<PAGE>
As filed with the Securities and Exchange Commission on February 7, 2000.
Registration No. 333-88629
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NET VALUE HOLDINGS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
--------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
7319
--------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
65-0867684
---------------------------------------
(I.R.S. Employer Identification Number)
1085 Mission Street
San Francisco, CA 94103
(415) 575-4755
-----------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Andrew P. Panzo
Chief Executive Officer
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
(215) 564-9190
--------------------------------------------------------
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
Michael C. Forman, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 South Broad Street
Philadelphia, PA 19102
(215) 568-6060
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ___________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
-----------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Securities Amount To Be Offering Price Aggregate Registration
to be Registered Registered Per Share Offering Price Fee
====================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 3,722,560 $4.375 $16,286,200 $4,527.56
====================================================================================================================
</TABLE>
The registration fee calculated above was previously paid at the time
of the initial filing of this registration statement. This registration
statement registers the resale of 3,722,560 shares of common stock offered by
selling stockholders, as follows:
o 2,358,160 shares issuable upon conversion of 4,824 shares of our
Series B Convertible Preferred Stock;
o 295,040 shares issuable upon exercise of the warrants held by the
holders of shares of our Series B Convertible Preferred Stock; and
o 1,069,360 shares of common stock presently held by three other
selling stockholders.
In addition to the number of shares set forth above, the amount to be
registered includes any shares of our common stock issued as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The Proposed Maximum Offering Price Per Share and the Proposed Maximum
Aggregate Offering Price in the table above are estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(c) promulgated under
the Securities Act of 1933. These estimates were calculated based on the average
of the bid and ask prices for our common stock on the NASDAQ Over-the-Counter
Bulletin Board Trading System on October 6, 1999.
We hereby amend this registration statement on such date or dates as
may be necessary to delay its effective date until we shall file a further
amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Dated February 7, 2000
SUBJECT TO COMPLETION
PROSPECTUS
3,722,560 SHARES
NET VALUE HOLDINGS, INC.
COMMON STOCK
The following stockholders are offering and selling up to 3,722,560
shares of our common stock:
Sven Behrendt
Juergen Jaekel
Gary E. Markman
Tonga Partners, LP
Yeoman Ventures, Ltd.
Lightline Limited
Little Wing LP
Little Wing Too LP
Tradewinds Fund, LLC
JDN Partners, LP
Bayhill Fund, Ltd.
RS Orphan Fund, LP
RS Orphan Offshore Fund, LP
The selling stockholders may offer the shares of common stock through
public or private transactions, on the NASDAQ Over-the-Counter Bulletin Board
Trading System, at prevailing market prices, or at privately negotiated prices.
We will not receive any proceeds from this offering. However, 295,040 of the
shares of common stock which we are registering are issuable upon exercise of
warrants. If all of the warrants are exercised, we will receive gross proceeds
of $1,507,470.
Our common stock is listed on the NASDAQ Over-the-Counter Bulletin
Board Trading System under the symbol "NETVE." On February 4, 2000, the closing
sale price for our common stock, as quoted on the NASDAQ Over-the-Counter
Bulletin Board Trading System was $14.00 per share.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 12.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this Prospectus is February 7, 2000.
<PAGE>
TABLE OF CONTENTS
-----------------
ABOUT THIS PROSPECTUS .................................................... 3
SUMMARY .................................................................. 3
FORWARD-LOOKING STATEMENTS ............................................... 11
RISK FACTORS ............................................................. 11
USE OF PROCEEDS .......................................................... 33
MARKET PRICE AND DIVIDEND INFORMATION .................................... 33
CAPITALIZATION ........................................................... 35
SELECTED CONSOLIDATED FINANCIAL DATA ..................................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................ 41
BUSINESS ................................................................. 52
MANAGEMENT ............................................................... 75
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK ....... 84
SELLING STOCKHOLDERS ..................................................... 86
PLAN OF DISTRIBUTION ..................................................... 90
TRANSACTIONS WITH OFFICERS AND DIRECTORS
AND OTHER BUSINESS RELATIONSHIPS ................................... 91
DESCRIPTION OF CAPITAL STOCK ............................................. 95
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 100
PRINCIPAL UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS ............. 101
EXPERTS .................................................................. 104
LEGAL MATTERS ............................................................ 105
WHERE YOU CAN FIND MORE INFORMATION ...................................... 105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................... F-1
INFORMATION NOT REQUIRED IN PROSPECTUS ................................... II-1
<PAGE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by an independent accounting firm.
SUMMARY
This summary highlights material information regarding our company and
the offering contained in this prospectus. However, this summary is not complete
and may not contain all of the information that may be important to you. You
should read the entire prospectus carefully, including the financial data and
related notes, before making an investment decision. Unless otherwise
specifically stated, the information in this prospectus assumes that holders of
our securities have not exercised any options or warrants which are currently
outstanding.
History of Net Value Holdings, Inc.
We were formed as a Florida Corporation on December 20, 1991. In 1992,
we failed to file our annual report with the State of Florida and were
administratively dissolved on October 9, 1992. On June 15, 1998, we filed all
required reports and paid all deficient annual fees and penalties and were
reinstated as a corporation in the State of Florida. Accordingly, from October
9, 1992 through June 15, 1998, we had no operations and generated no revenues or
expenses. In October 1998, our stockholders approved our redomestication in the
State of Delaware and we are presently a Delaware corporation.
Pursuant to share exchange transactions completed during October 1998
through December 1998 with 20 Net Value, Inc. stockholders, we acquired
approximately 66% of the issued and outstanding shares of Net Value, Inc.'s
common stock and 100% of the issued and outstanding shares of Net Value, Inc.'s
Series A Preferred Stock.
On July 30, 1999, we merged with Strategicus Partners, Inc., an Oregon
corporation. As a result of our merger with Strategicus, we acquired ownership
interests in metacat.com, Inc., AsiaCD, Inc. and College 411.com, Inc., each of
which was owned by Strategicus at the time of the merger. In addition, members
of Strategicus' management team became officers and directors of our
corporation.
In September 1999, we acquired our ownership interest in AssetExchange,
Inc.
In October 1999, we acquired our ownership interest in Webmodal, Inc.
In November 1999, we acquired our ownership interest in Swapit.com,
Inc.
In December 1999, Net Value, Inc. sold substantially all of its assets,
including the name BrightStreet.com, Inc., to Promotions Acquisition, Inc., a
Delaware corporation, in connection with a $17,000,000 investment in Promotions
Acquisition, Inc. by outside investors. Pursuant to this transaction, Net Value,
Inc. received $2,000,000 in cash, Promotions Acquisition, Inc.'s agreement to
assume approximately $1,600,000 in liabilities of Net Value, Inc., and 2,958,819
shares of common stock, representing a 12% ownership interest in Promotions
Acquisition, Inc. calculated on a fully diluted basis.
3
<PAGE>
Subsequent to this transaction, Promotions Acquisition, Inc. changed
its name to BrightStreet.com, Inc. As a result of this transaction, Net Value,
Inc. has no operations. Net Value, Inc. has loaned us the $2,000,000 which it
received pursuant to this transaction and we have agreed to satisfy Net Value,
Inc.'s remaining liabilities with these funds. We then intend to complete a
merger with Net Value, Inc. pursuant to which the remaining stockholders of Net
Value, Inc. will receive .4 shares of our common stock for every share of Net
Value, Inc. common stock which they tender to us in the merger. In addition,
holders of Net Value, Inc.'s common stock purchase warrants and vested stock
options will receive common stock purchase warrants and stock options based on
this same exchange ratio. Also as a result of this transaction, we no longer own
a majority interest in an operating company that is presently generating
revenues.
In January 2000, we acquired our ownership interest in
IndustrialVortex.com, Inc.
Our principal executive office is located at 1085 Mission Street, San
Francisco, California 94103. The phone number of our principal executive office
is (415) 575-4755. We also maintain an office at Two Penn Center Plaza, Suite
605, Philadelphia, Pennsylvania 19102 and our telephone number is (215)
564-9190. We maintain an Internet website at www.netvalueholdings.com. The
information on our Internet website is not part of this prospectus.
Recent Financial Results
In 1998, we experienced net losses of $26,800,203. For the nine months
ended September 30, 1999, we experienced net losses of $22,314,313 (unaudited).
Through September 30, 1999, we have
o experienced an accumulated deficit of $65,609,799 (unaudited);
o not generated any revenues from our operations; and
o have not received any dividends from our affiliate companies.
Our affiliate companies are development stage companies with limited
revenues. In addition, we face substantial competition from other providers of
capital and management services including publicly-traded Internet companies,
venture capital firms and large corporations. Many of these companies have
greater financial resources than we do. Accordingly, we expect that we will
continue to experience net losses for approximately the next 12 to 24 months,
until our majority-owned affiliate companies begin to generate profits and our
minority-owned affiliate companies develop their businesses sufficiently to pay
dividends. We plan to generate revenues from the operations of our
majority-owned affiliate companies as we consolidate the operations of these
affiliate companies with our operating results for financial reporting purposes,
and from dividends which we receive from our minority-owned affiliate companies.
However, we do not expect to be able to generate significant revenues to meet
our operational needs, nor do we expect our majority owned affiliate company to
generate revenues to meet our combined operational needs, over the next twelve
months. We also do not expect to receive dividends from our affiliate companies
over the next twelve months given the nature of development stage companies.
We presently have sufficient capital resources to fund our operations
for the next six months, after which we expect to need additional funds for our
continuing operations. We plan to raise funds from the private sale of
securities prior to the end of the second quarter of 2000. We will use the
proceeds of these securities offerings to fund our operations and to acquire
interests in additional affiliate companies. However, we can give no assurance
that we will be successful in raising such funds. If we are unable to raise
sufficient funds to operate our business at that time, we will be forced to
cease operations and liquidate our assets. In such event, purchasers of our
common stock could lose all or a substantial portion of their investment.
Affiliate Companies
We are an Internet holding company actively engaged in e-commerce
through our affiliate companies. We primarily engage in acquiring a controlling
interest in and providing financial, management and technical support to
4
<PAGE>
development stage Internet businesses which we either participate in founding or
identify as meeting our criteria. All of our affiliate companies are currently
in the development stage. We currently have ownership interests in seven
affiliate companies. Our approximate ownership interest in each of our current
affiliate companies is as follows:
<TABLE>
<S> <C> <C>
metacat.com, Inc. (www.metacat.com) 100%
College 411.com, Inc. (www.college411.com) 27%
IndustrialVortex.com, Inc. (www.industrialvortex.com) 25%
AssetExchange.com, Inc. (www.AssetExchange.com) 20%
Net Value, Inc. N/A 66%
AsiaCD, Inc. (www.asiacd.com) 11%
Webmodal, Inc. (www.Webmodal.com) 10%
Swapit.com Inc. (www.swapit.com) 12%
</TABLE>
metacat.com, Inc. is an Internet-based e-commerce superstore that
aggregates and searches the product offerings of catalog and mail order
businesses and will allow consumers to purchase these products through its
Internet website. metacat launched its Internet website in December 1999. As of
September 30, 1999, metacat had not recognized any revenues, had minimal assets
and had an accumulated deficit of approximately $120,000 (unaudited). metacat's
net losses for the nine months ended September 30, 1999 were approximately
$120,000 (unaudited).
College 411.com, Inc. is an online community for college students
featuring functional academic resources, comparison shopping for student items,
as well as social features such as chat rooms, message centers and customized
news and information sites. College 411's Internet website became fully
functional in January 2000. As of September 30, 1999, College 411 had not
generated any revenues, had assets of $92,278, net losses of $100,017
(unaudited) for the nine months ended September 30, 1999 and had an accumulated
deficit of $100,017 (unaudited).
IndustrialVortex.com, Inc. is developing an Internet website that will
facilitate the purchase and sale of industrial automation products. This
application will provide purchasers of these products with relevant content that
will permit them to make informed and cost-effective purchasing decisions.
IndustrialVortex.com plans to launch its Internet website in February 2000. As
of December 31, 1999, IndustrialVortex.com had not generated any revenues, had
assets of $21,631 and had an accumulated deficit of $48,048.
AssetExchange, Inc. provides banks and other financial institutions
with an Internet-based listing service which allows them to more efficiently
trade loan portfolio assets. AssetExchange launched its Internet website in
August 1999. As of September 30, 1999, AssetExchange had not generated any
revenues, had assets of $439,233, net losses of $48,529 (unaudited) for the nine
months ended September 30, 1999 and had an accumulated deficit of $48,529
(unaudited).
Net Value, Inc. was the historical owner of the technology and assets
which are presently used in BrightStreet.com, Inc.'s operations. In December
1999, Net Value, Inc. sold substantially all of its assets to BrightStreet.com,
Inc. Net Value, Inc. no longer has any operations and holds a 12% ownership
interest in BrightStreet.com, Inc. calculated on a fully-diluted basis. We plan
to complete a merger with Net Value, Inc. in the next three to six months.
BrightStreet.com, Inc. has developed technology that enables retailers,
manufacturers and operators of Internet websites that publish non-product
related information for consumers to deliver Internet-based promotions to
consumers. BrightStreet licenses its technology directly to customers' Internet
websites, providing them with the capability to distribute branded promotions
with consumer targeting, lower cost, and real-time monitoring of the
effectiveness of such promotions. BrightStreet has created a network of
affiliated Internet websites. This network offers customers who want a wider
distribution of their promotions the ability to place their promotions on the
Internet websites of companies with whom BrightStreet has a relationship. As of
September 30, 1999, BrightStreet had assets of approximately $34,000
(unaudited), had not generated any revenues, had no net losses or income
(unaudited) for the nine months ended September 30, 1999 and had an accumulated
deficit of $0 (unaudited).
5
<PAGE>
AsiaCD, Inc. is a 24-hour online music and video store targeted to
individuals of Asian descent living throughout the world and individuals who
enjoy Asian popular culture. AsiaCD provides these individuals with easy access
to a broad range of media titles at competitive prices which include local
rather than international shipping costs. AsiaCD's Internet website is fully
functional and through September 30, 1999 it has generated approximately
$1,473,845 (unaudited) in revenues. AsiaCD's net losses for the nine months
ended September 30, 1999 were approximately $271,478 (unaudited). As of
September 30, 1999, AsiaCD's accumulated deficit was approximately $380,789
(unaudited).
Webmodal, Inc. is developing an Internet application for use by
shippers in purchasing and executing domestic full-truckload intermodal freight
shipments. This application will allow shippers to input their specific
transportation needs and receive all of the information necessary for them to
schedule and execute intermodal shipments in a cost-effective manner. Webmodal
plans to launch its Internet website in 2000. As of September 30, 1999, Webmodal
had not recognized any revenues, had assets of approximately $220,000
(unaudited), net losses of approximately $70,000 (unaudited) for the nine months
ended September 30, 1999 and had an accumulated deficit of approximately $70,000
(unaudited).
Swapit.com, Inc. is designing a consumer-driven electronic barter
exchange on the Internet. Swapit.com, Inc. believes that this service will allow
the swap and sale of consumer goods between individuals. Swapit.com, Inc. plans
to launch its Internet website in April 2000. As of November 30, 1999,
Swapit.com had not generated any revenues, had assets of $479,048 and had an
accumulated deficit of $78,016.
Description of Selling Stockholders
In this registration statement we are registering the resale of up to
3,722,560 shares of our common stock by thirteen of our stockholders. These
stockholders acquired their shares of our common stock which they are offering
for resale as follows:
On February 4, 1999, Sven Behrendt purchased a convertible promissory
note in the principal amount of $2,000,000 from us. We received $2,000,000 as
consideration for the issuance of the convertible promissory note. On March 19,
1999, pursuant to the terms of the convertible promissory note, Mr. Behrendt
converted the principal amount of the convertible promissory note plus all
accrued interest thereon into 807,644 shares of the Company's common stock.
On February 20, 1999, Juergen Jaekel purchased a convertible promissory
note in the principal amount of $500,000 from us. We received $500,000 as
consideration for the issuance of the convertible promissory note. On April 18,
1999, pursuant to the terms of the convertible promissory note, Mr. Jaekel
converted the principal amount of the convertible promissory note plus all
accrued interest thereon into 202,533 shares of the Company's common stock.
On January 1, 1999, Gary Markman purchased a convertible promissory
note in the principal amount of $113,125 from us. As consideration for the
issuance of the convertible promissory note, Mr. Markman agreed to cancel a Net
Value, Inc. promissory note in the principal amount of $100,000 which he owned
and to release us, Net Value, Inc. and the present and future officers and
directors of each corporation from any claims related to this Net Value, Inc.
promissory note. On June 16, 1999, pursuant to the terms of the convertible
promissory note, Mr. Markman converted the principal amount of the convertible
promissory note plus all accrued interest thereon into 59,183 shares of the
Company's common stock.
In two transactions which closed on September 17, 1999 and October 1,
1999, respectively, we sold the following number of shares of our Series B
6
<PAGE>
Preferred Stock, which are convertible into the following number of shares of
our common stock at the lowest possible conversion price of $2.50 per share, and
issued common stock purchase warrants to the following entities:
<TABLE>
<CAPTION>
Selling Stockholder Series B Preferred Common Stock Warrants Consideration
------------------- ------------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Tonga Partners, L.P. 1,500 600,000 91,744 $1,500,000
Yeoman Ventures, Ltd. 250 100,000 15,288 $250,000
Lightline Limited 250 100,000 15,288 $250,000
Little Wing LP 450 180,000 27,520 $450,000
Little Wing Too, LP 150 60,000 9,176 $150,000
Tradewinds Fund LLC 150 60,000 9,176 $150,000
JDN Partners, L.P. 675 270,000 41,288 $675,000
Bayhill Fund, Ltd. 75 30,000 4,584 $75,000
RS Orphan Fund, LP 927 370,800 56,696 $927,000
RS Orphan Offshore Fund, LP 397 158,800 24,280 $397,000
----- --------- ------- ----------
TOTAL 4,824 1,929,600 295,040 $4,824,000
===== ========= ======= ==========
</TABLE>
The registration rights agreement which we entered into with the
holders of the Series B Preferred Stock requires that we register 2,653,200
shares of our common stock, although only 1,475,224 shares are issuable on
exercise of the warrants and on conversion of the Series B Preferred Stock at
the current conversion price of $4.0875 and only 2,224,640 shares would be
issuable on exercise and conversion assuming the lowest possible conversion
price of $2.50. For purposes of the disclosures in this prospectus, the 428,560
excess shares being registered by us, based upon a conversion price of $2.50,
have been allocated among the holders of Series B Preferred Stock on a pro rata
basis based on their ownership of shares of Series B Preferred Stock. These
shares may or may not actually be issued.
Summary of Consolidated Financial Data
The following summary of historical and pro forma consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our audited
Consolidated Financial Statements and related Notes thereto included elsewhere
in this prospectus. We have presented this pro forma information for comparative
purposes only. The summary pro forma data does not purport to represent what our
results would have been if the events described below had occurred at the dates
indicated. The Pro Forma Consolidated Balance Sheet Data reflect the following
as if they had occurred as of September 30, 1999:
o We received net proceeds of $2,582,000 in October 1999 from
the sale of 2,824 shares of our Series B Preferred Stock.
o In the fourth quarter of 1999 and during January 2000,
holders of our convertible debentures converted principal
and accrued interest of $3,113,046 into 1,426,575 shares of
our common stock.
7
<PAGE>
o In the fourth quarter of 1999 and during January
2000, holders of our convertible debentures converted
principal and accrued interest of $1,326,822 into
663,411 shares of our common stock.
o We completed our investment in Webmodal in October
1999, whereby we acquired 12% of the issued and
outstanding shares of common stock of Webmodal for
$350,000 in cash. Our equity interest in this company
will be accounted for under the cost method of
accounting.
o We completed our investment in Swapit.com in November
1999, whereby we acquired shares of Series A
Preferred Stock which is convertible into 10% of the
issued and outstanding shares of common stock of
Swapit.com for $500,000. Our equity interest in this
company will be accounted for under the cost method
of accounting.
o We exercised warrants to purchase 1,125,000 shares of
college 411.com, Inc.'s common stock for $75,000 in
October 1999. This increased our total ownership of
the common stock of College 411.com, Inc. to 29%. Our
equity interest in this company will continue to be
accounted for under the equity method of accounting.
o On October 1, 1999 we paid $250,000 in satisfaction
of the stock subscription payable to AssetExchange,
Inc. Our equity interest in this company will
accounted for under the equity method of accounting.
o We issued 676,374 shares of our common stock in a
private placement with the RS Orphan Fund, LP and the
RS Orphan Offshore Fund, LP in October 1999 pursuant
to which we received gross proceeds of $676,374.
o We sold Net Value, Inc.'s assets to Promotions
Acquisition, Inc. for $2,000,000, a 12% equity
interest in Promotions Acquisition, Inc. calculated
on a fully-diluted basis, and the assumption by
Promotions Acquisition, Inc. of approximately
$1,600,000 of Net Value, Inc.'s liabilities. We have
assumed approximately $2,000,000 of Net Value, Inc.'s
liabilities.
8
<PAGE>
Summary of Selected Consolidated Financial Data
<TABLE>
<CAPTION>
January 1,
Nine Months Ended 1998
Year Ended Year Ended Year Ended September 30, through
December 31, December 31, December 31, (Unaudited) September 30,
1996 1997 1998 1998 1999 1999
-------------- --------------- -------------- -------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses -- -- 140,484 1,120 4,297,728 4,438,212
-------------- --------------- -------------- -------------- ------------ ------------
Loss from operations -- -- (140,484) (1,120) (4,297,728) (4,438,212)
Other income (expense) -- -- (302,393) (4,685) (12,434,419) (12,736,812)
-------------- --------------- -------------- -------------- ------------ ------------
Loss from continuing operations -- -- (442,877) (5,805) (16,732,147) (17,175,024)
-------------- --------------- -------------- -------------- ------------ ------------
Loss from discontinued operations (3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,582,166) (32,003,025)
-------------- --------------- -------------- -------------- ------------ ------------
Net Loss (3,314,094) (11,235,237) (11,549,703) (10,201,148) (22,314,313) (49,178,049)
Preferred stock
dividend-discontinued operations (1,181,250) (15,250,500) (15,250,500) -- (16,431,750)
Net loss to common stockholders (12,416,487) (26,800,203) (25,451,648) (22,314,313) (65,609,799)
=============== ============== ============== ============ ============
Net loss per common share
outstanding, Basic and Diluted,
continuing operations -- -- (0.09) -- (1.93)
============== =============== ============== ============== ============
Net loss per common share
outstanding, Basic and Diluted,
discontinued operations (3.55) (6.88) (8.59) (6.70) (0.65)
============== =============== ============== ============== ============
Weighted average shares
outstanding, Basic and Diluted 934,810 1,804,700 4,711,351 3,796,197 8,647,063
============== =============== ============== ============== ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999 (Unaudited)
------------------------------
Actual Pro Forma
<S> <C> <C>
Balance Sheet Data ------- ---------
Cash and cash equivalents $1,051,930 $4,135,304
Ownership interest in affiliated companies 5,225,362 11,219,938
Total assets 8,616,982 16,787,446
Current portion of long-term debt and accrued
interest 1,643,177 1,386,657
Long-term debt, net of discounts and current
portion 5,814,898 3,204,016
Total liabilities 11,236,017 6,629,302
Series B mandatory redeemable preferred stock 1,732,000 4,177,584
Stockholders' equity (deficit) (4,351,035) 5,980,559
Total liabilities and stockholders'
equity (deficit) 8,616,982 16,787,446
Working capital (deficit) (2,850,121) 1,800,748
</TABLE>
9
<PAGE>
Summary of Selected Consolidated Financial Data
Pro Forma Transactions
<TABLE>
<CAPTION>
Conversion of
September 30, Sale of Series B Conversion of Convertible
1999 (unaudited) Preferred Stock Convertible Debentures Promissory Notes
------------------ ------------------ ----------------------- --------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents 1,051,930 2,582,000 -- --
Ownership interest in affiliated
companies 5,225,362 -- -- --
Total assets 8,616,982 2,582,000 -- --
Current portion of long-term debt
and accrued interest 1,643,177 -- (694,478) (133,042)
Long-term debt, net of discounts
and current portion 5,814,898 -- (1,843,500) (767,382)
Total liabilities 11,236,017 -- (2,537,978) (900,424)
Series B mandatory redeemable
preferred stock 1,732,000 2,445,584 -- --
Stockholders' equity (deficit) (4,351,035) 136,416 2,537,978 900,424
Total liabilities and stockholders'
equity (deficit) 8,616,982 2,582,000 -- --
Working capital (deficit) (2,850,121) 2,582,000 694,478 133,042
</TABLE>
<TABLE>
<CAPTION>
Equity Interest Equity Interest Exercise of Equity Interest in
In Webmodal in Swapit.com College411 Warrants AssetExchange
------------------ ------------------ ----------------------- --------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents (350,000) (500,000) (75,000) (250,000)
Ownership interest in affiliated
companies 350,000 500,000 75,000 --
Total assets -- -- -- (250,000)
Current portion of long-term debt
and accrued interest -- -- -- (250,000)
Long-term debt, net of discounts
and current portion -- -- -- --
Total liabilities -- -- -- (250,000)
Series B mandatory redeemable
preferred stock -- -- -- --
Stockholders' equity (deficit) -- -- -- --
Total liabilities and stockholders'
equity (deficit) -- -- -- (250,000)
Working capital (deficit) (350,000) (500,000) (75,000) --
</TABLE>
<TABLE>
<CAPTION>
Sale of
Sale of NetValue, Equity Interest in
Common Stock Inc. Assets Industrial Vortex.com Pro Forma Balance
------------------ ------------------ ----------------------- --------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents 676,374 2,000,000 (1,000,000) 4,135,304
Ownership interest in affiliated
companies -- 4,069,576 1,000,000 11,219,938
Total assets 676,374 5,162,090 -- 16,787,446
Current portion of long-term debt
and accrued interest -- 821,000 -- 1,386,657
Long-term debt, net of discounts
and current portion -- -- -- 3,204,016
Total liabilities -- (918,312) -- 6,629,303
Series B mandatory redeemable
preferred stock -- -- -- 4,177,584
Stockholders' equity (deficit) 676,374 6,080,402 -- 5,980,559
Total liabilities and stockholders'
equity (deficit) 676,374 5,162,090 -- 16,787,446
Working capital (deficit) 676,374 2,489,975 (1,000,000) 1,800,748
</TABLE>
10
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us and about our affiliate companies,
including, among other things:
o development of an e-commerce market;
o our ability to identify trends in our markets and the
markets of our partners
companies and to offer new solutions that address the
changing needs of these markets;
o our ability to successfully execute our business model;
o the ability of each of our affiliate companies to compete
successfully against direct and indirect competitors;
o our ability to acquire interests in additional companies;
o growth in demand for Internet products and services; and
o adoption of the Internet as an advertising medium.
In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur.
RISK FACTORS
The shares of common stock which are the subject of this registration
statement involve a high degree of risk and represent a highly speculative
investment. You should not purchase these shares of common stock if you cannot
afford the loss of your entire investment. In addition to the other information
contained in this prospectus, you should carefully consider the following risk
factors in evaluating our corporation, our business prospects and an investment
in the shares of common stock.
RISKS PARTICULAR TO NET VALUE HOLDINGS, INC.
We have a very limited operating history upon which you may evaluate an
investment in Net Value Holdings.
We did not begin to implement our current business plan until July 1999
and therefore have a very limited operating history upon which you may evaluate
making an investment in our company. In addition, all of our current affiliate
companies are development stage companies that have limited operating histories
and have generated very limited, if any, revenues or earnings from operations
since inception. Accordingly, you will only be able to examine limited operating
results of our affiliate companies in making your investment decision.
11
<PAGE>
Our auditors have raised substantial doubt about our ability to continue as a
going concern and we will not receive any proceeds from this offering.
Due to our dependence on outside financing and the losses we have
incurred since inception, our auditors have raised substantial doubt about our
ability to continue as a going concern. Notwithstanding that doubt, this
offering relates solely to the resale of shares of our common stock by existing
shareholders and we will not receive any proceeds from sales of these shares of
common stock by these shareholders.
We no longer own our primary source of historical revenues and may not be able
to create or obtain additional sources of revenues.
Our primary source of revenues to date has been our operation of Net
Value, Inc. Specifically, Net Value, Inc. derived revenues from an agreement
between Net Value, Inc. and IQ Value LLC pursuant to which IQ licensed Net
Value's technology for commercial use. During the period from inception through
June 30, 1999, this agreement provided approximately $1,250,000 or 90% of our
consolidated revenues. This agreement, as amended, lapsed pursuant to its terms
on June 30, 1999. During the quarter ended September 30, 1999, we did not
generate any revenues. On December 3, 1999, Net Value, Inc. sold substantially
all of its assets. Although we own 100% of metacat.com, Inc., it is in the
development stage and will only generate minimal revenues during 2000.
Accordingly, we no longer own a majority interest in an operating company that
is presently generating revenues. Although we intend to devote our resources to
expanding metacat.com's operations, to developing additional majority-owned
affiliate companies whose operations will generate revenues and to developing
our minority-owned affiliate companies, if we are unable to do so, then we may
be forced to go out of business.
We have had a history of losses and expect continued losses in the foreseeable
future.
For the nine months ended September 30, 1999, we realized a net loss of
$22,314,313 (unaudited). For the year ended December 31, 1998, we realized a net
loss of $26,800,203 (unaudited). From our inception through September 30, 1999,
we have realized a cumulative net loss of $65,609,799 (unaudited). We expect to
continue to incur losses for the foreseeable future and, if we ever have
profits, we may not be able to sustain them.
Our expenses will increase as we continue in the development stage of
our business model and as we continue to build an infrastructure for our network
of affiliate companies. For example, we expect to hire up to ten additional
employees by December 31, 2000. We will hire these employees to manage both our
operations and the operations of our majority-owned affiliate companies. If any
of these and other expenses are not accompanied by increased revenues, then our
losses will be greater than we anticipate.
There is substantial doubt regarding our ability to continue as a going concern
and we may go out of business.
Since our inception, we have generated our operating funds primarily
through the sale of our equity and debt securities. Our dependence on outside
financing and the losses which we have incurred since our inception raise
substantial doubt about our ability to continue as a going concern. This
offering relates to the resale of shares of our common stock owned by or
issuable to our existing stockholders upon conversion of shares of our Series B
Preferred Stock and exercise of warrants. Accordingly, although we will receive
proceeds from the exercise of the warrants, we will not receive any of the
proceeds of this offering and it will not have any effect on our financial
condition. Our financial condition may have a negative effect on our ability to
enter into relationships with or to start-up and develop additional affiliate
companies. We are not certain that we will be able to, and we currently have no
12
<PAGE>
specific plans to, sell additional debt or equity securities to generate the
necessary proceeds to continue to finance our operations. In the second quarter
of 2000, we may attempt to sell additional securities to raise funds for working
capital purposes. If we fail to raise sufficient proceeds to finance our
operations through the sale of additional securities, then we will not have
sufficient cash to meet the basic requirements of our business plan and will
cease to continue as a going concern. If we cease to continue as a going
concern, then we may go out of business and investors in our common stock will
lose all or a substantial portion of their investment in our common stock.
Holders of our Series B Preferred Stock may have the right to require that we
redeem their shares for a maximum redemption price of $6,030,000.
If holders of our Series B Preferred Stock exercise their right to require
us to redeem their shares, then we may be forced to liquidate our assets in
order to satisfy these redemption rights. Holders of our Series B Preferred
Stock have the right to require us to redeem their shares upon the occurrence of
any of the following events:
o any consolidation, merger or other business combination which we
consummate with any other party pursuant to which the holders of
a majority of the voting power of our capital stock immediately
prior to such transaction do not hold a majority of the voting
power of the capital stock of the surviving entity subsequent to
such transaction;
o the sale or transfer of all or substantially all of our assets;
o the consummation of a purchase, tender or exchange offer made to
the holders of more than 30% of the outstanding shares of common
stock;
o the failure of this registration statement to be declared
effective by the Securities and Exchange Commission on or prior
to February 14, 2000;
o the lapse prior to September 17, 2001, of the effectiveness of
this registration statement or its unavailability for use by the
holders of the Series B Preferred Stock for a period of at least
ten consecutive trading days;
o the suspension from listing or the failure of the common stock to
be listed on either the NASDAQ Over-The Counter Bulletin Board
Trading System, the NASDAQ SmallCap Market, The NASDAQ National
Market, The New York Stock Exchange or the American Stock
Exchange for a period of five consecutive days;
o our notice to any holder of the Series B Preferred Stock of our
inability to comply or our intention not to comply with proper
requests for conversions of any Series B Preferred Stock into
shares of our common stock;
o our failure to comply with any conversion notice tendered by a
holder of the Series B Preferred Stock within ten business days
after we receive it and the stock certificates representing the
shares of Series B Preferred Stock being converted; and
o our breach of any representation, warranty, covenant, or other
term or condition contained in any of the documents related to
our sale and issuance of the Series B Preferred Stock, except for
a breach of covenant which is cured within ten days.
The current redemption price of the Series B Preferred Stock is $1,250 per
share and there are currently 4,824 shares of Series B Preferred Stock issued
and outstanding. Accordingly, if all of the Series B Preferred stockholders
exercised their redemption rights, then we will be required to pay $6,030,000 to
satisfy these redemption rights. As of February 4, 2000 we had approximately
$1,625,000 of cash and cash equivalents on hand. If we are not successful in
raising additional funds in the future and if the Series B Preferred
Stockholders exercise their redemption rights, then we will be required to
liquidate our assets in order to satisfy these redemption rights. Such
liquidation would have a material adverse effect on our ability to implement our
business plan and may cause our common stock to decrease in value or become
worthless.
13
<PAGE>
Our Officers and Directors have acquired personal interests in our affiliate
companies which may create conflicts of interest that may adversely affect our
stockholders' best interests.
Some of our Officers and Directors personally own interests or rights to
purchase interests in some of our affiliate companies as follows:
Officer/Director Affiliate Company
- ---------------- -----------------
Darr Aley AsiaCD, Inc., College 411.com, Inc.
Thomas Aley Swapit.com, Inc.
Stephen George AsiaCD, Inc., College 411.com, Inc.
Andrew P. Panzo AsiaCD, Inc.
Douglas Spink Asia CD, Webmodal, Inc.
Barry Uphoff AsiaCD, Inc.
This may cause the interests of these individuals to conflict with our
stockholders' best interests. For example, if the operations of one of these
affiliate companies is unsuccessful, it may be in our stockholders' best
interests for us to either divest our ownership interest in this affiliate
company or devote a smaller percentage of our management resources to assisting
in the development of this affiliate company. In addition, in order to avoid
registration under the Investment Company Act of 1940, we may have to divest our
ownership interest in a particular affiliate company. However, the officer(s) or
director(s) who own a personal interest in this affiliate company may vote not
to take this action or may seek to continue to devote management resources to
this affiliate company due to his personal interest. Our Board of Directors has
implemented a policy prohibiting our officers and directors from acquiring
personal interests in our affiliate companies in the future.
Our proposed operations are speculative in nature and may not ever result in any
operating revenues or profits.
We are not certain that our business model, even if successful, will
result in operating revenues or profits. Our success depends upon our ability to
develop or select affiliate companies that are ultimately successful. As of the
date of this prospectus, none of our affiliate companies which we have
identified have generated material revenues. Although we intend to internally
develop business concepts into operating affiliate companies, as of the date of
this prospectus, our only internally-developed affiliate companies, metacat.com,
Inc. and BrightStreet.com, Inc., have not generated material revenues.
Accordingly, we do not have an established history of selecting and developing
successful affiliate companies. Economic, governmental, regulatory and industry
factors outside our control affect each of our affiliate companies. If our
affiliate companies do not successfully implement their business plans with the
assistance of our experiences and methodologies, then we will not be able to
achieve our business plan. Accordingly, if these events occur, then we will not
generate any revenues and the value of our assets and the market price of our
common stock will decline. There are also material risks relating to the
businesses of our affiliate companies. Accordingly, the success of our
operations will be dependent upon the management and operations of our affiliate
companies, the timing of the marketing of our affiliate companies' products and
numerous other factors beyond our control.
14
<PAGE>
We are a holding company and we rely on our affiliate companies to fund our
operations.
We operate as an Internet holding company. As an Internet holding
company without significant income from operations, we expect to ultimately
derive the cash flow necessary to fund our operations from our affiliate
companies. In order to have sufficient cash flow to pay dividends, our affiliate
companies must generate earnings.
If our affiliate companies do not generate sufficient earnings to pay
dividends or otherwise distribute amounts to us which are sufficient to cover
our operating expenses, then we may not be able to pay our expenses, even if, on
a consolidated basis, our operating subsidiaries are profitable.
There is a scarcity of and competition for acquisition opportunities and
business combinations.
Although we expect a substantial number of our affiliate companies to
be entities founded by us, there are a limited number of Internet-based
businesses seeking investment capital which we deem to be desirable candidates
to become affiliate companies and there is a very high level of competition
among companies seeking to acquire interests in these entities. We are and will
continue to be a very minor participant in the business of seeking mergers or
business relationships with, and acquisitions of, small private and public
entities. A large number of established and well-financed entities, including
venture capital firms, are active in mergers and acquisitions with and acquiring
interests in companies which we may find to be desirable candidates to become
affiliate companies. Many of these investment-oriented entities have
significantly greater financial resources, technical expertise and managerial
capabilities than us. Consequently, we will be at a competitive disadvantage in
negotiating and executing possible business combinations with regard to these
entities as they generally have easier access to capital, which entrepreneurs of
development stage companies generally place greater emphasis on than obtaining
the management skills and networking services that we provide to our affiliate
companies. Even if we are able to successfully compete with these venture
capital entities, this competition may affect the terms of completed
transactions and, as a result, we may pay more than we expected for interests in
affiliate companies. We may not be able to identify companies that complement
our strategy, and even if we identify a company that complements our strategy,
we may be unable to acquire an interest in the company for many reasons,
including:
o a failure to agree on the terms necessary for a transaction,
such as the amount or price of our equity interest;
o incompatibility between our operational strategies and
management philosophies and those of the affiliate company;
o competition from other acquirers of Internet companies;
o a lack of sufficient capital to acquire an interest in a
potential affiliate company; and
o the unwillingness of a potential affiliate company to
affiliate with our corporation or one of our affiliate
companies.
If we are unable to successfully compete with other entities in
identifying and executing possible business opportunities, then we will not be
able to successfully implement our business plan.
