<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________.
Commission file number 0-29413
NET VALUE HOLDINGS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
---------------------------------------- -----------------------------------
(State or Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
1085 Mission Street
San Francisco, CA 94103
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415) 335-4700
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 17,739,847 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at July 31, 2000, subject to increase for a
contingency described within Footnote 11 to the Notes to the Consolidated
Financial Statements. In addition, there were 71,600 shares of treasury stock as
of such date.
<PAGE>
NET VALUE HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets at June 30, 2000
and December 31, 1999................................................1
Consolidated Statements of Operations
Three months ended June 30, 2000 and June 30, 1999;
Six months ended June 30, 2000 and 1999..............................2
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999..............................3
Notes to Consolidated Financial Statements...........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........20
Part II. Other Information
Item 1. Legal Proceedings ..................................................20
Item 6. Exhibits and Reports on Form 8-K....................................21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NET VALUE HOLDINGS, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
As of June 30 As of December 31
------------- -----------------
Assets 2000 1999
------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 38,674,084 $ 3,127,232
Available-for-sale securities 406,728 --
Interest receivable 99,785 28,176
Loans receivable 170,645 218,808
Capitalized financing fees, net -- 142,958
Prepaid expenses and other current assets 131,625 41,911
------------- ------------
Total current assets 39,482,867 3,559,085
Ownership interests in and advances to Affiliate Companies 14,583,040 7,065,557
Goodwill, net of accumulated amortization of $1,194,482,
and $578,906 in 2000 and 1999 2,611,647 3,227,298
Furniture and equipment, net 183,607 70,082
Other assets 128,923 67,346
------------- ------------
$ 56,990,084 $ 13,989,368
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 281,576 $ 802,202
Notes and loans payable -- 12,000
Convertible promissory notes -- 1,921,929
Convertible debentures -- 3,250,500
Long-term debt due within one year -- 11,732
Net liabilities of discontinued operations 1,014,526 1,773,591
------------- ------------
Total current liabilities 1,296,102 7,771,954
------------- ------------
Noncurrent liabilities:
Long-term debt, less amounts due within one year -- 67,302
------------- ------------
Total noncurrent liabilities -- 67,302
------------- ------------
Convertible preferred stock, Series B,
$.001 par value (0 and 4,824 shares authorized, issued
and outstanding at 2000 and 1999), net of costs of
issuance. Liquidation preference: $0 and $4,824,000 at
2000 and 1999 -- 4,448,872
Preferred stock dividend, Series C 1,295,834 --
------------- ------------
1,295,834 4,448,872
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 --
Common stock, Net Value, Inc. $.001 par value (100,000,000
shares authorized at 2000 and 1999; 1,097,588 issued and
1,096,338 outstanding at 2000; 1,037,338 issued and
outstanding at 1999) 1,098 1,038
Common stock, $.001 par value (50,000,000 shares authorized
at 2000 and 1999; 19,410,681 issued and 19,356,681
outstanding at 2000; 15,522,807 issued and outstanding at
2000 and 1999) 19,411 15,523
Additional paid-in capital 214,442,605 103,946,136
Accumulated deficit (140,062,076) (74,919,285)
Deferred compensation (19,840,561) (27,342,172)
Net 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 54,398,148 1,701,240
------------- ------------
$ 56,990,084 $ 13,989,368
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
---------------------------- -----------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
Operating expenses:
Stock-based compensation 7,472,562 86,000 13,366,749 86,000
General and administrative 2,313,725 902,555 4,417,203 946,996
----------- ---------- ----------- ----------
Total operating expenses 9,786,287 988,555 17,783,952 1,032,996
Interest income 703,989 4,816 915,946 4,816
Interest expense 10,851 1,175,196 84,627 2,559,155
Other losses 957,101 -- 957,101 --
----------- ---------- ----------- ----------
Loss before equity in losses of Affiliate Companies 10,050,250 2,158,935 17,909,734 3,587,335
Equity in losses of Affiliate Companies 2,366,905 -- 2,665,756 --
----------- ---------- ----------- ----------
Net loss from continuing operations 12,417,155 2,158,935 20,575,490 3,587,335
----------- ---------- ----------- ----------
Discontinued operations:
Loss from discontinued operations -- 1,507,039 -- 3,005,632
Loss on extinguishment of debt 554,676 -- 554,676 --
----------- ---------- ----------- ----------
Net loss 12,971,831 3,665,974 21,130,166 6,592,967
----------- ---------- ----------- ----------
Preferred stock dividends - continuing operations 959,939 -- 44,012,625 --
----------- ---------- ----------- ----------
Net loss to common stockholders $13,931,770 $3,665,974 $65,142,791 $6,592,967
=========== ========== =========== ==========
