delaware
General Corporation Law ("Dissenting Shares") shall not be converted into the
right to receive, or be exchangeable for, the shares of Stonepath Group, but the
holders thereof shall be entitled to payment of the appraised value of such
shares in accordance with the provisions of such Section 262; provided, however,
that (i) if any holder of Dissenting Shares shall subsequently deliver a written
withdrawal of his demand for appraisal of such Dissenting Shares (within the
written approval of the Surviving Corporation, if such withdrawal is not
tendered within 60 days after the Effective Time), or (ii) if any holder fails
to establish his entitlement to appraisal rights as provided in such Section
262, or (iii) if neither any holder of Dissenting Shares nor the Surviving
Corporation has filed a petition demanding a determination of the value of all
Dissenting Shares within the time provided in such Section 262, such holders (as
the case may be) shall forfeit the right to appraisal of such Dissenting Shares
and such Dissenting Shares shall thereupon be deemed to have been converted into
the right to receive and to have become exchangeable for, as of the Effective
Time, the Merger Consideration.
(9) This Agreement and Plan of Merger shall be submitted to the
stockholders of Net Value, Inc. for their approval or rejection in the manner
prescribed by the Delaware General Corporation Law. This Agreement and Plan of
Merger shall be submitted to the stockholder of Net Value Acquisition for its
approval or rejection in the manner prescribed by the Delaware General
Corporation Law. Pursuant to Section 251 of the Delaware General Corporation
Law, the approval of the stockholders of Stonepath Group to this Agreement
and Plan of Merger is not required.
A-2
<PAGE>
(10) In the event that this Agreement and Plan of Merger shall be
approved by the stockholders of Net Value, Inc. and the sole stockholder of Net
Value Acquisition in accordance with the provisions of Delaware law, Net Value,
Inc., as the Surviving Corporation, agrees that it will cause to be executed and
filed and recorded any document or documents prescribed by the laws of the State
of Delaware, and it will cause to be performed all necessary acts within the
State of Delaware and elsewhere to effectuate the merger.
(11) The Board of Directors, the Chairman, the President, any Vice
President, the Secretary, and any Assistant Secretary, and any other proper
officers of Stonepath Group, Net Value, Inc. and Net Value Acquisition
respectively, are hereby authorized, empowered, and directed to do any and all
acts and things, and to make, execute, deliver, file and record any and all
instruments, papers and documents which shall be or become necessary, proper or
convenient to carry out or put into effect any of the provisions of this
Agreement and Plan of Merger or of the merger herein provided for.
(12) At any time before the Effective Time, this Agreement and Plan of
Merger may be terminated and the merger may be abandoned by the Board of
Directors of either Stonepath Group or Net Value, Inc. or both, notwithstanding
the approval of this Merger Agreement by the shareholders of Stonepath Group or
Net Value, Inc.
A-3
<PAGE>
IN WITNESS WHEREOF, Net Value, Inc., Net Value Acquisition, and
Stonepath Group, Inc., by their duly authorized officers, have executed this
Agreement and Plan of Merger as of the date first above written.
NET VALUE, INC.
Attest:
/s/ By: /s/
------------------------------- ----------------------------------
STONEPATH GROUP, INC.
Attest:
/s/ By: /s/
------------------------------ ----------------------------------
NET VALUE ACQUISITION, INC.
Attest:
/s/ By: /s/
------------------------------ ----------------------------------
A-4
<PAGE>
EXHIBIT B
SECTION 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to (S)228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a non-stock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non-stock
corporation.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258 or 263 of this Chapter;
(1) provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock which, at the
record date fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement of the
merger or consolidation, were either (i) listed on a national securities
exchange or (ii) held of record by more than 2,000 stockholders; and further
provided that no appraisal rights shall be available for any shares of stock of
the constituent corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, appraisal rights under this Section shall be available for the shares
of any class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or consolidation
pursuant to Sections 251, 252, 254, 257, and 258 of this Chapter to accept for
such stock anything except (i) shares of stock of the corporation surviving or
resulting from such merger or consolidation; (ii) shares of stock of any other
corporation which at the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of record by more than
2,000 stockholders; (iii) cash in lieu of fractional shares of the corporations
described in the foregoing clauses (i) and (ii); or (iv) any combination of the
shares of stock and cash in lieu of fractional shares described in the foregoing
clauses (i), (ii) and (iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this chapter is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this Section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this Section, including those set forth in subsections (d) and
(e), shall apply as nearly as is practicable.
B-1
<PAGE>
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this Section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to take
such action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the surviving
or resulting corporation shall notify each stockholder of each constituent
corporation who has complied with the provisions of this subsection and has not
voted in favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within 10
days thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that appraisal
rights are available for any or all of the shares of the constituent
corporation, and shall include in such notice a copy of this Section. The notice
shall be sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. With 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition
B-2
<PAGE>
shall be filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of the interest, the Court may consider all relevant factors, including the rate
of interest which the surviving or resulting corporation would have had to pay
to borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the
B-3
<PAGE>
surviving or resulting corporation a written withdrawal of his demand of an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
<PAGE>
EXHIBIT C
DRAFT OF FORM OF OPINION OF
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
<PAGE>
John P. Warner, Esquire
202-452-7948
[email protected]
November ___, 2000
Stonepath Group, Inc.
1085 Mission Street
San Francisco, California 94103
Net Value, Inc.
1085 Mission Street
San Francisco, California 94103
Re: Federal Income Tax Consequences of Merger of Net Value Acquisition
Corporation into Net Value, Inc.
------------------------------------------------------------------
Gentlemen:
You have asked for our opinion as to the likely federal income tax
consequences of a proposed merger of Net Value Acquisition Corporation
("Acquisition"), a Delaware corporation that is the wholly-owned subsidiary of
Stonepath Group, Inc., formerly Net Value Holdings, Inc. ("Holdings"), with and
into Net Value, Inc. ("NVI"), a Delaware corporation, pursuant to which the
participating shareholders of NVI will surrender their NVI stock in exchange for
stock (or cash in lieu of fractional shares of stock) in Holdings and dissenting
shareholders will receive in cash the fair value of their NVI stock.