We are not required to follow any specific criteria for identifying affiliate
companies, and therefore may acquire interests in affiliate companies that do
not meet the criteria we have described.
To date, we have focused our acquisition and affiliating efforts on
businesses whose operations are focused in the Internet industry and meet the
following criteria:
o development stage entity;
o seeking $250,000 to $1,000,000 in capital;
o management that is experienced in the Internet industry and
in the substantive industry in which the affiliate company
will operate; and
o established branded products.
15
<PAGE>
However, we are not obligated to follow any particular operating, financial,
geographic or other criteria in evaluating candidates for potential business
combinations. In addition, we are not required to acquire interests in any
number of affiliate companies, complete any number of business combinations, or
internally develop any number of affiliate companies in any calendar year. We
will determine which target companies provide the best potential financial
return for our stockholders and we will determine the amount of equity and other
terms and conditions of investments. Once you purchase our securities, you will
not have the opportunity to evaluate the relevant economic, financial and other
information that our management team will use and consider in deciding whether
or not to enter into a particular business combination or factors or strategies
which they will implement in developing such relationships. We are not certain
that we will be successful in identifying and evaluating suitable business
opportunities and consummating business combinations with or acquiring interests
in additional affiliate companies. We do not anticipate that our affiliate
companies' operations will have a short-term positive impact on our operations.
Thus, we continue to seek additional target companies and are continuing to
develop companies based on our internally conceived business ideas. These
companies may operate in industries in which members of our management team have
little or no prior experience.
We may be required to dispose of our interests in our affiliate companies or
take other actions which we would not otherwise take in order to avoid
classification as an investment company under the Investment Company Act of
1940.
Although we are primarily engaged in the business of e-commerce through
our affiliate companies, our ownership of interests in our affiliate companies
could result in our classification as an investment company under the Investment
Company Act of 1940. If we are required to register as an investment company,
then we will incur substantial additional expense as the result of the
Investment Company Act of 1940's recordkeeping, reporting, voting, proxy
disclosure and other requirements. In addition, restrictions on transactions
between an investment company and its affiliates under the Investment Company
Act of 1940 would make it difficult, if not impossible, for us to fully
implement our strategy of actively managing, operating and promoting
collaboration among our network of affiliate companies. As a result, we intend
to take whatever steps are necessary in order not to be required to register as
an investment company, and may be forced to sell interests in affiliate
companies which we otherwise would continue to hold. Such sales may be for less
than fair market value due to the Company's need to dispose of the securities. A
company is presumed to be an investment company under the Investment Company Act
of 1940 if more than 45% of its total assets consists of, and more than 45% of
its income/loss and revenue attributable to it over the last four quarters is
derived from, ownership interests in companies it does not primarily control.
Under the Investment Company Act of 1940, we are considered to primarily control
a company if we own more than 25% of that company's voting securities and have
more control than any other single owner. Prior to the sale by Net Value, Inc.
of its assets to BrightStreet, Net Value, Inc. alone constituted greater than
55% of our total assets and substantially in excess of 55% of income/loss and
revenues for the past four fiscal quarters. As a result of the sale, we may have
more than 45% of our total assets comprised of and more than 45% of our
income/loss over the prior four fiscal quarters derived from ownership interest
in companies we do not primarily control.
The rules under the Investment Company Act of 1940 provide us with a
grace period of one year, at the end of which we must again meet the foregoing
45% tests. We intend to meet the tests as the result of our ownership interests
in companies which we will primarily control. However, because six of our
affiliate companies are not majority-owned subsidiaries and we may not retain a
majority ownership interest in our other two affiliate companies, changes in the
value of our ownership interests in our affiliate companies and the income/loss
and revenue attributable to our affiliate companies could require us to register
as an investment company under the Investment Company Act of 1940 unless we take
action to avoid registration requirements. For example, we may be forced to sell
our minority ownership interests in some of our affiliate companies which we do
not want to sell and any sale may be at less than fair market value as we will
be selling restricted securities in privately negotiated transactions. We may
also have to ensure that we retain at least a 25% voting ownership interest in
our majority-owned affiliate companies after their initial public offerings, if
any. In addition, we may have to acquire additional income or loss generating
assets that we might not otherwise have acquired or may have to forego
opportunities to acquire interests in companies that we would otherwise want to
acquire in connection with executing our business strategy.
16
<PAGE>
Our success could be impaired by valuations placed on Internet-related companies
by the investment community.
Our strategy involves creating value for our stockholders by developing
our affiliate companies and helping them to access the capital markets. We are
therefore dependent on the success of the market for Internet-related companies
in general and for initial public offerings of those companies in particular. To
date, there has been a substantial number of Internet-related initial public
offerings and additional offerings are expected to be made in the future. If the
market for Internet-related companies and initial public offerings were to
weaken for an extended period of time, then the ability of our affiliate
companies to grow and access the capital markets will be impaired and we may
need to provide additional capital to our affiliate companies in order to
protect our equity holdings. If we are unable to provide additional capital to
our affiliate companies in these circumstances, then our affiliate companies'
operations may suffer, we will not successfully implement our business plan and
the value of our common stock may decrease.
We expect our affiliate companies to grow rapidly and if we are unable to assist
them in sustaining and managing their growth, our affiliate companies'
businesses will suffer, which will adversely affect our business.
Our affiliate companies may experience rapid growth as they introduce
new products and services and hire additional employees to manage expanded areas
of development and service a growing number of consumers. Since such growth may
not be accompanied by immediate increases in revenues, this growth is likely to
place significant strain on their resources and on the resources we allocate to
assist our affiliate companies. In addition, our management may be unable to
convince our affiliate companies to adopt our ideas effectively, the affiliate
companies may fail in their attempt to execute our ideas or successfully manage
their growth. If we are unable to effectively assist our affiliate companies in
managing their growth, then they may not sustain profitable operations and the
value of our common stock may decrease.
Our resources and our ability to manage newly acquired or developed affiliate
companies may be strained as we acquire interests in and develop additional
Internet companies.
We have acquired or developed interests in Internet companies that
complement our business strategy. We plan to acquire or develop additional
affiliate companies that also complement our business strategy. In the future,
we may also acquire larger percentages or larger interests in companies than we
have in the past. These relationships may place a significantly greater strain
on our resources, our ability to manage such companies and our ability to
integrate them into our collaborative network.
If we are unable to obtain additional financing, then our business will suffer.
We will need to raise substantial additional financing in the future to
support our working capital needs or our affiliate companies' working capital
needs and to provide us with sufficient funding to enter into additional
business relationships and start additional development stage companies. As of
February 4, 2000, we had approximately $1,625,000 of cash and cash equivalents
on hand. We currently anticipate using an average of approximately $225,000 per
month over the next twelve months to satisfy our operating expenses.
Accordingly, we estimate that we presently have approximately $500,000 available
for use in developing or purchasing interests in new affiliate companies through
June 30, 2000. Our estimated average cost of developing and purchasing interests
in affiliated companies is approximately $500,000. This means that with our cash
on hand as of February 4, 2000, if we develop or purchase interests in more than
one additional affiliate company then we will not have sufficient cash to
satisfy our operating expenses through June 30, 2000. However, we have agreed to
satisfy Net Value, Inc.'s remaining liabilities of $1,712,420 . If we choose to
satisfy greater than $500,000 of these liabilities prior to June 30, 2000, then
we will not have sufficient cash to develop or acquire equity interests in any
new affiliate companies. While these funds may be sufficient to satisfy our
short term financing needs, we will need significant additional funding in order
to be able to continue to develop our network of companies. If we are unable to
secure additional financing on acceptable terms, then we will not be able to
fully implement our business plan.
17
<PAGE>
Our success is dependent on our continued employment of Andrew Panzo, Lee Hansen
and Thomas Aley and the continued employment by our affiliate companies of their
key personnel, including, for example, Joshua Lau of AsiaCD, Inc. and Chris
Kravas of Webmodal, Inc, and if we were to lose the services of these
individuals, our business and the businesses of our affiliate companies would be
negatively affected.
We believe that our success will depend on continued employment by us
and our affiliate companies of senior management and key technical personnel. If
one or more members of our management team or the management teams of any of our
affiliate companies are unable or unwilling to continue in their present
positions, then our business and operations could be disrupted.
As of February 4, 2000, our entire management team, other than Andrew
P. Panzo, has worked for us for less than one year. Andrew P. Panzo joined our
management team in January 1999. Other than Lee Hansen, our chief operating
officer who joined us on October 1, 1999 and Thomas Aley, our Executive Vice
President-Business Development, who joined us on November 22, 1999, the
remainder of our management team, including Darr Aley, Stephen George and Barry
Uphoff, joined our company in July 1999 in connection with our merger with
Strategicus Partners, Inc. Our efficiency may be limited while these employees
and future employees are being integrated into our operations. In addition, we
may be unable to identify and hire additional qualified management and
professional personnel to help lead us and our affiliate companies.
The success of some of our affiliate companies also depends on their
having highly trained technical and marketing personnel, including:
Neal Wozniak metacat.com, Inc.
Travis Bowie College 411.com, Inc.
David Smith IndustrialVortex.com, Inc.
Willie Koo AssetExchange.com, Inc.
R. Scott Wills BrightStreet.com, Inc.
Joshua Lau AsiaCD, Inc.
Chris Kravas Webmodal, Inc.
Kevin Wells Swapit.com, Inc.
Our affiliate companies will need to continue to hire additional
qualified personnel as their businesses grow. A shortage in the number of
trained technical and marketing personnel could limit the ability of our
affiliate companies to increase the sales of their existing products and
services and launch new product offerings.
We owe approximately $4,605,000 to third parties; if we are unable to satisfy
this indebtedness, our business will be adversely affected.
As of February 4, 2000, we had indebtedness to third parties in the
aggregate amount of approximately $4,605,000 (unaudited). Convertible debentures
in the aggregate principal amount of $102,500 will mature prior to January 15,
2001 if they are not previously converted into shares of our common stock.
However, a significant portion of our remaining third party indebtedness
consists of convertible debentures and convertible promissory notes which are
not current liabilities:
Approximate Amount of Indebtedness, Projected Maturity Date
Excluding Accrued Interest If Not Previously Converted
-------------------------- ---------------------------
$ 835,677 March 31, 2001
$2,848,000 Various Dates-February 3, 2001
through June 21, 2001
18
<PAGE>
In addition, if we acquire at least 80% of Net Value, Inc.'s common stock, then
we can automatically convert convertible debentures with maturity dates in 2001
in the aggregate principal amount of $2,950,500 into shares of our common stock
at conversion prices ranging from $2.00 to $2.50 per share. The holders of all
of our convertible debentures may elect at any time to convert the principal
amount of their convertible debentures plus all accrued interest thereon into
shares of our common stock at conversion prices ranging from $2.00 to $2.50 per
share. If such convertible debentures are converted into shares of our common
stock, then we will no longer have a cash liability related to these convertible
debentures. However, the presence of this indebtedness may have a negative
effect on our ability to obtain additional financing. In addition, if we do not
have adequate funds on hand at the maturity dates of these convertible
debentures and are obligated to repay these convertible debentures, then we will
require significant additional funding if we are unable to restructure or
otherwise delay our obligation to satisfy this indebtedness. We are not certain
that alternative financing will be available to us on acceptable terms or at
all.
We have issued a significant amount of stock-based compensation to our
officers and directors and this compensation has significantly decreased and
will continue to significantly decrease our earnings.
In 1999, we issued stock-based compensation of $32,598,805 to our
officers and directors in the form of stock options with exercise prices below
our market value on the date of grant. As a result of these grants, we recorded
a noncash expense of $2,781,740 which reduced our earnings in 1999 by
$2,781,740. We also recorded deferred compensation of 29,817,065 in 1999 as a
result of these stock option grants. We will amortize this amount to expense in
future years over the vesting period of the stock options. In the periods which
these amounts are amortized, our earnings will be decreased by the amount of
this expense. We plan to continue issuing stock options and other forms of stock
based compensation to our current officers and directors and to our future
employees. This future stock compensation will also decrease our earnings in the
future.
Fluctuations in our quarterly results based on our accounting methodologies may
adversely affect our stock price.
Our quarterly financial results may fluctuate significantly due to our
accounting methodologies. This may cause our operating results in any calendar
quarter to not meet securities analysts' or investors' expectations, which may
cause the price of our common stock to decrease. Our accounting methods for
particular affiliate companies will change as a result of changes in our
ownership percentages of our affiliate companies due to:
o our acquisition of additional ownership interests in
particular affiliate companies in which we already own
equity interests;
o a decrease in our ownership interests in particular
affiliate companies due to their issuance of additional
equity securities to third parties; and
o our acquisition or development of additional affiliate
companies which become majority owned subsidiaries of our
corporation.
For example, if we own interests that represent greater than 20% of the
issued and outstanding equity securities of an affiliate company, then we are
required to account for this ownership interest using the equity method of
accounting. The equity method of accounting requires us to reflect our share of
the earnings or losses of the affiliate company in our consolidated financial
statements. If this affiliate company issues additional equity securities to
third parties and our ownership interest is diluted below 20% of the issued and
outstanding equity securities of this affiliate company, then we will account
for this ownership interest using the cost method of accounting. Under the cost
method, our share of the affiliate company's earnings or losses is not included
in our consolidated financial statements. Accordingly, this type change in our
ownership interest of an affiliate company may cause our quarterly operating
results to fluctuate. In addition, if we own greater than 50% of the issued and
outstanding equity securities of an affiliate company, then we are required to
consolidate the affiliate company's financial statements with our financial
statements. Accordingly, as we acquire or develop additional affiliate companies
in which we own greater than 50% of the issued and outstanding equity
securities, our quarterly operating results will fluctuate. Based on our
business plan, we believe that period-to-period comparisons of our operating
results are not meaningful. However, securities analysts and investors may place
significant reliance on these results which may adversely affect our stock
price.
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Future securities offerings will dilute the ownership interest of our current
stockholders.
We expect to sell equity securities or convertible debt securities
during the second quarter of 2000 in order to raise the funds necessary to
internally develop or acquire equity interests in affiliate companies and to
fund our operations. In addition, we expect to sell additional securities from
time to time thereafter for the same purposes. Any such financing will involve
the issuance of our previously authorized and unissued securities and will
result in the dilution of the ownership interests of our present stockholders.
If our acquisitions and disposals of our equity interests in our affiliate
companies cause negative tax consequences, then our business and results of
operations will be adversely affected.
Federal and state tax consequences will, in all likelihood, be major
considerations in our decision to make any investment in an affiliate company or
to undertake any business combination. Currently, pursuant to various federal
and state tax provisions, such transactions may be structured so as to result in
a tax-free treatment to both companies participating in the transaction. While
we intend to structure any business combination so as to minimize the federal
and state tax consequences to both us and the target entity, we cannot be
certain that such a business combination will meet the statutory requirements of
a tax-free reorganization or that the parties will obtain the intended tax-free
treatment upon a transfer of stock or assets. A non-qualifying reorganization
could result in the imposition of both federal and state taxes which may
adversely affect us and our stockholders. In addition, if we sell equity
interests in our affiliate companies, then we may recognize considerable gains
which could result in the imposition of both federal and state taxes which may
adversely affect us and our stockholders.
RISKS RELATED TO THE OFFERING.
Shares eligible for future sale by current holders of our securities may
decrease the price of our common stock.
If holders of our securities sell substantial amounts of our common
stock, including shares issued upon the exercise of outstanding options and
warrants and shares issued upon conversion of convertible debentures, then the
market price of our common stock could decrease. We currently have issued and
outstanding convertible debentures in the aggregate principal amount of
approximately $3,786,177 which are convertible at any time into shares of common
stock by the holders thereof at conversion prices ranging from $2.00 to $2.50
per share. In addition, we currently have issued and outstanding warrants to
purchase approximately 1,503,058 shares of our common stock. The holders of
these warrants may exercise them at any time at exercise prices ranging from
$2.50 per share to $6.00 per share. Although restrictions under federal
securities laws limit the ability of the shares of our common stock issuable
upon conversion of these securities to be resold in the public market upon
issuance, these restrictions may only apply for a period of one year from the
date of the convertible promissory notes and for one year from the date on which
these warrants are exercised. We have also issued and outstanding 4,824 shares
of our Series B Preferred Stock which are presently convertible at a price of
$4.0875 per share into 1,180,184 shares of our common stock. In addition, at any
time prior to the first anniversary of the effective date of this registration
statement, the holders of our Series B Preferred Stock may elect to reset their
conversion price to the closing sales price of our common stock, provided that
they may not reset their conversion below $2.50 per share. On February 4, 2000,
the closing sales price of our common stock was $14.00. If the holders of our
Series B Preferred Stock were to reset their conversion price to the conversion
floor price of $2.50 per share, then they would be entitled to receive 1,929,600
shares of our common stock upon full conversion of their shares of our Series B
Preferred Stock. This registration statement registers the resale of the shares
of our common stock issuable upon conversion of Series B Preferred Stock and the
shares of our common stock issuable upon exercise of the related warrants.
Accordingly, there are no longer any restrictions currently in place on the
shares of our common stock underlying the Series B Preferred Stock and the
related 295,040 warrants, and upon the conversion or exercise of these
securities, there will be approximately an additional 2,225,000 shares of our
common stock available for sale on the open market. This increase in the supply
of shares eligible for sale on the open market may decrease the trading price of
our common stock.
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There is no significant trading market for our common stock.
Our common stock is not eligible for trading on any national or
regional exchange. Our common stock is eligible for trading in the
over-the-counter market in the "Pink Sheets" or on the NASDAQ Over-the-Counter
Bulletin Board Trading System pursuant to Rule 15c2-11 of the Securities
Exchange Act of 1934. This market tends to be highly illiquid, in part because
there is no national quotation system by which potential investors can trace the
market price of shares except through information received or generated by a
limited number of broker-dealers that make a market in that particular stock.
The National Association of Securities Dealers has enacted new eligibility
requirements for issuers whose securities are quoted on the Bulletin Board.
Pursuant to these rules, no issuer's securities may be quoted on the Bulletin
Board unless the issuer files periodic reports with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Although we are not subject to these new eligibility requirements until
February 24, 2000, we intend to comply with these requirements as soon as
possible. If we do not comply with these eligibility requirements on a timely
basis, then our common stock will be ineligible for quotation on the Bulletin
Board until we are in compliance with these requirements. There are currently no
plans, proposals, arrangements or understandings with any person with regard to
the development of a trading market in the common stock. We are not certain that
an active trading market in the common stock will develop, or if such a market
develops, that it will be sustained. In addition, there is a greater chance for
market volatility for securities that trade in the Pink Sheets or on the
Bulletin Board as opposed to a national exchange or quotation system. This
volatility may be caused by a variety of factors, including:
o the lack of readily available price quotations;
o the absence of consistent administrative supervision of "bid" and
"ask" quotations;
o lower trading volume; and
o market conditions.
In a volatile market, we may experience wide fluctuations in the market
price of our securities. These fluctuations may have an extremely negative
effect on the market price of our securities and may prevent you from obtaining
a market price equal to your purchase price when you attempt to sell our
securities in the open market. In these situations, you may be required to
either sell our securities at a market price which is lower than your purchase
price, or to hold your investment in our securities for a longer period of time
than you planned to hold this investment.
If, in the future, our common stock satisfies the definition of a "penny stock,"
then broker-dealers will be required to provide their customers with disclosure
documents prior to allowing them to participate in transactions involving our
common stock.
Pursuant to the Securities Exchange Act of 1934, if, in the future, our
common stock satisfies the definition of a "penny stock," then broker-dealers
will be required to provide their customers with disclosure documents prior to
allowing them to participate in transactions involving our common stock. These
disclosure requirements may prove to be burdensome to broker-dealers and may
discourage them from allowing their customers to participate in transactions
involving our common stock. This may materially limit trading activities
involving our common stock.
"Penny stocks" are equity securities with a market price below $5.00
per share other than a security that is registered on a national exchange;
included for quotation in the NASDAQ system; or whose issuer has net tangible
assets of more than $2,000,000 and has been in continuous operation for greater
than three years. Issuers who have been in operation less than three years must
have net tangible assets of at least $5,000,000.
Rules promulgated by the Securities and Exchange Commission under
Section 15(g) of the Exchange Act require broker-dealers engaging in
transactions in "penny stocks," to first provide to their customers a series of
disclosures and documents, including:
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o a standardized risk disclosure document identifying the
risks inherent in investment in "penny stocks;"
o all compensation received by the broker-dealer in connection
with the transaction;
o current quotation prices and other relevant market data; and
o monthly account statements reflecting the fair market value
of the securities. In addition, these rules require that a
broker-dealer obtain financial and other information from a
customer, determine that transactions in penny stocks are
suitable for such customer and deliver a written statement
to such customer setting forth the basis for such
determination.
On February 4, 2000, the closing sales price of our common stock was
$14.00. Although our common stock does not presently constitute a "penny stock,"
we cannot predict with any certainty that our common stock will not trade below
$5.00 in the future and thereby constitute "penny stock." In that event, trading
activities for the common stock will be made more difficult for broker-dealers
than in the case of securities not defined as "penny stock." This may have the
result of depressing the market for our securities and an investor may find it
difficult to dispose of such securities.
Further, under the Exchange Act, and the regulations thereunder, any
person engaged in a distribution of shares of our common stock offered by this
prospectus may not simultaneously engage in market making activities with
respect to the common stock during the applicable "cooling off" periods prior to
the commencement of such distribution.
Anti-takeover provisions under our Certificate of Incorporation and Delaware Law
could make a third party acquisition of our corporation difficult.
Our Amended and Restated Certificate of Incorporation and Bylaws and
the Delaware General Corporation Law include provisions that could delay, defer
or prevent a takeover attempt that stockholders may consider to be in their best
interests. These include:
Staggered Board of Directors. Our Board of Directors is divided into
three classes serving terms currently expiring in 2000, 2001 and 2002 and
directors may only be removed for cause. These provisions may limit the ability
of holders of common stock to remove our Board of Directors through a proxy
contest.
Stockholder Proposals. Our stockholders must give advance notice,
generally 60 days prior to the relevant meeting, for stockholder nominations of
candidates for our Board of Directors and for certain other business to be
conducted at any stockholders' meeting. This limitation on stockholder proposals
could inhibit a change of control by delaying action on any proposed change in
control until the annual meeting of stockholders.
Preferred Stock. Our certificate of incorporation authorizes our Board
of Directors to issue up to 10,000,000 shares of preferred stock having such
rights as may be designated by our Board of Directors, without stockholder
approval. This issuance of preferred stock could inhibit a change in control by
making it more difficult to acquire the majority of our voting stock.
Delaware Anti-takeover Statute. The Delaware General Corporation law
restricts certain business combinations with interested stockholders. This
statute may have the effect of inhibiting a non-negotiated merger or other
business combination.
We do not anticipate paying dividends.
We have not paid any cash dividends on our common stock since our
inception and we do not anticipate paying cash dividends in the foreseeable
future. Any dividends which we may pay in the future will be at the discretion
of our Board of Directors and will depend on our future earnings, any applicable
regulatory considerations, our financial requirements and other similarly
unpredictable factors. For the foreseeable future, we anticipate that we will
retain any earnings which we may generate from our operations to finance and
develop our growth and that we will not pay cash dividends to our stockholders.
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RISKS PARTICULAR TO OUR AFFILIATE COMPANIES.
Each of our affiliate companies has a very limited operating history
and has generated very limited, if any, revenues.
Other than Net Value, Inc., our affiliate companies were all formed
less than two years ago. Each of our affiliate companies is in the development
stage and has generated very limited, if any, revenues. Accordingly, we have no
historical basis on which to evaluate the future success of any of our affiliate
companies.
Most of our affiliate companies have inadequate amounts of capital and
will require significant additional financing to execute their business plans.
Other than BrightStreet, each of our affiliate companies only has
sufficient capital resources to meet operating expenses for less than one year.
Accordingly, most of our affiliate companies will require significant additional
financing to execute their business plans. Although we intend to assist our
affiliate companies in obtaining this financing, there is no assurance that
these affiliate companies will be able to obtain this financing on a timely
basis. If any of our affiliate companies are unable to obtain the required
financing on a timely basis, then they may not be able to execute their business
plans.
Our affiliate companies may be unable to protect their proprietary rights which
may increase the level of competition which they face.
Although our affiliate companies seek to protect their proprietary
rights, their actions may be inadequate to protect any trademarks, copyrights
and other proprietary rights. This may result in increased competition to our
affiliate companies. Many of our affiliate companies are in the development
stage and are either in the process of preparing their initial trademark or
patent applications or are awaiting approval of these initial applications by
the United States Patent and Trademark office. For example, our affiliate
companies have filed the following applications:
<TABLE>
<S> <C>
College 411.com, Inc. one trademark application
BrightStreet.com, Inc. one patent application and eight trademark applications
AsiaCD, Inc. one trademark application
Webmodal, Inc. two trademark applications
</TABLE>
Competitors will incur additional costs associated with developing
their own customer recognition and developing technology to offer similar
products and services without infringing on the affiliate companies' patents. If
our affiliate companies cannot successfully protect and enforce their
proprietary rights, then their ability to establish customer recognition will be
diminished, and our affiliate companies may face competition from competitors
who are using technology developed in whole or part by the affiliate company,
thus increasing the level of competition which our affiliate companies may face.
Our affiliate companies have experienced some difficulty in protecting
and enforcing their proprietary products and services. For example, BrightStreet
filed its initial patent application in 1995 and the United States Patent and
Trademark Office has not yet issued a patent covering BrightStreet's technology.
In addition, effective copyright and trademark protection may be unenforceable
or limited in certain countries and the global nature of the Internet makes it
impossible for some of our affiliate companies to control the dissemination of
their work.
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Our affiliate companies may be subject to claims that their products or services
infringe on intellectual property rights of third parties.
Our affiliate companies may be subject to claims that their products or
services infringe on patents or trademarks of third parties. Any of these
claims, with or without merit, could subject our affiliate companies to costly
litigation and divert the attention of their technical and management personnel.
If these claims are valid, then our affiliate companies may be required to cease
the infringing activity and pay substantial damages. For example, BrightStreet
is currently named as a defendant in a lawsuit in which the plaintiff has
alleged that BrightStreet's technology infringes upon its patent. If
BrightStreet loses this litigation, it may be required to cease offering its
product and services. Even if BrightStreet successfully defends this claim, it
will incur substantial legal fees and defense costs. If our affiliate companies
incur significant expenses in connection with litigation and their management
and personnel are required to divert their attention to this litigation, then
the expenses, lost time to further develop their products and services and
financial losses incurred by our affiliate companies will increase and their
profits, if any, will decrease.
The success of our affiliate companies depends on the development of the
e-commerce market, which is uncertain.
All of our affiliate companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not continue to
develop, or if the Internet does not expand as an effective medium for the sale
of products and services, then our affiliate companies may not succeed. For
example, AsiaCD, Swapit.com and metacat each allow consumers to purchase
products over the Internet. If consumer use of the Internet to purchase goods
and services does not continue to develop and expand, then these affiliate
companies may not attract a sufficient customer base and their businesses may be
adversely affected. In addition, if businesses do not continue to use or expand
their use of the Internet for conducting business then some of our affiliate
companies may not develop an adequate customer base to execute their business
plans. For example, if financial institutions are unwilling to purchase and sell
loan portfolios over the Internet, then AssetExchange will not sufficiently
develop its service to meet its business plan. In addition, if businesses are
unwilling to forgo the service provided by marketing intermediaries in order to
plan and execute intermodal shipments over the Internet, then Webmodal will not
develop a sufficient customer base to execute its business plan.
Our long-term success depends on widespread market-acceptance of
e-commerce. A number of factors could prevent such acceptance, including the
following:
o the unwillingness of businesses to shift from traditional
business processes to e-commerce processes;
o the necessary network infrastructure for substantial growth
in usage of e-commerce may not be adequately developed;
o increased government and securities regulation or taxation
may adversely affect the viability of e-commerce;
o insufficient availability of telecommunication services or
changes in telecommunication services could result in slower
response times for the users of e-commerce; and
o concern and adverse publicity about the security of
e-commerce transactions.
Our affiliate companies may fail if their competitors provide superior
Internet-related products or continue to have greater resources than our
affiliate companies.
Competition for Internet products and services is intense and grows on
a daily basis. As the market for e-commerce grows, we expect that competition
will intensify. Barriers to entry are minimal and competitors can offer products
and services at a relatively low cost. As no physical presence is required to
commence operations, our affiliate companies' competitors may emerge without the
same degree of warning that competitors who are traditional bricks-and-mortar
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businesses would provide to those businesses. Our affiliate companies compete
for a share of a customer's:
o purchasing budget for services, materials and supplies with
other online providers and traditional distribution
channels; and
o advertising budget with online services and traditional
off-line media, such as print and trade associations.
Many of our affiliate companies' existing competitors have greater
brand recognition and greater financial, marketing and other resources than our
affiliate companies. This may place our affiliate companies at a competitive
disadvantage in responding to other companies' pricing strategies, technological
advances, advertising campaigns, strategic partnerships and other initiatives.
In addition, our affiliate companies compete to attract and retain a
critical mass of buyers and sellers. Our affiliate companies' competitors may
develop Internet products or services that are superior to, or have greater
market acceptance than, those offered by our affiliate companies. If our
affiliate companies are unable to compete successfully against their existing
and developing competitors, then our affiliate companies may fail.
Our affiliate companies' computer and communications systems may fail, which may
discourage content providers and consumers from using our affiliate companies'
systems.
Our affiliate companies' businesses depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
Interruptions could result from natural disasters as well as power loss,
telecommunications failure and similar events. Any system interruptions that
cause our affiliate companies' Internet websites to be unavailable to Internet
browsers may reduce the attractiveness of our affiliate companies' Internet
websites to consumers and third party content providers. If consumers and third
party content providers are unwilling to use our affiliate companies' Internet
websites, then our business, financial condition and operating results could be
adversely affected.
Our affiliate companies' businesses may be disrupted if they are unable to
upgrade their systems to meet increased demand.
Capacity limits on our affiliate companies' technology, transaction
processing systems and network hardware and software may be difficult to project
and they may find it difficult to expand and upgrade their systems to meet
increased use. Our affiliate companies will require significant amounts of
capital to upgrade their technology systems. If our affiliate companies are
unable to obtain this financing to appropriately upgrade their systems and
network hardware and software, then the operations and processes of our
affiliate companies may be disrupted.
Since it only recently launched its Internet website, metacat believes
that its technology systems are currently being used at approximately 5% of
capacity. metacat believes that its technology systems can accommodate several
thousand transactions a day. In addition, metacat's technology systems can be
expanded by purchasing additional hardware and software licenses. metacat
believes that it can accomplish any required expansion of its technology systems
within one to two days.
Although College 411 owns its own web server, its operations are hosted
by AboveNet Communications 24 hours a day and is currently running at
approximately 20% capacity. College 411 believes that it can easily expand both
its database architecture and web server through the addition of server
hardware.
AssetExchange's technology systems have the capacity to handle
approximately 20,000 members. Accordingly, AssetExchange believes that its
technology systems are currently operating at less than 5% of its capacity.
AssetExchange believes that it can quickly increase its capacity by adding
processors to the existing server, providing additional servers or replacing the
server with a more powerful server.
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BrightStreet believes that its technology systems have the capacity to
deliver approximately 2,000,000 promotion views per day. BrightStreet is
presently experiencing an average of approximately 400 promotion views per day.
BrightStreet believes that it can easily increase its capacity by purchasing
additional servers, processors and hard disk arrays.
AsiaCD's web server is hosted by Mindspring. In addition, AsiaCD's
transaction processing is performed by Yahoo! Store and Wells Fargo Bank.
Accordingly, AsiaCD believes that it currently has sufficient capacity to handle
its transaction volume. AsiaCD can easily expand its technology systems by
purchasing additional web servers.
Since Webmodal, IndustrialVortex.com and Swapit.com have not launched
their Internet websites and operations, they do not yet face capacity limits.
Our affiliate companies that publish or distribute content over the Internet may
be subject to legal liability.
Some of our affiliate companies may be subject to legal claims relating
to the content on their Internet websites, or the downloading and distribution
of this content. For example, College 411, IndustrialVortex.com, AssetExchange,
AsiaCD and Webmodal all use content and information obtained from third party
sources. Claims involving matters such as defamation, invasion of privacy and
copyright infringement can be made against these affiliate companies if they
improperly obtain or use this content. Providers of Internet products and
services have been sued in the past, sometimes successfully, based on the
content of material contained on their Internet websites. In addition, some of
the content provided by our affiliate companies on their Internet websites is
drawn from data compiled by other parties, including governmental and commercial
sources, and our affiliate companies re-enter the data. This data may have
errors. If any of our affiliate companies' Internet website content is
improperly used or if any of our affiliate companies supply incorrect
information, it could result in unexpected liability. Any of our affiliate
companies that incur this type of unexpected liability may not have insurance to
cover the claim or, if coverage is in place, it may not be adequate. If our
affiliate companies incur substantial costs because of this type of unexpected
liability, then the expenses incurred by our affiliate companies will increase
and their profits, if any, will decrease.
Changes in federal and state tax treatment of Internet sales could result in
decreased revenues for some of our affiliate companies.
The imposition of sales taxes on Internet sales would increase the effective
cost of goods to purchasers from metacat.com, College 411, AsiaCD and Swapit.com
and may result in lower sales. Currently, these affiliate companies are not
required to charge any customer sales and usage tax, and there is a federally
imposed moratorium on taxation of Internet transactions. However, the growth of
Internet commerce is likely to lead state revenue agencies to pursue taxation on
Internet sales. To the extent that states are successful in imposing taxes on
Internet sales, the result will be an effective increase in the cost of goods
purchased through Internet websites. Consumers may respond by shifting to
traditional purchasing methods such as catalog sales which often do not impose
sales tax or interstate shipments or store purchases which do not involve
shipping costs.
Concerns regarding security of transactions and transmitting confidential
information over the Internet may have an adverse impact on our business.
We believe that concerns regarding the security of confidential
information transmitted over the Internet discourage many potential customers
from engaging in online transactions. If our affiliate companies that depend on
such transactions, such as metacat.com, AsiaCD, College 411 and Swapit.com do
not add sufficient security features to their future product releases, then our
affiliate companies' products and services may not gain market acceptance or
there may be additional legal exposure to them.
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Since it launched its Internet website in December 1999, metacat has
experienced one 90 minute service interruption due to a disruption experienced
by metacat's Internet service provider. metacat's systems were not affected by
this outage.
Since it launched its Internet website, College 411 has experienced
approximately ten service interruptions, each of which lasted for a duration of
five minutes or less.
In September 1999, AssetExchange experienced several brief outages due
to an incorrect database configuration setting. Each of these outages lasted for
less than 30 minutes. AssetExchange has not experienced any unscheduled outages
since this problem was corrected.
In the past 75 days, BrightStreet has experienced four service
interruptions. Three of these interruptions lasted for 30 minutes or less and
the fourth interruption lasted for approximately two hours. All of these service
interruptions were scheduled maintenance periods for BrightStreet's co-location
facility and occurred between the hours of 1:00 a.m. and 4:00 a.m. PST. These
service interruptions were pre-announced to BrightStreet's customer base seven
days in advance of each interruption. BrightStreet believes that these scheduled
maintenance interruptions are a regular activity that will continue to occur in
the foreseeable future.
During the past 18 months, AsiaCD experienced three service
interruptions. Two of these interruptions were related to web servers and were
resolved within two hours by installing new hardware and more servers. The third
interruption involved AsiaCD's online payment gateway and lasted for one day.
During this period, AsiaCD disabled its real time credit card authorization
system and processed orders by manually authorizing credit card purchases.
Since Webmodal, IndustrialVortex.com and Swapit.com have not launched
their Internet websites and operations, they have not experienced any service
interruptions.
Our affiliate companies' technology systems are vulnerable to break-ins, viruses
or similar problems which, if they occur, could adversely affect their
reputations.
The technology systems of our affiliate companies are potentially
vulnerable to physical or electronic break-ins, viruses or similar problems. If
a person circumvents the security measures imposed by any one of our affiliate
companies, then he or she could misappropriate proprietary information or cause
interruption in operations of the affiliate company. Security breaches that
result in access to confidential information could damage the reputations of our
affiliate companies and expose the affected affiliate company to a risk of loss
or liability. Some of our affiliate companies may be required to make
significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more widespread, our affiliate
companies' customers will become more concerned about security. If our affiliate
companies are unable to adequately address these concerns, then they may be
unable to sell their products.
All of our affiliate companies anticipate rapid growth, and failure to manage
that growth could adversely affect their businesses.
Each of our affiliate companies anticipates rapid growth, which will
require continual enhancement to financial and management controls, reporting
systems and procedures and expansion, training and management of personnel. If
any affiliate company fails to have systems, procedures and controls which are
adequate to support its growth and operations, it may be unable to successfully
implement its business plan. In addition, it may lose customers who become
dissatisfied as the result of operational problems created by the failure to
manage growth, adversely impacting revenues, expenses and earnings.
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Risks particular to metacat.com.
metacat.com's business will be adversely affected if it is unable to maintain a
current product database.
metacat.com will have to develop and maintain a product database from
the catalog merchants it serves. Keeping the product database updated as
individual catalogs change their selections and prices will require diligence
and continual dialogue with retailers. If metacat.com is unable to maintain a
current and accurate database, consumers will become frustrated with its service
and turn to other methods for purchasing products.
If merchants whose products metacat.com offers fail to ship orders properly,
metacat.com will incur increased costs and reduced sales.
If merchants whose products are ordered through metacat.com fail to
ship their orders in a timely manner, ship incomplete or otherwise faulty
orders, or fail to maintain inventory, then metacat.com will incur additional
expense in customer service in order to handle problems and may have to make
refunds to purchasers. In addition, consumers do not have great tolerance for
such problems, and chronic problems will result in fewer repeat customers and
reduced orders as frustrated customers cease using its service. Although
merchant performance is not under metacat.com's direct control, metacat.com will
maintain a customer service history for each cataloger and conduct a periodic
performance review, as well as act to either discipline or remove catalogers
with consistently poor service records in order to ensure timely information and
a high level of customer service.