Basic and diluted net (loss) per common share -
continuing operations $ (0.76) $ (0.23) $ (3.91) $ (0.41)
=========== ========== =========== ==========
Basic and diluted net (loss) per common share -
discontinued operations $ (0.03) $ (0.16) $ (0.03) $ (0.35)
=========== ========== =========== ==========
Basic and diluted weighted average common shares outstanding: 17,672,454 9,188,787 16,521,162 8,645,151
=========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
---------------------------
2000 1999
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(21,130,166) $(6,592,967)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 663,136 2,042,708
Stock-based compensation - continuing operations 13,366,749 86,000
Stock-based compensation - discontinued operations -- 823,484
Interest paid with stock issuance 75,619 120,014
Other loss 957,101 --
Equity in losses of Affiliate Companies 2,665,756 --
Loss from extinguishment of debt - discontinued operations 554,676 --
Changes in assets and liabilities:
Interest receivable (71,609) (4,162)
Prepaid expenses and other current assets (89,714) (70,000)
Other assets (61,577) --
Accounts payable and accrued expenses (245,788) (98,364)
Discontinued operations (187,902) --
------------ -----------
Net cash used in operating activities (3,503,719) (3,693,287)
Cash flows from investing activities:
Collections on loans -- 200,000
Collections on advances to Affiliate Companies 75,000 --
Acquisition of ownership interests in Affiliate Companies (6,300,000) (270,000)
Advances to Affiliate Companies (3,430,000) (360,000)
Purchases of furniture and equipment (124,847) --
------------ -----------
Net cash used in investing activities (9,779,847) (430,000)
Cash flows from financing activities:
Repayments of notes payable (28,281) (240,000)
Long-term debt borrowings -- 6,455,000
Long-term debt payments (79,034) --
Issuance of warrants 1,099,584 --
Issuance of preferred stock 48,274,760 --
Purchase of treasury stock (328,147) --
Payment of preferred stock dividend, Series B (108,464) --
Payment of financing fees -- (460,600)
------------ -----------
Net cash provided by financing activities 48,830,418 5,754,400
Net increase in cash and cash equivalents 35,546,852 1,631,113
Cash and cash equivalents at beginning of year 3,127,232 1,466
------------ -----------
Cash and cash equivalents at end of period $ 38,674,084 $ 1,632,579
============ ===========
Cash paid for interest $ 29,153 $ 43,866
============ ===========
Cash paid for taxes $ -- $ --
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(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 June 30, 2000, Net Value owned
interests in seven Affiliate Companies. Net Value is based in San
Francisco with offices in New York, Boston and Philadelphia.
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information. Certain information and footnote
disclosures normally included in financial statements have been condensed
or omitted pursuant to the rules and regulations of the SEC relating to
interim financial statements. These statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly Net Value's financial position, operations and cash flows for the
periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K filed with the SEC on May 11, 2000.
Interim operating results are not necessarily indicative of the results
for a full year. Certain prior year amounts in the consolidated financial
statements have been reclassified in accordance with generally accepted
accounting principles to conform with current period presentation.
The accompanying unaudited consolidated financial statements of Net Value
reflect the results of the in-process merger with Net Value, Inc. ("NV
Inc."). At June 30, 2000, Net Value owned approximately 65% of the
outstanding common stock of NV Inc. Because it is unlikely that the
minority shareholders will make additional capital contributions to erase
accumulated NV Inc. losses, no amount has been ascribed to the
approximate 35% minority interest. Net Value plans on acquiring the
remaining shares that it does not own by completing the merger within
three to six months pursuant to which NV Inc. shareholders will be
offered .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.
(2) 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 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>
-4-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(3) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Net Value's ownership interests in and advances
to Affiliate Companies accounted for under the equity method and cost
method of accounting at June 30, 2000. One Affiliate Company,
metacat.com, is consolidated and therefore is not included in the table
below. All of the Affiliate Companies are privately held companies.
<TABLE>
<CAPTION>
Excess of carrying
value over net Percentage of
Carrying value assets ownership
-------------- ------------ -------------
<S> <C> <C> <C>
Equity method:
AlarmX.com $ 670,936 $ 307,614 61%(1)
Webmodal 5,251,755 3,723,644 39%
Swapit.com 3,092,755 316,053 30%
AssetExchange 273,188 241,602 20%
------------- ------------
$ 9,288,634 $ 4,588,913
============= ============
Cost method:
BrightStreet.com $ 3,994,406 14%(2)
YesAsia 1,300,000 9%
-------------
5,294,406
-------------
$ 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.