It is our opinion that it is more likely than not that the proposed
merger will be treated for federal income tax purposes as a taxable sale of
stock by the NVI shareholders to Holdings in exchange for Holdings stock and
cash.
I. Summary of Conclusions
In formulating our opinions set forth hereafter, we have examined and
relied upon the terms and conditions of the proposed merger as provided to us by
Acquisition, Holdings and NVI and their representatives, on representations made
to us by Holdings, NVI and their representatives, and on the proxy statement
filed with the Securities and Exchange Commission in connection with the
proposed transaction. If there are any material changes in the terms and
conditions of that merger as finally carried out by Acquisition, NVI, Holdings
and their shareholders or if any of the representations made to us are not
consistent with the relevant facts or intentions to which they relate, the
conclusions set forth in this letter may require modification.
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Our opinions are based on facts as presented to us as set forth herein,
pertinent provisions of the Internal Revenue Code of 1986, the Income Tax and
Procedure and Administration Regulations issued by the Treasury thereunder, and
interpretations of the Revenue Code and regulations by the courts and the
Internal Revenue Service, all as they exist at the date of this letter. The
regulations, judicial decisions and administrative interpretations, as well as
the statutory provisions, are subject to change at any time and, in some
circumstances, with retroactive effect. Any material change in the authoritative
interpretation of the Revenue Code made after the date of this letter could
result in a change in our conclusions.
As discussed in detail herein, certain issues that this opinion letter
considers concern questions for which there is a paucity of pertinent and
reliable authority. In those areas, our conclusions constitute a reasoned
interpretation of the applicable provisions of the Revenue Code and regulations
without assurance that such interpretations have been or will be accepted by the
Internal Revenue Service or the courts.
Predicated on the above and on the more detailed discussion contained
hereinafter, our conclusions may be expressed as follows:
1. Shareholders of NVI who receive stock in Holdings and cash in lieu
of fractional shares of stock in Holdings should recognize taxable gain or loss,
to the extent that the fair market value of the Net Value Holdings common stock
plus any cash in lieu of fractional shares received by the stockholder in the
merger exceeds, or is less than, the stockholder's basis in the NVI stock
surrendered. Such gain or loss will constitute capital gain or loss as long as
the NVI common stock surrendered is a capital asset in the hands of the
exchanging NVI stockholder and will be long term gain or loss if the exchanging
NVI stockholder has a holding period exceeding one year in the NVI common stock
surrendered. The stockholder's basis in the Net Value Holdings common stock
received in the merger will equal its fair market value at the time of the
merger and the holding period of the Net Value Holdings common stock will
commence on the day following the merger.
2. NVI should not recognize any gain or loss for federal income tax
purposes on the proposed transaction. NVI should retain the present basis in and
holding period of its assets.
3. NVI shareholders who receive cash equal to the "fair value" of their
NVI shares by virtue of the exercise of their appraisal rights under Delaware
law will (assuming that such shareholders hold their shares as capital assets),
in general, recognize capital gain or loss equal to the difference between the
amount of cash received and the basis of their NVI shares. NVI shareholders with
a holding period in their shares of one year or less will receive short term
capital gain or loss treatment on the deemed redemption or sale of such shares
due to the receipt of cash upon the exercise of statutory appraisal rights.
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Depending on the stock ownership attribution rules of section 318(a) of the
Code, however, it is conceivable that some such shareholders could be treated as
having received a distribution from NVI taxable in full as a dividend to the
extent of NVI's earnings and profits, if any, or as a taxfree return of capital
to the extent that NVI has no such earnings and profits as of the end of its
current taxable year.
II. Facts
A. Background
Holdings is a Delaware corporation formed in 1991 that is engaged in
acquiring equity interests in, and providing business development services to,
technology businesses which the corporation believes offer significant growth
opportunities. Holdings intends to take an active role in the management and
development of the businesses in which it makes an equity investment.
Holdings conducts no revenue-generating operations of its own. Its
assets consist almost exclusively of stock interests in nine corporations and
rights to acquire additional stock interests in all of those corporations.
Holdings' interest in six of those corporations is less than 50 percent in terms
of both voting power and value. Holdings also owns a 100 percent interest in
metacat.com, Inc., a 69 percent interest in Alarmx.com, Inc., and a 65 percent
interest in NVI. Holdings anticipates that its interest in Alarmx.com will be
reduced to below 50 percent within 12 months.
In October 1998, Holdings acquired approximately 66% of NVI's
outstanding common stock through share exchange transactions with 20 of NVI's
largest stockholders in which those stockholders received consideration,
approximately half of which consisted of voting common stock and the remainder
consisted of nonvoting preferred stock in Holdings that was, pursuant to a
recapitalization in 1999, converted into voting common stock in Holdings. As a
result of the merger described below, Holdings will acquire the remaining
minority interest in NVI. The consideration to be paid in connection with the
merger will be common stock in Holdings that, taking into account the 1999
recapitalization, will be the same per share consideration initially paid by
Holdings to acquire control of NVI.
NVI is a Delaware corporation organized in 1996. Until December 1999,
it was a development stage company whose products incentivized consumers to
purchase products and services sold across all categories of trade. NVI
developed a patent-pending process to deliver coupons, discounts and other
promotional incentives to Internet users. NVI also developed a technology to
address coupon industry concerns regarding fraudulent coupon redemption.
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In December 1999, NVI sold its business and assets to Brightstreet.com,
Inc., a new company formed by members of NVI's then senior management team and a
group of third party investors. In exchange for substantially all of its assets,
NVI received, among other consideration, 2,958,819 shares of BrightStreet.com,
Inc. common stock equal to an approximate 14% ownership interest in
BrightStreet.com, Inc. NVI is currently a 14% owner of BrightStreet.com, Inc.
and has no other current operations.
Acquisition is a newly-formed Delaware corporation organized by
Holdings for the sole purpose of effecting the merger. Acquisition has not
conducted any prior business.