Competition from various sources could aversely impact metacat's operating
results.
metacat.com, Inc. competes with a wide variety of online and offline
sources for mail order products. Competition includes literally thousands of
sources from which consumers can make purchases, including traditional "bricks
and mortar" stores, print-based mail order catalogs, individual merchants'
online catalogs and online aggregators of products and catalogs. metacat
directly competes with online competitors including catalogcity.com and
Catalog.com, each of whom have Internet websites that are currently in operation
and attracting consumers. Many of metacat's competitors have established
Internet websites and greater resources and customer recognition than metacat.
Metacat's ability to compete will be dependent on providing hard-to-find
products and on effective marketing to inform consumers of the existence of its
Internet website.
Risks particular to Webmodal.
If intermodal railroads are unwilling to establish relationships with Webmodal,
then Webmodal will be unable to implement its business plan.
Webmodal's business plan is dependent on establishing relationships
with intermodal railroads so that it can market intermodal products and
services. "Intermodal" refers to shipment of goods by truck from the point of
origin to a railroad yard, where entire truck trailers are loaded on railcars
and shipped by rail to a destination yard, where the trailers are offloaded and
trucked to the shipping destination. Most intermodal railroads have contract
minimum and creditworthiness requirements. If Webmodal fails to either meet
these requirements or obtain exceptions to the requirements based on the
potential value to the railroads of its services, then it will be unable to
establish relationships with the railroads. Webmodal has entered into
preliminary discussions with several railroads and believes that it is
reasonably likely that each of these discussions will result in an agreement. A
failure to establish these relationships on a consistent basis will reduce the
attractiveness of Webmodal's products and services.
28
<PAGE>
If Webmodal is unable to establish relationships with trucking companies in hub
cities, then it will be delayed in executing its business plan.
Webmodal's business plan requires that it establish relationships for
online pricing and operations interfaces with trucking companies in over 100
intermodal hub locations around the country. If too many trucking companies are
unwilling to provide the resources or attention necessary for such a
relationship, or lack necessary information interfaces, Webmodal's ability to
offer services in the applicable hub cities will be adversely affected until
such relationships can be established. Webmodal has entered into preliminary
discussions with several trucking companies and believes that it is reasonably
likely that each of these discussions will result in an agreement.
Webmodal will not be successful unless it can convert shippers from traditional
methods of arranging for shipments.
Shippers of goods by intermodal means traditionally have relied on
intermodal marketing companies to negotiate pricing, arrange for shipping and
otherwise act as intermediaries in the shipping process. Webmodal's success will
be dependent on its ability to educate shippers regarding the advantages of
Webmodal's services and persuade them to adopt a new way of doing business.
Webmodal has not yet started marketing its services to shippers. To the extent
that Webmodal is unsuccessful in this educational effort, its business will
suffer.
Competition from various sources could adversely impact Webmodal's operating
results.
Webmodal faces competition from various current and potential
participants in the intermodal shipping market, who could respond to Webmodal by
developing similar systems and apply greater marketing and management resources,
thus reducing Webmodal's entry into the market and adversely affecting
Webmodal's revenues. Existing intermodal marketing companies such as Hub Group
and Mark VII Transportation, Inc. and intermodal-enabled trucking companies such
as J.B. Hunt Transportation Services, Inc. and Schneider National have
pre-existing service relationships with intermodal carriers as well as
substantially greater resources than Webmodal. The Hub Group and CrossRoad have
introduced limited online information systems that do not have all of the
intended features of Webmodal's system, but could potentially develop systems
similar to Webmodal's. Railroads, trucking companies and other independent
entities similar to Webmodal also could enter this market. Third party logistics
companies, to whom shippers sometimes outsource shipment management activities
and who are a primary source of potential customers for Webmodal, could become
competitors. Finally, other transportation-related e-commerce ventures, such as
National Transportation Exchange, FreightQuote and RouteGuide.com do not appear
to be currently directed at the intermodal shipping market but could develop
applications for that market. If any of these companies successfully enters this
market, then Webmodal may incur increased expenses as a result of this increased
level of competition. This increase in expenses will adversely affect Webmodal's
operating results.
Risks particular to College 411.
College 411's target audience may not respond to its offerings in sufficient
numbers.
If College 411 does not attract sufficient college students to view content and
buy products on its Internet website, then its revenues will be adversely
affected. College 411's business model relies on advertising revenues which are
dependent on the number of visits to its Internet website, and on revenues from
sales of products offered for sale on its Internet website. Although the
Internet websites content is carefully chosen to attract college students,
College 411 is targeting a fastpaced consumer group with progressive, rapidly
shifting tastes and preferences who may not ultimately accept its product
offerings.
29
<PAGE>
Competition from various sources could adversely impact College 411's operating
results.
College 411 faces competition from a variety of sources, including such
online competitors as College Club, MyBytes and Student Advantage, each of which
have Internet websites providing a variety of products and services similar to
those provided by College 411. In addition to these entities, College 411
competes secondarily with many other online providers of content that appeals to
college students and with print and electronic media including television and
radio, newspapers and magazines that target young adults. Many of College 411's
competitors have greater resources than College 411 and have been providing
products and services to college students for longer periods of time. College
411's ability to compete will be dependent on its ability to provide content and
services that appeal to college students.
Risks particular to AsiaCD.
A larger competitor in the Asian music market could adversely affect AsiaCD's
operating results.
If a large, well-funded United States based music Internet website
launches an Internet website directed at sales of Asian music titles to the
Asian population in the United States, it would compete directly with AsiaCD and
could reduce AsiaCD's revenues and require that AsiaCD increase its marketing
efforts in response. However, existing music Internet websites contain almost no
Asian music, and therefore do not compete with AsiaCD, and AsiaCD is not aware
of any proposal for this type of Internet website to materially increase its
Asian music offerings or launch an Asia-specific Internet website. As AsiaCD
becomes a more prominent player in the already-crowded online music space,
competition is likely to arrive, either from larger entities with broad
offerings that include Asian titles or from other Asia-specific Internet
websites.
AsiaCD may be unable to obtain an adequate number of music titles to sell if it
is unable to develop supplier relationships in Asian countries.
AsiaCD relies on the supply of Asian music titles from local
distributors in various Asian countries. It has supplier relationships in Hong
Kong, Japan and Taiwan, but needs to build strong ties with suppliers in Korea,
China, and other Asian countries in order to broaden its selections. If it is
unable to do so, its potential business growth will be limited.
Relatively wide availability of counterfeit goods in Asia may make it difficult
for AsiaCD to sell genuine products in Asia.
Loose intellectual property laws and uneven enforcement of existing
laws in many Asian countries has led to wide availability of cheap but
low-quality compact discs and videos. Since AsiaCD carries only original,
high-quality products on its Internet website, it must depend on local copyright
enforcement efforts, or consumer perception of the higher quality of its
products, in order to compete against such goods in the Asian market. If it is
unsuccessful in creating consumer perception of the quality of its goods, it
will not be successful in these markets.
AsiaCD's sales in Asia could be adversely affected by economic conditions in
Asia.
AsiaCD's ability to generate significant sales in Asia will depend in
part on the speed with which various Asian countries recover from recent
economic instability and recession. Any recurring downturn or political or
economic instability could adversely affect AsiaCD's sales in that region.
30
<PAGE>
Risks particular to AssetExchange, Inc.
Buyers and sellers of financial assets may not accept AssetExchange's services,
resulting in lower than anticipated revenues.
AssetExchange's service may not attract the number and quality of
portfolios for sale and the number of buyers that it has anticipated. In
addition, particular classes of assets that are offered for resale on
AssetExchange's Internet website may not be priced attractively for resale. If
sufficient sellers and buyers do not use AssetExchange's services, then its
revenues and income will be adversely affected.
Competitive services for brokerage of financial assets could reduce
AssetExchange's business.
If other online financial asset brokerage systems appear, or buyers and
sellers of financial assets use online means for direct negotiation of
transactions, the result will be a reduction in the volume of transactions
through AssetExchange's service and resulting lower revenues and income. The
online asset brokerage business is new and rapidly evolving. It is likely that
other entities will emerge and attempt to compete in this market. As there are a
limited number of active buyers of credit card portfolios, it may be feasible
for buyers and sellers to make direct contact to negotiate transactions without
using AssetExchange or a competing service. Other potential competitors include
businesses currently conducting online mortgage portfolio auctions and loan
participations who may choose to enter the market for credit card portfolios.
Risks particular to Swapit.com.
Swapit.com may overvalue goods taken in trade, resulting in accumulation of
inventory and write-offs.
Swapit.com will attempt to credit users' accounts for any used good
submitted to it with an amount which reflects the market value that it can
acquire from other users in trade for the same item. As the market value in
trade of used goods cannot be estimated precisely, it may overvalue used goods.
In addition, Swapit.com may opt to credit users with an amount that exceeds the
valuation of the goods offered in trade by a current or potential user in order
to build a user base and develop its brand name. This may result in the
accumulation of inventory or the sale or exchange of overvalued goods at reduced
margins or at a loss. Swapit.com may be forced to write-off large quantities of
aging inventories, or maintain large reserves on our books, due to valuation
errors.
Competition from a variety of online trading services will be intense and
Swapit.com may not be able to compete successfully.
The market for trading and sales over the Internet is new, rapidly
evolving and intensely competitive, and Swapit.com expects competition to
intensify in the future. Though its business concept can be differentiated from
existing person-to-person trading services, barriers to entry are relatively
low, and the necessary hardware and software is commercially available. Services
similar to Swapit.com could therefore appear at any time. In addition Swapit.com
expects that it will compete heavily with existing person-to-person trading
services including eBay, Yahoo!, Auctions, Amazon.com, Excite, Inc., Auction
Universe and a number of other small services. It will also compete indirectly
with business-to-consumer online auction services such as Onsale, First Auction,
Surplus Auction and uBid. It potentially faces competition from any number of
large online communities and services that have expertise in developing online
commerce and in facilitating online trading and who could rapidly develop and
launch services similar to ours prior to or after our appearance. Some current
and many potential competitors have longer company operating histories, larger
customer bases and greater brand recognition in other business and Internet
markets than Swapit.com does. Some of these competitors also have significantly
greater financial, marketing, technical and other resources. Other online
trading services may be acquired by, receive investments from or enter into
31
<PAGE>
other commercial relationships with larger, well established and well financed
companies. As a result, some of its competitors with other revenue sources may
be able to devote more resources to marketing and promotional campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
website and systems development than Swapit.com. Increased competition may
result in reduced operating margins, loss of market share and diminished value
of Swapit.com's brand. In addition, some of its competitors have offered
services for free and others may do this as well.
A decline in demand for used goods would adversely impact Swapit.com's business.
A decline in the popularity of, use of or demand for, certain items
traded or sold through Swapit.com's service could reduce the overall volume of
transactions on the service, resulting in reduced revenues. For instance if
audio compact discs become less popular because of the emergence of MP3s or
another new recording medium, trades or purchases of used compact discs from the
service may decline and thus harm Swapit.com's business. Swapit.com will derive
most of its revenues from fees received from sellers on trades made using the
service. Swapit.com's future revenues will depend upon the level of demand for
used and aged goods, as well as the demand for goods of the type that will be
traded through the service. The demand for used goods may fluctuate with changes
in consumer discretionary spending and other economic conditions.
Risks particular to BrightStreet.
BrightStreet may not be able to compete successfully in the consumer advertising
and promotion business due to the intense competition in the industry.
BrightStreet faces significant competition from many promotion and
advertising companies as well as on-line publishers which compete, directly or
indirectly, for consumer advertising and promotion business from advertisers and
for consumers' time and attention. Many of these companies have longer operating
histories, greater market presence, and substantially greater financial and
other resources than BrightStreet. Many of these companies, including Catalina
Marketing Corporation, Money Mailer, Val-Pak Direct Marketing Systems,
Interactive Coupon Network, Valassis Communications, Inc. and News America
Holdings Incorporated have initiated or are planning to initiate programs and
services involving the Internet. Additionally, the Internet is a relatively new
format through which retailers and consumers conduct business. As the Internet
evolves and consumers gain greater confidence in the Internet and other means of
electronic commerce, it is likely that competition will increase. Accordingly,
there can be no assurance that competition will not increase from existing
competitors, that established or new companies will not enter the market, that
competitors will not offer comparable products and services at lower prices than
BrightStreet, or that BrightStreet will be able to compete successfully with
such existing or new competitors.
Rapid technological changes could reduce the value of BrightStreet's technology
or make it non-competitive.
The online services industry is subject to rapid and significant
changes in technology. Such changes could lead to new products and services that
compete with products proposed to be offered by BrightStreet or could lower the
cost of current competing products and services to the point where
BrightStreet's products and services could become non-competitive. In response
to these changes, BrightStreet could be required to reduce the prices of its
products or to increase its research and development expenses in an effort to
develop technological advances in its own products so that they remain
competitive in the marketplace. While BrightStreet is not aware of any
technology changes that would materially affect the attractiveness or
effectiveness of its proposed products and services, the effect of technological
changes on its business cannot be predicted. In the event that BrightStreet is
unable to continue to upgrade its products and services, it will be unable to
provide the types of products and services demanded by consumers of online
services.
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<PAGE>
Risks particular to IndustrialVortex.com
Buyers and sellers of industrial products may not accept IndustrialVortex.com's
services, resulting in lower than anticipated revenues.
Since IndustrialVortex.com has not yet launched its Internet website,
no suppliers or customers of industrial products have signed up or agreed to use
IndustrialVortex.com's services to facilitate the purchase and sale of
industrial products. If a sufficient number of suppliers and customers of
industrial products do not sign up and continue to use IndustrialVortex.com's
services to facilitate the purchase and sale of industrial products, then its
revenues and income will be adversely affected.
Competition from various sources could adversely impact IndustrialVortex.com's
operating results.
IndustrialVortex.com competes with a variety of online and offline
sources for industrial automation products, including traditional distributors
of such products who maintain physical locations, catalogs and websites such as
PurchasingCenter.com. IndustrialVortex.com anticipates that additional websites
offering industrial automation products will be established.
IndustrialVortex.com's ability to compete will be dependent on providing an
efficient marketplace for buyers and sellers of these products. If its
competitors provide a more efficient marketplace, its revenues and results of
operations will be adversely affected.
USE OF PROCEEDS
We used the $2,500,000 which we received from the sale of convertible
promissory notes to Messrs. Behrendt and Jaekel for general corporate and
working capital purposes.
We did not receive any cash from the sale of the convertible promissory
note to Mr. Markman as this note was issued to Mr. Markman in exchange for his
cancellation of a Net Value, Inc. promissory note in the principal amount of
$100,000 plus accrued interest of $13,125.
We used the $4,824,000 which we received from the holders of the Series
B Preferred Stock, together with $676,574 received from the purchasers of
676,374 shares of our common stock on October 1, 1999, as follows:
o Legal fees and commissions related to our sale of the Series
B Preferred Stock of approximately $300,000;
o Loans to Metacat.com, Inc., Net Value, Inc. and
College411.com, Inc. totaling approximately $800,000;
o Equity Investments in College411.com, Inc., Asset Exchange,
Inc., Webmodal, Inc., SwapIt.com, Inc. and
IndustrialVortex.com, Inc. totaling approximately
$2,400,000;
o Repayment of indebtedness of approximately $535,000; and
o Working capital and general corporate purposes of
approximately $1,445,000.
We will not receive any proceeds from the sale of up to 3,722,560
shares of our common stock which are being offered for sale by 13 of our
stockholders pursuant to this registration statement. However, 295,040 of these
shares will only be issued upon the exercise of warrants. If all of these
warrants are exercised, then we will receive gross proceeds of $1,507,470. We
will use these proceeds for general corporate and working capital purposes.
MARKET PRICE AND DIVIDEND INFORMATION
As of the date of this prospectus, our common stock is traded through
the NASDAQ Over-the-Counter Bulletin Board Trading System under the symbol
"NETVE." The market for our common stock on the NASDAQ Over-the-Counter Bulletin
Board Trading System is sporadic and the quarterly average daily volume of
shares traded since inception ranged from a low of 31,539 shares to a high of
153,583 shares. The following table presents the range of the high and low bid
33
<PAGE>
and average daily volume information for our common stock for the periods
indicated, which information was provided by NASDAQ Trading and Market Services.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Average Daily
High Low Volume (Shares)
---- --- ---------------
<S> <C> <C> <C>
Year Ended December 31, 1999
Fourth Quarter 5.7500 4.0000 31,539
Year Ending December 31, 1999
First Quarter 6.3750 4.7500 38,393
Second Quarter 7.6875 4.5000 55,695
Third Quarter 6.3125 3.8125 49,461
Fourth Quarter 13.4375 3.5625 120,817
Year Ending December 31, 2000
First Quarter (through
February 4, 2000) 14.9375 7.125 153,583
</TABLE>
Our common stock has only been traded on the NASDAQ Over-the-Counter
Bulletin Board Trading System since November 24, 1998. Records of our stock
transfer agent indicate that as of February 4, 2000, there were approximately
196 record holders of our common stock. We have not paid any cash dividends to
date and do not anticipate or contemplate paying cash dividends in the
foreseeable future. We plan to retain any earnings for use in the operation of
our business and to fund future growth.
34
<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization on an actual
basis as of September 30, 1999 and on a pro-forma basis as if the following
transactions occurred on September 30, 1999:
o We received net proceeds of 2,582,000 in October 1999 from the sale
of 2,824 shares of our Series B Preferred Stock.
o In the fourth quarter of 1999 and in January 2000 and February
2000, holders of our convertible debentures converted
principal and accrued interest of $3,113,046 into 1,426,575
shares of our common stock.
o In the fourth quarter of 1999 and in January 2000, holders of
our convertible promissory notes converted principal and
accrued interest of $1,326,822 into 663,411 shares of our
common stock.
o We issued 676,374 shares of our common stock in a private
placement with the RS Orphan Fund, LP and the RS Orphan
Offshore Fund, LP in October 1999 pursuant to which we
received gross proceeds of $676,374.
o We sold Net Value, Inc.'s assets to Promotions Acquisition, Inc. for
$2,000,000, an approximate 14% equity interest in Promotions
Acquisition, Inc. and the assumption by Promotions Acquisition, Inc.
of approximately $1,600,000 of Net Value, Inc.'s liabilities. We have
assumed approximately $2,000,000 of Net Value, Inc.'s liabilities.
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------
Actual Pro-Forma
----------------------------------
<S> <C> <C>
Debt:
Short-term, including current portion of long-term plus accrued interest
$ 1,643,177 $ 1,636,657
Long-term, net of current portion 5,814,898 3,204,016
Series B mandatory redeemable preferred stock, Net Value Holdings, Inc., $.001
par value per share $1,000 liquidation value, $1,250 redemption value. At
September 30, 1999, 2,000 shares issued and outstanding; 4,824
shares issued and outstanding on a Pro-Forma basis
1,732,000 4,177,584
Stockholders' equity (deficit):
Common stock, Net Value, Inc., $.001 par value per share. At September 30,
1999, 1,037,338 shares issued and outstanding; 1,037,338 shares issued and
outstanding as adjusted 1,038 1,038
Common stock, Net Value Holdings, Inc., $.001 par value per share. At
September 30, 1999, 13,371,902 shares issued and outstanding; 15,557,531
shares issued and outstanding as adjusted 13,372 16,073
Additional paid-in capital 93,109,725 95,309,910
Deferred compensation - continuing operations (29,817,065) (29,817,065)
Deferred compensation - discontinued operations (2,048,306) --
Deficit accumulated during the development stage (65,609,799) (59,529,397)
------------ ------------
Total Stockholders' Equity (deficit) (4,351,035) 5,980,559
------------ ------------
Total Capitalization $ 4,839,040 $ 14,998,816
============ ============
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Capitalization
Pro Forma Transactions
Sale of Conversion of
Series B Conversion of Convertible Sale of Sale of Net
Sept. 30, 1999 Preferred Convertible Promissory Common Value, Inc. Pro Forma
(unaudited) Stock Debentures Notes Stock Assets Balance
---------------- ------------ -------------- -------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt:
Short-term, including
current portion of
long-term plus accrued
interest $1,643,177 $ -- $ (694,478) $(133,042) $ -- $ 821,000 $1,636,657
Long-term, net of current
portion 5,814,898 -- (1,843,500) (767,382) -- -- 3,204,016
Series B mandatory
redeemable preferred stock,
Convertible Series A, $.001
par value per share.
At September 30, 1999,
2,000 shares issued and
outstanding; 4,824 shares
issued and outstanding on
a Pro-Forma basis 1,732,000 2,445,584 -- -- -- -- 4,177,584
Stockholders' equity (deficit):
Common stock, Net Value
Holdings, Inc., $.001 par
value per share. At
September 30, 1999,
1,037,338 shares issued and
outstanding; 1,037,338
shares issued and
outstanding as adjusted 1,038 -- -- -- -- -- 1,038
Common Stock, Net Value
Holdings, Inc., $.001 par
value per share. At
September 30, 1999,
13,371,902 shares issued
and outstanding; 15,557,531
shares issued and
outstanding as adjusted 13,372 -- 1,427 663 677 -- 16,139
Additional paid-in capital 93,109,725 136,416 2,536,551 899,761 675,697 (2,048,306) 95,309,844
Deferred compensation
-continuing operations (29,817,965) -- -- -- -- -- (29,817,065)
Deferred compensation
-discontinued operations (2,048,306) -- -- -- -- 2,048,306 --
Deficit accumulated during
the development stage (65,609,799) -- -- -- -- 6,080,402 (59,529,397)
----------- ---------- ---------- -------- -------- ---------- -----------
Total stockholders' equity
(deficit) (4,351,035) 136,416 2,537,978 900,424 676,374 6,080,402 5,980,559
----------- ---------- ---------- -------- -------- ---------- -----------
Total Capitalization $ 4,839,040 $2,582,000 $ -- $ -- $676,374 $6,901,402 $14,998,816
=========== ========== ========== ======== ======== ========== ===========
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
January 1,
Year Ended Year Ended Year Ended Nine Months Ended 1998 through
December 31, December 31, December 31, September 30, September 30,
Statement of Operations 1996 1997 1998 1998 1999 1999
------------ ------------ ------------- ------------ ------------- -----------
Data: (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
------------ ------------ ------------ ------------- -------------- -----------
Revenues $ - $ - $ - $ - $ - $ -
Operating expenses
Compensation and related
expenses - - - - 3,122,091 3,122,091
Professional fees - - 129,878 513,933 643,811
Consulting - - - - 107,849 107,849
Selling, general and
administrative - - 10,606 1,120 498,667 509,273
Equity loss - - - - 55,188 55,188
------------- ----------- ------------ ------------- ----------- -----------
Total Operating Expenses
- - 140,484 1,120 4,297,728 4,438,212
------------- ----------- ------------ ------------- ----------- -----------
Loss from Operations - - (140,484) (1,120) (4,297,728) (4,438,212)
------------- ----------- ------------ ------------- ----------- -----------
Other Income (expense)
Interest Income - - - - 19,690 19,690
Interest Expense - - (253,957) (4,685) (11,750,930) (12,004,887)
Financing Fees - - (48,436) - (703,179) (751,615)
------------- ----------- ------------ ------------- ----------- -----------
Total Other Income
(Expenses) - - (302,393) (4,685) (12,434,419) (12,736,812)
Loss from continuing
operations - - (442,877) (5,805) (16,732,147) (17,175,024)
------------- ----------- ------------ ------------- ----------- -----------
Loss from discontinued
operations (3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,582,166) (32,003,025)
------------- ----------- ------------ ------------- ----------- -----------
Net Loss (3,314,094) (11,235,237) (11,549,703) (10,201,148) (22,314,313) (49,178,049)
Preferred Stock
Dividend-Discontinued
operations (1,181,250) (15,250,500) (15,250,500) - (16,431,750)
------------- ------------ ------------- ----------- -----------
Net Loss to Common
Stockholders ($12,416,487) ($26,800,203) ($25,451,648) ($22,314,313) ($65,609,799)
============= ============= ============ ============= ============
Net loss per common share
outstanding Basic and
Diluted continuing
operations
- - (0.09) - (1.94)
============== ============ ============ ============== ============
Net loss per common share
outstanding Basic and
Diluted discontinued
operations
(3.55) (6.88) (5.59) (6.70) (0.65)
=============== ============ ============= =============== ===========
Weighted average shares
outstanding
Basic and Diluted 934,810 1,804,700 4,711,351 3,796,197 8,647,063
</TABLE>
37
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Balance Sheet Data December 31, December 31, September 30,
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents
-- 1,466 1,051,930
Working capital (deficit) (3,427,635) (7,984,380) (2,850,121)
Total assets 1,800,402 1,422,519 8,616,982
Total liabilities 4,227,058 8,985,241 11,236,017
Long-term debt, net of
discounts & current
portion -- 294,092 5,814,898
Series B mandatory
redeemable preferred stock
-- -- 1,732,000
Stockholders' equity
(deficit) (2,426,656) (7,562,722) (4,351,035)
</TABLE>
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with our
audited Consolidated Financial Statements and related Notes thereto included
elsewhere in this prospectus.
General
We are an Internet holding company actively engaged in e-commerce
through a network of affiliate companies. As of September 30, 1999, we owned
interests in five e-commerce companies, which we refer to as our affiliate
companies. We are currently in the process of acquiring all of the issued and
outstanding securities of Net Value, Inc. As of December 31, 1998 we acquired
66% of the outstanding shares of common stock of Net Value, Inc. through share
exchange transactions with 20 Net Value, Inc. shareholders. As a result of these
transactions, these Net Value, Inc. shareholders obtained a majority ownership
interest in our company. We were a dormant entity until October 1998 when we
commenced our acquisition of Net Value, Inc. We have accounted for this
acquisition as a recapitalization. This means that the historical financial
statements of Net Value, Inc. have become the financial statements of our
entity. We expect to complete a merger with Net Value, Inc. in 2000 pursuant to
which we will acquire the remaining issued and outstanding securities of Net
Value, Inc.
Net Value, Inc.'s operations consisted of developing software to be
used in connection with Internet based coupons. During 1999, the management of
Net Value, Inc. estimated that it would require approximately $15,000,000 to
$20,000,000 to fully implement its business plan. In November 1999, we
determined that the best use of our resources was to permit Net Value, Inc. to
seek outside investors to provide this funding. Net Value Inc.'s senior
management team, Scott Wills and Gregory Roberts, identified third party
investors who were only willing to make an investment of this magnitude through
the purchase of Net Value, Inc.'s assets by a newly-formed company with no
existing liabilities. Accordingly, in December 1999, Net Value, Inc. sold its
entire business operations to Promotions Acquisition, Inc., a newly-formed and
capitalized corporation, in exchange for $2,000,000 in cash, assumption by
Promotions Acquisition, Inc. of approximately $1,600,000 in liabilities,
cancellation of all employee stock options granted after June 1, 1998 and
releases from employment obligations for all existing employees, and 12% of
Promotions Acquisition, Inc.'s common stock calculated on a fully-diluted basis.
Net Value, Inc. retained approximately $2,000,000 of liabilities. Six
third-party investors provided $17,000,000 in exchange for preferred stock
convertible into approximately 63% of the common stock of Promotions
Acquisition, Inc. on a fully-diluted basis. The third party investors were not
affiliated with Messrs. Wills or Roberts.
Scott Wills and Gregory Roberts collectively own approximately 24% of
the common stock of Promotions Acquisition, Inc., calculated on a fully-diluted
basis. In addition, the remaining management team and employees of Promotions
Acquisition, Inc., substantially all of whom were previously employed by Net
Value, Inc., are entitled to receive options or restricted stock grants
representing approximately 5% of Promotions Acquisition, Inc.'s common stock
calculated on a fully-diluted basis. Neither Scott Wills nor Gregory Roberts
have or had any relationship with us other than as former officers of our
subsidiary.
Net Value, Inc. has loaned to us the cash which it received in this
transaction. We plan to use this cash to satisfy Net Value, Inc.'s remaining
liabilities . Any payments which we make to creditors on behalf of Net Value,
Inc. will reduce the unpaid principal and interest related to this loan.
We have changed significantly during the fourth quarter of fiscal year
1999. Subsequent to the sale of its assets to Promotions Acquisition, Inc. on
December 3, 1999, we refer to Net Value, Inc.'s operations as discontinued
operations. Our historical financial statements are those of Net Value, Inc.
Since Net Value, Inc. sold
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its operations, our financial statements for all prior periods have been
restated to segregate the results of operations of Net Value, Inc. as results
from discontinued operations.
Upon the completion of our merger with Net Value, Inc., Net Value, Inc.
will be merged into our company, and we will own all of Net Value, Inc.'s assets
and liabilities. This will not change our financial statement presentation as
these items are already reflected on our balance sheet.
Effect of Various Accounting Methods on our Results of Continuing Operations
The various interests that we acquire in our affiliate companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in an affiliate company.
Consolidation. Affiliate companies in which we directly or indirectly
own more than 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting. Under this method, an
affiliate company's financial statements are reflected within our Consolidated
Statements of Operations. None of our affiliated companies were consolidated as
of December 31, 1998. As of September 30, 1999, Net Value, Inc. and metacat.com,
Inc. are our only consolidated affiliate companies.
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 net results of operations in the Consolidated Statements of
Operations.
Equity Method. Affiliate companies whose results we do not consolidate,
but over whom we exercise significant influence, are generally accounted for
under the equity method of accounting. Whether or not we exercise significant
influence with respect to an affiliate company depends on an evaluation of
several factors including, among others, representation on the affiliate
company's board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the affiliate company, including voting
rights associated with our holdings in common, preferred and other convertible
instruments in the affiliate company. Under the equity method of accounting, an
affiliate company's results of operations are not reflected within our
consolidated statements of operations; however, our share of the earnings or
losses of the company is reflected in the caption "Equity loss" in the
Consolidated Statements of Operations. As of December 31, 1998, we did not
account for any of our affiliate companies under the equity method of
accounting. As of September 30, 1999, we accounted for the following affiliate
companies under this method:
o College 411.com, Inc.
o AssetExchange, Inc.
In addition, we plan to account for our ownership in
IndustrialVortex.com, Inc. under the equity method of accounting. We have
representation on the board of directors of all of the above affiliate
companies.
Most of our equity method affiliate companies are in a very early stage
of development and have not generated any revenues. All of our equity method
affiliate companies were formed in 1999 and are expected to incur substantial
losses in 1999 and 2000.
Cost Method. Affiliate companies not accounted for under either the
consolidation or the equity methods of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our Consolidated Statements of
Operations. At September 30, 1999, we accounted for AsiaCD under the cost method
of accounting. In addition, subsequent to completion of our merger with Net
Value, Inc., we plan to account for BrightStreet.com, Inc. under the cost method
of accounting. We also plan to account for our ownership interest in Swapit.com,
Inc. under the cost method of accounting.
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Our cost method affiliate companies are in a very early stage of
development and have not generated significant revenues. In addition, our cost
method affiliate companies have incurred substantial losses and are expected to
continue to incur substantial losses in 1999 and 2000.
Net Results of Operations
Twelve Months Ended December 31, 1997 Compared to the Twelve Months Ended
December 31, 1996
Continuing Operations
The only operations that existed during this time period were from
operations which were disposed of in December, 1999. All management and
employees related to these operations are no longer employed by our company.
Discontinued Operations
The losses which we incurred in each of these years were related to the
software development operations, which we subsequently disposed of. During these
years, we incurred significant expenses relating to development and
infrastructure costs. Comparisons of the results for the twelve months ended
December 31, 1997 and 1996 are not directly comparable given the limited
operating history of Net Value, Inc. in 1996. We incurred a loss from operations
of $11,235,237 in 1997 compared to a loss from operations of $3,314,094 during
1996, an increase of $7,921,143. Approximately $1,300,000 of this increase was
due to additional non-cash compensation expense in 1997 as a result of grants of
stock options with exercise prices which were less than the fair value of Net
Value, Inc.'s common stock at the date of grant. Approximately $1,900,000 of
this increase was due to additional interest expense in 1997 from increased
borrowings and amortization of debt discounts. The remaining increase in losses
from operations was the result of an approximate $4,700,000 increase in general
operating expenses from the development of the company's infrastructure in
anticipation of launching its online coupon products. In addition, during 1997
Net Value, Inc. granted a preferred stock dividend of $1,181,250 related to the
issuance of shares of Series A Convertible Preferred Stock pursuant to the terms
of a preferred stock purchase agreement.
Twelve Months Ended December 31, 1998 Compared to the Twelve Months Ended
December 31, 1997
Continuing Operations
The only operations that existed during 1997 were from discontinued
operations.
We did not generate any operating revenues in 1998.
The results from continuing operations for the years ended December 31,
1998 and 1997 are not directly comparable as all operations during periods prior
to 1998 have been discontinued. We incurred a net loss from continuing
operations of $442,877 in 1998. Approximately $129,900 was paid for professional
fees related to our merger with Net Value, Inc. An additional $11,000 was used
for our normal operating expenditures in our attempts to acquire interests in
affiliate companies. The remaining $302,000 was primarily related to interest
expense and financing fees on convertible debentures issued during the fourth
quarter of 1998.
Discontinued Operations
We incurred a loss from discontinued operations of $11,106,826 in 1998
compared to a loss of $11,235,237 during 1997. The decrease of $128,411 was
primarily due to a decrease in research and development costs of $894,250, a
decrease in advertising costs of $545,118 and an increase in revenues of
$1,330,367, offset primarily by an increase in compensation and related expenses
of $483,444, an increase in professional fees of $611,006 and an increase in
interest and financing costs of $1,570,715.
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Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Continuing Operations
We started to build our current infrastructure in September 1998 when
our current operations were established in Philadelphia. The operating results
for the nine months ended September 30, 1999 and 1998 are not directly
comparable given our limited continuing operating activities prior to September
1998.
During the nine months ended September 30, 1999 and for the nine months
ended September 30, 1998, we did not generate any operating revenues.
We incurred net losses from continuing operations of $16,732,147 during
the nine months ended September 30, 1999 and $5,805 during the nine months ended
September 30, 1998, which was an increase of $16,726,342. This increase was
primarily due to an increase in interest expense of $11,746,245 and financing
fees of $703,179. The increased loss was also the result of an increase in
professional fees of $513,933, an increase in compensation expense of
$3,122,091, a $606,516 increase in consulting and selling, general and
administrative expenses and an increase in our losses from our affiliates
accounted for under the equity method.
Compensation and related expenses increased to $3,122,091 during the
nine months ended September 30, 1999 from $0 during the nine months ended
September 30, 1998, an increase of $3,122,091. This increase was primarily from
the non-cash amortization of stock based compensation issued in connection with
the employment agreements from the addition of core management staff during our
development stage, which amounted to $2,781,740 as of September 30, 1999, while
salaries and related expenses amounted to $340,351. We recorded approximately
$32,600,000 of compensation expense in connection with the stock and options
issued to our management staff and consultants of which approximately
$29,817,000 has been deferred as of September 30, 1999 and will be amortized
over the vesting period of the respective stock options agreements, including
deferred compensation of $4,904,000 and $3,204,000 attributable to options
granted to Andrew Panzo, our Chief Executive Officer, and Lee Hansen, our
President, respectively. This deferred compensation will be amortized ratably
through June 2002 for Mr. Panzo and through September 2002 for Mr. Hansen.
Professional fees were $513,933 during the nine months ended September
30, 1999 and $0 during the nine months ended September 30, 1998, an increase of
$513,933. We incurred the professional fees during the nine months ended
September 30, 1999 for general corporate matters and preparation of a
registration statement registering the resale of shares of our common stock.
Other general administrative expense and consulting expense increased
to $606,516 during the nine months ended September 30, 1999 from $1,120 during
the nine months ended September 30, 1998, an increase of $605,396. The increase
was primarily attributable to additional general corporate expenses incurred
during our development stage as we developed our operating plan and continued to
expand our operations.
Interest expense, which was primarily a non-cash expense, increased to
$11,750,930 during the nine months ended September 30, 1999 from $4,685 during
the nine months ended September 30, 1998, an increase of $11,746,245. The
increase was primarily attributable to additional 1999 interest and debt
discount amortization on the convertible promissory notes issued in January
1999, additional interest and debt discount amortization on the convertible
debentures which we issued in the fourth quarter of 1998 and the first nine
months of 1999, as well as additional interest and debt discount amortization on
the convertible debentures which we issued to Founders Equity Group and its
affiliates in March 1999. The discount was the result of beneficial conversion
features attached to the convertible promissory notes and convertible debentures
that allowed those noteholders to convert their notes into shares of our common
stock at below market rates. As of September 30, 1999, we had approximately
$1,645,000 of unamortized discounts that will amortize over the term of the
convertible debentures.
Financing fees increased by $703,179 during the nine months ended
September 30, 1999. The increase in financing fees was primarily from the
amortization of loan costs we paid in the fourth quarter of 1998 and the
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nine months ended September 30, 1999 related to the issuance of the convertible
debentures we issued in the fourth quarter of 1998 and the first nine months of
1999, and the convertible debentures which we issued to Founders Equity Group
and its affiliates in March 1999. As of September 30, 1999, there was
approximately $417,000 of prepaid financing fees that will be amortized over the
remaining term of the convertible debentures.
As of September 30, 1999, we had an accumulated deficit of $65,609,799.
We believe approximately $23,000,000 of this amount will be available to offset
future taxable income, if any. These carryforwards will expire between 2011 and
2020. We have recorded a full valuation allowance against the future benefit
from these loss carryforwards because it is more likely than not that sufficient
taxable income will not be realized during the carryforward period to utilize
the deferred tax asset. It is also possible that certain loss carryforwards
resulting from our discontinued operations may be significantly limited if
future offerings of our common stock significantly dilute our present ownership.
Discontinued Operations
We incurred a loss from the discontinued operations during the nine
months ended September 30, 1999 of $5,582,166 compared to a loss of $10,195,343
during the nine months ended September 30, 1998. This decrease of $4,613,177 was
primarily due to a decrease in revenues of $77,667 in 1999, increases in
consulting expenses of $148,792, advertising expenses of $63,080 and general and
administration expenses of $394,436 with corresponding decreases in 1999 in
interest and financing fee expense of $2,594,392, research and development
expense of $1,698,519, compensation and related expenses of $634,838, and
professional fees of $369,403.
Changes in Financial Position, Liquidity and Capital Resources
Our net losses and the need for additional financing to implement our
business plan and continue our operations raise substantial doubt about our
ability to continue as a going concern unless additional financing can be
obtained from alternative sources. We do not expect to be able to generate
significant revenues to meet our operational needs, nor do we expect our
majority owned affiliate company to generate revenues to meet our combined
operational needs over the next twelve months. We also do not expect to receive
dividends from our affiliate companies over the next twelve months given the
nature of development stage companies.