The following summarized financial information for Affiliate Companies
accounted for under the equity method of accounting at May 31, 2000, has
been compiled from the unaudited financial statements of the respective
companies:
<TABLE>
<CAPTION>
Balance sheets: May 31, 2000
------------
<S> <C>
Current assets $ 5,895,631
Noncurrent assets 2,771,658
------------
Total assets $ 8,667,290
============
Current liabilities $ 1,758,625
Noncurrent liabilities 313,809
Stockholders' equity 6,594,856
------------
Total liabilities and stockholders' equity $ 8,667,290
============
Results of operations:
Three months ended
May 31, 2000
------------------
Revenues $ 14,336
Net loss $ (4,618,958)
</TABLE>
-5-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(4) Acquisition
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 include 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
===============
(5) Borrowing Arrangements
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ----------
<S> <C> <C>
8% Convertible debentures $ -- $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
Other -- 12,000
-------- ----------
-- 5,263,463
Less amount due within one year -- 5,196,161
-------- ----------
Noncurrent portion $ -- $ 67,302
======== ==========
</TABLE>
(a) 8% Convertible Debentures
Net Value repaid in full the 8% Convertible Debentures plus
accrued interest 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.
-6-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(5) Borrowing Arrangements (continued)
(b) 12% Convertible Promissory Notes
Net Value repaid in full the 12% Convertible Promissory Notes plus
accrued interest 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 273,390 warrants to purchase common stock in
connection with the conversions. These warrants are exercisable
over a three-year period from the date of issuance at a $6 per
share exercise price.
(c) 10% Convertible Promissory Note
Net Value repaid in full the 10% Convertible Promissory Notes plus
accrued interest through the issuance of 400,000 shares of common
stock pursuant to the original conversion terms of the note.
(6) Preferred Stock
Preferred Stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------------------------- ----------------------------------
Shares Shares
outstanding Amount (1) outstanding Amount (2)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Series B -- $ -- 4,824 $ 4,448,872
Series C 4,166,667 40,883,087 -- --
--------- ------------ ----- ------------
4,166,667 $ 40,883,087 4,824 $ 4,448,872
========= ============ ===== ============
</TABLE>
(1) Amount is net of issuance costs and proceeds allocated to the
Series C Warrants.
(2) Amount is net of issuance costs.
Series B Preferred Stock
In February 2000, the holders of Net Value's Redeemable Convertible
Series B Preferred Stock (Series B Shares) converted their Series B
Shares into 1,180,180 shares of common stock pursuant to the original
terms of the issuance. The Series B Shares had a liquidation preference
of $1,000 per share, 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 Series B issuance in 1999, Net Value issued
warrants to purchase 295,040 shares of common stock (Series B Warrants).
These warrants are exercisable at prices equivalent to a range between
110% to 140% of the conversion price of the Series B Shares. Through June
30, 2000, the warrant holders exercised 210,944 Series B Warrants with
cash proceeds to Net Value of $1,077,792.
-7-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(6) Preferred Stock (continued)
Series C Preferred Stock
In March 2000, the Company sold 4,166,667 shares of its Convertible
Series C Preferred Stock (Series C Shares) at $12 per share for net
proceeds of $48,274,760 after payment of issuing costs consisting 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 to the cost of the
Series C Warrants as determined using a Black-Scholes option-pricing
model.
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Series B Preferred Stock dividend $ -- $ -- $ 108,464 $ --
Series C Preferred Stock dividend 959,939 -- 1,295,834 --
Beneficial conversion feature on -- -- 42,608,327 --
Series C Shares
--------------- ---------------- --------------- ----------------
$ 959,939 $ -- $ 44,012,625 $ --
=============== ================ =============== ================
</TABLE>
The Series B Preferred Stock dividend was paid in cash in February 2000
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 and therefore does not
represent a cash obligation of the Company.
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
sales 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.
-8-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(7) Deferred Compensation
The components of deferred compensation from continuing operations are as
follows:
<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>
(8) Other Loss
Other loss consists of the following:
Three and 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 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.
-9-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(9) 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>
Three months ended June 30, Six months ended June 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
------------------ --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Net loss $ (12,971,831) $ (3,665,974) $ (21,130,166) $ (6,592,967)
Other comprehensive income:
Unrealized gain 161,651 -- 161,651 --
------------------ --------------- --------------- ------------------
Comprehensive income (loss) $ (12,810,180) $ (3,665,974) $ (20,968,515) $ (6,592,967)
================== =============== =============== ==================
</TABLE>
(10) Net 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,
stock warrants, convertible debt, and convertible preferred stock are not
included because the inclusion would be anti-dilutive (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, and 5,297,180 at June
30, 2000 and 1999, respectively. Such securities, had they been dilutive,
would have been included in the computations of diluted loss per share
using the treasury stock method.
(11) Commitments and Contingencies
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.
In October 1999, Net Value terminated its employment agreement with
Douglas Spink, the former Chief Technology Officer and director, for
cause due to Mr. Spink's material breach of his employment agreement and
his breach of his fiduciary duties to the Company. The various agreements
with Mr. Spink state that if Mr. Spink was terminated for cause, he
forfeits all unvested shares of our common stock that he held on the date
of termination and he repays all loans advanced to him. In January 2000,
Mr. Spink filed an action against the Company alleging that the Company's
termination of his employment constituted a breach of his employment
agreement and violated statutes regarding the payment of wages. Net Value
intends to vigorously defend itself against all claims made by Mr. Spink
and in May 2000, filed a claim for injunctive relief requiring Mr. Spink
to forfeit and return 1,610,835 shares of his unvested common stock. The
litigation will center on the number of shares of Net Value common stock
to which Mr. Spink is entitled, if any. Because of the preliminary nature
of this matter, it is not possible at this time to quantify the number of
shares, if any, that the former employee will be entitled.