B. Proposed Transaction
As part of its plan to acquire the remaining equity interests in NVI,
Holdings has formed Acquisition, a wholly-owned Delaware corporation, to which
it has transferred Holdings common stock and cash in exchange for all of
Acquisition's stock. As part of the same plan, Acquisition will, pursuant to
Delaware law, merge with and into NVI. By operation of law, on the effective
date of the merger, NVI will receive all of the assets of, and will assume all
of the liabilities of, Acquisition.
In the merger, NVI stockholders will receive 0.4 shares of Holdings
common stock for each share of NVI common stock owned by them, rounded down to
the nearest whole share, without interest, plus a check for any fractional share
of Holdings common stock they would otherwise receive. Holders of what would
have been a fractional share of Holdings common stock will receive cash (rounded
to the nearest cent) equal to the high bid price per share of Holdings' common
stock on the trading day immediately preceding the closing date, multiplied by
the fraction of the share (rounded to the nearest hundredth of a share) of
Holdings common stock that they would have received. NVI shareholders who
dissent from the merger will have the right under Delaware law to receive for
all of their NVI shares cash equal to the appraised "fair value" of those
shares.
III. Legal Discussion
A. General Principles
As a general principle, whenever a taxpayer exchanges property,
including stock, for cash or other property, the taxpayer is required to
recognize taxable gain or loss on the exchange equal to the amount of cash and
the fair market value of the other property received less the taxpayer's
adjusted basis for the property surrendered.(1) When a taxpayer exchanges stock
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(1) Sections 61, 1001 and 1002 of the Internal Revenue Code of 1986, as
amended. Unless otherwise indicated, all statutory references are to the
Internal Revenue Code of 1986, as amended.
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in a target corporation for stock in an acquiring corporation in a merger,
taxfree treatment of the exchange may be available, but only if the specific
statutory, regulatory and judicially-imposed requirements for taxfree
reorganization treatment are satisfied.
B. Requirements for Taxfree Reorganization Treatment
In order for a merger, such as the proposed merger of Acquisition into
NVI, in which a corporation is merged into a target corporation and the
shareholders of the target corporation exchange their stock for stock in a
corporation controlling the merged corporation to qualify for taxfree treatment
under the rules specifically addressing reverse triangular mergers in section
368(a)(2)(E), four statutory requirements must be fulfilled. First, the merger
must constitute a statutory merger as described in section 368(a)(1)(A). Second,
shareholders of the surviving target corporation must receive in the merger
voting stock of a corporation that controls the merged corporation. Third, the
shareholders of the surviving target corporation must exchange in the merger a
controlling stock interest in that corporation for voting stock of a corporation
that controls the merged corporation. Fourth, the surviving corporation must
continue to hold "substantially all" of its properties and of the properties of
the merged corporation.
Alternatively, such a transaction can qualify as a reorganization under
the rules governing stock-for-stock exchanges under section 368(a)(1)(B), but
only if two statutory requirements are met. First, the shareholders of the
surviving corporation must receive as consideration solely voting stock of the
corporation controlling the merged corporation. Second, the corporation
controlling the merged corporation must, immediately after the transaction, own
at least 80 percent of the voting stock and at least 80 percent of each other
class of stock in the target corporation.
In order to qualify as either type of tax-free reorganization, a
transaction must not only satisfy the objective criteria of one or more of the
subparagraphs under section 368, but must also satisfy three additional
requirements for reorganization treatment that have been developed by the courts
and by the Treasury in regulations. Thus, the proposed merger would have to
satisfy the business purpose requirement, the continuity of proprietary interest
requirement and the continuity of business enterprise requirement in order to
qualify for tax-free reorganization treatment. Finally, a transaction will not
qualify for taxfree reorganization treatment if it violates restrictions
contained in section 368(a)(2)(F) respecting reorganizations involving at least
two "investment compan[ies]."
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1. Characterization of the Scope of the Transaction
As noted in A., above, Holdings acquired approximately 66 percent of
the stock of NVI through a share exchange with NVI's largest shareholders in
October 1998. At the time, Holdings expressed its intention to seek to acquire
the remaining stock of NVI at the same per share conversion ratio as was used in
the October 1998 share exchange. The proposed merger is designed to implement
Holdings' stated intention and, taking into account the 1999 Holdings
recapitalization, the consideration to be paid in the merger will reflect the
same NVI-to-Holdings share conversion that was used in the October 1998 share
exchange.
Under these circumstances, there is authority that, under the
well-established step transaction doctrine, the proposed merger could, for
federal income tax purposes, be considered part of the same transaction as the
October 1998 share exchange.(2) However, application of the step transaction
doctrine depends on application of all the facts and circumstances. In light of
the two-year hiatus between the October 1998 share exchange and the merger, and
the intervening recapitalization and the evolution of Holdings in the interim,
and the fact that the remaining NVI shareholders are under no obligation to
approve the merger, it is more likely that the merger could be characterized as
a transaction independent from the October 1998 share exchange.(3)
Given the difficulty in making a definitive judgment as to whether the
merger is likely to be characterized without regard to, or as part of the same
transaction as, the October 1998 share exchange, our analysis will, to the
extent relevant, consider the likely tax consequences of the merger under both
characterizations.
2. Satisfaction of Objective Requirements of Section 368(a)
a. Merger Characterized as Independent Transaction
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(2) See, e.g., King Enterprises, Inc. v. United States, 418 F.2d 511 (Ct. Cl.
1969), in which a corporation's acquisition of the stock of a target
corporation for a combination of stock, cash and promissory notes was
considered part of the same transaction as the merger, eight months later,
of the target corporation into the acquiring corporation.
(3) Compare McDonald's Restaurants of Illinois, Inc. v. Commissioner, 688 F.2d
520 (7th Cir. 1982) (sale, six months after merger, of acquiring
corporation shares received as merger consideration was considered part of
the same transaction as the merger) with Penrod v. Commissioner, 88 T.C.