As of February 4, 2000 we had approximately $1,625,000 of cash and cash
equivalents on hand. We anticipate that our current operations will require
approximately $225,000 per month over the next twelve months. We have agreed to
use the proceeds of our loan from Net Value, Inc. to pay Net Value, Inc.'s
remaining liabilities of approximately $1,715,000. We therefore estimate that we
have sufficient working capital to fund our current operations through June 30,
2000 and to pay the obligations of Net Value, Inc. as they are presented.
We intend to obtain financing to fund our operations for the next
twelve to eighteen months through the sale of additional debt and equity
securities. We have had preliminary discussions with a limited number of
institutional funding sources, on the basis of which we believe that funding can
be obtained. However, we are not certain that we will be able to obtain
additional financing . If we fail to raise to raise additional financing, then
we will be required to adjust our business plan, including reducing operating
expenses and curtailing acquisition of new interests in affiliate companies. In
addition, we may be required to sell some or all our investments at liquidation
values or to cease operations and liquidate our assets. For a more complete
description of our financial condition, see "Consolidated Audited Financial
Statements."
We are a development stage enterprise and from our inception through
September 30, 1999 we have earned no revenues from our operations and have not
received any dividends from our affiliate companies. Since inception through
September 30, 1999, we received net proceeds of approximately $2,391,000 from
the sale of our equity securities. In addition, during the period from January
1, 1998 through September 30, 1999, we received approximately $9,257,000 net of
loan financing costs paid from the sale of convertible debentures. Accordingly,
net proceeds from the sale of debt and equity amounted to approximately
$11,648,000 during the period from January 1, 1998 through September 30, 1999.
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During the period from January 1, 1998 through December 31, 1998, we
received gross proceeds of $2,906,500 from the sale of our debt securities to
various related and independent third parties, including $1,402,500 in proceeds
from the sale of our convertible debentures in the fourth quarter of 1998. The
convertible debentures accrue interest at the simple rate of 8% per annum. The
holders may convert the convertible debentures at any time. We may force the
mandatory conversion of the convertible debentures into shares of our common
stock at a conversion price of $2.00 per share upon the occurrence of:
o the completion of our merger with Net Value, Inc.;
o our acquisition of at least 80% of the issued and outstanding
capital stock of BrightStreet; or
o the effective date of a registration statement registering the
resale of all shares of common stock issuable upon conversion
of the convertible debentures.
The maturity date of the convertible debentures is the earlier of:
o the date on which the holder elects to convert all of the
outstanding unpaid principal and accrued interest on the note
into shares of common stock;
o the date upon which we elect to cause a mandatory conversion
of all of the outstanding principal and accrued interest on
the note into shares of common stock; or
o two years from the date of the issuance of the convertible
debentures.
From January 1, 1999 through June 30, 1999, we issued additional
convertible debentures in the aggregate principal amount of $6,455,000 having
conversion prices ranging from $2.00 to $2.50 per share on the same terms and
conditions. Through February 4, 2000, holders of these convertible debentures
converted an aggregate of $4,907,000 of principal and approximately $183,654 of
accrued interest into 2,202,243 shares of our common stock. We used the funds
received from the sale of these convertible debentures to pay commercial
accounts payable and to fund both our operations and the continuing operations
of Net Value, Inc. Accordingly, as of February 4, 2000, the unpaid principal
amount of these convertible debentures was $2,950,500. This amount will become
due at various dates in the fourth quarter of 2000 through the first quarter of
2001 if the convertible debentures are not converted prior to their maturity
date.
During October, November and December 1997, Net Value, Inc. issued
promissory notes in the aggregate principal amount of $4,025,000. These
promissory notes matured on the one-year anniversary of their dates of issuance.
Net Value, Inc. did not repay these promissory notes on their maturity dates.
Accrued interest on these promissory notes at December 31, 1998 was $495,646.
these promissory notes were held by investors with no other affiliation or
relationship with Net Value, Inc. or Net Value Holdings, Inc. Net Value, Inc.
had defaulted on these promissory notes and did not have the capital resources
to repay these promissory notes and continue its operations. Effective January
1, 1999, we issued convertible promissory notes in the aggregate principal
amount of $4,270,125 to the holders of Net Value, Inc.'s promissory notes in
exchange for their agreement to cancel Net Value, Inc. promissory notes in the
aggregate principal amount of $3,800,000 plus $470,125 of accrued interest
thereon and to release our corporation, Net Value, Inc. and the present and
future officers and directors of each corporation from any claims related to the
Net Value, Inc. promissory notes. Since Net Value, Inc. was our only affiliate
company at the time, we issued our convertible promissory notes to satisfy Net
Value, Inc.'s obligations in order to protect our equity interest in Net Value,
Inc. This allowed Net Value, Inc. to continue to develop its operations. The
holders of these convertible promissory notes have the right to convert the
principal balance plus all accrued interest related to these convertible
promissory notes into shares of our common stock at a conversion price of $2.00
per share at any time. We may convert the principal and accrued interest on
these convertible promissory notes into shares of common stock at a rate of
$2.00 per share, upon our common stock's achievement of certain market price
targets. These convertible promissory notes accrue interest at the simple rate
of 12% per annum and have a maturity date of the earlier of:
o the date on which the convertible promissory notes are
converted into shares of our common stock; or
o the one-year anniversary of the closing of our merger with Net
Value, Inc.
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We are required to issue warrants to purchase one-half of one share of
our common stock for each share issued to the holders upon any conversion of the
convertible promissory notes. The warrants are exercisable over a period of
three years from the date of issuance at an exercise price of $6.00 per share.
The holders of the remaining Net Value, Inc. promissory notes did not
participate in this exchange offering. In December 1999, on behalf of Net Value,
Inc., we repaid the outstanding principal balance and accrued interest on the
remaining promissory notes of $283,990. Through February 4, 2000, holders
converted these convertible promissory notes in the aggregate principal amount
of $3,434,448 plus accrued interest of $246,796 into 1,835,863 shares of our
common stock and received warrants to purchase an additional 917,932 shares of
our common stock. Accordingly, as of February 4, 2000, the unpaid principal
amount of these convertible promissory notes was $835,677. We believe that we
will close our merger with Net Value, Inc. on or before March 31, 2000.
Accordingly, this amount will become due on March 31, 2001 if the convertible
promissory notes are not converted prior to their maturity date.
In March and April 1998, Net Value, Inc. received licensing fees in the
aggregate amount of $1,250,000 from IQ Value L.L.C. pursuant to the terms of a
Distribution and License Agreement which the parties entered into on April 7,
1998. Net Value, Inc. used these funds to pay commercial accounts payable and to
fund continuing operations. This fee represented approximately 90% of Net Value,
Inc.'s revenues from its inception through June 30, 1999. In December 1998, the
parties determined that it would be in each of their best interests to terminate
their relationship. Net Value, Inc. had granted IQ Value exclusivity with
respect to sales of Net Value, Inc.'s services to local merchants. This
exclusivity arrangement covered a significant component of Net Value Inc.'s
potential business. Over time, Net Value, Inc. lost confidence in IQ Value's
ability to execute its business plan and generate sufficient revenues from its
arrangement with Net Value, Inc. Net Value, Inc. believed that it could generate
significantly greater revenues selling its services into this local merchant
market. Conversely, IQ Value lost confidence in Net Value, Inc.'s ability to
develop the technology which IQ Value had licensed from Net Value, Inc.
Accordingly, the parties mutually agreed to terminate this agreement as of June
30, 1999, and Net Value, Inc. will not generate any additional revenues from
this relationship.
On March 1, 1999, we issued four convertible promissory notes in the
aggregate principal amount of $900,000 to Founders Equity Group, Inc. and three
of its affiliates in exchange for the lender's cancellation of a promissory note
which matured on March 1, 1999 and its release of our corporation and our
present and future officers and directors from any claims related to payment of
principal and accrued interest pursuant to the promissory note. The lenders may
convert all or any part of the outstanding principal amount of the convertible
promissory notes, plus all accrued interest thereon through the date of
conversion, into shares of our common stock at a conversion price of $2.50 per
share. The conversion price subsequently was adjusted to $2.25 pursuant to
anti-dilution provisions in the convertible promissory notes. We may force the
lenders to convert the entire principal amount of the convertible promissory
notes, plus all accrued interest thereon, upon our common stock's satisfaction
of certain price and volume requirements and the registration of the resale of
all shares of our common stock issuable to the lenders upon such mandatory
conversion of the convertible promissory note. The lenders are also entitled to
piggyback registration rights with respect to all shares issuable upon any
conversion of the convertible promissory notes. As additional consideration for
the lender's agreement to cancel the original promissory note and accept
convertible promissory notes in full satisfaction of our obligations pursuant to
the original promissory note, we issued the lender a warrant to purchase 90,000
shares of our common stock at an exercise price of $2.50 per share and a warrant
to purchase 90,000 shares of our common stock at an exercise price of $5.00 per
share. The lender may exercise each of these warrants at any time prior to
February 28, 2002. The lender is not entitled to any registration rights with
respect to any shares of our common stock issued upon the exercise of either of
these warrants. On February 4, 2000, the holders of these convertible promissory
notes converted the principal amount of these convertible promissory notes into
400,000 shares of our common stock.
Since inception through September 30, 1999, we used approximately
$1,210,000 to fund our general corporate expenses, including salaries and wages,
professional and consulting fees and interest expense and we advanced
approximately $6,503,000 to Net Value, Inc. to fund its operations and
development stage activities. We continued to advance funds to Net Value, Inc.
through December 3, 1999, the date of the asset sale with Promotions
Acquisition, Inc.
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In June 1999, pursuant to a loan agreement, we advanced an aggregate
total of $1,555,000 to Strategicus Partners, Inc. Strategicus used these funds
as follows:
o $1,000,000 to purchase an approximate 13% equity interest in
AsiaCD, Inc.
o $100,000 to purchase an approximate 10% equity interest in
College 411.com, Inc.;
o $60,000 to extend a short term loan to Cowboys and Robots,
Inc.
o $85,000 for general corporate purposes; and
o $310,000 to extend a loan to Douglas Spink, the president of
Strategicus.
In June 1999, we also extended a loan in the principal amount of
$267,000 to Darr Aley, one of our directors, who was a stockholder of
Strategicus at the time of the loan. We extended these loans to Mr. Spink and
Darr Aley to induce them to enter into an employment agreement and consulting
agreement, respectively, with our company and to remain an employee and
consultant of our company throughout the terms of their respective agreements.
On July 30, 1999, we completed a merger with Strategicus. In connection with the
merger, we issued an aggregate of 601,029 vested shares of our common stock,
184,627 vested shares of our Series A Preferred Stock, 6,923,599 unvested shares
of our common stock and 2,126,833 unvested shares of our Series A Preferred
stock to Darr Aley, Stephen George, Douglas Spink and Barry Uphoff, the
stockholders of Strategicus, in exchange for 100% of the issued and outstanding
capital stock of Strategicus. The 5,282,289 unvested shares of our common stock
which were issued to Messrs. Uphoff, George and Darr Aley were scheduled to vest
pro rata on a monthly basis over a period of 48 months from the closing date of
the merger. However, on August 31, 1999, Messrs. Uphoff, George and Darr Aley
agreed to forfeit these unvested shares of common stock and we agreed to issue
them options to purchase an aggregate of 5,282,289 shares of our common stock.
These options will have an exercise price of $1.00 per share and will have the
same vesting period as the unvested shares of common stock. Messrs. Uphoff,
George and Darr Aley have subsequently agreed to forfeit an aggregate of
3,770,041 stock options so that they each now own options to purchase 687,416
shares of our common stock. The 1,641,310 unvested shares of our common stock
which were issued to Mr. Spink were scheduled to vest pro rata on a monthly
basis over a period of 24 months from the closing date of the merger. We have
subsequently terminated Mr. Spink's employment agreement and Mr. Spink has
forfeited 1,616,835 of his unvested shares of our common stock. Upon
consummation of the merger, each of the former Strategicus stockholders was
appointed to our board of directors. Our common stock and preferred stock
exchanged for Strategicus stock was ascribed a value of $6.06 per share and $.77
per share, respectively. The value of our stock issued in the transaction was
allocated to the investments in Metacat, AsiaCD and College411, which were
investments held by Strategicus.
As a result of the merger, we now own Strategicus' investments in
AsiaCD and College 411 and 100% of the capital stock of metacat.com, Inc. Since
Strategicus merged into us pursuant to the merger agreement, it is no longer a
legal entity and its obligations under the loan agreement with us have been
discharged. Other than Strategicus' equity interests in AsiaCD, College411 and
metacat.com, Inc., we acquired Strategicus' total assets of $817,000, which
consisted primarily of cash of $4,000, a loan to an officer and director of
$383,000, subscription receivables from officers and directors of $100,000, a
loan to an employee of $60,000, an investment in AsiaCD of $250,000 and an
investment in College411 of $20,000, and metacat's total assets of $11,000 in
connection with this merger, which consisted primarily of computer hardware and
software. We also assumed Strategicus' liabilities of $73,000, which consisted
primarily of trade accounts payable, accrued expenses and a loan from a
director, and metacat's liabilities of $5,600, which consisted primarily of
trade accounts payable. In connection with this merger, we recorded goodwill of
$241,267. Strategicus was a holding company at the time of the merger. metacat
was a development stage company that was designing an Internet website with the
ability to aggregate catalogs and allow consumers to purchase items from those
catalogs over the Internet. This merger provided us with three affiliate
companies and marked the beginning of the implementation of our business plan to
act as an Internet holding company. Since each of these affiliate companies are
in the development stage and Strategicus had no other operations, this merger
did not have a material effect on our results of operations. In connection with
this merger, we entered into an employment agreement with Mr. Spink and a
consulting agreement with Mr. Aley. For a more complete discussion of the terms
of these agreements, see "MANAGEMENT - Employment Agreement" and "MANAGEMENT -
Consulting Agreements." Pursuant to each of these agreements, we will forgive
the repayment
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of each of Messrs. Spink and Aley's loans if they remain employed or engaged by
us for certain periods of time. For a more complete description of these terms,
see "TRANSACTIONS WITH OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPS -
Forgiveness of Certain Loans to Members of Our Management Team."
On October 10, 1999, we acquired a 20% interest in AssetExchange, Inc.
for $420,000. This transaction did not result in our acquisition of any business
or assets other than equity securities of AssetExchange, Inc. and did not result
in our assumption of any liabilities. This transaction resulted in goodwill of
$370,000. This transaction resulted in our acquisition of an equity interest in
an affiliate company and therefore did not have any effect on the nature of our
operations as a holding company. In addition, since this affiliate company is in
the development stage, this acquisition did not have a material effect on our
results of operations.
During the fourth quarter of 1999 we continued to actively pursue the
acquisition of additional equity interest in affiliate companies as follows:
o On October 11, 1999, we acquired a 12% interest in Webmodal,
Inc. for $350,000 in cash. Since we account for Webmodal using
the cost method of accounting, we have not recorded any
goodwill in connection with this transaction.
o On October 6,1999 we increased our ownership percentage in
College 411, Inc. to 29% of the issued and outstanding common
stock of College 411 through our exercise of warrants to
purchase 1,125,000 shares of College 411's common stock. As
this was merely an exercise of common stock purchase warrants,
there was no goodwill associated with this transaction.
o On November 24, 1999, we acquired a 12% interest in
Swapit.com, Inc. for $500,000 in cash. Since we account for
Swapit.com using the cost method of accounting, we have not
recorded any goodwill in connection with this transaction.
None of the transactions consummated during the fourth quarter of 1999
resulted in our acquisition of any business or assets other than equity
securities of these affiliate companies and did not result in our assumption of
any liabilities. These transactions resulted in our acquisition of additional
equity interests in affiliate companies and, therefore, did not have any effect
on the nature of our operations as a holding company. In addition, since each of
these affiliate companies is in the development stage, these acquisitions did
not have a material effect on our results of operations.
On January 31, 2000, we acquired a 25% interest in
IndustrialVortex.com, Inc. for $1,000,000. This transaction did not result in
our acquisition of any business or assets other than equity securities of
IndustrialVortex.com, Inc. and did not result in our assumption of any
liabilities. This transaction resulted in goodwill of $1,000,000. This
transaction resulted in our acquisition of an equity interest in an affiliate
company and therefore did not have any effect on the nature of our operations as
a holding company. In addition, since this affiliate company is in the
development stage, this acquisition did not have a material effect on our
results of operations.
During July 1999, we loaned $60,000 to Cowboys and Robots, Inc. Cowboys
and Robots, Inc. is a development stage company currently engaged in developing
an Internet website, armyHQ.com, which will provide content to personnel serving
in the United States military. We have determined not to acquire an equity
interest in this company and are presently attempting to negotiate the repayment
of this loan.
During the period from June 1999 through December 1999, Net Value, Inc.
has failed to make required rent payments in the aggregate amount of
approximately $105,000 pursuant to the lease agreement for its Fairfield,
Connecticut office. The landlord is currently holding a security deposit of
$79,711. In November 1999, the
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landlord filed a lawsuit against Net Value, Inc. seeking damages, interest,
attorneys' fees and costs related to Net Value, Inc.'s alleged breach of this
lease agreement. Net Value, Inc. is presently attempting to negotiate a
settlement of this lawsuit. This settlement may require Net Value, Inc. to
forfeit its security deposit and make additional payments. If Net Value, Inc. is
unable to reach a settlement agreement with the landlord, and it is unsuccessful
in its defense of this lawsuit, then it may be subject to a judgment equal to
the remaining lease payments through the expiration of the lease in December
2000 plus additional damages. As of September 30, 1999, we accrued an expense
for all future rent payments under the lease, amounting to approximately
$244,000.
On October 6, 1998, Net Value, Inc. entered into a settlement agreement
with DMR Consulting Group, Inc. Pursuant to this agreement, DMR agreed to accept
$270,000 as full payment of Net Value, Inc.'s obligation of approximately
$745,000 in consulting fees incurred in connection with consulting services
which DMR provided to Net Value, Inc.. Net Value, Inc. was unable to make the
required payments under this settlement agreement. On December 3, 1998, the
parties amended this settlement agreement to provide for a payment schedule
whereby Net Value, Inc. paid $50,000 upon executing the agreement and agreed to
repay the remaining balance upon the earlier of:
o the closing of its private placement of convertible
debentures; or
o if Net Value, Inc. is unable to close its private placement in
1999, then in quarterly installments throughout 1999.
The amended settlement agreement states that if Net Value, Inc.
breaches any of its payment obligations, then the amended settlement agreement
is terminated and Net Value, Inc. remains liable for the full amount of its
original obligation. Accordingly, DMR may at any time assert a claim for the
$170,000 due under the amended settlement agreement and the $475,000 which
constitutes the difference between the original obligation and the agreed upon
settlement amount. If DMR asserts this claim, then Net Value, Inc. may be
required to pay DMR $625,000, which would have a negative effect on its
liquidity and financial position.
In order to fund our current operations and to satisfy our current
obligations as they come due, we consummated several equity transactions in
September and October, 1999 as follows:
o During September and October 1999, we sold 4,824 shares of our
Series B Preferred Stock for net proceeds of approximately
$4,574,000 after payment of offering costs of $250,000 in
October 1999.
o During October 1999, we sold 676,374 shares of our common
stock to the RS Orphan Fund, LP and the RS Orphan Offshore
Fund, LP for an aggregate purchase price of $676,374.
After the next six months, we expect to need additional funds for our
continuing operations and to fund current and prospective affiliate companies
through offerings of our debt and equity securities.
Year 2000
Many computer programs were written using two digits rather than four
digits to define the applicable year. This posed a problem at the end of 1999
because these computer programs may have recognized a date using "00" as the
year 1900, rather than the year 2000. This in turn could have resulted in major
system failures or miscalculations and is generally referred to as the Year 2000
issue. We have not experienced any system failures since January 1, 2000. In
addition, none of our affiliate companies have experienced any system failures
since January 1, 2000. We did not incur any material expenses in preparation for
the Year 2000 Issue. Our affiliate companies incurred the following expenses in
preparation for the Year 2000 Issue:
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Affiliate Company Approximate Total Expenses
------------------ --------------------------
metacat.com, Inc. $ 0
College411.com, Inc. 0
IndustrialVortex.com, Inc. 0
AssetExchange, Inc. 0
AsiaCD, Inc. 5,600
BrightStreet.com, Inc 17,000
Webmodal, Inc. and Swapit.com, Inc. do not plan to develop or launch
their Internet websites until the spring of 2000. Accordingly, they did not
incur any expenses related to preparation for the year 2000 issue.
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BUSINESS
History
We were formed as a Florida Corporation on December 20, 1991. In 1992,
we failed to file our annual report with the State of Florida and were
administratively dissolved on October 9, 1992. On June 15, 1998, we filed all
required reports and paid all deficient annual fees and penalties and were
reinstated as a corporation in the State of Florida. Accordingly, from October
9, 1992 through June 15, 1998, we had no operations and generated no revenues or
expenses. In October 1998, we redomesticated in the State of Delaware and we are
presently a Delaware corporation.
Pursuant to share exchange transactions completed during October 1998
through December 1998 with 20 Net Value, Inc. stockholders, we acquired
approximately 66% of the issued and outstanding shares of Net Value, Inc.'s
common stock and 100% of the issued and outstanding shares of Net Value, Inc.'s
Series A Preferred Stock. We currently intend to merge with Net Value, Inc. on
or before March 31, 2000. Pursuant to the merger, Net Value, Inc.'s other
stockholders will receive .4 shares of our common stock for every share of Net
Value, Inc. common stock tendered to us. Subsequent to the completion of our
merger with Net Value, Inc., we will own 100% of Net Value, Inc.'s assets.
On July 30, 1999, we merged with Strategicus Partners, Inc., an Oregon
corporation. For a complete discussion of this merger, see "TRANSACTIONS WITH
OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPSLoan and Merger
Agreements with Strategicus Partners, Inc." As a result of our merger with
Strategicus, we now own interests in metacat.com, Inc., AsiaCD, Inc. and College
411.com, Inc. In addition, we have a new management team. For a complete
description of our management team, see "MANAGEMENT.
"In September 1999, we acquired an equity interest in
AssetExchange.com, Inc. In October 1999, we acquired an equity interest in
Webmodal, Inc. In November 1999, we acquired an equity interest in Swapit.com,
Inc. In January 2000, we acquired an equity interest in IndustrialVortex.com,
Inc.
General
We are an Internet holding company which owns equity interests in, and
provides strategic management services to our affiliate companies. We primarily
assist these companies by performing the following functions:
o formulation of business models;
o introducing the companies to strategic partners;
o supporting their marketing and public relations functions;
o providing strategic advice regarding operations and
management;
o recruiting key employees; and
o assisting with the completion of future rounds of capital
financing.
The current market environment creates significant opportunities for
our business model which brings entrepreneurs a flexible source of capital, a
hands-on management team to assist in navigating the critical early steps in a
development stage company and contacts in the Internet industry that provide
beneficial strategic alliances or resources.
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Our operating strategy is to both originate concepts for new Internet
businesses that we will found and identify appropriate existing Internet
businesses, fund such businesses and develop them into a collaborative network
that leverages the collective financial, strategic planning and management
experience and key industry relationships of our management team. We currently
have ownership interests in seven Internet businesses in various stages of
development. Our corporate headquarters are located in San Francisco. We also
have an east coast satellite office, in which two of our employees are
principally engaged in identifying potential affiliate companies located on the
East Coast.
In some cases, we will identify the concept for a new Internet company
that we believe will satisfy consumer or business needs that are presently
underserved in the Internet market and that is complementary to our other
affiliate companies. We will then recruit management, fund the start-up and
development of these companies and manage their operations, taking a majority
equity interest. We will also search for and identify entrepreneurs throughout
the United States who have started companies that meet these criteria and
provide them with funding and management support to assist them in the
development of their companies. In these instances, we usually will hold a
minority interest, but will have substantial control over operations by having:
o the right to elect one or more directors,
o the right to designate outside accountants and approval rights
over attorneys, public relations firms and other outside
consultants;
o approval rights over significant corporate decisions such as
annual budgets, executive compensation, indebtedness, capital
expenditures and new securities issuances,
o preemptive rights; and
o enhanced voting rights.
The premise of our business plan is that to succeed in the digital
economy, Internet start-up companies need to work with a team of hands-on,
experienced entrepreneurs who can help develop management teams, raise capital,
create operational excellence and manage processes in diverse areas such as
customer service, marketing, logistics management and technology.
Our current affiliate companies include:
metacat.com, Inc. (www.metacat.com). Founded in 1998, metacat is an
Internet-based e-commerce superstore that aggregates and searches the product
offerings of catalog and mail order businesses. Based in Portland, Oregon,
metacat currently has six employees.
College 41l.com, Inc. (www.college4ll.com). Founded in 1998, College
411 is an online college community featuring functional academic resources,
comparison shopping for student items such as textbooks, as well as chat,
personalized news and message centers. Based in San Francisco, California,
College 411 currently has eight employees.
IndustrialVortex.com, Inc. ( Founded in 1999, IndustrialVortex.com is
developing an Internet website that will aggregate vendors of industrial
automation products and facilitate transactions between these vendors and
purchasers of these products. Based in Orange, California, IndustrialVortex.com
currently has six employees.
AssetExchange, Inc. (www.AssetExchange.com). Founded in 1999,
AssetExchange provides banks and other financial institutions with an
Internet-based listing service which allows them to purchase and sell loan
portfolio assets in an efficient manner. Based in Portland, Oregon,
AssetExchange currently has three employees.
Net Value, Inc. Founded in 1996 as a distributer of coupons and other
promotions to consumers via the Internet, Net Value, Inc. sold substantially all
of its assets to BrightStreet.com, Inc. in December 1999. Net Value presently
has no operations and owns an equity interest in BrightStreet.com, Inc. We
anticipate completing a merger with Net Value, Inc. in the next three to six
months.
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BrightStreet.com, Inc. (www.brightstreet.com). Founded in 1999,
BrightStreet develops and distributes online promotional campaigns. Based in
Mountain View, California, BrightStreet currently has 17 employees.
AsiaCD, Inc. (www.asiacd.com). Founded in 1998, AsiaCD is a leading
e-commerce company for the Asian community in the United States. Based in San
Francisco, California, AsiaCD currently has 40 employees.
Webmodal, Inc. (Founded in 1999, Webmodal is developing an Internet
application for use by shippers in purchasing and executing domestic full
truckload intermodal freight shipments. Based in Woodstock, Illinois, Webmodal
currently has five employees.
Swapit.com, Inc. (Founded in 1999, Swapit.com is developing a
consumer-driven electronic barter exchange on the Internet. Based in Boston,
Massachusetts Swapit.com currently has six employees.
Identifying Affiliate Companies
We actively research and target both unexploited Internet business
concepts and existing development stage Internet companies that possess the
following characteristics:
o Development stage companies with current capital requirements
of $1 million or less. Venture capital deals in the Internet
industry have dramatically increased both in number and size
over the last four years. Of the 332 Internet transactions
completed in the second quarter of 1999, the average
investment size was approximately $11.5 million (source:
Ventureone, Fall 1999). Increasingly, venture capital firms
seek to invest approximately $2 million to $5 million in the
early stage financing of start-up companies. These investments
significantly increase the market capitalization of the
issuing company, which may make subsequent rounds of financing
cost prohibitive to potential sources of capital. These
investments may also significantly dilute the ownership
interest of the founders of the issuing company. As a result,
most venture capital firms are an unattractive source of
capital for companies that require only $250,000 to $1 million
in capital to build the foundation of a new business.
Accordingly, these companies often turn to "friends and
family" investors, usually-consisting of a patchwork of
friends, family and high net worth investors who accept the
risks associated with investing in development stage
companies. These "friends and family" and "angel" investors
typically provide limited funding and generally do not provide
any of the management and strategic services which we can
provide. With a significant equity position, board
representation and voting rights, we can play a substantial
role in directing the course of a company's development with
resources not otherwise available to the company. Thus, we
believe that our services and business model will be
attractive to such entrepreneurs.
o Business models that focus on creating loyal customer
relationships through electronic content, commerce and
community. Both Internet and traditional "bricks and mortar"
businesses are rewarded if their brands command a loyal
customer following which can be converted into sales
transactions. Unless Internet businesses provide sufficient
value to legitimately claim the customers or the Internet
traffic as their own, the customers of these businesses and
their associated revenue streams will choose other brands. We
therefore target those businesses which can develop brand
identity and loyalty with customers.
o Opportunities rooted in the transition of industry segments to
the Internet. The Internet is still in its infancy. Only a few
industries, such as the retail securities brokerage industry,
the travel industry and the publishing and recorded music
industries, have significantly transitioned to the Internet as
a medium for sales and distribution of products. We believe
that there are many more industries that will begin to use the
Internet as a medium for sales and the distribution of
products. We focus our efforts on developing or locating
companies that service industries which we believe should
begin or increase using the Internet to
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sell their products and services. Internet companies that
capitalize on these transition industries can gain a
competitive advantage and create significant business value to
their customers.
o Business models that facilitate the formation of communities.
One step in building an Internet business is to create
communities of value where the host facilitates content
created by the community and provides a forum that supports
transactions among members. Communities in diverse areas such
as health care, personal finance, cooking and pets have
already emerged on the Internet and there are many more new
communities that will emerge in a widening array of areas in
the near future.
o Management team whose values mirror our belief in the
importance of passion, commitment and highly-effective
performance. We seek long-term relationships with hard working
entrepreneurs who recognize that it takes more than capital to
develop a successful business. We target companies managed by
individuals who recognize that creating an Internet business
requires that management focus on teamwork and that management
recognize the value of management and operations experts who
can facilitate operational excellence, developing
relationships with other Internet-based companies both within
and outside of the company's industry and managing processes
in areas as diverse as brand development, sales, marketing,
management and technology. We generally seek individuals with
management experience in both the Internet space and in the
industry or "domain" in which their company will operate. In
those instances in which we identify a concept and form and
fund a company to develop the concept, we will recruit
entrepreneurial management for the company that has these
characteristics. We believe it is important for the management
teams of our affiliate companies to have experience in the
Internet space so that they can provide our affiliate
companies with a strong understanding of e-commerce. We
believe that it is important for the management teams of our
affiliate companies to have "domain" experience so that they
can provide our affiliate companies with an established
reputation within the industries which our respective
affiliate companies operate as well as an extensive network of
contacts within these industries.
Competition
We face competition for capital from publicly-traded Internet
companies, venture capital companies, consulting firms and large corporations.
Many of these competitors have greater financial resources and brand name
recognition than we do. These competitors may limit our opportunity to acquire
interests in new affiliate companies. If we cannot acquire interests in or
internally develop promising companies, then our strategy to develop and build a
collaborative network of affiliate companies may not succeed.
Competition for Internet products and services is intense. As the
market for e-commerce products and services grows, we expect that competition
will intensify. Barriers to entry are minimal, and competitors can offer
products and services at a relatively low cost.
In addition, some of our affiliate companies compete to attract and
retain a critical mass of buyers and sellers. Several companies offer
competitive solutions that compete with one or more of our affiliate companies.
We expect that additional companies will offer competing solutions on a
stand-alone or combined basis in the future. Furthermore, our affiliate
companies' competitors may develop Internet products or services that are
superior to, or have greater market acceptance than, the solutions offered by
our affiliate companies. If our affiliate companies are unable to compete
successfully against their competitors, then our affiliate companies may fail.
Many of our affiliate companies' competitors have greater brand
recognition and greater financial, marketing and other resources than our
affiliate companies. This may place our affiliate companies at a disadvantage in
responding to their competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
BrightStreet faces significant competition from many promotion and
advertising companies as well as on-line publishers which compete, directly or
indirectly, for consumer advertising and promotion business from
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advertisers and for consumers' time and attention. Competitors include Catalina
Marketing Corporation, Money Mailer, Val-Pak Direct Marketing Systems,
Interactive Coupon Network, Valassis Communications, Inc. and News America
Holdings Incorporated, who to date primarily operate by distribution of coupons
in printed form through mailings, newspaper inserts and other mass media. These
competitors and others may initiate programs and services involving the Internet
which would compete directly with BrightStreet. Additionally, the Internet is a
relatively new format through which retailers and consumers conduct business. As
the Internet evolves and consumers gain greater confidence in the Internet and
other means of electronic commerce, it is likely that competition will increase.
Webmodal faces competition from at least 50 intermodal marketing
companies such as The Hub Group and Mark VII Transportation, Inc., approximately
five large intermodal-enabled trucking companies such as J.B. Hunt
Transportation Services, Inc. and Schneider National, numerous railroads and
trucking companies and third-party logistics providers, as well as
transportation-related e-commerce ventures such as The National Transportation
Exchange, Inc., RouteGuide.com and FreightQuote. Many actual and potential
competitors possess advantages such as existing business relationships and
substantially greater financial resources. Some of these companies have
introduced on-line capabilities which offer some of the services intended to be
offered by Webmodal or which offer services which are similar to Webmodal's
intended services to customers outside of Webmodal's target intermodal market.
These companies could expand their marketing and operational efforts or existing
online capabilities to develop a system similar to Webmodal's intended system.
However, Webmodal is not aware of a competitor who has developed or introduced a
product concept for intermodal transportation that includes all of Webmodal's
intended product capabilities. Webmodal believes it will have operational
advantages that will allow it to compete effectively. For example, Webmodal
expects to realize considerably greater marketing and customer service staff
productivity than traditional transportation and transportation marketing
companies. Webmodal believes an existing transportation intermediary interested
in deploying a similar business model would risk significant profit margin
erosion and disruption of existing selling processes.
College 411 has several principal competitors, including College Club,
MyBytes and Student Advantage. College Club seeks to create virtual college
communities online to enhance the educational experience of college students.
MyBytes provides free academic resources, community-building capabilities,
communications tools, lifestyle services and original content to college
students. Student Advantage, originally an off-line provider of retail discounts
to college students at stores in the areas around college campuses, is building
a similar on-line presence. Each of these Internet websites provides products
and services similar to those provided by College 411. In addition to these
entities, College 411 will compete secondarily with many other online providers
of content that appeals to college students and with print and electronic media
including television and radio, newspapers and magazines that target young
adults. College 411's ability to compete will be dependent on its ability to
provide content and services that appeal to college students. In order to do so,
College 411 will have a staff of recent college graduates evaluating and
producing its content and services.
metacat.com, Inc. competes with a wide variety of online and offline
sources for mail order products. Competition will include literally thousands of
sources from which consumers can make purchases, including traditional "bricks
and mortar" stores, print-based mail order catalogs, individual merchants'
online catalogs and online aggregators of products and catalogs. metacat
directly competes with online competitors including catalogcity.com and
Catalog.com. Catalogcity.com has indexed thousands of print catalog titles on
their Internet website. Each catalog offers a limited number of products for
direct sale through the catalogcity Internet website, with links to the catalog
merchant's own Internet website (if one exists). Catalogcity targets well-known
retailers such as Sharper Image, Land's End and Hammacher Schlemmer, many of
whom have their own Internet websites that compete directly with catalogcity.
Metacat targets smaller merchants. In addition, metacat is not organized by
catalog, permitting consumers to make a more directed search by product.
Finally, metacat intends to offer for direct sale all products offered in the
catalogs of its merchants rather than a selected few products from each
merchant. Catalog.com provides a searchable index of catalogs and hosts Internet
websites for each listed catalog. Consumers are not able to conduct a search by
product and direct purchases from the Catalog.com Internet website are limited.
Catalog.com also has targeted larger merchants than those that metacat intends
to do business with. Metacat believes that the significant differences in the
product mix and ease of purchase that its Internet website will provide will
permit it to compete effectively with these online merchants.
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AsiaCD competes generally with all retailers of music titles that
include Asian selections. Most mass market retailers, including "bricks and
mortar" retailers such as Walmart, HMV and Borders, and online retailers such as
Amazon.com, carry a limited number of Asian titles and therefore compete only
slightly with AsiaCD. If a large, well-funded company launches an Internet
website directed at sales of Asian music titles to the Asian population in the
United States, it will compete directly with AsiaCD and could reduce AsiaCD's
revenues and cause an increase in AsiaCD's marketing expenses in response.
However, AsiaCD is not aware of any Internet website that is proposing to
materially increase its Asian music offerings or launch an Asia-specific
Internet website. As AsiaCD becomes a more prominent player in the online music
space, it is likely to experience increased competition, either from larger
entities with broad offerings that include Asian titles or from other
Asia-specific Internet websites. AsiaCD believes that it will have a significant
competitive advantage due to its status as the first such Internet website and
its use of local language that captures and enhances the visitor's experience.
AssetExchange competes for financial asset transaction business with an
existing highly fragmented marketplace of buyers and sellers working directly or
through a variety of intermediaries to complete transactions. No competing
online or offline "marketplace" for such assets currently exists. However,
AssetExchange believes that other providers will enter this market, especially
if AssetExchange's service proves to be popular with buyers and sellers of
financial assets. The online asset brokerage business is new and rapidly
evolving and it is likely that other entities will emerge and attempt to compete
in this market. As there are a limited number of active buyers of credit card
portfolios, it will continue to be feasible for buyers and sellers to make
direct contact to negotiate transactions without using AssetExchange or a
competing service, although AssetExchange believes that the demonstrated
efficiencies and cost-saving potential of its service will be attractive even to
sophisticated buyers and sellers. Other potential competitors include businesses
currently conducting online mortgage portfolio auctions and loan participations
who may choose to enter the market for credit card portfolios.
Swapit.com expects competition in the market for trading and sales over
the Internet to intensify in the future. Though its business concept can be
differentiated from existing person-to-person trading services, barriers to
entry are relatively low, and the necessary hardware and software is
commercially available. Services similar to Swapit.com could therefore appear at
any time. In addition Swapit.com expects that it will compete heavily with
existing person-to-person trading services including eBay, Yahoo!, Auctions,
Amazon.com, Excite, Inc., Auction Universe and a number of other small services.
It will also compete indirectly with business-to-consumer online auction
services such as Onsale, First Auction, Surplus Auction and uBid. It potentially
faces competition from any number of large online communities and services that
have expertise in developing online commerce and in facilitating online trading
and who could rapidly develop and launch services similar to Swapit.com prior to
or after Swapit.com's appearance. Some current and many potential competitors
have longer company operating histories, larger customer bases and greater brand
recognition in other business and Internet markets than Swapit.com. Some of
these competitors also have significantly greater financial, marketing,
technical and other resources.