-10-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
(11) Commitments and Contingencies (continued)
In another matter related to this dispute, during June 2000, an
individual filed a complaint against Mr. Spink alleging that this
individual was forced out of the management team of Strategicus Partners
prior to its merger with Net Value. This complaint also names Net Value
and seeks shares of Net Value capital stock equal to the claimant's
alleged ownership interest in Strategicus Partners. Since the allegation
relates to the ownership of Strategicus Partners' capital stock, the
Company has demanded indemnification from Mr. Spink. In the event Mr.
Spink declines to indemnify the Company or provide the Company with legal
defense, then Net Value intends to vigorously defend itself against this
action. Net Value has filed a response to this complaint denying this
individual's claims. Due to the preliminary nature of this matter, it is
not possible to quantify the Company's potential loss, if any.
On or about July 27, Steve Rosendahl, Jim Steuer and Pinnacle Technology
L.L.C., filed a complaint against Mr. Spink, the Company, Merus and Aspen
Value, LLC, in the Circuit Court in the State of Oregon for Multnomah
County. The plaintiffs in this case allegedly purchased shares of Common
Stock from Mr. Spink in January 2000. The plaintiffs apparently seek a
declaratory judgment against the Company regarding their ownership of
140,000 shares of Mr. Spink's stock in the Company. This complaint was
recently served. The Company intends to fully investigate and defend this
action. The Company has also asserted a claim for indemnification against
Mr. Spink in its Delaware proceeding.
-11-
<PAGE>
CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q included forward-looking statements
within the meaning of Section 7A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our affiliate companies, that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," " believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those in our other Securities and Exchange
Commission filings, including our Registration Statement on Form S-1 declared
effective on June 30, 2000 by the SEC (File No. 333-38716) and our Annual Report
on Form 10-K filed on May 11, 2000. The following discussion should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We were originally formed as a Florida corporation in 1991. We did not have any
operations until our change of domicile into Delaware in October 1998. This
occurred in conjunction with our acquisition of a controlling interest in Net
Value, Inc. which commenced in October 1998. Net Value, Inc. was engaged in the
development and distribution of online promotional campaigns.
We obtained control of Net Value, Inc. when we acquired 66% of its outstanding
common stock through share exchange transactions with 20 of its largest
stockholders. Since as a result of these transactions the former Net Value, Inc.
stockholders obtained a majority ownership interest of our company, the
transaction was accounted for as a recapitalization. Under a recapitalization,
the historical financial statements presented are those of the company acquired,
not those of the legal acquiror. Accordingly, the financial information included
in our financial statements prior to October 1998 is that of Net Value, Inc.
We plan to complete a merger with Net Value, Inc. within three to six months
pursuant to which we intend to offer .4 shares of our common stock for every
share of Net Value, Inc. common stock tendered to us by the existing Net Value,
Inc. stockholders. This is being done in order to acquire the remaining minority
interest in Net Value, Inc. Additionally, we will issue common stock purchase
warrants and stock options to the holders of Net Value, Inc.'s common stock
purchase warrants and vested stock options at the same exchange ratio. Since we
already own a majority of Net Value, Inc.'s capital stock, we can assure that
the merger will be completed. Accordingly, our 1999 and 2000 financial
statements reflect the results of our in-process merger with Net Value, Inc.
At June 30, 2000, we 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.
Our financial statements also reflect the operations of Net Value, Inc. as a
discontinued operation. This was necessitated when, in November 1999, we made
the strategic decision to exit the development and distribution of online
promotional campaign operations of Net Value, Inc. In December 1999, we sold the
business and assets of Net Value, Inc. to BrightStreet.com, Inc., a new company
formed by members of Net Value, Inc.'s then senior management team and a group
of third party investors. Through Net Value, Inc., we retained a 14% interest in
the common stock of BrightStreet.com.
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<PAGE>
We have segregated the operating results of the discontinued operations of Net
Value, Inc. from continuing operations and have reported these operating results
as a separate line item on the statements of operations. Upon the completion of
our merger with Net Value, Inc., we will own all of Net Value, Inc.'s assets and
liabilities. This will not change our financial statement presentation as these
items are already reflected on our balance sheet.
Because we acquire significant interests in early-stage companies, many of which
generate net losses, we have experienced, and expect to continue to experience,
significant volatility in our quarterly results. We do not know if we will
report net income in any period, and we expect that we will report net losses in
many quarters for the foreseeable future. While our affiliate companies have
consistently reported losses, we may have net income in certain periods and may
experience significant volatility from period to period due to non-recurring
transactions and other events incidental to our ownership interests in and
advances to affiliate companies. These transactions include dispositions of, and
changes to, our affiliate company ownership interests, and impairment charges.