14156 (1987) (sale, eight months after merger, of acquiring corporation
shares received as merger consideration was considered independent of the
merger).
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If the merger is considered as an independent transaction for tax
purposes, it could not qualify as a reverse triangular merger under section
368(a)(2)(E). Eligibility for that treatment depends upon the acquiring
corporation acquiring at least 80 percent of the voting stock and at least 80
percent of each class of nonvoting stock of the target corporation in the
transaction. Holdings will acquire in the merger only 35 percent of the
outstanding stock of NVI.
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On the other hand, the merger could satisfy the objective requirements
of section 368(a)(1)(B) if the merger is considered an independent
transaction.(4) Section 368(a)(1)(B) requires only that, immediately after a
transaction in which the acquiring corporation acquires stock in the target
corporation solely for voting stock, the acquiring corporation own at least 80
percent of the voting stock and at least 80 percent of each class of nonvoting
stock of the target corporation. Holdings will acquire the remaining NVI stock
solely for voting stock in the merger and, immediately after the merger, will
own all of the outstanding NVI shares.
b. Merger Characterized as Part of Same Transaction
as October 1998 Share Exchange
If the merger is considered as part of the same transaction as the
October 1998 share exchange, it would not satisfy the objective criteria for
taxfree treatment under either section 368(a)(2)(E) or section 368(a)(1)(B)
because of the Holdings nonvoting stock that was initially issued as
consideration in the 1998 share exchange. In that exchange, approximately 33
percent (one-half of the total consideration) of the NVI stock was acquired for
Holdings nonvoting preferred stock.(5)
In order for section 368(a)(2)(E) to apply, the acquiring corporation
must acquire, for voting stock, at least 80 percent of the voting stock and at
least 80 percent of each class of nonvoting stock of the target corporation.
Because Holdings has acquired more than 20 percent of the NVI stock for Holdings
nonvoting stock, the 80 percent requirement of the statute would not be
satisfied even if the remaining 34 percent of the NVI stock were acquired solely
for Holdings voting stock.
In order for section 368(a)(1)(B) to apply, the acquiring corporation
must acquire stock in the target corporation solely for voting stock and,
immediately after the transaction, own at least 80 percent of the voting stock
and at least 80 percent of each class of nonvoting stock of the target
corporation. The use of any nonvoting stock as consideration for target
corporation stock in the transaction, even if at least 80 percent of the target
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(4) See Rev. Rul. 67-448, 1967-2 C.B. 144.
(5) It could be argued that the 1998 share exchange and the 1999
recapitalization could be stepped together as one transaction, namely as
the acquisition of 66 percent of the NVI stock solely for voting stock of
Holdings. If so, it might be possible for the overall transaction to
satisfy the voting stock consideration requirements of sections
368(a)(2)(E) and 368(a)(1)(B). However, the lack of any intent at the time
of the share exchange to have the Holdings nonvoting preferred stock
converted into voting stock and the hiatus between the share exchange and
the recapitalization make it difficult to ignore the issuance of Holdings
nonvoting preferred stock in the share exchange.
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corporation's outstanding stock is acquired for voting stock, precludes
application of section 368(a)(1)(B).(6) Holdings issuance of nonvoting stock as
consideration in the October 1998 share exchange would therefore disqualify the
merger from taxfree stock-for-stock reorganization treatment if the share
exchange were considered part of the merger transaction.
3. Continuity of Business Enterprise
The continuity of business enterprise requirement for tax free
reorganization treatment is satisfied for purposes of section 368 only if the
surviving target corporation, in this case, NVI, either continues its "historic
business" or uses a significant portion of its "historic business assets" in a
business.(7) The governing regulations provide that a corporation's "historic
business" does not include any business "enter[ed] into as part of [the] plan of
reorganization."(8) A target corporation's sale of its historic business assets
and reinvestment of the sale proceeds in securities or other investments as part
of an overall plan of reorganization prevents a transaction from satisfying the
continuity of business enterprise requirement and thus precludes taxfree
reorganization treatment.(9)
Whether a sale of business assets is part of a plan of reorganization
is determined based on consideration of all the facts and circumstances.(10) If
the contemplated merger is characterized as part of the same transaction as the
October 1998 share exchange, NVI's December 1999 sale of its active marketing
incentivization business assets in exchange for cash and a 14 percent interest
in Broadstreet.com, Inc. would probably be viewed as the termination of its
historic business and the commencement of a new business as part of the overall
reorganization plan. If so viewed, the transaction would not satisfy the
continuity of business enterprise requirement.
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(6) Chapman v. Commissioner, 618 F.2d 856 (1st Cir. 1980), rev'g Reeves v.
Commissioner, 71 T.C. 727 (1979); Heverly v. Commissioner, 621 F.2d 1227
(3d Cir. 1980), rev'g Pierson v. United States, 472 F. Supp. 957 (D. Del.
1979).
(7) Regs. section 1.368-1(d). Although the regulations are expressed in terms
of the acquiring corporation continuing the acquired corporation's business
or using the acquired corporation's business assets in a business, in the
context of a reorganization in which the target corporation's stock is
acquired, such as a section 368(a)(2)(E) or a section 368(a)(1)(B)
reorganization, the standard must be satisfied by the target corporation,
see Rev. Rul. 81-92, 1981-1 C.B. 133.
(8) Regs. section 1.368-1(d)(1)(i).
(9) Regs. section 1.368-1(d)(5) Example (3).
(10) Treasury Decision 7745, 1981-1 C.B. 134, 137-38, 139.
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On the other hand, if the contemplated merger is characterized as an
independent transaction, separate from the October 1998 share exchange, it is
likely that NVI's holding of its 14 percent interest in Broadstreet.com, Inc.
would be considered its "historic business" provided that NVI's sale of its
active business assets in December 1999 were not in contemplation of the
merger.(11) In that event, the merger would satisfy the continuity of business
enterprise requirement if, as Holdings has represented, it intends to maintain
NVI's interest in Broadstreet.com after the merger.