IndustrialVortex.com expects to face competition from many
business-to-business Internet websites that are entering various segments of the
industrial products market. For example, is serving the chemicals market, is
serving the steel market and is serving the plastics market. While each of the
companies that operate these Internet websites has expertise in each of their
substantive industries, none of these companies has attempted to enter the
market for industrial automation products such as motors, valves, sensors,
temperature controllers and generators. This is the market in which
IndustrialVortex.com intends to participate. IndustrialVortex.com anticipates
competing more directly with VerticalNet, a company that operates an Internet
website that links to approximately 50 other business-to-business Internet
websites which each sell products and supplies to specific industries.
IndustrialVortex.com also anticipates competing more directly with
PurchasingCenter.com, Inc., an operator of a business-to-business Internet
website that facilitates the purchase and sale of products which
IndustrialVortex.com intends to include on its Internet website.
IndustrialVortex.com will also compete
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with catalogs and bricks-and-mortar locations which have traditionally serviced
the industrial products industry.
Benefits Of Our Services
Affiliation with us will provide our affiliate companies the following
benefits:
o Hands-on strategic, operational and technology expertise. Our
management team is experienced in assisting Internet companies
in the implementation and understanding of areas such as
strategic planning, sales, marketing, partnership strategy,
capital planning, brand development, management, technology
implementation, negotiations and divestiture/acquisition
planning. Companies which they have assisted in addition to
our affiliate companies include:
o AdAuction.com
o Intervista
o AuctionNet.com
o Noosh
o HealthyPlanet.com
o HomePortfolio.com
o Interworld
o iconjohn.com
o epylon.com
By sharing the lessons learned from these experiences, we
believe that we can help companies efficiently implement and
improve their business plans.
o Speed and flexibility. As entrepreneurs who are experienced in
the capital raising process, our management team recognizes
the importance of rapid yet prudent funding decisions. Our
goal is to make funding decisions and to deliver funds to
those companies which we choose to fund within two weeks of
receiving a business plan and completing our due diligence
review of the prospective candidate. In addition to acting
quickly and prudently, we believe in providing a high degree
of flexibility to our affiliate companies. For example,
although we will encourage our affiliate companies to take
full advantage of our resources, we will not require the
management teams of our affiliate companies to move their
operations to be near our offices, as is common in the venture
capital industry. Although it may be easier for us to assist
our affiliate companies if they are located nearby, we believe
that we can efficiently communicate our ideas and knowledge to
our affiliate companies located throughout the country.
o Network of companies and people. In a time where marketing,
capital, technology and partnerships are critical, we believe
that people and relationships remain the most important
elements of success for development stage enterprises. The
members of our management team sit on either the board of
directors or board of advisers of public and private Internet
companies. As a result of these activities, our management
team has participated in transactions involving alliances
among Internet companies and possess an extensive contact list
consisting of individuals who work in the Internet industry.
Through this network of relationships and experiences, our
management team can provide superior business assistance to
our affiliate companies.
o Business experience. Members of our management team are part
of a generation that has spent its entire professional career
using computers and technology. Collectively, we have spent
over twenty years in the Internet industry. We believe that
the Internet and the digital economy are not disruptive, but
rather an evolutionary way of life. This vision helps in
identifying business models and development stage companies on
the Internet that will develop and produce commercially
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needed products. In addition, members of our management team
are seasoned in fundamental business principles due to their
experience at firms such as:
o Goldman, Sachs & Co.;
o Merrill Lynch, Pierce, Fenner & Smith, Inc.;
o Venture Partners;
o Booz-Allen and Hamilton;
o Bank of America;
o Bankers Trust;
o CNBC;
o Ziff Davis & Publishing (ZD Net);
o Wild Wild Web;
o Lycos;
o WhoWhere.com; and
o Diamond Technology Partners, Inc.
We believe that this combination of vision and business acumen will
enable us to efficiently develop an understanding of the seemingly chaotic
digital economy and capitalize upon significant opportunities presented by the
Internet.
Our Affiliation Process
We intend to follow a four-step process for selecting and acquiring
interests in affiliate companies. First, we identify and evaluate potential
affiliate companies which meet our fundamental criteria, strategy and product
commercialization potential. Once a target company is identified, we perform due
diligence on the target opportunity and its senior management team. Once we
determine to proceed, we develop a management and operating plan with that team.
After closing, we provide support both at a management and operational advisory
level and from a board of directors level, particularly in the areas of
strategic relationship development, planning, senior management staffing,
capital structure advice and budgeting.
1. Transaction Sourcing
We believe that the following factors will enable us to identify
high-quality potential affiliate companies:
o Industry Relationships. We intend to maintain and
further develop relationships with industry leaders
in the high technology and Internet communities. Our
management team has utilized these working
relationships in over a dozen various ventures in the
Internet industry and intends to use these
relationships as a source of new opportunities.
o Executives. Our management team has relationships
with senior executives at successful high technology,
private equity and investment banking companies who
we believe will refer opportunities to us and provide
us with their own perspectives and market
intelligence on the Internet industry.
o Industry Consultants. Our management team has and
will continue to have working relationships with many
specialized industry consultants who we expect to be
positioned to refer opportunities to us.
o Ability to Internally Generate Opportunities. Members
of our management team will identify and explore
potential e-commerce business ideas that have the
potential to compliment our business strategy.
Promising ideas will be further developed. As members
of our management team develop these ideas, we will
provide necessary capital,
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management and operational services and recruit
managers to execute the developed operating
strategies.
2. Due Diligence
Once we have identified a target company or opportunity for our
network, we will perform an extensive due diligence review on the target
company.
Throughout the due diligence process, our management team will interact
with the management and/or owners of the potential affiliate company to analyze
its business and the ability of its existing management to partner with our
management team.
o Thorough Analysis. Our management team is involved in
all components of the due diligence process,
including management, commercial, financial, legal
and operational due diligence. In addition to
reviewing all of the potential affiliate company's
existing contracts, business plans and financial
projections, we conduct extensive interviews with all
members of the potential affiliate company's
management team and perform market research covering
the industry in which the potential affiliate company
operates.
o Assessment of Operations. An important component of
our due diligence process is to assess the
assumptions underlying a potential affiliate
company's business model and growth strategy. We
evaluate each assumption to determine whether the
potential affiliate company's business model presents
a viable business opportunity. In addition, we
determine whether the potential affiliate company's
business model is capable of being efficiently
implemented in the e-commerce field.
o Utilizing Management's Network. Our management team's
relationships and experiences will help us evaluate a
potential affiliate company's management, technology
and competitive environment.
The due diligence process with respect to internally generated
opportunities will involve market research and assessment of the assumptions
underlying the business model and growth strategy.
In addition, from time to time, we may extend short term secured and
unsecured loans to potential affiliate companies to satisfy their short term
financing needs while we perform our due diligence review of the candidate
company.
3. Development of the Operating Plan
Concurrent with our due diligence review, we will begin to develop a
working relationship with the management team of the potential affiliate company
and assist them in or expand the development of an operating plan for the
affiliate company.
o Close Working Relationship with Management. We intend
to pursue relationships with affiliate companies
where we can develop a close working relationship
with the management team during the due diligence
process. In conjunction with the management team of
the potential affiliate company, we expect to develop
realistic budgets and operating assumptions and to
design and develop an operating plan based on our
experience with Internet start-up companies in areas
such as marketing, technology, financial, partnership
and operations.
o Equity Participation. We intend to take an active
role in structuring equity-based incentives for
members of the management team of affiliate
companies. We expect that
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senior management of all affiliate companies will own
significant equity in their company. We believe that
it is crucial for all members of the affiliate
company's senior management to have an equity stake
in their company in order to support a team approach
to the project.
4. Development and Ongoing Support
Following our decision to acquire an interest in a target company or
develop an internally generated opportunity, our management team will work
closely with senior management of the affiliate company in the implementation of
an operating plan. We expect that this mentoring process will be integral to the
success of each of our affiliate companies. This process will consist of the
following components:
o Broaden and Develop Management Teams. We intend to
actively support affiliate companies in the
recruitment and acquisition of additional management
and personnel needed to execute an agreed upon
operating plan and to pursue target opportunities. We
will have in-house recruitment professionals to
assist affiliate companies in recruitment and
retention of personnel. As the affiliate companies
graduate from the development stage to mature
operating businesses, their management teams must be
expanded and solidified. We believe that we will be
able to assist our affiliate companies in identifying
the need for, finding and developing qualified
personnel to manage their companies.
o Focus Operating Plan Objectives. A well-developed
operating plan is crucial to the execution of a
promising business concept and will significantly
increase the probability of success within any
start-up organization. Our management will work
closely to assist affiliate companies in implementing
their operating plans and refining and focusing the
detailed components of these plans as the affiliate
companies develop.
o Developing Strategic Relationships. In the Internet
industry, the development of strategic relationships
is crucial to the success of a company's business
model. We plan to use our management team's
experience to strategically align our affiliate
companies with other Internet companies that will
allow them to realize their full growth potential.
Disposition of Interests
Although we intend to invest in affiliate companies on a long-term
basis, we will negotiate rights that will enable us to dispose of all or a
portion of our interest in an affiliate company. The decision to sell will be
based on a number of factors, including whether the affiliate company continues
to fit within our business strategy and complements our network of affiliate
companies, whether our assets represented by the interest in the affiliate
company can be better applied to benefit other affiliate companies or to fund
new investments and whether we need to dispose of an interest in order not to be
required to register as an investment company.
Our Affiliate Companies
We currently own equity in each of the following affiliate companies:
<TABLE>
<CAPTION>
Approximate
% of Amount of
Date(s) of Equity Capital Stock
Affiliate company Location Investment Acquired Purchased
- ----------------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
METACAT.COM, INC. PORTLAND, OR June 1999 100% $ 250,000
COLLEGE 411.COM, INC. SAN FRANCISCO, CA June 1999 and 27% $ 250,000
September 1999
INDUSTRIALVORTEX.COM, INC. ORANGE, CA January 2000 25% $1,000,000
ASSETEXCHANGE, INC. PORTLAND, OR September 1999 20% $ 420,000
ASIACD, INC. SAN FRANCISCO, CA June 1999 11% $1,000,000
WEBMODAL, INC. WOODSTOCK, IL October 1999 10% $ 350,000
SWAPIT.COM, INC. BOSTON, MA November 1999 12% $ 500,000
</TABLE>
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In addition, we own approximately 66% of the issued and outstanding
common stock and 100% of the issued and outstanding Series A Preferred Stock of
Net Value, Inc. We acquired this ownership interest through a series of share
exchange transactions with stockholders of Net Value, Inc. In December 1999, Net
Value, Inc. sold substantially all of its assets, including the name
BrightStreet.com, Inc., to Promotions Acquisition Inc., a Delaware corporation
formed by the former management of Net Value, Inc. Subsequent to this
transaction, Promotions Acquisition Inc. changed its name to BrightStreet.com,
Inc. As a result of this transaction, Net Value, Inc. owns approximately 12% of
BrightStreet's common stock on a fully diluted basis. Net Value, Inc. does not
have any operations. We plan to complete a merger with Net Value, Inc. within
three to six months pursuant to which we will issue .4 shares of our common
stock for every share of Net Value, Inc. common stock tendered to us by the
existing Net Value, Inc. stockholders and we will issue common stock purchase
warrants and stock options to the holders of Net Value, Inc.'s common stock
purchase warrants and vested stock options at the same exchange ratio.
metacat.com, Inc.
metacat is an online superstore for small catalogs. It offers a
one-stop shopping Internet website that allows consumers to browse and purchase
a wide variety of items. metacat has entered into merchant relationships with 12
multi-catalog and retail companies whose combined product offerings consist of
an aggregate of approximately 11,000 product SKU bar codes. metacat offers a
wide variety of goods at a single, searchable database. metacat believes that by
pairing the penetration and specialization of the catalog industry with the
Internet's unique retailing power, it will provide consumers with a convenient
and useful way to browse or shop over the Internet. metacat launched its
Internet website, which allows consumers to purchase a variety of consumer goods
from catalogs and mail order services that are linked to its Internet website,
in December 1999.
metacat is building an online store by aggregating the content of
thousands of small, print-based mail order catalogs into a database. This
database contains product descriptions and allows consumers to browse, obtain
information regarding the products and purchase the products directly from one
Internet website. metacat intends to form relationships with many different
catalogs and to use the pre-established distribution and inventory expertise of
individual catalogs to market products. Management believes that metacat will
offer small catalogs the high Internet profile that they could not otherwise
afford, serving as a front-end marketing organization for their products.
As a company that brings together a collection of useful information
and the ability to purchase products and services related to the information
presented, metacat serves as an intermediary between catalog retailers and
Internet customers. As the popularity of its Internet website grows, metacat
hopes to capitalize on the economies of scale possible in Internet retailing.
Economies of scale exist when a company experiences decreasing per-unit costs as
its total sales unit volume increases. Internet retailers can generally
experience economies of scale in their marketing, customer service and
technology functions. Marketing costs generally decrease on a per-unit basis as
Internet retailers grow, due to the increasing strength of their brand name via
word-of-mouth, and the decreasing per-unit costs of advertising as individual
advertising purchases increase in size. Customer service costs decrease on a
per-unit basis as staffing requirements can be spread over an expanded customer
base. Finally, since technology
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costs are generally a one-time investment that is required to build an Internet
website, this investment becomes a smaller percentage of per unit costs as the
company's sales volume increases.
metacat expects to focus on pre-existing distribution channels for the
many product categories too small, specialized, or diffuse to be exploited by
"category killers." A "category killer" is a retailer that attempts to present a
selection of merchandise that is so broad that it covers all consumer needs in a
given product category. For example, Toys "R" Us has often been described as a
"category killer" in the toys and entertainment retailing space. In the Internet
space, "category killer" refers to an Internet website that brings together
substantially all relevant information and product/service providers for a given
category at one, unified Internet website. For example, Amazon.com, Inc.
provides consumers with an Internet website that provides all of the information
and service necessary to purchase books and compact discs. Our management team
anticipates that metacat will establish itself as an important shopping
destination on the Internet for specialized and unique products through:
o A User-Friendly Interface: metacat is developing a
user-friendly interface that will include a full-featured
shopping cart, cookie-based tracking of past purchases to
facilitate payment processing and approval of credit card
orders while the consumer is on metacat's Internet website.
o Customer Service: metacat will focus on being responsive to
customer's needs throughout the ordering process. metacat will
accurately fill its product orders and promptly respond to
customers' questions and complaints regarding their purchases
through its Internet website. metacat plans to invest in
customer service software as well as training programs for its
customer service staff. In this manner, metacat hopes to
present a unified, consistently positive message to its
customers regarding service issues. Finally, customer service
will be delivered by hiring sufficient staff to handle service
requirements efficiently and in a courteous manner.
o A Concerted Branding Campaign: metacat plans to execute
targeted marketing campaigns through which it seeks to
establish its brand. metacat plans to establish its initial
customer marketing at upscale, female consumers. metacat plans
to initiate its first marketing campaign in the Spring of
2000. Its goal is to work with Internet websites which serve
as links or portals to many other Internet websites and other
companies that will increase traffic to its Internet website.
metacat will seek to develop advertising relationships with
these entities that will include significant
pay-for-performance components such as revenue sharing
agreements.
metacat plans to generate revenues by charging retailers who sell
products on its Internet website a commission calculated based on the gross
retail revenue of transactions completed on its Internet website. In the future,
metacat plans to develop additional revenue streams from selling advertisements
on its Internet website and charging product placement fees. metacat does not
expect to generate revenues from these sources until the third quarter of 2000.
We currently own 100% of the issued and outstanding common stock of
metacat. As of September 30, 1999, metacat has not recognized any revenues, had
minimal assets, had net losses of $67,000 (unaudited) for the nine months ended
September 30, 1999, and had an accumulated deficit of $120,000 (unaudited).
College 411.com, Inc.
According to the U.S. Department of Education, in 1995 there were
approximately 13.9 million college students in the United States. This amount is
projected to increase to 16.1 million by 2007 for an average annual growth rate
of 1.7%. College students have significant buying power and influence in our
economy. Jupiter Communications estimates that United States college students
spend $100 billion annually and online student spending is expected to increase
to $2.5 billion by 2002.
College 41l's goal is to provide college students with an Internet
website that enables them to link to a large collection of student-oriented
resources on the Internet. College 411 intends to provide a wide array of
information
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and products and services that are useful to a college student. College 411's
Internet website provides the following content to college students:
o news;
o research information;
o career counseling;
o procrastination tips; and
o dating tips.
College 411 has designed and launched several communication
applications on its Internet website that provide the following services:
o Proprietary search techniques are search methods developed by
College 411 that allow students to find more information about
a particular product or topic. For example, Comparison Book
Finder is a textbook price comparison tool which allows
students to obtain and compare prices for textbook titles from
multiple electronic stores (i.e., Amazon.com,
Barnesandnoble.com, etc.),
o Communication applications such as Instant Messenger, an
application that allows college students to send messages to
each other,
o an Academics Research Engine that allows students to instantly
access information regarding over 10,000 topics, and
o a College Localization Tool which allows students to instantly
access information about their college or university.
College 411 is currently designing additional content sections of its
Internet website which will provide:
o auction services;
o online radio broadcasts
o classified advertisements
o travel guides, and
o game services
College 411 is attempting to enter into relationships with original
equipment manufacturers whereby College 411 will license its products and
services to these manufacturers for use with their equipment. College 411
believes that these co-branded relationships will be beneficial because they
will help to direct users to College 411's Internet website. College 411's
Internet website became operational in October 1999 and plans to begin adding
the additional content sections described above in January 2000. College 411
plans to generate cash flow from five sources: affiliate programs,
general/targeted advertising, firm branding, chargeable services and rental fees
for prominent partnerships on its Internet website.
We currently own 3,750,000 shares of College 411's common stock. This
represents approximately 27% of College 411's issued and outstanding common
stock. Darr Aley currently serves on College411's Board of Directors. As of
September 30, 1999, College 411 had not generated any revenues, had assets of
$92,278, net losses of approximately $100,000 (unaudited) for the nine months
ended September 30, 1999 and had an accumulated deficit of approximately
$100,000 (unaudited).
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IndustrialVortex.com, Inc.
IndustrialVortex.com is developing an Internet website that will facilitate the
purchase and sale of industrial automation products such as:
o motors;
o valves;
o sensors;
o timers;
o temperature controllers;
o generators;
o compressors;
o drives; and
o push buttons.
As a facilitator of business-to-business e-commerce, IndustrialVortex.com is
designing this website to provide purchasers with relevant content that will
permit them to make informed and cost-effective purchasing decisions.
IndustrialVortex.com's website will allow purchasers to efficiently access many
vendors of these products, to browse their product offerings and pricing
schedules, and to negotiate transactions with these vendors through one website.
At no cost to the vendors, IndustrialVortex.com's website will provide
purchasers with a set of e-commerce transaction tools, including catalog
purchases, supplier bidding, purchaser pooling, auctions and product showcasing.
Purchasers will access the website and have the ability to:
o chat with vendors on-line;
o chat with other purchasers of the products on-line;
o view pricing schedules;
o view vendors' inventory records;
o view their past purchasing history; and
o track orders.
In this manner, IndustrialVortex.com is seeking to create an electronic
marketplace where vendors can communicate with existing and new customers in an
efficient manner. IndustrialVortex.com believes that its website will provide a
valuable service that would otherwise be extremely costly for individual vendors
to develop on their own. IndustrialVortex.com anticipates that it will generate
revenues from:
o transaction fees charged to vendors;
o service fees in connection with set-up and custom features in
support of these transactions; and
o the sale of reports describing purchasing and selling patterns
of the market, product performance and life cycles as derived
from data obtained based on transactions conducted through its
website.
IndustrialVortex.com believes that the cost of these fees to vendors
will be accompanied by significant reductions in selling costs which they
currently experience including telephone and telecopier charges, preparation and
delivery of mail catalogs, and the costs associated with bidding procedures,
proposals and purchase orders. IndustrialVortex.com anticipates that its website
will be functional in February 2000.
We currently own 2,858,215 shares of IndustrialVortex.com's Series A
Preferred Stock which we are entitled to convert into 2,858,215 shares of
IndustrialVortex.com's common stock at any time. As of the date of this
prospectus, if we were to elect to exercise this conversion option, then we
would own 25% of IndustrialVortex.com's issued and outstanding shares of common
stock calculated on a fully-diluted basis. Allison Stollmeyer, our Director of
Business Development, is a director of IndustrialVortex.com.
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AssetExchange, Inc.
AssetExchange, Inc. has created a network which allows financial
institutions to buy and sell loan portfolios and other assets among themselves.
AssetExchange supports this network by providing an Internet-based listing
service of financial assets. AssetExchange's network will initially focus on
credit card portfolios. AssetExchange's Internet website, which was launched in
August 1999, now has approximately 100 registered members who own portfolios
consisting of a combined total of greater than 60% of the outstanding general
purpose credit card debt in the United States. The registered members are
entities that are generally in the market to purchase portfolios. In addition,
AssetExchange's Internet website currently has three loan portfolios listed for
sale. There are currently two pending transactions priced at approximately
$20,000,000 each, at least one of which AssetExchange believes will close during
the first quarter of 2000.
Financial institutions regularly buy and sell a variety of loan
portfolios from each other. These loan portfolios include credit card accounts,
automobile loans, mortgages, small business loans and student loans. Financial
institutions purchase and sell these assets for both strategic and tactical
purposes. The volume of these transactions among financial institutions has been
increasing. This increase in transaction volume has been driven by the banking
and financial industry's trend toward specialization, consolidation and risk
management goals.
The markets for the purchase and sale of these assets are currently
fragmented and inefficient. Many transactions are completed based on personal
contacts made by brokers or investment bankers. Transaction costs are
substantial and matches between buyers and sellers are unlikely to be the best
available matches in the financial markets. Since search and transaction costs
can prevent deals and limit marketing efforts, medium and small sized banks are
deterred from participating in these markets.
AssetExchange is currently focusing on transactions involving credit
card portfolios. Credit card portfolios generally consist of consumer accounts
associated with a particular financial institution's credit card program. These
portfolios typically include total outstanding balances ranging from less than
$1 million to over $1 billion. In 1998, credit card portfolio transactions
totaled approximately $32 billion in asset value. This represented an
approximate 55% increase over 1997 transactions. AssetExchange is currently
targeting loan portfolios valued at between $5,000,000 and $200,000,000 for
listing on its Internet-based service. AssetExchange believes that this is an
appropriate portfolio value to target because investment bankers and brokers
generally charge expensive fees that make selling portfolios in this valuation
range cost prohibitive to the selling financial institution. AssetExchange
believes that financial institutions will view its Internet-based service as a
viable alternative for selling credit card portfolios in this value range.
AssetExchange believes that the total value of credit card portfolios in this
range is approximately $5 billion. Other classes of loan portfolios, such as
mortgage loans, auto loans and student loans, create an overall accessible loan
portfolio transaction market of approximately $50 billion.
AssetExchange addresses the inefficiencies which are inherent in these
markets by providing a secure and confidential Internet-based listing and e-mail
notification service for financial institutions. AssetExchange's Internet
website supports posting, browsing and searching for assets. E-mail notification
alerts buyers of new listings of loan portfolios. AssetExchange's primary role
is "matchmaking" between sellers and buyers of loan portfolios. Outside vendors
provide valuations of loan portfolios, legal advice and credit analysis.
AssetExchange may later elect to provide these services based on customer
demand. These vendors currently may purchase advertising and links to their own
Internet websites from AssetExchange. AssetExchange's goal is to provide an
efficient conduit for transacting a broad range of financial assets among
financial institutions.
AssetExchange anticipates that its primary customers will include
banks, finance companies, thrifts, community banks, credit unions and other
financial institutions. Brokers and investment bankers may also use
AssetExchange's services to expand their transaction base and reduce their
transaction costs. AssetExchange is unaffiliated with existing market
participants. This practice allows AssetExchange to provide an impartial and
powerful tool for gaining market exposure.
AssetExchange anticipates that its primary source of revenues will be
commissions on transactions completed on its Internet website. Based on
discussions with financial institutions and brokers, in today's market,
commissions typically range from 50 to 300 basis points, which is approximately
0.50% to 3% of a transaction's value, depending on the level of services
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provided by the finder or broker. AssetExchange currently charges 30-50 basis
points of a transaction's value and this fee is divided between the buyer and
seller equally. This pricing structure may be adjusted to meet the practices of
other industries as AssetExchange expands into other classes of loan portfolios.
AssetExchange anticipates that it will generate additional revenues by providing
links to its Internet website and selling advertising space on its Internet
website to vendors of related services. AssetExchange believes that a possible
future revenue stream may be subscription fees paid by users of its network.
AssetExchange's initial marketing efforts will focus on aggressively
pursuing market-share and building the AssetExchange.com brand recognition. In
addition to the direct selling efforts of AssetExchange's employees, these
marketing efforts will include advertising in trade journals and direct mail
marketing programs. As of September 30, 1999, AssetExchange had not generated
any revenues, had assets of $439,233, net losses for the nine months ended
September 30, 1999 of $48,529 (unaudited) and had an accumulated deficit of
48,529 (unaudited).
We currently own 258,065 shares of AssetExchange's Series A Preferred
Stock which we are entitled to convert into 258,065 shares of AssetExchange's
common stock at any time. As of the date of this prospectus, if we were to elect
to exercise this conversion option, then we would own approximately 20% of
AssetExchange's issued and outstanding shares of common stock. Douglas Spink
currently sits on the Board of Directors of AssetExchange, Inc.
Net Value, Inc./BrightStreet.com, Inc.
Asset Sale Transaction
On December 3, 1999, Net Value, Inc. (f/k/a BrightStreet.com, Inc.)
sold substantially all of its assets to Promotions Acquisition, Inc., a Delaware
corporation formed by the former management team of Net Value, Inc. for the
purpose of acquiring the assets of Net Value, Inc. and succeeding to its
business. In exchange for substantially all of its assets, Net Value, Inc.
received:
o $2,000,000;
o the assumption by Promotions Acquisition, Inc. of Net Value, Inc.
liabilities presently valued at approximately $1,600,000;
o the release from all of Net Value, Inc.'s employees of all of Net
Value, Inc.'s obligations under employment agreements entered into by
Net Value, Inc. and these employees;
o the cancellation of all issued and outstanding Net Value, Inc. stock
options held by Net Value, Inc.'s employees; and
o 2,958,819 shares of Promotions Acquisition, Inc. common stock equal
to an approximate 12% ownership interest in Promotions Acquisition,
Inc. calculated on a fully diluted basis.
Simultaneous with this transaction, Promotions Acquisition Inc.
consummated the following transactions:
o the issuance to its management team of options and restricted stock
grants representing an approximate 25% ownership interest of
Promotions Acquisition Inc. calculated on a fully diluted basis; and
o an equity financing transaction in which Promotions Acquisition Inc.
received equity investments in the aggregate of $17,000,000 for
shares of Promotions Acquisition Inc.'s Series A Preferred Stock
representing an approximate 63% ownership interest in Promotions
Acquisition, Inc. calculated on a fully diluted basis.
The shares of common stock which Net Value, Inc.
received in this transaction are entitled to the same registration, preemptive
and other rights as the holders of Promotion Acquisition Inc.'s Series A
Preferred Stock. As a result of this transaction, Net Value, Inc. no longer has
any operations and no longer has any obligations to consultants or employees who
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were employed or engaged by Net Value, Inc. on the closing date of this
transaction. Accordingly, we do not anticipate providing any additional
financial support to Net Value, Inc. or BrightStreet.com, Inc. Net Value, Inc.
has loaned us the $2,000,000 proceeds it received in this transaction. We have
agreed to use this cash to satisfy Net Value, Inc.'s existing obligations which
were not assumed by Promotions Acquisition Inc. Any payments which we make to
creditors on behalf of Net Value, Inc. will reduce the unpaid principal and
interest related to this loan. Alternatively, Net Value, Inc. may issue
additional equity to satisfy these liabilities. We then plan to complete a
merger with Net Value, Inc. pursuant to which we will issue .4 shares of our
common stock for every share of Net Value, Inc. common stock tendered to us by
the existing Net Value, Inc. stockholders. We will also issue common stock
purchase warrants and stock options to the holders of Net Value, Inc.'s common
stock purchase warrants and vested stock options at the same exchange ratio. We
currently own approximately 66% of the issued and outstanding shares of Net
Value, Inc.s common stock and 100% of the issued and outstanding shares of Net
Value, Inc.s Series A Preferred Stock. Net Value, Inc.s Series A Preferred Stock
has the following rights and preferences:
o Liquidation preference of $1.00 per share;
o Convertible at the option of either Net Value, Inc. or the holder
into 12.5 shares of Net Value, Inc.s common stock; and
o No dividends or voting rights.
Pursuant to the merger, and Net Value, Inc.'s other stockholders will
receive .4 shares of our common stock for each share of Net Value, Inc. common
stock tendered to us. Subsequent to this merger, we will own 100% of Net Value,
Inc.'s assets
Subsequent to the completion of the sale of Net Value, Inc.'s assets to
Promotions Acquisition, Inc., Promotions Acquisition, Inc. changed its name to
BrightStreet.com, Inc.
BrightStreet.com, Inc.
BrightStreet enables manufacturers, retailers and other Internet
websites to deliver, track, and analyze promotions targeted to Internet users.
BrightStreet's technology delivers its promotional offers to customers via the
Internet. BrightStreet operates a permissionbased system which requires
consumers to register before they are permitted to receive promotional offers.
BrightStreets technology allows its customers to track and analyze consumer
behavior by reporting the amount and type of promotional offers that each
consumer views, prints and redeems. BrightStreet licenses its services directly
to manufacturers, retailers, and Internet websites that publish nonproduct
related information for consumers. BrightStreet also offers a network of
affiliated Internet websites that distributes promotional offers for
manufacturers and retailers.
BrightStreet markets an Internet based service that allows
manufacturers, retailers, and Internet websites that publish nonproduct related
information for consumers to deliver customized promotions such as coupons and
free samples via their Internet websites. In doing so, these businesses develop
a rich consumer database, built from registration data that consumers provide as
a prerequisite to receiving valuable promotions, such as discounts on
merchandise and free product samples.
In addition to allowing consumers to register and download offers via
its customers' Internet websites, BrightStreet has created the BrightStreet
Network, a promotional network of affiliated Internet websites. The BrightStreet
Network offers customers who want a wider distribution of their promotions the
ability to place the promotions on the Internet websites of companies with whom
BrightStreet has a relationship. BrightStreet licenses a service from a third
party that allows its customers to create promotions. This system then delivers
these promotions to the affiliated network websites which are authorized to
display these promotions and deliver them to consumers. In these situations,
BrightStreet serves as an intermediary between its customers and consumers.
Manufacturers and retailers experience broader distribution of their promotions
and the portals get the Internet website content and revenues which they need,
with a high perceived value to the consumer.
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BrightStreet intends to generate revenues from two sources:
o licensing fees from licensing its technology platform and promotion
services, and
o network fees from transactions, sponsorships, and other marketing
programs on affiliate Internet websites. As of September 30, 1999,
BrightStreet had assets of approximately $34,000 (unaudited), had not
generated any revenues, had no net losses or income (unaudited) for
the nine months ended September 30, 1999, and had an accumulated
deficit of $0 (unaudited).
AsiaCD, Inc.
AsiaCD is a 24-hour online music store for individuals of Asian descent
located throughout the world who either lack easy access to a broad range of
media titles when living outside their native country or who simply enjoy media
from other cultures. AsiaCD is focused on delivering quality service and the
best prices to its customers. AsiaCD has over 24,000 customers and has
historically experienced customer growth of approximately 85% per calendar
quarter since AsiaCD's inception. Management believes that AsiaCD is poised to
expand its United States based e-commerce business model into new international
markets and to take advantage of the rapidly growing Asian online presence in
the United States and worldwide. AsiaCD was founded in January 1998 and launched
its Internet website, www.asiacd.com, in May 1998. AsiaCD currently has 40
employees working in three offices located in the following cities:
o San Francisco (27);
o Hong Kong (11); and
o Taiwan (2).
AsiaCD has over 24,000 customers who have purchased products from its
Internet website. Approximately 44% of these customers have returned to AsiaCD's
Internet website and made at least one additional purchase. The average order
size for each AsiaCD customer is approximately $40. AsiaCD expects to experience
continued sales growth as a result of its aggressive marketing in the United
States. AsiaCD currently plans to initiate a marketing campaign that will
include:
o Television and radio commercials;
o Print advertisements;
o Public relations and event sponsorships; and
o Internet advertisements.
AsiaCD also plans to expand into other Asian markets where it will
apply its concept of "cross-cultural sales." By providing convenient,
inexpensive access to a broad range of titles "foreign" to a given market,
AsiaCD taps into the increasingly global nature of mass media and uses the
Internet to fulfill a need that is not adequately serviced in the traditional
"bricks and mortar" world. In the United States, AsiaCD's Internet website
offers access to Cantonese, Mandarin, Japanese and Korean products. In Hong Kong
and Taiwan, it intends to offer convenient access to European, Japanese and
American titles, at competitive prices which include local rather than
international shipping costs. AsiaCD has established accounts with three major
record companies and five movie production companies in Hong Kong. AsiaCD
purchases all products which it sells in Hong Kong and Taiwan either directly
from these companies or from authorized distributors of these companies. AsiaCD
intends to utilize its presence in multiple nations to increase distribution and
purchasing power. AsiaCD currently sells compact discs, digital video discs and
videocassettes. If AsiaCD completes its proposed financing, then it expects to
introduce gifts, comic books, toys, games and magazines as new product offerings
on its Internet website in 2000. In addition, AsiaCD plans to offer electronics
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<PAGE>
on its Internet website in 2001. AsiaCD plans to launch a business-to-business
Internet website in the first quarter of 2000 and plans to expand its market to
include Japan, Korea, China and other Asian countries.
We currently own 1,000,000 shares of AsiaCD's Series A Preferred Stock
which we are entitled to convert into 1,000,000 shares of AsiaCD's common stock
at any time. As of the date of this prospectus, if we were to elect to exercise
this conversion option, then we would own approximately 11% of AsiaCD's issued
and outstanding shares of common stock. We are also entitled to receive a
warrant to purchase 300,000 shares of AsiaCD's common stock at an exercise price
of $1.00 per share. In addition, we have appointed Stephen George to serve on
AsiaCD's board of directors. Through September 30, 1999, AsiaCD had generated
approximately $1,473,845 in revenues (unaudited). AsiaCD's losses for the nine
months ended September 30, 1999 were approximately $271,478 (unaudited). As of
September 30, 1999, AsiaCD's accumulated deficit was approximately $380,789
(unaudited).
Webmodal, Inc.
Webmodal is developing an Internet application for use by shippers in
purchasing and executing domestic fulltruckload 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 freights final
destination.
Intermodal shipping provides shippers with an opportunity to achieve
significant cost reductions in comparison to shipping freight via highwayonly
trucking. However, intermodal shipping is presently characterized by a complex
and inefficient purchasing and execution process.
Webmodal is in the process of building an Internet application that it
anticipates will improve the process of evaluating and purchasing intermodal
transportation services. This interface will allow shippers to:
o input their specific transportation needs;
o view relevant transportation alternatives which may satisfy those
needs;
o assemble the service components of an intermodal shipment, including
an origin trucking carrier, a railroad carrier and a destination
trucking carrier; and
o execute an order for transportation services.
Today, shippers generally purchase intermodal transportation through
marketing intermediaries. The marketing intermediaries perform logistical
coordination tasks using labor intensive marketing and customer service
processes involving telephone and facsimile communications with customers and
carriers. In using these traditional intermediaries to purchase transportation
services, shippers do not generally have access to information on prices and
schedules associated with underlying transportation services. As a result,
shippers are typically unable to confirm that optimal service selections are
being made on their behalf. In addition, because shippers using traditional
intermediaries are not typically made aware of the costs associated with the
underlying transportation services, they are unable to readily observe the fee
that is being paid to the intermediary for management of their shipments.
Webmodals services will allow shippers to replace their dependence on
these traditional marketing intermediaries with an online solution which will
provide complete information regarding carrier rates, schedules and service
performance records. Analogous to an online travel agent, Webmodal plans to
eliminate the need for cumbersome research and negotiation with marketing
intermediaries by collecting all relevant information into a single userfriendly
database. Webmodal will also reduce the manpower costs associated with
traditional marketing intermediaries. Webmodals service will replace the
telephone, facsimile and other laborintensive processes and communications
necessary to initiate and coordinate intermodal shipments with immediate,
automated digital connections with carriers
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<PAGE>
In addition to creating an Internet application that it believes will
simplify the purchase and execution of domestic fulltruckload intermodal
transportation, Webmodal is also positioned to expand into related market
segments such as the provision of a similar purchasing interface for:
o overtheroad trucking;
o railroad shipping; and
o international container shipping.
Webmodal also plans to offer related products such as:
o online traffic analysis tools for shipping customers; and
o multicarrier shipment coordination product for marketing to carriers
and intermediaries.
By replacing laborintensive 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. Webmodal is currently designing its
technology and expects to launch its Internet website in 2000.
We currently own 1,221 shares of Webmodals common stock. This
represents approximately 10% of Webmodals issued and outstanding common stock.
As of September 30, 1999, Webmodal had not generated any revenues, had assets of
approximately $220,000 (unaudited), net losses of approximately $70,000
(unaudited) for the nine months ended September 30, 1999 and an accumulated
deficit of approximately $70,000 (unaudited). Douglas Spink, a member of our
Board of Directors, currently sits on Webmodal's Board of Directors.
Swapit.com
Swapit.com is creating a consumer-driven electronic barter exchange on
the Internet. Swapit.com believes that this service will enable the swap or sale
of consumer goods between individuals. Swapit.com 's goal is to build a service
that attempts to consolidate the fragmented $180 billion (DLJ) secondhand
distribution market. Swapit.com's service will first permit the trading of
music, movies, books and games, and will then diversify into other consumer
products. Swapit.com intends to generate revenues from:
o listing, transaction and referral fees;
o direct sales; and
o advertising revenues
Swapit.com's service will provide an environment that enables a
threeparty exchangebased system. Consumers willing to trade will submit their
products to a central repository/warehouse. Once the consumer submits his
products into the warehouse, he can use the service to identify other consumer
goods of like value which he can then withdraw from the warehouse. Swapit.com
believes that using this threeparty exchange system will exponentially increase
the chances of a successful trade, thereby generating a higher level of
revenues. Swapit.com believes that its Internet website will be fully
operational in April 2000.