On a continuous basis, but no less frequently than at the end of each
reporting period, we evaluate:
o the carrying value of our ownership interest in and advances to
each of our affiliate companies for possible impairment based on
achievement of business plan objectives and milestones;
o the value of each ownership interest in the affiliate company
relative to carrying value;
o the financial condition and prospects of the affiliate company; and
o other relevant factors.
The business plan objectives and milestones we consider include those related to
financial performance such as achievement of planned financial results or
completion of capital raising activities, and those that are not primarily
financial in nature such as the launching of an Internet website or the hiring
of key employees. The fair value of our ownership interests in and advances to
privately held affiliate companies is generally determined based on the value at
which independent third parties have or have committed to invest in our
affiliate companies.
Effect of Various Accounting Methods on our Results of Continuing Operations
Accounting for Stock-Based Compensation.
Stock-based compensation is a non-cash charge relating to the amortization of
deferred compensation. We record deferred compensation when we make restricted
stock awards or compensatory stock option 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 our common stock
on the date of grant. In the case of options granted to consultants or advisory
board members, the amount of deferred compensation recorded is the fair value of
the stock options on the grant date as determined using a Black-Scholes option
pricing model. We record deferred compensation as a reduction to stockholders'
equity and an offsetting increase to additional paid-in capital. We then
amortize 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.
Grants to Employees. All awards to employees are fixed awards. This
means that the number and exercise price of the stock options are known
on the date of grant. Under these fixed awards, the amount of deferred
compensation which we record is similarly fixed and represents the
total amount of future amortization to stock-based compensation.
Grants to Consultants and Advisory Board. In accordance with the
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling Goods or Services, stock-based awards to
consultants and advisory board members for future professional services
are considered variable. This means that the amount of deferred
compensation is periodically adjusted to the current fair value of the
unvested awards as determined using a Black-Scholes option pricing
model. Similarly, the amortization to stock-based compensation for
variable
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<PAGE>
awards also fluctuates in direct proportion to the increase or decrease
in deferred compensation resulting from changes in fair value. These
fluctuations are largely dependent on the fair market value of our
common stock, 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 we acquire in our affiliate companies are accounted
for under three broad methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on our voting
ownership in an affiliate company.
Consolidation. Affiliate companies in which we directly or indirectly
own more than 50% of the outstanding voting securities are generally
accounted for under the consolidation method of accounting. Under this
method, an affiliate company's financial statements are reflected
within our Consolidated Statements of Operations. As of June 30, 2000,
metacat.com, Inc. is our only consolidated affiliate company.
The effect of an affiliate company's net results of operations on our
net results of operations is generally the same under either the
consolidation method of accounting or the equity method of accounting,
because under each of these methods only our share of the earnings or
losses of an affiliate company is reflected in our results of
operations in the Consolidated Statements of Operations.
Equity Method. Affiliate companies whose results we do not consolidate,
but over whom we exercise significant influence, are generally
accounted for under the equity method of accounting. Whether or not we
exercise significant influence with respect to an affiliate company
depends on an evaluation of several factors including, among others,
representation on the affiliate company's board of directors and
ownership level, which is generally a 20% to 50% interest in the voting
securities of the affiliate company, including voting rights associated
with our holdings in common stock and preferred stock in the affiliate
company. Under the equity method of accounting, our share 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, our 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
and December 31, 1999 we accounted for the following affiliate
companies under this method:
<TABLE>
<CAPTION>
Voting Ownership
Affiliate Company ----------------
Since June 30, 2000 December 31, 1999
----------------- ------------- -----------------
<S> <C> <C> <C>
AlarmX.com 2000 61%(1) --
Asset Exchange, Inc. 1999 20% 20%
SwapIt.com 1999 30% 11%
Webmodal, Inc. 1999 39% 12%
</TABLE>
(1) AlarmX.com is not consolidated because we anticipate that
our majority ownership is temporary and will be reduced below
50% within 12 months of our initial investment.
We have representation on the board of directors of all of the above
affiliate companies. Most of our equity method affiliate companies are
in a very early stage of development and have not generated any
revenues. All of our equity method affiliate companies were formed 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, our share of
the
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<PAGE>
earnings or losses of these companies is not included in our
Consolidated Statements of Operations. Our affiliate companies
accounted for under the cost method of accounting at June 30, 2000 and
December 31, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
----------------
Affiliate
Company Since June 30, 2000 December 31, 1999
------------- ------------- -----------------
<S> <C> <C> <C>
Brightstreet.com 1999 14%(2) 14%
YesAsia 1999 9% 11%
</TABLE>
(2) We own this interest indirectly through Net Value, Inc.,
our 65% owned subsidiary at June 30, 2000.