4. Investment Company Rules
Even if an exchange satisfies both the affirmative statutory rules for
section 368 treatment and the continuity of business enterprise requirement,
taxfree treatment is unavailable to the shareholders of the target corporation
if (i) the target corporation and the acquiring corporation are "investment
compan[ies]," (ii) the target corporation is not a regulated investment company
or a real estate investment company and more than 25 percent of its assets
consists of stock or security of one issuer or more than 50 percent of its
assets consists of stock or securities of five or fewer issuers, and (iii) the
target corporation's shareholders' receipt of acquiring corporation stock
results in the diversification of the transferors' interests.(12) For this
purpose, an "investment company" is a corporation more than 50 percent of the
value of whose assets consists, immediately after the relevant transaction, of
stock and securities of less-than 50 percent owned subsidiaries, if at least 80
percent of the value of its assets are "held for investment."(13) A corporation
that participates in a potential reorganization transaction is deemed to own
directly its ratable share of the assets owned by its 50 percent-or-greater
owned subsidiaries, rather than its stock in such subsidiaries, for both the 50
percent test and the 80 percent test.(14)
Immediately after the proposed transaction, Holdings' only assets will
be its stock interests in the nine corporations in which it presently holds
equity interests. It will have no revenue-generating business of its own.
Therefore, it is likely that it will be an investment company within the meaning
of section 368(a)(2)(F) if it is treated as holding "for investment" the
minority stock interests it holds and the value of these interests represents at
least 80 percent of the value of all of its assets.
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(11) See Abegg v. Commissioner, 429 F.2d 1209 (2d Cir. 1970) (sale of active
business and reinvestment of proceeds in investment portfolio two years
prior to, and not in contemplation of, reincorporation transaction does not
violate continuity of business enterprise).
(12) Section 368(a)(2)(F).
(13) Section 368(a)(2)(F)(iii).
(14) Id.
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There is little authority on whether the ownership of significant
minority positions in other corporations, coupled with significant management
involvement in those corporations and the provision of systematic business
assistance, constitutes holding those minority positions "for investment" within
the meaning of section 368(a)(2)(F). However, analogous authority suggests that
such a holding would be treated as for investment. In Private Letter Ruling
9347022 (August 30, 1993), a target corporation that organized, financed,
acquired significant equity interests in a limited number of corporations in
order to "have a significant influence in the management and operation of
[those] companies" was treated as an investment company within the meaning of
section 368(a)(2)(F).
Other cases interpreting the phrase "held for investment" for other
purposes under the Internal Revenue Code have generally treated significant
stock ownership - even majority stock ownership - as being for investment so
long as a significant motivation for the taxpayer's holding of the interest is
to obtain dividend income or a profit upon eventual disposition of the interest,
as opposed to profit from the sale, rental or licensing of property or the
provision of services. For example, in Datamation Services, Inc. v.
Commissioner, T.C. Memo 1976-252, the Tax Court held that a data processing
corporation's holding of all of the stock in a corporation that operated
technical training schools was for investment purposes, and not for use in its
business, for purposes of the capital loss provisions where the taxpayer's
motivation was to realize gain on the value of the investee corporation rather
than to enhance the taxpayer's own directly conducted business. In Miller v.
Commissioner, 70 T.C. 448, 455-60 (1970), the Tax Court held that a
partnership's controlling interest in a bank corporation was held for investment
within the meaning of a statute that limited the amount of deductions for
"investment interest" - defined as interest on debt incurred to purchase or
carry property held for investment - where the partnership's fees from
transactions with the bank and the individual partners' salaries from the bank
were only slightly larger than the partnership's annual interest expense on debt
incurred to acquire the bank corporation stock. Holdings has represented to us
that it will derive no fee or other transactional income from dealings with the
corporations in which it has invested. Therefore, it is likely that Holdings'
interests in the corporations in which it holds a less than 50 percent by vote
and value will be considered as "held for investment" for purposes of section
368(a)(2)(F).
Under section 368(a)(2)(F)(iii), Holdings will be an investment company
only if more than 80 percent of its assets are "held for investment." For this
purpose, Holdings will be treated as owning the assets owned by, and engaging in
any business conducted by, any corporation in which Holdings' interest, measured
either by voting power or value, is at least 50 percent. Thus, Holdings will be
an investment company only if its proportionate share of the business assets of
metacat.com, Inc. and Alarmx.com, Inc. represent less than 20 percent of its
assets by value. We note that the book value of Holdings' investments in
metacat.com and Alarmx.com represents approximately 8.1 percent of the total
book value of stock held by
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Holdings in the nine corporations (including NVI) in which it holds interests.
Holdings has represented that the value of its interests in metacat.com, Inc.
and Alarmx.com, Inc. represent less than 20 percent of its total assets by
value. Therefore, it is likely that Holdings will be treated as an investment
company immediately after the merger of Acquisition into NVI.
NVI's virtually sole asset is, and immediately after the merger will
be, its 14 percent stock interest in Broadstreet.com, Inc. In light of that, NVI
will be an investment company within the meaning of section 368(a)(2)(F) whose
stockholders may be subject to tax on an otherwise taxfree reorganization
because (i) more than 50 percent of its assets will be stock or securities, (ii)
based on the analysis with respect to Holdings, more than 80 percent of its
assets will be property "held for investment," and (iii) more than 25 percent of
its assets by value will consist of stock in a single issuer.
Therefore, the merger will not be a taxfree reorganization as to the
stockholders of NVI unless their receipt of Holdings stock in exchange for
Holdings stock does not result in a diversification of their holdings. In the
case of undiversified investment company - one, such as NVI, more than 25
percent of whose assets consist of stock in a single issuer or more than 50
percent of whose assets consist of stock in five or fewer issuers - a
reorganization will result in the prohibited diversification unless either (i)
the target and the acquiring corporation are ultimately owned by substantially
the same persons in substantially the same proportions or (ii) the assets held
for investment by the target and the acquiring corporation consist of
substantially of the same underlying investments held in substantially the same
proportions. In the instant case, neither of those conditions is satisfied. The
only substantial asset of NVI is its 14 percent stock interest in
Broadstreet.com, whereas Holdings owns stock interests in eight corporations
other than NVI, none of which owns an interest in Broadstreet.com. Furthermore,
Holdings has represented that none of the NVI stockholders owns an interest in
Holdings.