We currently own 162,590 shares of Swapit.com 's Series A Convertible
Preferred Stock, which we are entitled to convert into 162,590 shares of
Swapit.coms common stock at any time. In addition, we currently own 26,589
shares of Swapit.coms common stock. This represents an aggregate of
approximately 12% of Swapit.com's issued and outstanding common stock on a
fullydiluted basis. In addition, we have the contractual right to vote an
additional 258,411 shares of Swapit.com's common stock held by Thomas Aley, our
Executive Vice President, Business Development, representing approximately an
additional 15% of its common stock on a fullydiluted basis. Thomas Aley
currently serves on Swapit.com's Board of Directors. As of November 30, 1999,
Swapit.com had not generated any revenue, had assets of $479,048 and had an
accumulated deficit of $78,016.
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<PAGE>
Investment Company Act of 1940
The Investment Company Act of 1940 regulates mutual funds and other
entities which meet the definition of an investment company. An investment
company generally includes any entity that is engaged primarily in the business
of investing, reinvesting and trading in securities. The rules under the
Investment Company Act provide in part that an entity is presumed not to be an
investment company if 45% or less of the value of its total assets (excluding
government securities and cash) consists of, and 45% or less of its income over
the last four quarters is derived from, securities other than either government
securities or securities issued by entities that it does not primarily control
which are not themselves engaged in the business of investing in securities. As
the regulations governing the relationship between an investment company and the
entities in which it invests are inconsistent with the manner in which we intend
to provide services to our affiliate companies, it is critical to our business
plan that we not be an investment company subject to the Investment Company Act.
We will be considered to primarily control an entity if we own more
than 25% of its voting securities and have more control than any other single
owner. Under current regulations, we are considered to control metacat,
College411 and Net Value, Inc. Prior to the sale of Net Value, Inc.s assets to
BrightStreet, the assets and income of our affiliate companies that we do not
primarily control did not exceed the limits described above. As a result of the
sale, the assets and income of our nonprimarily controlled affiliate companies
currently exceed those limits. Under current regulations, we have a safe harbor
period of one year during which we will not be considered an investment company,
provided that we have a bona fide intent to primarily engage in a business other
than that of investing, reinvesting and trading in securities as soon as
reasonably possible. Our board of directors has adopted a resolution confirming
this intent. We intend to meet this standard by structuring all future affiliate
company investments to include at least a 25% voting percentage, board
representation, approval rights over material decisions and other features that
will give us primary control for purposes of the Investment Company Act. In this
manner, we will maintain the assets of and income derived from our nonprimarily
controlled affiliate companies below 45% of our total assets and income.
However, fluctuations in the value of our interests in our affiliate companies
may make it difficult for us to accomplish and maintain this goal. Accordingly,
in order to satisfy this goal we may from time to time dispose of interests in
some of our noncontrolled affiliate companies.
The regulations under the Investment Company Act provide an exemption
from the definition of an investment company for any entity which the Securities
and Exchange Commission finds is primarily engaged in a business other than
investing in securities. We believe that we are primarily engaged in the
ecommerce business through the activities of our affiliate companies and the
services we provide to them. We may apply to the Securities and Exchange
Commission for this exemption. If we are granted this exemption, we may have
greater latitude in structuring investments in affiliate companies and may not
be compelled to dispose of interests in noncontrolled affiliate companies in
order to maintain our noninvestment company status.
Employees
As of February 4, 2000, excluding our affiliate companies, we had eight
full-time employees. None of our employees are currently covered by collective
bargaining agreements and we consider our relations with our employees to be
satisfactory.
Facilities
We currently sublease office space at Two Penn Center Plaza, Suite 605,
Philadelphia, Pennsylvania at a rate of $2,000 per month. We also share office
space in San Francisco, California with Epylon.com, Inc., a corporation owned by
Stephen George, a director of Net Value Holdings, Inc., at no expense.
In November 1997, Net Value, Inc. entered into a lease for its
executive offices located at 1960 Bronson Road, Building No. 2, Fairfield,
Connecticut. The office space consists of approximately 8,800 square feet.
Pursuant to the terms of this lease, Net Value, Inc. is required to pay rent of
$13,284 per month plus utilities, general liability insurance premiums for up to
$5,000,000 of coverage and the amount of any increases in operating expenses and
real estate taxes up to 5% over the amounts paid for these expenses during the
year ended June 30, 1998. This lease expires on December 31, 2000. Net Value,
Inc. vacated this office space and ceased making rent payments under this lease
in June 1999. On November 23, 1999, the landlord filed a lawsuit against Net
Value, Inc. seeking damages, interest, attorneys' fees and costs, related to Net
Value, Inc.'s alleged breach of this lease agreement.
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<PAGE>
In April 1999, Strategicus Partners, Inc. and Douglas Spink entered
into a lease agreement with Q-19, Incorporation, an Oregon corporation, for
office space for metacat.com, Inc. located at 1526 N.W. 19th Avenue, Portland,
Oregon. The office space consists of approximately 1,200 square feet. This lease
agreement terminates on April 30, 2001. Pursuant to this lease agreement,
monthly rent is $1,200 through April 30, 2000 and $1,248 for the remaining lease
term, plus all costs for electricity and janitorial services.
Legal Proceedings
On January 7, 2000, Douglas Spink, a former officer and director of Net
Value Holdings, Inc. filed an action against Net Value Holdings, Inc. in the
United States District Court for the District of Oregon, alleging that Net Value
Holdings, Inc. had breached its employment agreement with Mr. Spink and violated
Oregon statutes regarding the payment of wages. The complaint alleges that Net
Value Holdings, Inc.:
o falsely claimed that Mr. Spink engaged in improper conduct;
o stated to Mr. Spink its intention to terminate him for cause;
o had interfered with Mr. Spink's performance of his duties as Chief
Technology Officer of Net Value Holdings, Inc.;
o had effectively frozen Mr. Spink out of the management of Net Value
Holdings, Inc.; and
o failed to pay Mr. Spink his wages due since the beginning of November
1999.
The complaint seeks damages in the amount of $17,000,000 on the breach
of contract claim, plus prejudgment interest from the date of the breach of the
employment agreement or, in the alternative, an order directing Net Value
Holdings, Inc. to specifically perform its obligations under its employment
agreement with Mr. Spink. The complaint seeks damages in the amount of $150,000
on the wage claim, plus penalty wage, prejudgment interest, costs and
disbursements. As of the date of this prospectus, Net Value Holdings, Inc. has
not received proper service of this complaint. The parties are continuing in
good faith to negotiate a settlement of this dispute. However, if a settlement
cannot be achieved and this complaint proceeds to trial, Net Value Holdings,
Inc. intends to vigorously defend against these claims and to assert
counterclaims against Mr. Spink .
On August 23, 1999, coolsavings.com, Inc. filed an action against Net
Value, Inc. (f/k/a BrightStreet.com, Inc.) in the United States District Court
for the Northern District of Illinois, Eastern Division, alleging that Net
Value, Inc. had infringed upon United States Letters Patent No. 5,761,648
entitled "Interactive Marketing Network and Process Using Electronic
Certificates" held by coolsavings. The complaint alleges that Net Value, Inc.,
through its Internet website and products, has committed acts of infringement
by:
o performing or completing steps of the methods and processes described
and claimed in Patent No. 5,761,648;
o by actively inducing others to practice the methods and processes
described and claimed in Patent No. 5,761,648 by, among other things,
performing or completing steps of such methods and processes; and
o by offering to sell or selling a system or service for offering and
providing targeted electronic certificates such as coupons, for use
in practicing the methods and processes described and claimed in
Patent No. 5,761,648.
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<PAGE>
The complaint seeks both a preliminary and permanent injunction
prohibiting Net Value, Inc. from further acts of infringement, as well as
damages. On November 23, 1999, Net Value, Inc. filed its answer to this
complaint as well as a counterclaim against coolsavings.com, Inc. seeking a
declaratory judgment of invalidity and noninfringement of Patent No. 5,761,648.
Neither a discovery schedule nor a trial have been set in this matter. Net
Value, Inc. cannot estimate the amount of damages that it may incur if the court
issues a final judgment concluding that Net Value, Inc. has infringed on
coolsavings' patent. In addition, based on its estimate of the cost of defending
this type of litigation, Net Value, Inc. may decide to settle this case for an
amount that, although substantially less than the damages sought by coolsavings,
may be significant. Pursuant to the Asset Purchase Agreement which Net Value,
Inc. entered with BrightStreet.com, inc. (f/k/a Promotion Acquisition, Inc.)
BrightStreet has agreed to assume all liabilities related to this lawsuit,
including all legal expenses incurred in defending against these claims.
On November 23, 1999, The Bronson Road Group filed an action against
Net Value, Inc. in Superior Court, State of Connecticut. The Bronson Road Group
is the landlord of Net Value, Inc.'s Fairfield, Connecticut office. The
complaint seeks damages, interest, attorneys' fees and costs related to Net
Value, Inc.'s alleged breach of the lease agreement which the parties entered
into in November 1997. The complaint alleges that Net Value, Inc. has breached
this lease agreement by failing to make required rent payments since June 1,
1999. Pursuant to the Asset Purchase Agreement which Net Value, Inc. entered
into with BrightStreet.com, Inc., Net Value, Inc. agreed to assume all
liabilities related to this lawsuit, including all legal expenses incurred in
defending against these claims.
Independent Accountants
In June 1998, subsequent to Net Value Holdings' reinstatement as a
corporation in the State of Florida, we retained Barry L. Friedman, P.C. to
audit Net Value Holdings' financial statements for the period from January 1,
1998 through June 15, 1998 and for the years ended December 31, 1997 and
December 31, 1996. In December 1996, we determined that it would be beneficial
to have the same independent accounting firm audit both Net Value, Inc.'s
financial statements and Net Value Holdings' financial statements. Accordingly,
we did not reappoint Barry L. Friedman, P.C. as our independent accounting firm.
Barry L. Friedman, P.C. has confirmed that it did not have any disputes or
disagreements with Net Value Holdings or its management regarding accounting
principles or practices, financial statement disclosure or auditing scope or
procedures.
In January 1999, subsequent to the consummation of the share exchange
transactions with the stockholders of Net Value, Inc., we engaged LJ Soldinger
Associates as our independent accountant. LJ Soldinger Associates has completed
the audit of our consolidated financial statements for the year ended December
31, 1998. To review our consolidated audited financial statements, see
"Consolidated Audited Financial Statements."
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, their ages and positions are set
forth below:
<TABLE>
<S> <C> <C>
Andrew P. Panzo 35 Chairman of the Board of Directors and Chief
Executive Officer
Lee Hansen 32 President
Darr Aley 35 Executive Vice President, Business Development
and Director
Thomas Aley 35 Executive Vice President, Business Development
Barry Uphoff 33 Director
Douglas Spink 29 Director
Stephen George 32 Director
</TABLE>
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<PAGE>
Andrew P. Panzo has served as one of our directors and as our President
and Chief Executive Officer since January 1999. Prior to joining our management
team and during the first six months of his employment with Net Value Holdings,
from October 1993 to June 1999, Mr. Panzo was a managing director at American
Maple Leaf Financial Corporation, a boutique investment banking firm located in
Philadelphia, Pennsylvania. Mr. Panzo currently serves on BrightStreet's board
of directors. Mr. Panzo received a masters degree in International Business and
Finance from Temple University.
Lee Hansen has served as our Chief Operating Officer since October 1,
1999. Prior to joining our management team, Mr. Hansen was Senior Vice President
of Corporate Strategy and Development at Bank of America Corporation from May
1997 to September 1999, where he managed strategy projects and merger and
acquisition activities. From July 1993 to April 1997, Mr. Hansen served as an
associate in the Lease Finance and the Private Placement and High Yield Groups
and as Vice President in the International Capital Raising Group at Banc of
America Securities, where he originated, structured and executed over $2 billion
of private placements and bond offerings. Mr. Hansen received an MBA from the
J.L. Kellogg Graduate School of Management.
Darr Aley has served as our Executive Vice President for Business
Development and as one of our directors since July 1999. Prior to joining our
management team, Mr. Aley was Vice President of Corporate Development at Lycos,
Inc. from August 1998 to August 1999, where he was responsible for developing
Internet joint ventures and strategic alliances. From December 1997 to August
1998, Mr. Aley worked at Who/Where, a search engine that enables users to locate
a person's home and e-mail address. From December 1996 to December 1997, Mr.
Aley worked at Zip Two, a venture capital firm. From December 1994 to December
1996, Mr. Aley worked at Soft Bank, a venture capital firm. Mr. Aley currently
serves on College411's Board of Directors. Mr. Aley received a BA from the
University of New Hampshire.
Thomas Aley has served as our Executive Vice President for Business
Development since November 22, 1999. Prior to joining our management team, Mr.
Aley was Executive Vice President of Marketing at Wild Web, Inc. from June 1997
through November 1999 where he oversaw business development including
operations, marketing and sales for Wild Web's online and television divisions.
In November 1998, Mr. Aley played an instrumental role in the sale of WildWeb to
GT Interactive Software. From June 1995 to June 1997, Mr. Aley was Director of
Electronic Commerce at Ziff-Davis where he managed the Company's Net Buyer
initiatives and ZDNet service. From January 1994 to June 1995, Mr. Aley was the
Director of Marketing for Eliza Corporation, where he sold speech recognition
technology to cable and television companies in the interactive television
industry. From January 1992 to January 1994, Mr. Aley worked at Ono-Sendai
Corporation. From October 1990 to January 1992, Mr. Aley worked at Shiva
Corporation. Mr. Aley currently serves on Swapit.com, Inc.'s Board of Directors.
Mr. Aley received an MBA in High Technology Marketing and Operations from
Northeastern University.
Barry Uphoff has served as Chairman of our Board of Directors since
July 1999. Mr. Uphoff is also a partner at Diamond Technology Partners, Inc., an
e-business consulting firm. Prior to joining Diamond Technology Partners in July
1994, Mr. Uphoff was a management consultant with Booz, Allen and Hamilton from
June 1991 to July 1994 where he provided strategic and technology consulting
services to a variety of clients. Mr. Uphoff received an MBA from The University
of Chicago.
Douglas B. Spink has served as one of our directors since July 1999 and
was our Chief Technology Officer from July 1999 to October 1999. Prior to July
1999, Mr. Spink was President and founder of Strategicus Partners Inc., a
technology consulting firm and e-commerce business incubator, from March 1999 to
July 1999, where he was responsible for the formation of metacat.com, inc. Prior
to forming Strategicus, Mr. Spink served as the Vice President of Direct
Marketing of G.I. Joe's, a sporting goods retailer based in Portland, Oregon,
from September 1998 through March 1999. Mr. Spink founded and operated
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Timberline Direct, Inc., a direct marketing company, and Athletica.com, Inc., a
sports nutritional portal, from July 1997 until September 1998, when he sold
these companies to G.I. Joe's. From April 1996 to July 1997, Mr. Spink served as
the Western Region Director of Tessera Enterprise Systems. Mr. Spink also served
as the director of Technical Controls and Vice President of Financial and
Analytical Services of Ideon Technology Group, Inc. from December 1994 to April
1996. Mr. Spink also served as a strategic consultant with the Boston Consulting
Group from September 1994 to December 1994, and served as a database marketing
consultant with Leo Burnett from September 1993 to September 1994, where he
consulted in marketing with Fortune 100 companies. Mr. Spink currently serves on
the Board of Directors of both Webmodal and AssetExchange. Mr. Spink received an
MBA from The University of Chicago.
Stephen George has served as a member of our Board of Directors since
July 1999. Mr. George is also the chief executive officer of Epylon.com, Inc., a
business to business San Francisco Bay-area e-commerce company. Prior to forming
Epylon.com, Inc., Mr. George was a Vice President in the San Francisco office of
Goldman Sachs & Co., from January 1996 to May 1999 where he provided a broad
range of financial services to emerging technology companies, entrepreneurs,
management teams and venture capitalists with a specialization in the Internet
industry. From April 1992 through January 1996, Mr. George worked as an
investment banker for Merrill Lynch, Pierce, Fenner & Smith, Inc. Mr. George
currently serves on AsiaCD's Board of Directors. Mr. George received a BA in
Government from Cornell University.
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<PAGE>
Executive Compensation
During the period from March 31, 1992 through September 4, 1998, Marc
A. Kuperman served as our sole officer and director. During this period, Mr.
Kuperman did not receive any compensation in exchange for his services. From
September 4, 1998 through January 6, 1999, Alexis Christodoulou served as our
sole officer and director. During this period, Mr. Christodoulou did not receive
any compensation in exchange for his services.
The table below sets forth information concerning the compensation we
paid to our chief executive officer and each executive officer who was paid
compensation at an annual rate of greater than $100,000 in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
Name and ------------------------- -------------------
Principal Position Salary Bonus Number of Options
------------------ ------ ----- -----------------
<S> <C> <C> <C>
Andrew P. Panzo,
Chairman and Chief Executive Officer $87,500 0 1,020,000
Lee Hansen, President $34,615 0 1,000,000
Thomas Aley,
Executive Vice President $23,077 $50,000 900,000
</TABLE>
The following table sets forth information regarding options granted in
1999 to the executive officers named in our Summary Compensation table above.
Amounts represent the hypothetical gains that could be achieved from the
respective options if exercised at the end of the option term. These gains are
based on assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration date based
upon the grant price.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual
Rates of Stock Price
Appreciation Individual Grants for Option Term
- ------------ -------------------------------------------------------------- --------------------------
% of Total
Options
Granted to
Number of Employees
Options in Fiscal Exercise or
Name Granted Year Base Price Expiration Date 5% 10%
- --------------- --------- ---------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Panzo 1,020,000 19.6% $1.00 July 30, 2004 $7,290,960 $9,459,480
Lee Hansen 1,000,000 19.3% $1.00 October 1, 2004 $4,591,329 $6,056,962
Thomas Aley 900,000 17.3% $1.00 November 22, 2004 $4,836,150 $6,346,800
</TABLE>
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<PAGE>
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in our Summary
Compensation Table above. The value of unexercised in-the-money options is
calculated based on the closing bid price of our common stock on December 31,
1999 of $11.00.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
---------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew P. Panzo 245,000 775,000 $2,450,000 $7,750,000
Lee Hansen 165,833 834,167 $1,658,330 $8,341,670
Thomas Aley 112,500 787,500 $6,890,630 $7,875,000
</TABLE>
The table below sets forth the information concerning the compensation
which Net Value, Inc. paid to its chief executive officer and each executive
officer who was paid compensation greater than $100,000 in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
Name and --------------------------- -------------------
Principal Position Salary Bonus Number of Options
------------------ -------- ------- -----------------
<S> <C> <C> <C>
R. Scott Wills
President and Chief Executive Officer $182,185 $50,000 0
Gregory B. Roberts,
Chief Technology Officer $166,789 $25,000 0
Mark Lapolla,
Vice President Engineering $ 92,847 $10,000 0
Andrew P. Panzo,
President 0 0 60,000
</TABLE>
The following table sets forth information regarding options granted in
1999 to the executive officers named in the Net Value, Inc. Summary Compensation
Table above. Amounts represent the hypothetical gains that could be achieved
from the respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their expiration
date based upon the grant price.
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<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
--------------------------------- ---------------------------
% of Total
Options
Number of Granted to
Options Employees Exercise or
Name Granted in Fiscal Year Base Price Expiration Date 5% 10%
- --------------- --------- -------------- -------------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Panzo 60,000 100.00% $ 1.00 December 4, 2004 $157,980 $215,352
</TABLE>
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in the Net Value, Inc.
Summary Compensation Table above. The value of unexercised in-the-money options
is calculated based on the closing bid price of our common stock on December 31,
1999 of $11.00. The fiscal year end option values for Mr. Panzo's options to
purchase 60,000 shares of Net Value, Inc.'s common stock were calculated
assuming that our merger with Net Value, Inc. was consummated as of December 31,
1999 and that Mr. Panzo's stock options were converted into options to purchase
24,000 shares of our common stock at an exercise price of $2.50 per share.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
---------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew P. Panzo 60,000 0 $204,000 $ 0
</TABLE>
Employment Agreements
In June 1999, Net Value Holdings entered into three year employment
agreements with each of Messrs. Panzo and Spink. In addition to an annual salary
of $150,000, the employment agreements provide for bonus compensation at the
discretion of the Board of Directors. Pursuant to the employment agreements,
each of Messrs. Panzo and Spink are entitled to fringe benefits including
participation in pension, profit sharing and bonus plans, as applicable, and
life insurance, hospitalization, major medical, paid vacation and expense
reimbursement. Mr. Spink's employment agreement also provides for the
forgiveness of a loan in the principal amount of $310,000 which Strategicus
Partners had previously provided to Mr. Spink. Net Value Holdings has agreed not
to take any actions to demand repayment or to collect this loan during the term
of the employment agreement so long as we do not terminate Mr. Spink's
employment for "cause," death or disability (as such terms are defined in the
employment agreement). Net Value Holdings also agreed to forgive Mr. Spink's
obligation to repay:
o 50% of the principal amount plus accrued interest of this loan
if Mr. Spink remains an employee of Net Value Holdings on
January 1, 2000 and the remaining 50% of the principal amount
plus accrued interest of this loan if Mr. Spink remains an
employee of Net Value Holdings on May 28, 2000;
77
<PAGE>
o the entire principal amount plus accrued interest of this loan
if his employment is terminated in breach of the employment
agreement; or
o the entire principal amount plus accrued interest of this loan
in the event of a "Change in Control," as that term is defined
in the employment agreement.
The unvested shares of our capital stock which we issued to Mr. Spink
in connection with our merger with Strategicus Partners vest in equal increments
over a period of 24 months as long as he remains our employee during this
vesting period. If we terminate Mr. Spink's employment agreement due to his
death, disability or for "cause" as such terms are defined in his employment
agreement or if Mr. Spink terminates his employment agreement without any cause,
then he shall forfeit all of his unvested shares of our capital stock.
Mr. Panzo's employment agreement provides that he will be awarded
options to purchase 1,200,000 shares of common stock pursuant to a stock option
plan which Net Value Holdings intends to implement in 2000. Options to purchase
120,000 shares of common stock will vest immediately and the remainder of the
options will vest over a three year period. Mr. Panzo may exercise these options
for five years following their vesting date at an exercise price of $1.00 per
share. In September 1999, Mr. Panzo agreed to reduce his option award pursuant
to his employment agreement. Mr. Panzo is now entitled to receive options to
purchase 1,080,000 shares of our common stock.
On January 21, 2000, we sent Mr. Spink written notice of termination of
his employment agreement effective October 19, 1999, based on Mr. Spink's prior
conduct. Pursuant to the terms of his employment agreement and our merger
agreement with Strategicus Partners, Mr. Spink has forfeited his 1,616,835
unvested shares of our common stock. In addition, we intend to take legal action
to obtain repayment of the unforgiven principal amount of his loan of $310,000
plus all accrued interest thereon. In addition, we intend to take legal action
to obtain repayment of approximately $185,000 in other advances to Mr. Spink.
In September 1999, Net Value Holdings entered into a three year
employment agreement with Lee Hansen pursuant to which Mr. Hansen will serve as
Net Value Holdings' chief operating officer. In addition to an annual salary of
$150,000, Mr. Hansen's employment agreement provides for bonus compensation at
the discretion of the Board of Directors. Pursuant to his employment agreement,
Mr. Hansen is entitled to fringe benefits including participation in pension,
profit sharing and bonus plans, as applicable, and life insurance,
hospitalization, major medical, paid vacation and expense reimbursement. Net
Value Holdings has agreed to award Mr. Hansen options to purchase 900,000 shares
of common stock pursuant to a stock option plan that it intends to implement in
2000. Options to purchase 90,000 shares of common stock will vest immediately
and the remainder of the options will vest over a three year period. As long as
he is employed by Net Value Holdings, Inc., Mr. Hansen may exercise these
options at an exercise price of $1.00 per share until the later of:
o the fifth anniversary of their vesting date; or
o one year after the effective date of a registration statement
registering the resale of the shares of common stock issuable
upon exercise of the options.
If Mr. Hansen's employment is terminated, then the exercise period of
his options may be reduced.
In November 1999, Net Value Holdings entered into a one-year employment
agreement with Thomas Aley pursuant to which Mr. Aley will serve as an Executive
Vice President of Net Value Holdings. In addition to an annual salary of
$150,000, Mr. Aley's employment agreement provides for bonus compensation at the
discretion of the Board of Directors. Pursuant to his employment agreement, Mr.
Aley is entitled to fringe benefits including participation in pension, profit
sharing and bonus plans, as applicable, and life insurance, hospitalization,
major medical, paid vacation and expense reimbursement.
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<PAGE>
Consulting Agreements
We have entered into consulting agreements with each of Messrs. Uphoff,
Darr Aley and George. Pursuant to the terms of the consulting agreements, each
of Messrs. Uphoff, Aley and George will be paid a monthly retainer of $500. The
options to purchase shares of our common stock which we have agreed to issue to
Messrs. Uphoff, Aley and George in exchange for their cancellation of the
unvested shares of our capital stock which we issued to each of them in
connection with our merger with Strategicus Partners will vest in equal
increments over a period of 48 months provided each remains engaged as a
consultant to our company. For a detailed discussion of the issuance and
cancellation of these shares of our common stock, see "TRANSACTIONS WITH
OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPS." We may terminate their
consulting agreements at any time and for any reason. If we terminate either of
Mr. Aley's or Mr. George's consulting agreements, then the respective consultant
shall forfeit all unvested stock options. If we terminate Mr. Uphoff's
consulting agreement, then Mr. Uphoff shall forfeit all options which have not
vested within 60 days of the termination date of his consulting agreement.
Mr. Aley's consulting agreement also provides for the forgiveness of a
loan in the principal amount of $267,000 which we have provided to Mr. Aley. We
will forgive:
o one-third of the principal amount of this loan, plus accrued
interest thereon, if Mr. Aley remains engaged by us on the
first anniversary of the effective date of the merger with
Strategicus Partners;
o one-third of the principal amount of these loans, plus accrued
interest thereon, if Mr. Aley remains engaged by us on the
second anniversary of the effective date of the merger with
Strategicus Partners, Inc.; and
o one-third of the principal amount of this loan, plus accrued
interest thereon, if Mr. Aley remains engaged by us on the
third anniversary of the effective date of the merger with
Strategicus Partners, Inc.
On October 1, 1999 we entered into a consulting agreement with Paul H.
Stephens, a founder and formerly a principal of the investment banking firm of
Robertson Stephens & Company. Under the consulting agreement, Mr. Stephens has
been appointed to our newly created Advisory Board. In this capacity, Mr.
Stephens will review and advise us regarding our business and prospects and the
business and prospects of our affiliate companies. He will also assist us in
completing acquisitions of and making investments in other businesses and will
assist us in obtaining additional rounds of financing. Mr. Stephens led
Robertson Stephens' research and institutional sales effort in the late 1970's
and early 1980's and then transitioned into its new business corporate finance
department where he worked until 1985. He then restructured the firm's venture
capital group, managing it until 1990, when he formed The RS Orphan Fund, LP, a
limited partnership focused on investing globally in undiscovered or neglected
growth companies. In June 1993, Mr. Stephens launched The Contrarian Fund, a
public mutual fund that also has a global focus on developing companies.
In exchange for rendering these consulting services, we sold a total of
676,374 shares of our common stock to The RS Orphan Fund, LP and The RS Orphan
Offshore Fund, LP for a total purchase price of $676,374. These funds also
purchased a total of 1,324 shares of our Series B Preferred Stock and warrants
to purchase 80,976 shares of our common stock in our October 1999 private
placement offering. These funds are managed by Mr. Stephens. No additional
compensation will be paid to Mr. Stephens pursuant to the consulting agreement.
We will reimburse Mr. Stephens for reasonable business expenses which he incurs
in performing his duties pursuant to the consulting agreement. This consulting
agreement has a three year term and either we or Mr. Stephens may terminate this
agreement upon one month's notice to the other party.
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<PAGE>
Board of Directors
Our bylaws currently provide that the authorized number of directors
that serve on our Board of Directors at any time will be a variable number
ranging from one to nine with the exact number to be fixed by the Board of
Directors. Our Board of Directors currently consists of five members. Members of
our Board of Directors hold office for a period of three years. The terms of the
current directors are staggered as follows:
Class of 2002: Messrs. Aley and George
Class of 2001: Mr. Panzo
Class of 2000: Messrs. Spink and Uphoff
Each director holds office until his successor is elected and qualified
at the Annual Meeting of Stockholders held during the year in which his term
expires. Our Board of Directors has an audit committee which consists of Messrs.
Panzo, Uphoff and George. Our Board of Directors has a compensation committee
which consists of Mr. Panzo.
Our directors who are also officers, employees, consultants or
principal stockholders of our company do not currently receive additional
compensation for their services to the board of directors. We intend to award
stock options to our non-employee directors following implementation of a stock
option plan.
Advisory Board
We are currently in the process of establishing an Advisory Board. The
members of our Advisory Board will provide us and our affiliate companies with
strategic guidance in all aspects of our operations. Current members of our
Advisory Board include Paul Stephens, Warren Zide, Tom Cohen, Marc H. Meyer, Tom
Rosenwald and Michela O'Connor Abrams.
Liability and Indemnification of Officers and Directors
Our Amended and Restated Certificate of Incorporation provides that our
directors will not be liable for monetary damages for breach of their fiduciary
duty as directors, other than the liability of a director for:
o for a breach of the director's duty of loyalty to our
corporation or its stockholders;
o for acts or omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of
law;
o for a willful or negligent declaration of an unlawful
dividend, stock purchase or redemption; or
o for transactions from which the director derived an improper
personal benefit.
These provisions are consistent with the applicable provisions of Delaware law.
Our Amended and Restated Certificate of Incorporation requires us to
indemnify all persons whom we may indemnify pursuant to the Delaware General
Corporation Law to the full extent permitted by Delaware Law.
In addition, our bylaws require us to indemnify our officers and
directors and other persons against expenses, judgments, fines and amounts
incurred or paid in settlement in connection with civil or criminal claims,
actions, suits or proceedings against such persons by reason of serving or
having served as officers, directors, or in other capacities, if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to our best interests and, in a criminal action or proceeding, if he
had no reasonable cause to believe that his/her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in
80
<PAGE>
a manner which he or she reasonably believed to be in or not opposed to our best
interests or that he or she had reasonable cause to believe his or her conduct
was unlawful. Indemnification as provided in our bylaws shall be made only as
authorized in a specific case and upon a determination that the person met the
applicable standards of conduct. Insofar as the limitation of, or
indemnification for, liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers, or persons controlling us pursuant to the
foregoing, or otherwise, we have been advised that, in the opinion of the
Securities and Exchange Commission, such limitation or indemnification is
against public policy as expressed in the Securities Act of 1933 and is
therefore, unenforceable.
81
<PAGE>
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK
The following table sets forth information with respect to the
beneficial ownership of our common stock owned, as of February 4, 2000, by:
o the holders of more than 5% of our common stock;
o each of our directors;
o our executive officers; and
o all directors and executive officers of our company as a group.
Prior to this offering, as of February 4, 2000, 14,535,425 shares of
our common stock were issued and outstanding. Assuming the consummation of this
offering, as of February 4, 2000, an aggregate of 14,535,425 shares of our
common stock will remain issued and outstanding. For purposes of computing the
percentages under this table, it is assumed that all options and warrants to
acquire our common stock which have been issued to the directors, executive
officers and the holders of more than 5% of our common stock and are fully
vested or will become fully vested within 60 days of the date of this Prospectus
have been exercised by these individuals and the appropriate number of shares of
our common stock have been issued to these individuals.
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
--------------------------------------------------
Amount and Nature of
Name of Beneficial Owner Position Beneficial Ownership (1) Percentage of Class
------------------------ -------- ------------------------ -------------------
<S> <C> <C> <C>
Sven Behrendt Beneficial 834,644 5.7
10 Gilston Road Owner
London, United Kingdom
Rozel International Holdings, Ltd. Beneficial 2,950,950 20.3
Whitehill House Owner
Newby Road, Industrial Estate
Hazel Grove, Stockport
Cheshire, United Kingdom
SK7 5DA
Andrew P. Panzo (2) Officer, 141,663 1.0
8 Pennsford Lane Director
Media, PA 19063
Douglas Spink Director 431,041 3.0
15455 NW Greenbrier Parkway
Suite 210
Beaverton, OR 97006
Barry Uphoff (2) Director 142,584 1.0
4080 Winberie Avenue
Naperville, IL 60564
Darr Aley (2) Director 142,584 1.0
615 Howard Avenue
Brulingame, CA 94010
Stephen George (2) Director 142,584 1.0
5 Morning Sun Avenue
Mill Valley, CA 94941
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially Owned
---------------------------------------------------
Amount and Nature of
Name of Beneficial Owner Position Beneficial Ownership (1) Percentage of Class
------------------------ -------- ------------------------ -------------------
<S> <C> <C> <C>
Lee Hansen (2) Officer -0- *
1475 Vallejo Street, #3
San Francisco, CA 94109
Thomas Aley (2) Officer -0- *
260 Elsinore Street
Concord, MA 01742
Tonga Partners, L.P. Beneficial 824,963 5.4
c/o Cannell Capital Management Owner
600 California Street
14th Floor
San Francisco, CA 94108
Attn: J. Carlo Cannell
RS Orphan Fund, LP Beneficial 983,458 6.5
388 Market Street Owner
Suite 200
San Francisco, CA 94111
Attn: Paul H. Stephens
All directors and executive
officers as a group 1,000,456 6.9
(7 people)
</TABLE>
- ------------------
* Less than one percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. Unless otherwise noted, we
believe that all persons named in the table have sole voting and
investment power with respect to all shares of our common stock
beneficially owned by them.
(2) Does not include stock options which we have agreed to grant to our
officers and directors as our stock option plan remains subject to
approval by our Board of Directors and our stockholders. We have agreed
to grant the following stock options to our officers and directors upon
adoption and approval of our stock option plan:
Grantee Number of Options
------- -----------------
Darr Aley 687,416
Thomas Aley 900,000
Stephen George 687,416
Lee Hansen 1,000,000
Andrew Panzo 1,020,000
Barry Uphoff 687,416
We anticipate that our board of directors will approve our stock option
plan on or about March 1, 2000.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders,
the number of shares of our common stock beneficially owned by the selling
stockholders as of February 4, 2000 and the number of shares of our common stock
which may be offered for sale pursuant to this prospectus by the selling
stockholders.
The shares listed for Messrs. Behrendt, Jaekel and Markman represent
shares of common stock which are presently owned by each of these individuals.
Other than the shares listed for each of these individuals, the number of shares
set forth in this table represents an estimate of the number of shares of our
common stock to be offered for resale by the selling stockholders. The remaining
selling stockholders own shares of our Series B Preferred Stock and common stock
purchase warrants. We cannot determine the actual number of our shares of common
stock issuable upon conversion of our Series B Preferred Stock. This number will
change based on the unanimous election by the holders of the Series B Preferred
Stock to exercise their one-time right to reset the conversion price to the
greater of the current market price of our common stock or $2.50 per share of
the Series B Preferred Stock. This number of shares of our common stock could be
significantly less or more than these estimates depending on factors which we
cannot predict at this time including, among other factors, the future market
price of our common stock.
The number of shares of our common stock issuable upon conversion of
the Series B Preferred Stock is calculated by dividing the liquidation value of
$1,000 per share of the Series B Preferred Stock by the conversion price per
share. Since there are 4,824 shares of Series B Preferred Stock issued and
outstanding, the total liquidation value of the Series B Preferred Stock is
$4,824,000. Accordingly, if the holders had converted all of the shares of the
Series B Preferred Stock on January 7, 2000, then the conversion price per share
would have been $4.0875 and the Series B Preferred Stock would have been
converted into approximately 1,180,184 shares of our common stock. This table is
prepared assuming:
o that the holders of the Series B Preferred Stock will
convert their shares of our Series B Preferred Stock
at the conversion floor price of $2.50 per share into
1,929,600 shares of our common stock; and
o that the holders of Series B Preferred Stock will
exercise all 295,040 issued and outstanding warrants.
Pursuant to the Registration Rights Agreement which we entered into
with the holders of the Series B Preferred Stock, we are required to register
the resale of 2,750,000 shares of our common stock on behalf of the holders of
the Series B Preferred Stock. However, this obligation was conditioned upon the
holders purchasing a total of 5,000 shares of our Series B Preferred Stock.
Since we only sold 4,824 shares of our common stock, we are only obligated to
register 2,653,200 shares of our common stock on behalf of the holders of the
Series B Preferred Stock and the warrants. We allocated the difference between
this amount and the 2,224,640 shares identified above of 428,560 to the holders
of the Series B Preferred Stock on a pro rata basis.
Each holder may only convert its shares of Series B Preferred Stock to
the extent that the number of shares of our common stock issuable upon
conversion, together with the number of shares of our common stock owned by the
holder and its affiliates would not exceed 4.99% of the issued and outstanding
shares of our common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934. This calculation of shares of common stock
owned by a holder does not include shares of our common stock underlying
unconverted shares of our Series B Preferred Stock owned by the holder.
Accordingly, the number of shares of our common stock set forth in this table
for each selling stockholder may exceed the number of shares of our common stock
that each selling stockholder could own beneficially at any given time through
their ownership of our Series B Preferred Stock.
These shares may be offered from time to time by the selling
stockholders named below. However, the selling stockholders are under no
obligation to sell all or any portion of these shares of our common stock. In
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<PAGE>
addition, the selling stockholders are not obligated to sell such shares of our
common stock immediately under this prospectus. Since the selling stockholders
may sell all or part of the shares of common stock offered in this prospectus,
we cannot estimate the number of shares of our common stock that will be held by
the selling stockholders upon termination of this offering.
None of the selling stockholders is an officer or director of our
company. Other than Paul Stephens, who manages the RS Orphan Fund L.P. and the
RS Orphan Offshore Fund, L.P. and is a member of our Advisory Board, none of the
selling stockholders has had any material relationship with our company, our
affiliate companies or our predecessors within the last three years.