Our cost method affiliate companies are in a very early stage of
development and have not generated significant revenues. In addition,
our cost method affiliate companies have incurred substantial losses
and are expected to continue to incur substantial losses in 2000.
Results of Operations
Three and Six months ended June 30, 2000 compared to the Three and Six Months
Ended June 30, 1999
Continuing Operations
Stock-Based Compensation. Stock-based compensation totaled $7,472,562 and
$13,366,749 for the three and six months ended June 30, 2000, respectively,
compared to $86,000 for each of the corresponding periods in 1999. The increase
in stock-based compensation is due to the fact that we began building our
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 three
months ended June 30, 2000:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance beginning of period $ 17,814,920 $ 34,724,662 $ 52,539,582
Additions to deferred compensation 6,830,000 42,080 6,872,080
Cancellations and fair value adjustments (3,367,619) (28,730,920) (32,098,539)
Amortization to stock-based compensation (2,639,297) (4,833,265) (7,472,562)
----------------- ----------------- -----------------
Balance at June 30, 2000 $ 18,638,004 $ 1,202,557 $ 19,840,561
================= ================= =================
</TABLE>
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>
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<PAGE>
During the six months ended June 30, 2000, we also recorded stock-based
compensation of $709,375 relating to investment banking services that were paid
via the issuance of 25,000 shares of our common stock. We valued these services
based on our 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, we expect 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 our 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 our
common stock. Due to this market variability, we cannot accurately predict the
future amortization to stock-based compensation associated with these awards.
General and Administrative Expenses. Our general and administrative expenses
have increased to $2,313,725 and $4,417,203 for the three and six months ended
June 30, 2000, respectively, compared to $902,555 and $946,996 for the
corresponding respective periods in 1999. This increase is due to the execution
of our operating plan and the expansion of our operations which began in
mid-1999 and continues through June 2000. We expect our general and
administrative expenses to stabilize now that we have solidified our corporate
infrastructure and met our immediate hiring needs. The following is a schedule
of the significant components that comprise general and administrative expense:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Professional fees $ 1,027,959 $ 383,299 $ 1,784,150 $ 383,299
Salaries and benefits 669,841 23,062 1,001,986 23,062
Depreciation and amortization 340,143 -- 663,136 --
Other general and administrative 275,782 496,194 967,931 540,635
------------ ---------- ------------ ---------
Total $ 2,313,725 $ 902,555 $ 4,417,203 $ 946,996
============ ========== ============ =========
</TABLE>
Professional fees consist primarily of legal and accounting fees associated with
our SEC filings, annual and interim audit services, and general corporate
matters.
The increase in salaries and benefits expense over the prior quarter and prior
year periods is due to our active recruitment of executive personnel throughout
the first six months of 2000. We had 6 more full-time employees at June 30, 2000
than at March 31, 2000 and 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 our
furniture and equipment and the amortization of goodwill attributable to our
acquisition of Strategicus Partners, Inc. in July 1999. Total goodwill for the
Strategicus transaction was approximately $3.8 million, which is being amortized
on a straight-line basis over three years.
Other general and administrative consists primarily of marketing,
travel-related, office, and other operating expenses.
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<PAGE>
Interest Income. Our interest income totaled $703,989 and $915,946 for the three
and six months ended June 30, 2000, respectively, compared to $4,816 for each of
the corresponding periods in 1999. Interest income consists of the interest
earned on our cash and cash equivalents balances, with the change period over
period due to significant increases in our cash balances resulting from our
equity financings.
Interest Expense. Interest expense consists of:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Interest expense based on stated interest $ 10,851 $ 185,955 $ 84,627 $ 393,397
rates
Non-cash charge: beneficial conversion
features on convertible promissory notes
and debentures -- 989,241 -- 2,165,758
--------- ----------- --------- -----------
Total $ 10,851 $ 1,175,196 $ 84,627 $ 2,559,155
========= =========== ========= ===========
</TABLE>
The non-cash charge is the result of beneficial conversion features attached to
our convertible promissory notes and convertible debentures issued in 1999 that
allowed the holders to convert their notes and debentures into shares of our
common stock at below 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. We expect to fund our future operations
through the use of equity financings and do not anticipate that we will incur
these interest expense charges in the future.
Other loss. Other loss consists of:
Three and 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 our investment
in College411 by $195,088. Accordingly, we recorded a $195,088 gain as a result
of this transaction.