Therefore, it is likely that the merger would be treated as involving
two investment companies within the meaning of section 368(a)(2)(F) that results
in the diversification of the interests of the NVI stockholders, thereby
rendering inapplicable the tax-free reorganization rules of section 368.
B. Tax Consequences of Proposed Transaction.
Assuming that the proposed merger does not satisfy the requirements for
taxfree reorganization treatment under section 368, as we believe to be the most
likely result, the federal income tax consequences to NVI and its shareholders
are as follows:
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1. Characterization of Transaction for Tax Purposes
For federal income tax purposes, the formation of Acquisition and its
merger with and into NVI will be disregarded and the transaction will be treated
as an acquisition of the minority stock interest in NVI by Holdings in exchange
for Holdings company stock and cash.(15)
2. Consequences to NVI.
Since NVI is not considered a party to the proposed transaction, as
described above, it will not incur any tax consequences as a result of the stock
exchange.
Since it will remain in existence, NVI's taxable year will not end on
the date of the proposed merger. It will also retain its earnings and profits,
or deficit therein. Because the stock ownership of NVI will change by only 35
percent as a result of the merger, NVI's net operating loss carryforwards, if
any, will be available to offset future income of NVI to the same extent as they
were before the merger. If, however, at any time within three years after the
merger, third parties acquire more than a 15 percentage point interest in NVI,
NVI's ability to use its own net operating loss carryforwards, if any, may be
limited under section 382.
3. Consequences to NVI Shareholders
a. Receipt of Holdings Stock
Shareholders of NVI who receive stock in Holdings and cash in lieu of
fractional shares of stock in Holdings should recognize taxable gain, or loss,
to the extent that the fair market value of the Holdings common stock, plus any
cash in lieu of fractional shares, received by the stockholder in the merger
exceeds, or is less than, the stockholder's basis in the NVI stock surrendered.
Section 1001(a). Such gain or loss will constitute capital gain or loss as long
as the NVI common stock surrendered is a capital asset in the hands of the
exchanging NVI stockholder and will constitute long term gain or loss if the
exchanging NVI stockholder has a holding period exceeding one year in the NVI
common stock surrendered. The stockholder's basis in the Holdings common stock
received in the merger will equal its fair market value at the time of the
merger and the holding period will commence on the day following the merger.
Section 1012(a).
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(15) See, Rev. Rul. 73-427, 1973-2 C.B. 301.
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b. Receipt of Cash in Exercise of Statutory
Appraisal Rights
NVI shareholders who dissent from the merger and exercise their
appraisal rights under Delaware will be treated as having had their stock
redeemed by NVI.(16) Therefore, so long as -- taking into account operation of
the constructive stock ownership rules under section 318 -- any such
shareholder's interest in NVI is completely terminated, that shareholder would
recognize capital gain or capital loss equal to the difference between the
appraisal price and the shareholder's basis in his shares.(17) Any gain or loss
so recognized would be short-term in nature unless the shareholder's holding
period in his NVI shares exceeded one year at the effective time of the merger.
To obtain capital gain or loss treatment on the receipt of cash from
the exercise of his statutory appraisal rights, a NVI shareholder would most
likely have to satisfy the requirements of section 302(b)(3), that the
transaction results in a complete termination of his interest in NVI. In
determining whether such a shareholder had his interest completely terminated,
he would have to consider stock he actually owns and stock constructively owned
under the constructive stock ownership rules of section 318(a).
Under the constructive stock ownership rules, a shareholder is treated
as owning all shares owned by his parents, spouse, children and grandchildren,
section 318(a)(1). In addition to the attribution of stock to individual
shareholders, all shareholders of NVI would under section 318(a)(4) and
318(a)(2) be considered as owning (i) stock in Holdings that they have an option
to acquire, (ii) a proportionate part of the stock in Holdings that is owned by
partnerships of which they are members or corporations more than 50 percent of
the value of whose stock they own, and (iii) stock in Holdings owned by certain
trusts and estates of which they are beneficiaries. Partnerships that are
shareholders of Holdings would be deemed to own stock owned by their partners,
section 318(a)(3)(A). Corporations that own stock in Holdings would be deemed to
own stock owned by their majority shareholders, section 318(a)(3)(C). Trusts and
estates would be deemed to own stock owned by their beneficiaries, section
318(a)(3)(B) and (A).
In the event that a shareholder's own interest in NVI were terminated
but he would be deemed to own a continuing interest in the corporation by virtue
of continuing ownership by a family member, the constructive stock ownership
rules could be waived for purposes of determining whether a complete termination
of his interest had occurred if certain conditions were met, including that the
shareholder had no interest -- including as an officer, director or employee --
----------------
(16) If Holdings is the source of the funds used to pay dissenting shareholders,
however, the tax consequences to such shareholders will be the same as
those applicable to the NVI shareholders who participate in the merger, as
described in a., above.
(17) Section 302(b)(3) of the Code.
<PAGE>
Silverstein and Mullens
A DIVISION OF BUCHANAN INGERSOLL PC
Stonepath Group, Inc.
Page 15
November ___, 2000
other than as a creditor of NVI and did not re-acquire any interest in NVI
(other than by bequest or inheritance) within ten years of the effective time of
the merger. Section 302(c)(2).(18)
If a NVI shareholder who exercised his Delaware appraisal rights were
not eligible for capital gain or loss treatment, payment in cash of the fair
value of his shares would represent a distribution from NVI that would be
taxable to the extent NVI had any earnings and profits during either the current
year or as accumulated during NVI's existence and, to the extent that the
corporation had no such earnings and profits, would represent a return of
capital to the shareholder and capital gain to the extent that the appraised
value exceeded the shareholder's basis in his shares.(19)
This opinion is issued solely to Holdings and NVI and its shareholders
in connection with the transaction described in the first sentence of this
letter and may not be used for any other purpose. Our opinion is limited to the
matters discussed above. We have released the foregoing opinion as of the date
above and do not undertake to supplement our opinion with respect to factual
matters or changes in the law that may hereafter occur.