<TABLE>
<CAPTION>
Number of
Shares of Percentage Number of Shares of
Common Stock Before Common Stock After Percentage After
Name Before Offering Offering(1) Offering Offering
- ---- --------------- ----------- ------------------- ----------------
<S> <C> <C> <C> <C>
Sven Behrendt (2)
10 Gilston Road
London, U.K. SW1695R 834,644 5.7 27,000 *
Juergen Jaekel (3)
51 Valley Road
Athenton, CA 94027 229,533 1.6 27,000 *
Gary E. Markman (4)
424 Charles Lane
Wynnewood, PA 19096 59,183 * -0- *
Tonga Partners, L.P. (5)
c/o Cannell Capital Management
600 California Street
14th Floor
San Francisco, CA 94108
Attn: J. Carlo Cannell 824,963 5.4 -0- *
Yeoman Ventures, Ltd. (6)
P.O. Box 146
Road Town, Tortola
British Virgin Islands
Attn: Giora Lavie 137,449 * -0- *
Lightline Limited (7)
P.O. Box 146
Road Town, Tortola
British Virgin Islands
Attn: Giora Lavie 137,449 * -0- *
Little Wing LP (8)
c/o Quilcap Corp.
375 Park Avenue
Suite 1404
New York, NY 10152
Attn: Parker Quillen 247,568 1.7 -0- *
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Number of
Shares of Percentage Number of Shares of
Common Stock Before Common Stock After Percentage After
Name Before Offering Offering(1) Offering Offering
- ---- --------------- ----------- ------------------- ----------------
<S> <C> <C> <C> <C>
Little Wing Too LP (9)
c/o Quilcap Corp.
375 Park Avenue
Suite 1404
New York, NY 10152
Attn: Parker Quillen 82,523 * -0- *
Tradewinds Fund, LLC (10)
c/o Quilcap Corp.
375 Park Avenue
Suite 1404
New York, NY 10152
Attn: Parker Quillen 82,523 * -0- *
JDN Partners, L.P. (11)
2420 Camino Ramon, Suite 222
San Raman, CA 94583
Attn: John Nguyen 371,220 2.6 -0- *
Bayhill Fund, Ltd. (12)
2420 Camino Ramon, Suite 222
San Raman, CA 94583
Attn: John Nguyen 41,129 * -0- *
RS Orphan Fund, L.P. (13)
388 Market Street
Suite 200
San Francisco, CA 94111
Attn: Paul H. Stephens 983,458 6.5 473,462 2.8
RS Orphan Offshore Fund,
L.P. (14)
CITCO Fund Services
Corporate Center
West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
British West Indies
Attn: Paul H. Stephens 421,292 2.9 202,912 1.2
---------- --- ------- ---
TOTAL 4,452,934 716,374
========= =======
</TABLE>
- ----------
* Less than one percent.
(1) Calculated in accordance with Rule 13d-3(d)(i) of the Securities Exchange
Act of 1934.
(2) Sven Behrendt has sole voting and investment control over these securities.
(3) Juergen Jaekel has sole voting and investment control over these
securities.
(4) Gary Markman has sole voting and investment control over these securities.
(5) J. Carlo Cannell has sole voting and investment control over these
securities.
(6) Giora Lavie has sole voting and investment control over these securities.
(7) Giora Lavie has sole voting and investment control over these securities.
(8) Parker Quillen has sole voting and investment control over these
securities.
(9) Parker Quillen has sole voting and investment control over these
securities.
(10) Parker Quillen has sole voting and investment control over these
securities.
(11) John Nguyen has sole voting and investment control over these securities.
(12) John Nguyen has sole voting and investment control over these securities.
(13) Paul H. Stephens has sole voting and investment control over these
securities.
(14) Paul H. Stephens has sole voting and investment control over these
securities.
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<PAGE>
PLAN OF DISTRIBUTION
As of the date of this prospectus, the selling stockholders have not
determined how they will distribute the shares of our common stock which they or
their respective pledgees, donees, transferees or other successors in interest
are offering for resale . Accordingly, such shares may be sold from time to time
in one or more of the following transactions:
o block transactions;
o transactions on the over the counter electronic
bulletin board or on such other market on which our
common stock may from time to time be trading;
o privately negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination of these transactions
The sale price to the public in these transactions may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o negotiated prices; or
o such other price as the selling stockholders
determine from time to time.
In the event that we permit or cause this registration statement to
lapse, the selling stockholders may sell shares of our common stock pursuant to
Rule 144 promulgated under the Securities Act of 1933. The selling stockholders
shall have the sole and absolute discretion not to accept any purchase offer or
make any sale of these shares of our common stock if they deem the purchase
price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledges, donees,
transferees or other successors in interest, may also sell these shares of our
common stock directly to market makers acting as principals and/or
broker-dealers acting as agents for themselves or their customers. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of these shares
of our common stock for whom such broker-dealers may act as agents or to whom
they sell as principal or both. As to a particular broker-dealer, this
compensation might be in excess of customary commissions. Market makers and
block purchasers purchasing these shares of our common stock will do so for
their own account and at their own risk. It is possible that a selling
stockholder will attempt to sell shares of our common stock in block
transactions to market makers or other purchasers at a price per share which may
be below the prevailing market price of our common stock. There can be no
assurance that all or any of these shares of our common stock offered hereby
will be issued to, or sold by, the selling stockholders. Upon effecting the sale
of any of these shares of our common stock offered pursuant to this registration
statement, the selling stockholders and any brokers, dealers or agents, hereby,
may be deemed "underwriters" as that term is defined under the Securities Act of
1933 or the Securities Exchange Act of 1934, or the rules and regulations
thereunder.
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<PAGE>
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a selling
stockholder enters into an agreement or agreements with an underwriter, then the
relevant details will be set forth in a supplement or revisions to this
prospectus.
The selling stockholders and any other persons participating in the
sale or distribution of these shares of our common stock will be subject to
applicable provisions of the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder including, without limitation, Regulation M.
These provisions may restrict activities of, and limit the timing of purchases
and sales of any of these shares of our common stock by, the selling
stockholders. Furthermore, pursuant to Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously engaging in market
making and other activities with respect to such securities for a specified
period of time prior to the commencement of such distributions, subject to
specified exceptions or exemptions. These regulations may affect the
marketability of these shares of our common stock.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the selling stockholders or
their respective pledges, donees, transferees or other successors in interest,
may be required to make in respect thereof. We have agreed to indemnify the
selling stockholders holding our Series B Convertible Preferred Stock and
related Warrants against losses incurred by those selling stockholders as a
result of any inaccuracy in or breach of the representations, warranties or
covenants which we made to them in the stock purchase agreement relating to the
sale of our Series B Convertible Preferred Stock and related warrants. We have
also agreed in the related registration rights agreement to indemnify those
selling stockholders against losses incurred as a result of any untrue or
alleged untrue statement or omission of a material fact from this prospectus,
except any statements or omissions based solely upon information provided to us
by the selling stockholders or regarding the plan of distribution. To the extent
that a claim for indemnification under the registration rights agreement is
unavailable to those selling stockholders due to the failure or refusal of a
governmental authority to enforce it, we have agreed to contribute to the amount
paid or payable by those selling stockholders as a result of these losses. We
have agreed to make these contributions in an amount that is proportionate to
our relative fault with regard to any losses. Insofar as we are permitted to
indemnify the selling stockholders for liabilities arising under the Securities
Act of 1933, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities act of 1933 and is unenforceable.
We will pay substantially all of the expenses incident to the
registration and offering of our common stock, other than commissions or
discounts of underwriters, broker-dealers or agents.
TRANSACTIONS WITH OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPS
Share Exchange Transactions with Rozel International Holdings, Ltd.
In October 1998, we completed a share exchange transaction with Rozel
International Holdings, Ltd. in which we issued 1,000,000 shares of our common
stock valued at $4,630,000 and 500,000 shares of our Series A Preferred Stock
valued at $40,000 in exchange for 178,700 shares of BrightStreet's Series A
Preferred Stock. This represented 100% of BrightStreet's issued and outstanding
shares of Series A Preferred Stock. In October 1998, we also completed a share
exchange transaction with Rozel International Holdings, Ltd. in which we issued
1,145,594 shares of our common stock valued at $4,628,200 and 1,145,594 shares
of our Series A Preferred Stock valued at $91,648 in exchange for 4,582,377
shares of BrightStreet's common stock. Rozel International Holdings, Ltd. is a
beneficial owner of approximately 22.5% of our common stock.
Loan and Merger Agreements with Strategicus Partners, Inc.
On May 28, 1999, we entered into a loan agreement with Strategicus
Partners Inc. Pursuant to this loan agreement, we agreed to lend Strategicus
Partners up to $2,000,000 on a revolving credit basis with all advances made
under the loan agreement due on July 12, 1999. We subsequently amended the due
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date for the repayment of these loans to July 30, 1999. Strategicus Partners was
permitted to use the proceeds of these loans to make loans to two of its
stockholders and to make investments in AsiaCD, Inc. and College 411.com, Inc.
The obligation of Strategicus Partners to repay these loans was evidenced by a
promissory note in the principal amount of up to $2,000,000. Strategicus
Partners secured its obligation to repay these loans by granting us a security
interest in all of its assets including any of its investments in AsiaCD, Inc.
and College 411.com, Inc. We advanced an aggregate amount of $1,555,000 to
Strategicus Partners pursuant to this loan agreement. Strategicus Partners used
approximately $310,000 of these funds to make a loan to Douglas Spink and used
the remainder of these funds to make investments in AsiaCD, Inc. and College
411.com, Inc. and to pay the professional fees related to the completion of our
merger with Strategicus Partners. Upon the completion of our merger with
Strategicus Partners, we agreed to forgive the loan to Mr. Spink if he remains
an employee of Net Value Holdings on May 28, 2000. For a more detailed
discussion of this arrangement, see "MANAGEMENT-Employment Agreements."
On June 21, 1999, we entered into a merger agreement with Strategicus
Partners and Douglas Spink, the founder of Strategicus Partners, in which we
agreed to merge with Strategicus Partners. We completed our merger with
Strategicus Partners on July 30, 1999. Subject to vesting provisions described
in the merger agreement, we issued the following shares of our capital stock to
the stockholders of Strategicus Partners:
<TABLE>
<CAPTION>
Vested Shares of Unvested Shares of
Vested Shares of Unvested Shares of Series A Preferred Series A Preferred
Common Stock Common Stock Stock Stock
---------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Douglas Spink 239,847 1,641,310 73,678 504,187
Barry Uphoff 120,394 1,760,763 36,983 540,882
Darr Aley 120,394 1,760,763 36,983 540,882
Stephen George 120,394 1,760,763 36,983 540,882
------- --------- -------- ----------
TOTAL 601,029 6,923,599 184,627 2,126,833
TOTAL VALUE $3,642,237 $21,458,719 $142,163 $1,637,661
========== =========== ======== ==========
</TABLE>
The unvested shares of our capital stock listed above vest ratably on a
monthly basis over periods ranging from 24 months to 48 months based on the
individual stockholder's continued employment or engagement as a consultant with
Net Value Holdings. For a more detailed discussion of this arrangement, see
"Management -Employment Agreements, Consulting Agreements." These shares, upon
full vesting, were intended to represent approximately 40% of our capital stock
as of June 21, 1999, assuming we had 18,811,569 shares of common stock
calculated on a fully-diluted basis and 5,778,699 shares of Series A Preferred
Stock. In exchange for this issuance of our capital stock, we acquired all of
the issued and outstanding capital stock of Strategicus Partners. Our primary
purpose for completing the merger with Strategicus Partners was to acquire
rights to the investments made by Strategicus Partners in metacat.com, inc.,
AsiaCD, Inc. and College 411.com, Inc. and to retain the services of the four
stockholders of Strategicus Partners as employees and/or consultants of our
company.
Forgiveness of Loans to Members of Our Management Team
In May 1999, Strategicus Partners made a loan to Mr. Spink in the
principal amount of $310,000. This amount was extended to Mr. Spink to reimburse
him for expenses which he incurred in connection with the start-up of
metacat.com, Inc. This transaction was structured as a loan to induce Mr. Spink
to remain our employee for at least one year. The loan accrues interest at a
simple rate of 9% per annum. The repayment of the principal amount of this loan
plus all accrued interest was originally due on July 12, 1999 but was
subsequently extended to July 30, 1999. Upon the completion of our merger with
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Strategicus Partners, we entered into an employment agreement with Mr. Spink in
which we agreed not to take any actions to demand repayment or to collect this
loan during the term of the employment agreement so long as we do not terminate
Mr. Spink's employment for "cause," death or disability (as such terms are
defined in the employment agreement) and we agreed to forgive the principal
amount plus all accrued interest related to this loan if Mr. Spink remained an
employee of our company on the first anniversary of his employment. For a more
detailed discussion of this arrangement, see "MANAGEMENT-Employment Agreements."
On January 21, 2000, we sent Mr. Spink written notice terminating his employment
agreement, effective October 19, 1999. Accordingly, we intend to take legal
action to obtain repayment of the principal amount of this loan plus all accrued
interest thereon. In addition, in July 1999, Strategicus made an advance to Mr.
Spink in the principal amount of approximately $185,000. We intend to take legal
action to obtain repayment of this advance.
In June 1999, we extended a loan to Mr. Darr Aley in the principal
amount of $267,000. This amount was extended to Mr. Aley as an inducement for
him to leave his prior employment. This transaction was structured as a loan to
induce Mr. Aley to remain our consultant for the duration of his engagement. The
repayment of the principal amount of this loan plus all accrued interest was
originally due on July 12, 1999 but was subsequently extended to July 30, 1999.
Upon the completion of our merger with Strategicus Partners, we entered into a
consulting agreement with Mr. Aley in which we agreed not to take any actions to
demand repayment or to collect this loan during the term of the consulting
agreement. We also agreed to forgive Mr. Aley 's obligation to repay a portion
of this loan if he remains engaged as a consultant to our corporation on each of
the first three anniversaries of the date of his consulting agreement. For a
more detailed discussion of this arrangement, see "MANAGEMENT-Consulting
Agreements."
Series A Preferred Stock Exchange
In September 1999, we exchanged 2,898,788 shares of our common stock
for all 4,831,312 issued and outstanding shares of our Series A Preferred Stock.
For a detailed discussion of this transaction, see "DESCRIPTION OF CAPITAL
STOCK-Preferred Stock." Messrs. Spink, Uphoff, Aley and George participated in
this offering and received a total of 1,386,876 shares of our common stock
valued at $6,012,738 in exchange for the cancellation of all of their 2,311,460
shares of our Series A Preferred Stock.
Cancellation of Unvested Shares of Common Stock and Agreement to Issue Options
to Purchase Shares of Our Common Stock
On August 31, 1999, we entered into an agreement with each of Messrs.
Uphoff, Darr Aley and George to immediately cancel all of their 6,255,876
unvested shares of our common stock valued at $37,927,669. In addition, for each
share of common stock that they agreed to cancel, we agreed to issue Messrs.
Uphoff, Darr Aley and George an option to purchase one share of our common stock
pursuant to a stock option plan which we intend to implement in 1999.
Accordingly, we issued options to purchase a total of 6,255,876 shares of our
common stock valued at $11,889,024 to Messrs. Uphoff, Aley and George. Each of
these options will have an exercise price of $1.00 per share and will be subject
to the same vesting provisions that applied to the unvested shares of common
stock as described in our merger agreement with Strategicus Partners. On
September 13, 1999, each of Messrs. Uphoff, Aley, George and Panzo agreed to
forfeit their rights to receive 180,000 stock options valued at $374,400. On
September 13, 1999, Mr. Spink agreed to allow Net Value Holdings to cancel
180,000 of his unvested shares of common stock valued at $1,148,727. These
members of the management team entered into these agreements to allow us to
issue 900,000 stock options to Mr. Hansen. In September 1999, we entered into an
employment agreement with Mr. Hansen pursuant to which we agreed to issue
900,000 stock options to Mr. Hansen valued at $3,204,000. For a detailed
discussion of the terms of Mr. Hansen's employment agreement, see
"MANAGEMENT--Employment Agreements."
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Personal Investments of Members of Our Management Team in Our Affiliate
Companies
Members of our management team have made personal investments in some
of our affiliate companies. Through January 7, 2000, members of our management
team own the following equity interests in our affiliate companies:
<TABLE>
<CAPTION>
Affiliate company Equity Interest
----------------- ---------------
<S> <C> <C>
Andrew P. Panzo AsiaCD 12,000 shares of common stock
Barry Uphoff AsiaCD 12,000 shares of common stock
Darr Aley AsiaCD 12,000 shares of common stock
Darr Aley College 411 50,000 stock options
Stephen George AsiaCD 12,000 shares of common stock
Stephen George College 411 37,500 stock options
Douglas Spink Webmodal 400 shares of common stock
Douglas Spink Asia CD 12,000 shares of common stock
Thomas Aley Swapit.com 258,411 shares of common stock
</TABLE>
San Francisco Office Space
We share office space in San Francisco, California with a corporation
owned by Mr. George, at no expense.
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DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 50,000,000 shares of common stock, par value
$.001 per share, and 10,000,000 shares of preferred stock, par value $.001 per
share.
The following discussion, which describes all material terms of our
capital stock, is qualified in its entirety by reference to our certificate of
incorporation and bylaws, copies of which are filed as exhibits to this
registration statement.
Common Stock
The holders of our common stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. There is no
cumulative voting with respect to the election of directors. Accordingly,
holders of a majority of the outstanding shares of our common stock can elect
all members of our Board of Directors, and holders of the remaining shares by
themselves cannot elect any member of the Board of Directors.
The holders of our common stock are entitled to receive dividends in
the discretion of our Board of Directors. We may only pay dividends out of funds
legally available for this purpose. In the event of the liquidation, dissolution
or winding up of Net Value Holdings, Inc., the holders of our common stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over our common stock. Holders of
shares of our common stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemptive provisions applicable to our
common stock. All of the outstanding shares of our common stock are fully paid
and nonassessable.
Preferred Stock
Our certificate of incorporation provides that our Board of Directors
may establish one or more classes or series of preferred stock having such
number of shares and relative voting rights, designation, dividend rates,
liquidation and other rights, preferences and limitations as may be fixed by
them without further stockholder approval. The holders of our preferred stock
may be entitled to preferences over common stockholders with respect to
dividends, liquidation, dissolution or our winding up in such amounts are
established by our Board of Directors' resolutions issuing such shares.
In 1998 and 1999, we issued of 4,831,312 shares of our Series A
Preferred Stock to accredited investors. Our Series A Preferred Stock was
convertible into up to one share of our common stock upon our achievement of
specified performance objectives. After discussions with potential investment
bankers, underwriters and other sources of capital financing, we determined that
the conversion features of our Series A Preferred Stock were too complicated and
created uncertainty regarding the number of shares of our common stock which may
have been issuable into the market at any given time upon our satisfaction of
the performance objectives. Therefore, pursuant to a private offering, we issued
2,898,788 shares of our common stock in exchange for all 4,831,312 issued and
outstanding shares of our Series A Preferred Stock. Pursuant to this offering,
the holders of our Series A Preferred Stock forfeited all ownership rights to
the Series A Preferred Stock and any shares of our common stock issuable upon
conversion of the Series A Preferred Stock and released and discharged us and
each of our present and future officers, directors and employees from all claims
or rights related to the Series A Preferred Stock. As there are no longer any
issued and outstanding shares in this series, we plan to cancel the Series A
Preferred Stock.
In September 1999, we designated our Series B Preferred Stock. In
September and October 1999, we issued 4,824 shares of this series to ten
accredited investors in connection with a private placement offering in which we
raised gross proceeds of $4,824,000.
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The shares of Series B Preferred Stock, valued at $4,824,000, are
convertible into shares of our common stock at a conversion price of $4.0875 per
share. The number of shares of our common stock issuable upon conversion of the
Series B Preferred Stock is calculated by dividing the liquidation value of
$1,000 per share of the Series B Preferred Stock by the conversion price per
share. Since there are 4,824 shares of Series B Preferred Stock issued and
outstanding, the total liquidation value of the Series B Preferred Stock is
$4,824,000. Accordingly, if the holders had converted all of the shares of the
Series B Preferred Stock on January 7, 2000, then the conversion price per share
would have been $4.0875 and the Series B Preferred Stock would have been
converted into approximately 1,180,184 shares of our common stock. The holders
of the Series B Preferred Stock may elect to convert the Series B Preferred
Stock into shares of our common stock at any time after the earlier of:
o March 15, 2000; and
o 20 days after the effective date of this registration
statement.
During the period from September 17, 1999 until the first anniversary
of the effective date of this registration statement, the holders of the Series
B Preferred Stock may elect to reset the conversion price to a price per share
equal to the greater of:
o the closing bid price of our common stock on the two trading
days immediately preceding the date that we receive notice of
the reset election from all of the holders of the Series B
Preferred Stock, as a group; and
o $2.50.
The holders of the Series B Preferred Stock may only elect to reset the
conversion price once and they may not reset the conversion price below $2.50
per share. The Series B Preferred Stock accrues dividends at the rate of 5% per
annum of the liquidation value of $1,000 per share. However, the dividend rate
increases to 10% per annum whenever the closing bid price of our common stock is
below 2.50 per share for ten consecutive trading days. The dividend rate of the
Series B Preferred Stock is reset to 5% per annum only after the closing bid
price of our common stock is above $2.50 per share for five consecutive trading
days.
If the holders elected to convert all of the Series B Preferred Stock
on January 7, 2000, then the Series B Preferred Stock would have been converted
into approximately 1,180,184 shares of our common stock. However, this number of
shares will be significantly greater if the conversion price is reset to $2.50
per share. Purchasers of our common stock could therefore experience substantial
dilution of their investment upon conversion of the Series B Preferred Stock.
The shares of Series B Preferred Stock are not registered and may only be resold
if registered under the Securities Act of 1933 or sold in accordance with an
applicable exemption from registration, such as Rule 144 promulgated under the
Securities Act of 1933. We are registering the shares of our common stock which
are issuable upon conversion of the Series B Preferred Stock in this
registration statement.
We may redeem all or a portion of the Series B Preferred Stock at a
price per share equal to 120% of the liquidation preference amount, plus any
accrued and unpaid dividends on the Series B Preferred Stock.
The holders of the Series B Stock have the option of requiring us to
redeem their shares of Series B Preferred Stock upon the occurrence of any of
the following events:
o any consolidation, merger or other business combination which
we consummate with any other party pursuant to which the
holders of a majority of the voting power of our capital stock
immediately prior to such transaction do not hold a majority
of the voting power of the capital stock of the surviving
entity subsequent to such transaction;
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o the sale or transfer of all or substantially all of our
assets;
o the consummation of a purchase, tender or exchange offer made
to the holders of more than 30% of the outstanding shares of
common stock;
o the failure of this registration statement to be declared
effective by the Securities and Exchange Commission on or
prior to February 14, 2000;
o the lapse prior to September 17, 2001, of the effectiveness of
this registration statement or its unavailability for use by
the holders of the Series B Preferred Stock for a period of at
least ten consecutive trading days;
o the suspension from listing or the failure of the common stock
to be listed on either the NASDAQ Over-The Counter Bulletin
Board Trading System, the NASDAQ SmallCap Market, The NASDAQ
National Market, The New York Stock Exchange or the American
Stock Exchange for a period of five consecutive days;
o our notice to any holder of the Series B Preferred Stock of
our inability to comply or our intention not to comply with
proper requests for conversions of any Series B Preferred
Stock into shares of our common stock;
o our failure to comply with any conversion notice tendered by a
holder of the Series B Preferred Stock within ten business
days after we receive it and the stock certificates
representing the shares of Series B Preferred Stock being
converted; and
o our breach of any representation, warranty, covenant, or other
term or condition contained in any of the documents related to
our sale and issuance of the Series B Preferred Stock, except
for a breach of covenant which is cured within ten days.
The holders of the Series B Preferred Stock may require us to redeem
all or a portion of their shares of Series B Preferred Stock at a price per
share of Series B Preferred Stock equal to the greater of:
o $1,250; or
o the product of the conversion price per share of the Series B
Preferred Stock and the closing bid price of our common stock
on the trading date immediately preceding any of the
aforementioned events.
Registration Rights
Subsequent to this offering, holders of 406,138 shares of our common
stock are entitled to registration rights . These stockholders have "piggy-back"
registration rights in any offering of our securities pursuant to a registration
statement on Forms S-1, S-2 or S-3 filed subsequent to the consummation of our
merger with Net Value, Inc. We will bear the expenses incurred in connection
with filing such registration statement.
The merger agreement with Strategicus Partners and Douglas Spink which
grants these registration rights, defines a change of control as the occurrence
of any one of the following:
o any "person" as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, other than one
of our subsidiaries or affiliates becomes a "beneficial
owner," as such term is used in Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, of
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50% or more of any class of issued and outstanding capital
stock which ownership interest constitutes 50% or more of all
issued and outstanding voting shares;
o the majority of the members of our Board of Directors consists
of individuals other than members of our Board of Directors on
July 30, 1999, provided that persons elected to the Board of
Directors whose election or nomination was supported by
one-half of the directors at July 30, 1999 shall be considered
a member of the Board of Directors as of July 30, 1999; and
o any event which we would be required to report pursuant to
Items 1 or 2 of Form 8-K under the Securities Exchange Act of
1934, whether or not we are actually required to file a Form
8-K in relation to this transaction or event.
Upon a change of control Messrs. Panzo, Spink, Uphoff, Aley and George
may demand registration of the vested shares of common stock owned by each in a
public offering of such securities under the Securities Act of 1933. We are
required to use our best efforts to effect such registration. We will bear the
expenses incurred in connection with such registrations.
We are obligated to register 807,644 shares of our common stock owned
by Sven Behrendt and 202,533 shares of our common stock owned by Juergen Jaekel.
We agreed to file a registration statement with the Securities and Exchange
commission registering the resale of these shares of common stock on or before
August 15,1999. We did not file this registration statement until October 7,
1999. As a result of our breach of this agreement, we issued 27,000 shares of
our common stock to each of Messrs. Behrendt and Jaekel. These shares represent
the agreed upon penalty of 10,000 shares for breaching the agreement and 10,000
shares per month until the registration statement was filed on October 7, 1999,
calculated on a daily basis.
Subsequent to this offering, two stockholders holding an aggregate of
676,374 shares of our common stock are entitled to registration rights. These
stockholders have "piggy-back" registration rights in any offering of our
securities pursuant to a registration statement on Forms S-1, S-2 or S-3 filed
subsequent to the effective date of this registration statement. We will bear
the expenses incurred in connection with filing such registration statement.
Common Stock Purchase Warrants
As of the date of this prospectus, we have issued 1,503,058 common
stock purchase warrants.
On March 1, 1999, in connection with an issuance of convertible
promissory notes in the aggregate principal amount of $900,000, we issued
warrants to purchase 90,000 shares of our common stock at an exercise price of
$2.50 per share and warrants to purchase 90,000 shares of our common stock at an
exercise price of $5.00 per share. These warrants are exercisable at any time
prior to February 28, 2002.
In May 1999, we issued convertible promissory notes in the aggregate
principal amount of $4,270,125 to a group of accredited investors. The
convertible promissory notes were issued in satisfaction of promissory notes
issued by BrightStreet. Each participant in this offering received a convertible
promissory note with a principal amount equal to the principal amount of his
BrightStreet promissory note, plus all accrued interest thereon as of December
31, 1998, in exchange for the cancellation of his BrightStreet promissory note
and their agreement to release us, BrightStreet and the present and future
officers and directors from any claims related to his promissory note. The
noteholders may convert these convertible promissory notes at any time at a
conversion rate of $2.00 per share. We may require the noteholders to convert
the entire principal amount of their convertible promissory notes, plus all
accrued interest thereon, if the market price of our common stock is $5.00 per
share for a period of twenty consecutive trading days and we have registered the
resale of all shares of our common stock issuable to the noteholders upon such
mandatory conversion of the convertible promissory notes with the Securities and
Exchange Commission. We are obligated to issue a warrant to purchase one-half of
one share of our common stock for each share of our common stock issued to the
noteholders upon
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any conversion of the convertible promissory notes. These warrants are
exercisable for a period of three years after their grant date at an exercise
price of $6.00 per share. As of the date of this prospectus, we have issued
warrants to purchase 917,941 shares of our common stock to holders who have
converted their promissory notes.
In connection with the private offering which we completed in September
1999, we issued warrants to purchase 110,077 shares of our common stock at an
exercise price of $5.00 per share. These warrants are exercisable for a period
of three years from the date of grant.
As of January 31, 2000, we had issued and outstanding callable and
non-callable A, B, C and D warrants to purchase, in the aggregate, 295,040
shares of our common stock. We issued these warrants to the purchasers of the
Series B Preferred Stock and they are exercisable until October 1, 2004. Each
type of warrant is exercisable for, in the aggregate, the number of shares and
at the exercise price set forth below:
Shares Exercise Price
------ --------------
Non-callable A Warrants 36,880 $4.49625
Callable A Warrants 36,880 $4.49625
Non-callable B Warrants 36,880 $4.905
Callable B Warrants 36,880 $4.905
Non-callable C Warrants 36,880 $5.31375
Callable C Warrants 36,880 $5.31375
Non-callable D Warrants 36,880 $5.7225
Callable D Warrants 36,880 $5.7225
The exercise price of each of these warrants may be adjusted upon the
occurrence of:
o a recapitalization, reorganization, reclassification, merger
or sale of substantially all assets;
o a subdivision or combination of shares of our common stock;
o a stock dividend;
o our issuance of additional shares of our common stock at a
price per share less than the closing bid price per share on
the date of issuance;
o our issuance of common stock equivalents pursuant to which
shares of our common stock are issuable at a price per share
that is less than the closing bid price per share on the date
of issuance; and
o any purchase or redemption of shares of our common stock by us
at a price per share which is greater than the exercise price
of the warrants.
However, the following transactions will not trigger an adjustment to the
exercise price:
o any issuance of our securities other than for cash, as
consideration for a merger, consolidation or sale of assets,
in connection with any strategic partnership or joint venture
or in exchange for assets, stock or joint venture interests;
o our grant of any securities pursuant to an employee benefit
plan, stock option plan, restricted stock plan or stock
purchase plan for the benefit of our employees or directors;
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o any transactions regarding the sale or exchange of our
securities at a price per share greater than the price of the
Series B Preferred Stock;
o any securities issued upon conversion of the Series B
Preferred Stock or exercise of these warrants; and
o any securities issued in connection with transactions listed
on Schedule 2.1(c) or Schedule 2.1(z) of the Series B
Convertible Preferred Stock Purchase Agreement dated as of
September 17, 1999, a copy of which is included at Exhibit
10.19 hereto.
If the closing bid price of our common stock is at least 150% of the
relevant exercise price for 20 consecutive trading days and this registration
statement has been effective for 20 days, then we may terminate the callable
warrants by delivering 20 days written notice to the holders. The shares of our
common stock issuable upon exercise of these warrants are being registered
pursuant to this registration statement.
Transfer Agent and Registrar
The transfer agent for our common stock is StockTrans, Inc. The
transfer agent's address is 7 East Lancaster Avenue, Ardmore, Pennsylvania
19003, and its telephone number is (610) 649-7300.
SHARES ELIGIBLE FOR FUTURE SALE
14,535,425 shares of our common stock were outstanding as of February
4, 2000.
Under the terms of the subscription agreements of previous private
placements of our securities, 8,836,635 outstanding shares of our common stock
may not be sold or otherwise transferred, without our prior written consent or
the prior written consent of a placement agent whom we designate, except for
transfers to immediate family members or trusts for estate planning purposes,
until the date set forth below:
Number of Shares Restrictions in
Subject to Restriction Effect Through
- ---------------------- ---------------
4,531,764 First anniversary of the later of (i) the
date the shares are eligible for sale
under Rule 144 or (ii) the effective date
of a registration statement registering
the resale of the shares.
4,304,871 First anniversary of effective date of our
merger with BrightStreet
Holders of 5,663,865 shares of our common stock have registration
rights with respect to the registration of the resale of such shares under the
Securities Act of 1933. Upon the effectiveness of this registration statement,
which we are filing on behalf of thirteen such stockholders, 3,722,560 of these
shares will be freely tradeable under the Securities Act of 1933.
Upon completion of this offering, 10,585,425 "restricted shares" as
defined in Rule 144 will be outstanding. None of these shares will be eligible
for sale in the public market as of the effective date of this registration
statement.
In general, under Rule 144 as currently in effect, beginning on the
later of 90 days after the effective date of this registration statement or the
date on which the transfer restrictions described above have expired, a person
(or persons whose shares are aggregated) who owns shares that were purchased
from us (or any affiliate) at least one year
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previously, including a person who may be deemed our affiliate, is entitled to
sell within any three-month period, a number of shares that does not exceed the
greater of:
o 1% of the then outstanding shares of our common stock; or
o the average weekly trading volume of our common stock during
the four calendar weeks preceding the date on which notice of
the sale is filed with the Securities and Exchange commission.
Sales under Rule 144 are also subject to manner of sale provisions,
notice requirements and the availability of current public information about us.
Any person (or persons whose shares are aggregated) who is not deemed to have
been our affiliate at any time during the 90 days preceding a sale, and who owns
shares within the definition of "restricted securities" under Rule 144 under the
Securities Act that were purchased from us (or any affiliate) at least two years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
In addition to the outstanding shares of our common stock described
above, as of the date of this prospectus, we have 5,192,248 shares of common
stock reserved for issuance upon the exercise of outstanding options, 2,063,705
shares of our common stock reserved for issuance upon the conversion of issued
and outstanding convertible debentures in the aggregate principal amount of
$4,797,010 and 1,471,736 shares of common stock reserved for issuance upon the
exercise of common stock purchase warrants. All of these securities and the
shares of our common stock underlying each of these securities are restricted
securities. The transfer of these restricted securities is subject to the
requirements of Rule 144, as discussed above.
Future sales of restricted common stock under Rule 144 or otherwise or
of the shares which we are registering on this registration statement could
negatively impact the market price of our common stock. For a detailed
discussion of this risk, see "RISK FACTORS--RISKS RELATED TO THIS
OFFERING--Shares Eligible For Future Sale By Current Holders Of Our Securities
May Decrease The Price Of Common Stock." We are unable to estimate the number of
shares that may be sold in the future by our existing stockholders or the
effect, if any, that sales of shares by such stockholders will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock by existing stockholders could adversely
affect prevailing market prices.
PRINCIPAL UNITED STATES TAX CONSEQUENCES TO NONU.S. HOLDERS
For U.S. federal income tax purposes, a resident alien individual is
treated like a citizen: he or she is subject to U.S. tax on all of his or her
income, regardless of the source. A nonresident alien individual, on the other
hand, is subject to a special tax regime that is fundamentally different from
that which applies to citizens and resident aliens. You are a non-resident alien
if:
o you are not a lawful permanent resident of the U.S. at anytime
during the calendar year;
o you do not make an election to be treated as a resident alien;
and
o you are not physically present in the U.S. for 183 days or
more during the calendar year or the sum of your days of
physical presence in the U.S. for the current calendar year
plus 1/3 the number of days in the first preceding calendar
year plus 1/6 the number of days in the second preceding
calendar year equals less than 183 days provided; however,
that you will not be treated as a resident pursuant to this
lookback rule if (i) you are not physically present in the
U.S. for at least 31 days during the calendar year; or (ii)
you can establish that you have a tax home in and closer
connections to a foreign country.
98
<PAGE>
The following discussion summarizes principal U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by
"non-U.S. holders." You are a "non-U.S. holder" for U.S. federal income tax
purposes if you are:
o a non-resident alien individual;
o a foreign corporation;
o a foreign partnership; or
o an estate or trust that in either case is not subject to U.S.
federal income tax on a net income basis on income or gain
from common stock.
This discussion does not consider the specific facts and circumstances
that may be relevant to particular holders and does not address the treatment of
holders of common stock under the laws of any state, local or foreign taxing
jurisdiction. This discussion is based on the tax laws of the U.S., including
the Internal Revenue Code, as amended to the date hereof, existing and proposed
regulations thereunder, and administrative and judicial interpretation thereof,
as currently in effect. These laws are subject to change, possibly on a
retroactive basis.
You should consult your own tax advisors with regard to the application
of the federal income tax laws to your particular situation, as well as to the
applicability and effect of any state, local or foreign tax laws to which you
may be subject.
Dividends
If you are a non-U.S. holder of our common stock, dividends paid to you
are subject to withholding of U.S. federal income tax at a 30% rate or at a
lower rate if so specified in an applicable income tax treaty. If, however, the
dividends are effectively connected with your conduct of a trade or business
within the U.S. (holding stock in a corporation engaged in a trade or business
in the U.S. does not cause the shareholder to be engaged in a U.S. trade or
business by reason of the stock ownership), and they are attributable to a
permanent establishment that you maintain in the U.S., if that is required by an
applicable income tax treaty as a condition for subjecting you to U.S. income
tax on a net income basis on such dividends, then such "effectively connected"
dividends generally are not subject to withholding tax. Instead, such
effectively connected dividends are taxed at rates applicable to U.S. citizens,
resident aliens and domestic U.S. corporations.
Effectively connected dividends received by a non-U.S. corporation may
be subject to an additional "branch profits tax" at a 30% rate or at a lower
rate if so specified in an applicable income tax treaty.
Under currently effective U.S. Treasury regulations, dividends paid to
an address in a foreign country are presumed to be paid to a resident of that
country, unless the payor has knowledge to the contrary, for purposes of the 30%
withholding tax discussed above. Under current interpretations of U.S. Treasury
regulations, this presumption that dividends paid to an address in a foreign
country are paid to a resident of that country, unless the payor has knowledge
to the contrary, also applies for the purposes of determining whether a lower
tax treaty rate applies.
Under U.S. Treasury regulations that will generally apply to dividends
paid after December 31, 2000, the "New Regulations," if you claim the benefit of
a lower treaty rate, then you must satisfy certification requirements. In
addition, in the case of common stock held by a foreign partnership, the
certification requirements generally will apply to the partners of the
partnership and the partnership must provide specific information, including a
U.S. taxpayer identification number. The final withholding regulations also
provide look-through rules for tiered partnerships.
If you are eligible for a reduced rate of U.S. withholding tax under a
tax treaty, you may obtain a refund of any excess amounts withheld by filing a
refund claim with the IRS.