We recorded an impairment charge of $1,152,189 for the other than temporary
decline in carrying value of one of our Affiliate Companies accounted for under
the equity method. We acquired our ownership interest in this Affiliate Company
in 2000 for $1 million and advanced loans totaling $650,000. From the time of
our initial investment and through June 30, 2000, our funding to this company
represented all of the outside financing it had available to fund its
operations. When we determined that this company was unable to obtain further
rounds of financing necessary to sustain operations, we 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 three and six months ended June 30, 2000 amounted to $2,366,905 and
$2,665,756, respectively compared to $0 for each of the corresponding periods in
1999. These amounts represent our proportionate share of the losses of our
affiliate companies and the amortization of the excess of the cost of our
investment over our equity interest in the net assets of the affiliate companies
accounted for under the equity method of accounting. During the three and 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 three and six months ended June 30,
1999, we
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<PAGE>
did not account for any of our ownership interests in our affiliate companies
under the equity method. Our equity in losses will increase as we purchase
equity interests in early stage technology companies that typically incur losses
in their development stage and for which our equity in the net assets of company
exceeds the cost of our investment. Conversely, our equity in losses will
decrease when our affiliate companies report earnings and as the excess of our
investment over our equity interest in the net assets of the affiliate companies
is amortized to zero. We expect to continue to incur equity losses given the
early stage development of our affiliate companies.
Net Loss From Continuing Operations
We have 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 our affiliate companies and other
non-recurring transactions. For the three and six months ended June 30, 2000,
our net loss from continuing operations was $12,417,155 and $20,575,490,
respectively compared to $2,158,935 and $3,587,335 for each of the corresponding
periods in 1999. We are generally aggregating this amount into our federal and
state net loss carry forwards to be available to offset future taxable income,
if any.
Discontinued Operations
In December 1999, we 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.
We are currently in the process of merging with Net Value, Inc., after which we
will own all of Net Value, Inc.'s assets and liabilities. In preparation for the
merger, we are 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, we may record a
gain or loss upon settlement. During the three and six months ended June 30,
2000, we 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Series B preferred stock dividend $ -- $ -- $ 108,464 $ --
Series C preferred stock dividend 959,939 -- 1,295,834 --
Non-cash charge: beneficial conversion
Feature on Series C Share -- -- 42,608,327 --
------------ ----------- ------------- -----------
Total $ 959,939 $ -- $ 44,012,625 $ --
============ =========== ============= ===========
</TABLE>
The Series B preferred stock dividend was paid in cash in February 2000, when
the holders converted their Series B Shares into shares of our common stock. We
will not incur this dividend in future periods as the Series B Shares have 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 our the Series C Preferred Stock, the fair market
value of our common stock was higher than the offering price of our Series C
Preferred Stock of $12 per share. This differential in price constitutes a
beneficial conversion as defined in the Emerging Issues Task Force Issue No.
98-5, "Accounting for Convertible
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<PAGE>
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" (EITF 98-5). Accordingly, we 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.
Changes in Financial Position, Liquidity and Capital Resources
Our current operations do not generate sufficient operating funds to meet our
cash needs and, as a result, we have funded our operations with a combination of
equity and debt proceeds. We ultimately expect to fund our operations from the
cash flows of our affiliate companies. Currently however, our affiliate
companies do not generate sufficient earnings to pay dividends or otherwise
distribute amounts which are sufficient to cover our operating expenses.
Furthermore, we do not expect to receive such dividends within the next twelve
months due to the fact that each of our affiliate companies is in the
developmental stage of operations. We may also generate cash proceeds from the
sale of interests in our affiliate companies. Until we receive dividends from
our affiliate companies or realize cash proceeds from the sale of interests in
our affiliate companies, if at all, we will remain dependant on outside sources
of capital to fund our operations. We are not certain that such funds will be
available on terms that are satisfactory to us or at all.
In March 2000, we sold 4,166,667 shares of our Series C Preferred Stock and
warrants to purchase 416,667 shares of our common stock for net proceeds of
approximately $48.3 million after payment of offering costs. Each share of our
Series C Preferred Stock is convertible into one share of our common stock at
any time at the election of the shareholder. Our 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, we received repayment in full, plus accrued interest, of our
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, we used approximately $4.5 million to
fund our general corporate expenses, including salaries and wages, professional
and consulting fees and interest expense. In addition, we repaid in full all of
our outstanding convertible debentures and convertible promissory notes through
payments of $72,431 and the issuance of 2,338,633 shares of our common stock and
warrants to purchase 273,390 shares of our common stock.
During the six months ended June 30, 2000, we made the following investments and
advances to affiliate companies:
o On January 31, 2000, we acquired a 31% voting interest in
IndustrialVortex.com, Inc. for $1 million.
o On March 14, 2000, we acquired a 69% voting interest in AlarmX.com, Inc.
for $1 million.
o On May 9, 2000, we invested $4 million cash and issued 113,174 shares of
our common stock to Webmodal, thus increasing our voting interest from
10% to 39%. The common stock we issued had an approximate value of
$877,000 on the date of investment.
o We advanced in total $2,725,000 to SwapIt.com, Inc. We may request
payment on these advances at any time or we 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 We advanced approximately $1.1 million to our other affiliate companies.