Sincerely,
SILVERSTEIN AND MULLENS,
A DIVISION OF BUCHANAN INGERSOLL, P.C.
By: ___________________________
John P. Warner
-------------
(18) NVI shareholders who exercised their statutory appraisal rights but who
thereafter were deemed constructively to own NVI stock would still be
entitled to capital gain or loss treatment if, taking into account all
constructive stock ownership, their ownership represented less than a 50
percent interest in the corporation and declined in terms of percentage
ownership by at least 20 percent, section 302(b)(2), or they experienced a
"meaningful reduction" in stock ownership, section 302(b)(1) and United
States v. Davis, 397 U.S. 301 (1970).
(19) Section 301(c) of the Code.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Under Section 145 of the General Corporate Law of the State of
Delaware, Stonepath Group 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. Stonepath Group bylaws (Exhibit
3.2 hereto) also provide for mandatory indemnification of its directors,
officers, employees and agents to the fullest extent permissible under Delaware
Law.
Stonepath Group's Amended and Restated Certificate of Incorporation
(Exhibit 3.1 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
Stonepath Group 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 Stonepath Group 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.
Stonepath Group intends to obtain in conjunction with the
effectiveness of the registration statement, a policy of directors' and
officers' liability insurance that insures Stonepath Groups' directors and
officers against the cost of defense, settlement or payment of a judgment under
certain circumstances.
Exhibits
The following Exhibits are filed as part of this Registration
Statement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed as part of this Registration
Statement.
<TABLE>
<CAPTION>
Exhibit
Number Document
------ --------
<S> <C>
2.1(1) Merger Agreement and Plan of Reorganization dated as of June 21, 1999 among Net Value
Holdings, Inc. and Strategicus Partners Inc. and Douglas Spink (the "Strategicus Merger Agreement")
2.2(1) Amendment No. 1 to the Strategicus Merger Agreement
2.3(1) Amendment No. 2 to the Strategicus Merger Agreement
2.4(2) Agreement and Plan of Merger among Stonepath Group, Net Value Acquisition, Inc.
and Net Value, Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Bylaws
4.1(3) Specimen Certificate for Net Value Holdings, Inc.'s Common Stock
4.2(3) 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(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
4.6(4) Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock
4.7(4) Form of Net Value Holdings, Inc. Common Stock Purchase Warrant issued in connection with the
Series C Convertible Preferred Stock
4.8(4) Form of Compensation Warrant to be issued in connection with the Series C Convertible Preferred
Stock
5(2) Opinion of Buchanan Ingersoll, Professional Corporation, as to the legality of the shares of common
stock being registered.
8(2) Draft of Form of Tax Opinion of Buchanan Ingersol Professional Corporation
10.1(3) Employment Agreement with Andrew P. Panzo, dated June 1, 1999
10.2(3) Amended and Restated Employment Agreement with Douglas Spink, dated June 17, 1999
10.3(3) Employment Agreement with Lee Hansen, dated September 15, 1999
10.4(3) Consulting Agreement with Barry Uphoff, dated June 30, 1999
10.5(3) Consulting Agreement with Darr Aley, dated June 30, 1999
10.6(3) Consulting Agreement with Stephen George, dated June 21, 1999
10.7(3) Loan Agreement between Strategicus Partners Inc. and Net Value Holdings, Inc., dated as of May
28, 1999
10.8(3) Amendment No. 1 to the Loan Agreement between Strategicus Partners Inc. and Net Value
Holdings, Inc.
10.9(3) Amendment No. 2 to the Loan Agreement between Strategicus Partners Inc. and Net Value
Holdings, Inc.
10.10(3) Promissory Note in the amount of $310,000 issued by Douglas Spink in favor of Strategicus
Partners Inc., dated May 28, 1999
10.11(3) 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(3) Promissory Note issued by Net Value, Inc. in favor of SUNCL, Inc., dated October 1, 1998
10.13(3) Loan Agreement by and among Net Value, Inc., American Maple Leaf Financial Corporation and
the other signatories thereto, dated June 26, 1998
10.14(3) Promissory Note issued by Net Value, Inc. in favor of American Maple Leaf Financial Corporation,
dated June 26, 1998
10.15(3) Stock Purchase Agreement By and Between YesAsia, Inc. and Strategicus Partners, Inc., dated July
29, 1999
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.16(3) Common Stock Purchase Agreement By and Between College 411.com, Inc. and Strategicus
Partners, Inc., dated July 28, 1999
10.17(3) AssetExchange, Inc. Series A Preferred Stock Purchase Agreement, dated September 10, 1999
10.18(3) AssetExchange, Inc. Investor Rights Agreement, dated September 10, 1999
10.19(3) Series B Convertible Preferred Stock Purchase Agreement, dated as of September 17, 1999
10.20(3) Registration Rights Agreement
10.21(3) Form of Warrant
10.22(3) Employment Agreement with Tom Aley dated November 22, 1999
10.23(3) 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(3) Stock Purchase Agreement between Merus Partners, Inc. and Net Value Holdings, Inc. dated as of
October 11, 1999
10.25(3) Stock Purchase Agreement between Net Value Holdings, Inc. and Webmodal, Inc. dated as of
October 11, 1999
10.26(3) 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(3) Investor Rights Agreement by and between Swapit.com, Inc. and Net Value Holdings, Inc. dated as
of November 23, 1999
10.28(3) 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(3) 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(3) Stockholders Agreement by and among Promotions Acquisitions, Inc. and certain stockholders
dated as of December 3, 1999.
10.31(3) Registration Rights Agreement dated as of December 3, 1999
10.32(3) Common Stock Purchase Agreement dated as of October 1, 1999
10.33(3) Consulting Agreement dated as of October 1, 1999
10.34(6) Series A Convertible Preferred Stock Purchase Agreement by and between IndustrialVortex.com,
Inc. and Net Value Holdings, Inc. dated as of January 31, 2000
10.35(6) Investor Rights Agreement by and between IndustrialVortex.com, Inc,. and Net Value Holdings,
Inc. dated as of January 31, 2000
10.36(6) Co-Sale Agreement by and among Net Value Holdings, Inc., IndustrialVortex.com, Inc. and the
principal stockholders of IndustrialVortex.com, Inc. dated as of January 31, 2000
10.37(4) Registration Rights Agreement, dated as of March 3, 2000, by and among Net Value Holdings, Inc.
and the Series C Investors
10.38(4) Series C Preferred Stock Agreement, dated as of March 3, 2000, among Net Value Holdings, Inc.
and The Altar Rock Fund, L.P., Raptor Global Portfolio, Ltd., Brown Simpson Strategic Growth
Fund, Ltd. and brown Simpson Strategic Growth Fund, L.P.
10.39(4) Series C Preferred Stock Purchase Agreement, dated as of March 3, 2000, among Net Value
Holdings, Inc. and the remaining Series C Investors
10.40(7) Series A Convertible Preferred Stock Purchase Agreement by and between AlarmX.com, Inc. and
Net Value Holdings, Inc., dated as of March 14, 2000
10.41(7) Investor Rights Agreement by and between AlarmX.com, Inc. and Net Value Holdings, Inc., dated
as of March 14, 2000
10.42(7) Co-Sale Agreement by and among Net Value Holdings, Inc., AlarmX.com, Inc. and the principal
stockholders of AlarmX.com, Inc., dated as of March 14, 2000
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.43(7) Amended and Restated Employment Agreement by and between Net Value Holdings, Inc. and
Thomas Aley, dated as of April 17, 2000
10.44(7) Employment Agreement with Stephen Cohen dated April 17, 2000
10.45(7) Common Stock Purchase Warrant issued to Darr Aley on May 8, 2000
10.46(7) Common Stock Purchase Warrant issued to Stephen George on May 8, 2000
10.47(7) Common Stock Purchase Warrant issued to Barry Uphoff on May 8, 2000
10.48 Net Value Holdings, Inc. Amended and Restated 2000 Stock Incentive Plan
10.49(8) Series A Convertible Preferred Stock Purchase Agreement by and among Net Value Holdings, Inc.
and Webmodal, Inc., dated May 9, 2000
10.50(8) Investor Rights Agreement dated May 9, 2000 by and between Webmodal, Inc. and Net Value
Holdings, Inc.
10.51(8) Stock Purchase Warrant dated May 9, 2000 by Webmodal for 170,000 shares of Common Stock of
Net Value Holdings, Inc.
10.52(10) Stockholders' Agreement dated May 9, 2000 by and among Webmodal, Inc., Net Value Holdings,
Inc. and Christopher R. Kravas.
10.53(9) Preferred Stock Purchase Agreement by and among Net Value Holdings, Inc. and SwapIt.com, Inc.,
as of August 18, 2000.
10.54(9) Investor Rights Agreement as of August 22, 2000 by and between SwapIt.com, Inc. and Net Value
Holdings, Inc.
10.55(9) Stockholders' Agreement as of August 18, 2000 by and among SwapIt.com, Inc., Net Value Holdings,
Inc., Howard Schneider and Winston Kevin Wells.
10.56(9) Certificate of Amendment of Restated Certificate of Incorporation of SwapIt.com, Inc.
10.57(9) Settlement Agreement as of August 17, 2000 by and between Net Value Holdings, Inc. and
Strategicus Partners, Inc., Douglas Spink, Merus Partners and Ater Wynne, LLP (as Escrow
21.1(3) Subsidiaries of Net Value Holdings, Inc.
23.1 Consent of KPMG LLP regarding Net Value Holdings, Inc. dated September 1, 2000
23.2 Consent of L J Soldinger Associates regarding Net Value Holdings, Inc. dated August 31, 2000
23.3 Consent of L J Soldinger Associates regarding Net Value, Inc. dated August 31, 2000
23.4 Consent of Morgenstern & Associates regarding SwapIt.com, Inc. dated September 1, 2000
23.5 Consent of KPMG LLP regarding Webmodal, Inc. dated September 1, 2000
----------
(1) Incorporated by reference to Registrant's Registration Statement on Form S-1 (Reg. No. 333-88629)
filed October 6, 1999.
(2) Included as an exhibit to this prospectus included in this Registration Statement.
(3) Incorporated by reference to Registrant's Amendment No. 1 to Registrant's Registration Statement
on Form S-1 (Reg. No. 333-88629) filed December 17, 1999.
(4) Incorporated by reference to Registrant's Current Report on Form 8-K dated March 3, 2000.
(5) Not used.
(6) Incorporated by reference to Registrant's Amendment No. 3 to Registrant's Registration Statement
on Form S-1 (Reg. No. 333-88629) filed February 7, 2000.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for 1999 filed May 11, 2000.
(8) Incorporated by reference to Registrant's Current Report on Form 8-K dated May 9, 2000.
(9) Incorporated by reference to Registrant's Current Report on Form 8-K dated August 23, 2000.
</TABLE>
Undertakings
Insofar as indemnification for liabilities arising under the Act 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification is
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 Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment no. 1 to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Philadelphia, Commonwealth of Pennsylvania, on September 29, 2000.
NET VALUE HOLDINGS, INC.
BY: /s/ Andrew P. Panzo
---------------------------------------------
Andrew P. Panzo
Chairman of the Board of Directors and Chief
Executive Officer
BY: /s/ Jay Elwell
---------------------------------------------
Jay Elwell
Treasurer and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment no. 1 to the 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 and Chief Executive
-------------------- Officer
Andrew P. Panzo
/s/ Lee C. Hansen President and Director
--------------------
Lee C. Hansen
/s/ Darr Aley Director
--------------------
Darr Aley
/s/ Stephen George Director
--------------------
Stephen George
II-5