As of June 30, 2000, we had on hand existing cash and cash equivalents of
approximately $38.7 million. We believe that our cash and cash equivalents will
be sufficient to meet our operating expenses and investment requirements through
June 30, 2001. However, our future liquidity needs are dependant primarily on
the number of future acquisitions of equity interests in new affiliate companies
and the extent to which we participate in subsequent rounds of financings of our
existing affiliate companies. We may be required to curtail or reduce the scope
of our investment activities to satisfy our liquidity needs beginning June 30,
2001. Thereafter, we will be required to seek additional
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funds through the sale of our securities to outside sources of capital, which
could result in substantial dilution to stockholders. We are not certain that
these funds will be available on terms that are satisfactory to us, or at all.
If we are unable to obtain these funds, then we will be required to reduce our
acquisitions of equity interests in affiliate companies and reduce our operating
activities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to changes in interest rates and
the resulting impact on our invested cash. We place our cash with high credit
quality financial institutions and invest that cash in short term fixed income
investments with remaining maturities of less than 90 days. We are averse to
principal loss and ensure the safety and preservation of our invested funds by
investing in only highly rated investments and by limiting our exposure in any
one issuance. If market interest rates were to increase immediately and
uniformly by 10% from levels at June 30, 2000, the fair value of our portfolio
would decline by an immaterial amount. We do not invest in derivative financial
instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in our Annual Report on Form 10-K for the year ended
December 31, 1999, we are involved in litigation with Douglas Spink, our
former chief technology officer, relating to the termination of his employment
agreement with the Company. This litigation remains ongoing with each party
pursuing claims thereunder in the ordinary course.
In addition, during June 2000, Mr. Spink filed actions in the Court of
Chancery of the State of Delaware in and for New Castle County seeking to compel
the Company to call an annual meeting of its stockholders and to inspect its
stockholder list. Mr. Spink asserted other claims in these proceedings which
were stayed by the court or withdrawn by Mr. Spink. With the consent of Mr.
Spink, the Court entered an order permitting the Company to conduct its annual
meeting on September 25, 2000 pending SEC approval of the Company's proxy
materials. Mr. Spink voluntarily dismissed his remaining claim in the Chancery
Court proceeding.
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In another matter related to this dispute, on or about June 5, 2000,
Greg Biggs filed a complaint in the Circuit Court in the State of Oregon for the
County of Multnomah against Mr. Spink and Strategicus Partners. The Company was
also named as a defendant in this action. In his complaint, Mr. Biggs alleges
that prior to the Company's merger with Strategicus Partners, he entered into an
agreement with Mr. Spink to acquire 40% of the issued capital stock of
Strategicus Partners, which he currently values at $4,000,000. Mr. Biggs also
contends that he was "squeezed out" of the management of Strategicus Partners by
Mr. Spink and was, therefore, denied the opportunity to participate in the
Company's merger with Strategicus Partners in July 1999. Apart from a claim for
shares of the Company's capital stock equal to Mr. Biggs' ownership interest in
Strategicus Partners, Mr. Biggs does not recite any facts relating to claims
against the Company. The Company has filed an answer essentially denying Mr.
Bigg's claims. The Company also asserted a claim against Mr. Spink for
indemnification relating to the Biggs lawsuit in the Delaware federal court
proceeding initiated by the Company against Mr. Spink.
Finally, on or about July 27, Steve Rosendahl, Jim Steuer and Pinnacle
Technology L.L.C., filed a complaint against Mr. Spink, the Company, Merus and
Aspen Value, LLC, in the Circuit Court in the State of Oregon for Multnomah
County. The plaintiffs in this case allegedly purchased shares of Common Stock
from Mr. Spink in January 2000. The plaintiffs apparently seek a declaratory
judgment against the Company regarding their ownership of 140,000 shares of Mr.
Spink's stock in the Company. This complaint was recently served. The Company
intends to fully investigate and defend this action. The Company has also
asserted a claim for indemnification against Mr. Spink in its Delaware
proceeding.
With the exception of the Spink litigation discussed above, there have
been no material developments to any of the matters that require reporting under
this Item other than as reported in Part I, Item 3 -- "Legal Proceedings" of our
Annual Report on Form 10-K for the year ended December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
27.1 Financial Data Schedule.
(b) The Company filed the following Current Report on Form 8-K during the
three month period ended June 30, 2000:
(i) Current Report on Form 8-K, dated May 23, 2000.
The Company filed the foregoing Current Report on Form 8-K
reporting, under Item 2, the acquisition of 563,000 shares of
Series A Preferred Stock and a warrant to purchase 170,000
shares of common stock in Webmodal, Inc, a Delaware
Corporation, in exchange for $4 million cash and 113,174
shares of the Company's common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET VALUE HOLDINGS, INC.
Date: August 11, 2000 /s/ Andrew P. Panzo
---------------------
Andrew P. Panzo
Chief Executive Officer and Chairman
of the Board of Directors
Date: August 11, 2000 /s/ Jay Elwell
----------------
Jay Elwell
Treasurer and
Principal Accounting Officer
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