99
<PAGE>
Gain On Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to U.S.
federal income tax on gain recognized on a disposition of common stock unless:
o the gain is effectively connected with your conduct of a trade
or business in the U.S. and the gain is attributable to a
permanent establishment that you maintain in the U.S., if that
is required by an applicable income tax treaty as a condition
for subjecting you to U.S. taxation or a net income basis on
gain from the sale or other disposition of the common stock;
o you are an individual, you hold the common stock as a capital
asset and you are present in the U.S. for 183 or more days in
the taxable year of the sale or certain other conditions
exist; or
o you are or have been a "United States real property holding
corporation" for federal income tax purposes and you held,
directly or indirectly, at any time during the five-year
period ending on the date of disposition, more than 5% of our
common stock, and you are not eligible for any treaty
exemption.
Effectively connected gains recognized by a corporate non-U.S. holder
may also be subject to an additional "branch profits tax" at a 30% rate or at a
lower rate if so specified in an applicable income tax treaty.
We have not been, are not, and do not anticipate becoming a "United
States property holding corporation" for federal income tax purposes.
Federal Estate Tax
For estate tax purposes, an individual is a resident if at the time of
death he or she has domicile in the U.S. One has domicile if one intends to
reside in the U.S. permanently or indefinitely. Common stock held by an
individual non-U.S. holder at the time of death will be included in the holder's
gross estate for U.S. federal estate tax purposes and may be subject to U.S.
federal estate taxes, unless an applicable estate tax treaty provides otherwise.
The amount of the Federal estate tax will be between 6% and 30% of the non-U.S.
holder's taxable estate, depending upon the size of the estate.
Information Reporting and Backup Withholding
In general, U.S. information reporting requirements and backup
withholding tax will not apply to dividends paid to you if you are either:
o subject to the 30% withholding tax discussed above, or
o not subject to the 30% withholding tax because an applicable
tax treaty reduces or eliminates such withholding tax,
although dividend payments to you will be reported for purposes of the
withholding tax. See the discussion under "Dividends" above for further
discussion of the reporting of dividend payments. If you do not meet either of
these requirements for exemption and you fail to provide certain information,
including your U.S. taxpayer identification number, or otherwise establish your
status as an "exemption recipient," you may be subject to backup withholding of
U.S. federal income tax at a rate of 31% on dividends paid with respect to
common stock.
U.S. information reporting and backup withholding requirements
generally will not apply to a payment of the proceeds of a sale of common stock
made outside the U.S. through an office outside the U.S. of a non-U.S. broker.
100
<PAGE>
However, U.S. information reporting, but not backup withholding, will apply to a
payment made outside the U.S. of the proceeds of a sale of common stock through
an office outside the U.S. of a broker that:
o is a U.S. person;
o derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the U.S.;
o is a "controlled foreign corporation" as to the U.S.; or
o with respect to payments made after December 31, 2000, is a
foreign partnership with certain connections to the U.S.
in each case, unless the broker has documentary evidence in its records that the
holder or beneficial owner is a non-U.S. person and has no knowledge to the
contrary or the holder otherwise establishes an exemption.
Payment of the proceeds of a sale of common stock to or through a U.S.
office of a broker is subject to both U.S. backup withholding and information
reporting unless the holder certifies its non-U.S. status under penalty of
perjury or otherwise establishes an exemption.
Backup withholding is not an additional tax and you may apply any taxes
that are withheld against your tax liability and you generally may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing a refund claim with the Internal Revenue Service.
EXPERTS
The consolidated financial statements of Net Value Holdings, Inc. as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 have been included herein and in the registration
statement in reliance on the report of LJ Soldinger Associates, independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
The following reports have been included herein and in the registration
statement in reliance on the report of Morgenstern & Associates, independent
certified public accountants, given on the authority of that firm as experts in
auditing and accounting:
o The balance sheet of AssetExchange, inc. as of September 30,
1999;
o The balance sheet of College411.com, Inc. as of September 30,
1999;
o The balance sheet of SwapIt.com, Inc. as of September 30,
1999; and
o The financial statements of IndustrialVortex.com, Inc. as of
December 31, 1999 and for the period from May 20, 1999
(inception) to December 31, 1999
The following reports have been included herein and in the registration
statement in reliance on the report of Morgenstern & Associates, independent
certified public accountants, given on the authority of that firm as experts in
auditing and accounting.
101
<PAGE>
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for
us by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia,
Pennsylvania.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act of
1933 with respect to our common stock offered in this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits to the registration statement. For further
information with respect to Net Value Holdings, Inc. and our common stock
offered hereby, reference is made to the registration statement and the exhibits
filed as part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete; reference is made in each instance to the copy of such
contract and any other document filed as an exhibit to the registration
statement. Each such statement is qualified in all respects by reference to such
exhibit. The registration statement, including exhibits thereto, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C. and copies of all or any part thereof may be obtained
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain additional information
regarding the operation of the Public Reference Section by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at the address http:/www.sec.gov.
102
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Net Value Holdings, Inc.
Independent Auditors' Report ........................................................ F2
Balance Sheets as of December 31, 1997 and 1998 (audited) and September 30,
1999 (unaudited) .................................................................. F3
Statement of Operations for the years ended December 31, 1996, 1997 and 1998
(audited), for the nine months ended September 30, 1998 and 1999 (unaudited),
and the period December 16, 1994 (Inception) through September 30, 1999
(unaudited) ....................................................................... F4
Statement of Changes in Stockholders' Deficit for the years ended December
31, 1996, 1997 and 1998 (audited), and for the nine months ended September
30, 1999 (unaudited) .............................................................. F5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998
(audited), for the nine months ended September 30, 1998 and 1999 (unaudited),
and the period December 16, 1994 (Inception) through September 30, 1999
(unaudited) ....................................................................... F9
Notes to Financial Statements ....................................................... F10
Pro Forma Condensed Consolidated Financial Statements
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1999
(unaudited) ....................................................................... P2
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet (unaudited) ....... P3
AssetExchange.com, Inc.
Independent Auditors' Report ........................................................ F47
Balance Sheet as of September 30, 1999 (audited) .................................... F48
Statement of Operations for the period March 12, 1999 (date of inception)
through September 30, 1999 (unaudited) ............................................ F49
Statement of Changes in Stockholders' Equity for the period March 12, 1999
(date of inception) through September 30, 1999 (unaudited) ........................ F50
Statements of Cash Flows for the period March 12, 1999 (date of inception)
through September 30, 1999 (unaudited) ............................................ F51
Notes to Financial Statements ....................................................... F52
College411.com, Inc.
Independent Auditors' Report ........................................................ F56
Balance Sheet as of September 30, 1999 (audited) .................................... F57
Statement of Operations for the period April 13, 1999 (date of inception)
through September 30, 1999 (unaudited) ............................................ F58
Statement of Changes in Stockholders' Equity for the period April 13, 1999
(date of inception) through September 30, 1999 (unaudited) ........................ F59
Statements of Cash Flows for the period April 13, 1999 (date of inception)
through September 30, 1999 (unaudited) ............................................ F60
Notes to Financial Statements ....................................................... F61
Swapit.com, Inc.
Independent Auditors' Report ........................................................ F66
Balance Sheet as of November 30, 1999 (audited) ..................................... F67
Notes to Financial Statements ....................................................... F68
Industrialvortex.com, Inc.
Independent Auditors' Report ........................................................ F72
Balance Sheet as of December 31, 1999 (audited) ..................................... F73
Statement of Operations for the period from inception through
December 31, 1999 ................................................................. F74
Statement of Changes in Stockholders' Equity for the period from inception
through December 31, 1999 ......................................................... F75
Statements of Cash Flows for the period from inception through
December 31, 1999 ................................................................. F76
Notes to Financial Statements ....................................................... F77
</TABLE>
-F1-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Net Value Holdings, Inc.
We have audited the accompanying balance sheets of Net Value Holdings, Inc. (a
development stage entity) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Net Value Holdings, Inc. as of
December 31, 1997 and 1998, and the results of its operations, stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully discussed in Note 3 to
the financial statements, the Company's negative working capital position,
substantial losses incurred since inception, and dependence on outside financing
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Management's plans concerning these
matters are described in Note 3.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
April 30, 1999 (except Notes 2 and 4,
for which the date is December 3, 1999)
-F2-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
----------------------------- --------------
1997 1998 1999
------------ ---------- --------------
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ - $ 1,466 $1,051,930
Loan receivable - related parties - - 469,833
Loan receivable - 200,000 60,000
Prepaid financing fees, net - 170,182 417,380
Prepaid expenses - - 127,956
Other - - 15,562
Net current assets of discontinued operations 799,423 335,121 428,337
---------- ---------- ----------
Total Current Assets 799,423 706,769 2,570,998
Property and Equipment, Net - - 41,412
Ownership Interests in Affiliate Companies - - 5,225,362
Intangibles, Net - - 227,863
Other Assets - - 65,746
Deposits - - 6,452
Net Other Assets of Discontinued Operations 1,000,979 715,750 479,149
---------- ---------- ----------
$1,800,402 $1,422,519 $8,616,982
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Short-term borrowings - other $ - $ - $380,000
Stock subscription payable to affiliated company - - 250,000
Notes payable, net of discounts - 940,000 525,000
Notes payable - related party - 200,000 12,000
Long-term debt due within one year - - 71,287
Accrued interest - 41,399 404,890
Accounts payable, accrued salaries and accrued expenses - 107,022 384,630
Net current liabilities of discontinued operations 4,227,058 7,402,728 3,393,312
---------- ---------- ----------
Total Current Liabilities 4,227,058 8,691,149 5,421,119
---------- ---------- ----------
Non-Current Liabilities
Long-term debt, net of discounts and portion included in current
liabilities - 215,058 5,814,898
Net other liabilities of discontinued operations - 79,034 -
---------- ---------- ----------
Total Non-Current Liabilities - 294,092 5,814,898
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Commitments and Contingencies
Series B mandatory redeemable preferred stock, Net Value Holdings, Inc.,
$.001 par value per share, $1,000 liquidation value, $1,250 redemption
value. At September 30, 1999, 2000 shares issued and outstanding;
5,000 shares authorized - - 1,732,000
Stockholders' Deficit
Preferred stock, Net Value, Inc., $.001 par value per share. At
December 31, 1997, 22,500 shares issued and outstanding; 0 shares
issued and outstanding at December 31, 1998 and September 30, 1999;
$225,000 liquidation preference at December 31, 1997 22 - -
Series A preferred stock, Net Value Holdings, Inc., $.001 par value per
share. At December 31, 1997 and 1998 and September 30, 1999, 2,019,852,
2,519,852 and 0 shares issued and outstanding, respectively 2,020 2,520 -
Common stock, Net Value, Inc., $.001 par value per share. At
December 31, 1997 and 1998 and September 30, 1999, 651,650, 1,037,338
and 1,037,338 shares issued and outstanding, respectively 652 1,038 1,038
Common stock, Net Value Holdings, Inc., $.001 par value share.
At December 31, 1997 and 1998 and September 30, 1999, 2,019,852,
6,969,852 and 13,371,901 shares issued and outstanding, respectively 2,020 6,970 13,372
Additional paid-in capital 14,561,663 39,005,768 93,109,725
Deferred compensation - - (29,817,065)
Deferred compensation of discontinued operations (497,750) (3,283,532) (2,048,306)
Deficit accumulated during the development stage (16,495,283) (43,295,486) (65,609,799)
---------- ---------- ----------
Total Stockholders' Deficit (2,426,656) (7,562,722) (4,351,035)
---------- ---------- ----------
$1,800,402 $1,422,519 $8,616,982
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-F3-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30, December 16, 1994
--------------------------------------- ---------------------------- (Inception) through
1996 1997 1998 1998 1999 September 30, 1999
----------- ------------ ------------ ------------- -------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ - $ -
----------- ------------- ------------- ------------- -------------- -------------
Operating Expenses
Compensation and related
expenses $ - $ - $ - $ - $ 3,122,091 $ 3,122,091
Professional fees - - 129,878 - 513,933 643,811
Consulting - - - - 107,849 107,849
Selling, general and
administrative - - 10,606 1,120 498,667 509,273
Equity loss - - - - 55,188 55,188
----------- ------------- ------------- ------------- ------------ -------------
Total Operating Expenses - - 140,484 1,120 4,297,728 4,438,212
----------- ------------- ------------- ------------- ------------ -------------
Loss From Operations - - (140,484) (1,120) (4,297,728) (4,438,212)
----------- ------------- ------------- ------------- ------------ -------------
Other Income (Expense)
Interest income - - - - 19,690 19,690
Interest expense - - (253,957) (4,685) (11,750,930) (12,004,887)
Financing fees - - (48,436) - (703,179) (751,615)
----------- ------------- ------------- ------------- ------------ -------------
Total Other Income (Expense) - - (302,393) (4,685) (12,434,419) (12,736,812)
----------- ------------- ------------- ------------- ------------ -------------
Loss from Continuing Operations - - (442,877) (5,805) (16,732,147) (17,175,024)
----------- ------------- ------------- ------------- ------------ -------------
Loss from Discontinued Operations (3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,582,166) (32,003,025)
----------- ------------- ------------- ------------- ------------ -------------
Net Loss $(3,314,094) (11,235,237) (11,549,703) (10,201,148) (22,314,313) (49,178,049)
===========
Preferred Stock Dividend -
Discontinued Operations (1,181,250) (15,250,500) (15,250,500) - (16,431,750)
------------- ------------- ------------- ------------ -------------
Net Loss to Common Stockholders $(12,416,487) $(26,800,203) $ (25,451,648) $(22,314,313) $(65,609,799)
============= ============= ============= ============ ============
Basic and Diluted Net Loss Per
Common Share - Continuing
Operations $ (0.00) $ (0.09) $(0.00) $ (1.94)
============= ============= ============= ==============
Basic and Diluted Net Loss Per
Common Share - Discontinued
Operations $ (6.88) $ (5.59) $ (6.70) $ (0.65)
============= ============= ============= ==============
Basic and Diluted Weighted
Average Number of Common Shares
Outstanding 1,804,700 4,711,351 3,796,197 8,647,063
============= ============= ============= ==============
Pro Forma Information (Unaudited):
Net Loss $(3,314,094)
Pro Forma Tax Provision -
-----------
Pro Forma Net Loss $(3,314,094)
===========
Net Loss Per Share Data:
Basic and Diluted Net Loss Per
Common Share - Discontinued
Operations $ (3.55)
==========
Basic and Diluted Weighted
Average Number of Common
Shares Outstanding 934,810
==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
-F4-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------------------- ------------------------------------
Net Value, Inc. Holdings Net Value, Inc. Holdings
----------------- ---------------- ---------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 - $ - - $ - - $ - - $ -
Capital contribution - - - - - - - -
Founders' stock issued - - - - 272,500 273 - -
Founders' common
stock warrants issued - - - - - - - -
Common stock issued in
private placements (net of
offering costs of $189,090) - - - - 482,857 483 - -
Common stock issued and issuable
to former members - - - - 768,500 769 - -
Compensatory common stock options
issued - - - - - - - -
Common stock granted for
consulting services - - - - 87,500 87 - -
Unearned consulting services - - - - (43,750) (44) - -
Effects of common stock exchanged - - 1,567,607 1,568 (1,567,607) (1,568) 1,567,607 1,568
Net loss - - - - - - - -
-------- --------- --------- --------- ---------- ------ --------- -----
Balance at December 31, 1996 - - 1,567,607 1,568 - - 1,567,607 1,568
Common stock granted for
consulting services - - - - 43,750 44 - -
Compensatory common stock options
issued - - - - - - - -
Amortization of deferred compensation - - - - - - - -
Common stock issued in private
placements (net of offering
costs of $38,167) - - - - 73,750 73 - -
Common stock issued as consideration
for notes and loans payable - - - - 80,050 80 - -
Common stock and warrants issued
in connection with short-term bridge
financing (net of offering costs of
$(286,109) - - - - 100,625 101 - -
Common stock issued in
connection with conversion of note
and accrued interest - - - - 805,720 806 - -
Issuance of preferred stock 22,500 22 - - - - - -
Preferred stock dividend - - - - - - - -
Effects of common stock exchanged - - 452,245 452 (452,245) (452) 452,245 452
Net loss - - - - - - - -
-------- --------- --------- --------- ---------- ------ --------- -----
Balances at December 31, 1997,
carryforward 22,500 $ 22 2,019,852 $2,020 651,650 $ 652 2,019,852 $2,020
-------- --------- --------- --------- ---------- ------ --------- -----
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Members' Deferred Development
Capital Capital Compensation Stage Total
----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ - $485,000 $ - $(764,702) $(279,702)
Capital contribution - 15,000 - - 15,000
Founders' stock issued 817 - - - 1,090
Founders' common
stock warrants issued 2,000 - - - 2,000
Common stock issued in
private placements (net of
offering costs of $189,090) 2,485,427 - - - 2,485,910
Common stock issued and issuable
to former members 499,231 (500,000) - - -
Compensatory common stock options
issued 172,200 - - - 172,200
Common stock granted for
consulting services 962,415 - - - 962,502
Unearned consulting services (349,954) - - - (349,998)
Effects of common stock exchanged (1,568) - - - -
Net loss - - - (3,314,094) (3,314,094)
----------- -------- ---------- ---------- ----------
Balance at December 31, 1996 3,770,568 - - (4,078,796) (305,092)
Common stock granted for
consulting services 612,453 - - - 612,497
Compensatory common stock options
issued 1,932,150 - (1,932,150) - -
Amortization of deferred compensation - - 1,434,400 - 1,434,400
Common stock issued in private
placements (net of offering
costs of $38,167) 551,760 - - - 551,833
Common stock issued as consideration
for notes and loans payable 1,300,920 - - - 1,301,000
Common stock and warrants issued
in connection with short-term bridge
financing (net of offering costs of
$(286,109) 2,410,541 - - - 2,410,642
Common stock issued in
connection with conversion of note
and accrued interest 2,577,495 - - - 2,578,301
Issuance of preferred stock 224,978 - - - 225,000
Preferred stock dividend 1,181,250 - - (1,181,250) -
Effects of common stock exchanged (452) - - - -
Net loss - - - (11,235,237) (11,235,237)
----------- -------- ---------- ---------- ----------
Balances at December 31, 1997,
carryforward $14,561,663 $ - $(497,750) $(16,495,283 $(2,426,656)
----------- -------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
-F5-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------------------- ---------------------------------------
Net Value, Inc. Holdings Net Value, Inc. Holdings
------------------- -------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1997, brought forward 22,500 $ 22 2,019,852 $ 2,020 651,650 $ 652 2,019,852 $ 2,020
Issuance of preferred stock 276,200 277 - - - - - -
Preferred stock conversion (80,000) (80) - - 250,000 250 - -
Preferred stock repurchase (40,000) (40) - - - - - -
Issuance of warrants - - - - - - - -
Issuance of common stock - - - - 7,500 7 - -
Common stock issued in
connection with the conversion
of accrued interest - - - - 688 1 - -
Common stock issued as
consideration for the
satisfaction of preferred
stock purchase commitment - - - - 37,500 38 - -
Common stock issued pursuant
to the amended IQ Agreement - - - - 90,000 90 - -
Acquisition of assets
of Holdings - - - - - - 1,000,000 1,000
Common stock issued in
connection with 504 offering
(net of offering costs
of $60,570) - - - - - - 2,950,000 2,950
Exchange of preferred stock (178,700) (179) 500,000 500 - - 1,000,000 1,000
Compensatory common stock
options issued - - - - - - - -
Amortization of deferred
compensation - - - - - - - -
Debt discount arising from
convertible debt offering - - - - - - - -
Financing fee - - - - - - - -
Preferred stock dividend - - - - - - - -
Net loss - - - - - - - -
--------- -------- --------- -------- --------- -------- --------- --------
Balances at December 31, 1998 - $ - 2,519,852 $ 2,520 1,037,338 $ 1,038 6,969,852 $ 6,970
========= ======== ========= ======== ========= ======== ========= ========
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Members' Deferred Development
Capital Capital Compensation Stage Total
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1997, brought forward $14,561,663 $ - $(497,750) $(16,495,283) $ (2,426,656)
Issuance of preferred stock 2,761,723 - - - 2,762,000
Preferred stock conversion (170) - - - -
Preferred stock repurchase (399,960) - - - (400,000)
Issuance of warrants 49,200 - - - 49,200
Issuance of common stock 149,993 - - - 150,000
Common stock issued in
connection with the conversion
of accrued interest 13,749 - - - 13,750
Common stock issued as
consideration for the
satisfaction of preferred
stock purchase commitment (38) - - - -
Common stock issued pursuant
to the amended IQ Agreement 251,910 - - - 252,000
Acquisition of assets
of Holdings (1,000) - - - -
Common stock issued in
connection with 504 offering
(net of offering costs
of $60,570) 526,480 - - - 529,430
Exchange of preferred stock (1,321) - - - -
Compensatory common stock
options issued 4,368,039 - (4,368,039) - -
Amortization of deferred
compensation - - 1,582,257 - 1,582,257
Debt discount arising from
convertible debt offering 1,400,000 - - - 1,400,000
Financing fee 75,000 - - - 75,000
Preferred stock dividend 15,250,500 - - (15,250,500) -
Net loss - - - (11,549,703) (11,549,703)
----------- ------------ ------------ ------------ ------------
Balances at December 31, 1998 $39,005,768 $ - $(3,283,532) $(43,295,486) $ (7,562,722)
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-F6-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------------------- ------------------------------------------
Net Value, Inc. Holdings Net Value, Inc. Holdings
----------------- ------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- -------- ---------- ------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 - $ - 2,519,852 $ 2,520 1,037,338 $1,038 6,969,852 $6,970
Common stock issued in connection
with the conversion of
convertible
debt and accrued interest - - - - - - 1,175,668 1,175
Common stock issued in connection
with the conversion of exchange
notes and accrued interest - - - - - - 1,172,455 1,172
Debt discount arising from
convertible debt offering - - - - - - - -
Debt discount related to the
exchange notes and warrants - - - - - - - -
Debt discount related
to Founders' equity note - - - - - - - -
Compensatory common stock
options issued - - - - - - 1,763,822 1,764
Amortization of deferred
compensation - - - - - - - -
Founders' Warrants issued as
financing fees - - - - - - - -
Issuance of warrants attached to
Series B preferred stock, net
of preferred stock, net of
offering costs - - - - - - - -
Common and preferred stock
issued in connection
with Strategicus transaction - - 184,627 185 - - 601,029 601
Common stock issued in
connection with the
conversion of accrued interest - - - - - - 6,138 6
Issuance of common stock - - - - - - 60,250 61
Conversion of Series A
preferred stock - - (2,704,479) (2,705) - - 1,622,687 1,623
Net loss - - - - - - - -
------- -------- ---------- ------- --------- ------ --------- --------
Balances at September 30, 1999
(Unaudited) - $ - - $ - 1,037,338 $1,038 13,371,901 $13,372
======= ======== ========== ======= ========= ====== ========== =======
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Members' Deferred Development
Capital Capital Compensation Stage Total
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $39,005,768 $ - $ (3,283,532) $(43,295,486) $(7,562,722)
Common stock issued in connection
with the conversion of
convertible
debt and accrued interest 2,876,432 - - - 2,877,607
Common stock issued in connection
with the conversion of exchange
notes and accrued interest 2,343,740 - - - 2,344,912
Debt discount arising from
convertible debt offering 6,449,020 - - - 6,449,020
Debt discount related to the
exchange notes and warrants 4,270,125 - - - 4,270,125
Debt discount related
to Founders' equity note 900,000 - - - 900,000
Compensatory common stock
options issued 32,597,041 - (32,598,805) - -
Amortization of deferred
compensation - - 4,016,966 - 4,016,966
Founders' Warrants issued as
financing fees 454,500 - - - 454,500
Issuance of warrants attached to
Series B preferred stock, net
of preferred stock, net of
offering costs 129,372 - - - 129,372
Common and preferred stock
issued in connection
with Strategicus transaction 3,783,635 - - - 3,784,421
Common stock issued in
connection with the
conversion of accrued interest 30,076 - - - 30,082
Issuance of common stock 268,934 - - - 268,995
Conversion of Series A
preferred stock 1,082 - - - -
Net loss - - - (22,314,313) (22,314,313)
----------- ------------ ------------ ------------ -----------
Balances at September 30, 1999
(Unaudited) $93,109,725 $ - $(31,865,371) $(65,609,799) $(4,351,035)
=========== ============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-F7-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1997 1998
----------- ------------ ------------
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net Loss $(3,314,094) $(11,235,237) $(11,549,703)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 13,148 179,304 240,323
Amortization of financing fees - 70,496 275,423
Amortization of note payable discount - 583,660 2,675,648
Amortization of registration costs - - 597,740
Loan forgiveness - related parties - - -
Interest expense paid with stock issuance - 1,129,301 13,750
Compensatory common stock,
options and warrants issued and issuable 786,704 2,046,896 1,608,457
Equity loss - - -
Change in assets and liabilities
(Increase) Decrease in
Other current assets and deposits (354,223) (416,302) 774,197
Other non-current assets - - (21,107)
Increase (Decrease) in
Accounts payable, accrued expenses
and deferred rent 671,806 1,344,949 (65,077)
Deferred revenue - - -
Accounts payable and accrued
expenses - related parties 58,333 (58,333) 80,785
----------- ------------ ------------
Total Adjustments 1,175,768 4,879,971 6,180,139
----------- ------------ ------------
Net Cash Used in Operating Activities (2,138,326) (6,355,266) (5,369,564)
----------- ------------ ------------
Cash Flows from Investing Activities
Disbursements of loans - - (200,000)
Collections on loans - - -
Payments for ownership interest in Affiliates - - -
Purchases of furniture and equipment (308,896) (544,618) (57,478)
----------- ------------ ------------
Cash Used in Investing Activities (308,896) (544,618) (257,478)
----------- ------------ ------------
Cash Flows from Financing Activities
Proceeds from member loans 26,045 - -
Repayment of member loans (80,823) - -
Proceeds from bridge loan 245,000 - -
Repayment of bridge loan (245,000) - -
Proceeds from short-term borrowings - - -
Proceeds from notes and loans payable -
related parties - 3,601,000 1,728,000
Repayments of notes and loans payable -
related parties - (1,501,000) (745,000)
Proceeds from notes payable - 1,728,250 1,690,000
Repayment of notes payable - - (750,000)
Proceeds from long-term debt - - 1,402,500
Principal payments of long-term debt - - (34,173)
Proceeds from member capital contributions 15,000 - -
Proceeds from member private placements and
Founders' Stock, net of offering costs 2,487,000 551,833 529,430
Net proceeds from issuance of stock and
warrants - 2,560,641 -
Proceeds from sale of preferred stock - 225,000 2,762,000
Payment to repurchase preferred stock - - (400,000)
Payment of financing fees - (140,919) (80,000)
Registration costs - (124,921) (474,249)
----------- ------------ ------------
Net Cash Provided by Financing
Activities 2,447,222 6,899,884 5,628,508
----------- ------------ ------------
Net Increase in Cash and Cash Equivalents - - 1,466
Cash and Cash Equivalents at Beginning of
Period - - -
----------- ------------ ------------
Cash and Cash Equivalents at End of Period $ - $ - $ 1,466
=========== ============ ============
Cash Paid for Interest $ - $ $3,200 $ 93,537
=========== ============ ============
Cash Paid for Taxes $ - $ - $ -
=========== ============ ============
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Nine Months Ended December 16,
September 30, 1994 (Inception)
------------------------------- Through
1998 1999 September 30, 1999
------------ ------------ ------------------
(Unaudited) (Unaudited) (Unaudited)
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net Loss $(10,201,148) $(22,314,313) $(49,178,049)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 172,250 189,570 629,915
Amortization of financing fees 75,000 703,179 1,049,098
Amortization of note payable discount 2,525,410 11,160,968 14,420,276
Amortization of registration costs 597,740 - 597,740
Loan forgiveness - related parties - 107,167 107,167
Interest expense paid with stock issuance 13,750 181,445 1,324,496
Compensatory common stock,
options and warrants issued and issuable 1,054,148 4,234,379 8,676,436
Equity loss - 55,188 55,188
Change in assets and liabilities
(Increase) Decrease in
Other current assets and deposits 578,860 (236,735) (235,470)
Other non-current assets (334) 42,925 21,460
Increase (Decrease) in
Accounts payable, accrued expenses
and deferred rent 360,627 989,957 3,190,326
Deferred revenue 1,252,700 - -
Accounts payable and accrued
expenses - related parties - (65,192) 15,593
------------ ------------ ------------
Total Adjustments 6,630,151 17,362,851 29,852,225
------------ ------------ ------------
Net Cash Used in Operating Activities (3,570,997) (4,951,462) (19,325,824)
------------ ------------ ------------
Cash Flows from Investing Activities
Disbursements of loans - (637,000) (837,000)
Collections on loans - 200,000 200,000
Payments for ownership interest in Affiliates - (1,496,149) (1,496,149)
Purchases of furniture and equipment (45,416) (87,367) (1,026,931)
------------ ------------ ------------
Cash Used in Investing Activities (45,416) (2,020,516) (3,160,080)
------------ ------------ ------------
Cash Flows from Financing Activities
Proceeds from member loans - - 80,823
Repayment of member loans - - (80,823)
Proceeds from bridge loan - - 245,000
Repayment of bridge loan - - (245,000)
Proceeds from short-term borrowings - 443,000 443,000
Proceeds from notes and loans payable -
related parties 778,000 - 5,329,000
Repayments of notes and loans payable -
related parties (370,000) (380,184) (2,626,184)
Proceeds from notes payable 750,000 - 3,418,250
Repayment of notes payable (750,000) - (750,000)
Proceeds from long-term debt 950,600 6,635,122 8,037,622
Principal payments of long-term debt (43,752) (40,991) (75,164)
Proceeds from member capital contributions - - 500,000
Proceeds from member private placements and
Founders' Stock, net of offering costs - - 3,568,263
Net proceeds from issuance of stock and
warrants - - 2,560,641
Proceeds from sale of preferred stock 2,762,000 1,861,372 4,848,372
Payment to repurchase preferred stock - - (400,000)
Payment of financing fees (80,000) (495,877) (716,796)
Registration costs (285,855) - (599,170)
------------ ------------ ------------
Net Cash Provided by Financing
Activities 3,710,993 8,022,442 23,537,834
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 94,580 1,050,464 1,051,930
Cash and Cash Equivalents at Beginning of
Period - 1,466 -
------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ 94,580 $ 1,051,930 $ 1,051,930
============ ============ ============
Cash Paid for Interest $ 4,353 $ 172,679 $269,416
============ ============ ============
Cash Paid for Taxes $ - $ - $ -
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-F8-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 1 - DESCRIPTION OF THE BUSINESS
Nature of Operations
Net Value Holdings, Inc. is an Internet holding company which owns equity
interests in and provides strategic management services to development stage
Internet companies. It is a Development Stage Enterprise, as defined in
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting for
Development Stage Enterprises."
Prior to its disposition of one of the Company's operating segments in December
1999, the Company was developing Internet software products intended to provide
fee-based online promotions management services to manufacturers, retailers and
advertisers of consumer products and services through the electronic
transmission of online promotions.
History
Net Value, Inc. (formerly BrightStreet.com, Inc., netValue, Inc., COL
Acquisition Corp., and Vsquared, Inc.) was formed on July 16, 1996 and
subsequently merged on September 18, 1996 with Coupons Online, LLC (the "LLC"),
a limited liability company (collectively, "Net Value, Inc."). The Initial
Merger resulted in the LLC being the acquirer, for accounting purposes, since
the former members of the combining company retained the larger portion of the
voting rights pursuant to the terms of the merger agreement. Net Value, Inc., as
the surviving entity, was the legal acquirer.
On August 31, 1998, Net Value, Inc. entered into a letter of intent to merge
with SUNCL, Inc. (the "Merger"), a public shell company that did not engage in
business or operations of any kind, had nominal assets and liabilities, and
whose common stock was eligible for quotation on the NASDAQ Over-the-Counter
Bulletin Board Trading System. SUNCL, Inc. was incorporated under the laws of
the state of Florida on December 20, 1991 and reincorporated in the state of
Delaware on October 8, 1998. In contemplation of the Merger, the shareholders of
SUNCL, Inc. agreed to change the corporation's name to Net Value Holdings, Inc.
("Holdings"). The terms of the letter of intent provided that the shareholders
of Net Value, Inc. would receive a mutually agreed-upon portion of the equity of
Holdings, and that Holdings would be the surviving legal entity in the Merger.
As of December 31, 1998, Holdings had entered into share exchange agreements
with twenty Net Value, Inc. shareholders, who tendered approximately 66% of the
issued and outstanding shares of common stock and 100% of the issued and
outstanding shares of preferred stock of Net Value, Inc. to Holdings ("Share
Exchanges"). Terms of the Share Exchanges provided that the Net Value, Inc.
shareholders exchange four shares of Net Value, Inc. common stock for one share
of Holdings' common stock and one share of Holdings' Series A convertible
preferred stock. Each holder of Holdings' Series A convertible preferred stock
would be entitled to receive up to one share of Holdings' common stock based
upon the achievement of certain performance objectives. As a result of
negotiations between the Company and the Series A preferred shareholders, in
September 1999 each share of the preferred stock was converted into .6 shares of
the Company's common stock.
Net Value, Inc., a development stage enterprise, was developing Internet
software products intended to provide fee-based online promotions management
services to manufacturers, retailers and advertisers of consumer products and
services through the electronic transmission of online promotions to be targeted
and delivered to specific consumer segments. Net Value, Inc. has incurred losses
since its inception.
On July 30, 1999, as part of a step transaction to obtain an ownership interest
in three unrelated Internet companies, Holdings acquired Strategicus Partners,
Inc. ("Strategicus"). Strategicus was an Oregon corporation that was formed in
August 1998, had minimal assets, was in the process of developing Internet
operations of its own through its wholly-owned subsidiary, Metacat.com, Inc.
("Metacat"), and which had the opportunity to consummate transactions in two
other Internet companies in which Holdings desired to obtain interests. Prior to
the merger, Holdings advanced funds to Strategicus, which it principally used to
acquire the desired ownership interests. At the date of the merger, Strategicus
had ownership interests in three Internet businesses in various stages of
development, Metacat, Asia CD, Inc. ("AsiaCD") and College411.com, Inc.
("College411"). From September 1999 through January 2000, Holdings exercised
warrants to purchase additional shares of common stock in College411 and
acquired equity interests in four more Internet businesses, Asset Exchange, Inc.
("Asset Exchange"), Webmodal, Inc. ("Webmodal"), Swapit.com, Inc. ("Swapit") and
Industrialvortex.com, Inc. ("Vortex").
-F9-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 1 - DESCRIPTION OF THE BUSINESS (Continued)
On December 3, 1999, Net Value, Inc. sold substantially all of its assets and
its business including the name BrightStreet.com, Inc. In 2000, the Company
plans to complete its merger with Net Value, Inc. whereby the remaining
shareholders of Net Value, Inc. will receive the Company's securities on the
same terms and conditions as contained in the Share Exchanges, as adjusted for
the conversion of the Company's Series A convertible preferred stock.
Accordingly, the remaining shareholders of Net Value Inc. will receive .4 shares
of the Company's common stock for each share of Net Value, Inc. common stock
tendered in the merger.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles, and have
been presented on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company's dependence on outside financing or a business combination, along with
limited opportunities to invest in viable enterprises, raises substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The combination of Holdings and Net Value, Inc. has been treated as a
recapitalization of Net Value, Inc. Holdings was the legal acquirer in the
merger. Net Value, Inc. was the accounting acquirer since its shareholders
acquired a majority ownership interest in Net Value Holdings, Inc. Consequently,
the historical financial information included in these financial statements
prior to October 1998 is that of Net Value, Inc.'s. All significant intercompany
transactions and balances have been eliminated. Pro forma financial information
is not presented, since the combination is a recapitalization and not a business
combination.
Minority Interest
The financial statements of Net Value Holdings, Inc. are those of Net Value,
Inc. as the result of an in-process merger of the two entities which has been
recorded as a recapitalization. At September 30, 1999 Net Value Holdings, Inc.
owned 66% of the outstanding common stock of Net Value, Inc. Net Value Holdings,
Inc. plans on completing the merger with Net Value, Inc. in 2000 by acquiring
the remaining shares of Net Value, Inc. that it does not own.
The presentation of the common shares of Net Value, Inc. not owned by Net Value
Holdings, Inc. indicates there is a minority interest in 34% of the assets and
liabilities related to Net Value, Inc. At September 30, 1999, 34% of the
outstanding common stock of Net Value, Inc. continued to be owned by
stockholders other than Net Value Holdings, Inc. Because the total of the net
assets of Net Value, Inc. is negative, no amount has been ascribed to the 34%
minority interest and therefore no amount has been reflected as a minority
interest on the balance sheet. The minority interest has effectively been
included in the accumulated deficit of Net Value Holdings, Inc., the majority
owner. Since inception, Net Value, Inc. has had accumulated losses and at
September 30, 1999 it is unlikely that Net Value, Inc. will obtain new capital
contributions to erase the deficit.
Discontinued Operations
In November 1999, Net Value, Inc.'s Board of Directors approved a term sheet
encompassing the sale of substantially all of the assets of Net Value, Inc. in
exchange for cash, assumption of certain liabilities, cancellation of certain
stock options, release of employment obligations, and a 14.3% ownership in
Promotions Acquisition, Inc., a newly formed and capitalized company.
Accordingly, Net Value, Inc. is accounted for as a discontinued operation in the
accompanying consolidated financial statements. The operating results of the
discontinued operations of Net Value, Inc. have been segregated from continuing
operations and reported as a separate line item on the statement of operations.
The Company has restated its prior financial statements to present the operating
results of Net Value, Inc. as a discontinued operation.
-F10-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim Information
The interim consolidated financial data as of September 30, 1999 and for the
nine months ended September 30, 1999 and 1998 is unaudited. The information
reflects all adjustments, consisting only of normal recurring adjustments that,
in the opinion of management, are necessary to fairly present the financial
position and results of operations of the Company for the periods indicated.
Results of operations for the interim periods are not necessarily indicative of
the results of operations for a full fiscal year.
Development Stage Enterprise
The Company is a Development Stage Enterprise, and accordingly, certain
additional financial information is required to be included in the financial
statements from the inception of the Company to the current balance sheet date.
Principles of Consolidation
The financial statements are consolidated as of September 30, 1999 and for the
nine month period ended September 30, 1999 to include the accounts of the
Company and its wholly-owned subsidiary, Metacat. The various interests that the
Company acquires in other entities ("Affiliate Companies") are accounted for
under three broad methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on the Company's
voting interest in the Affiliate Company.
Consolidation
Affiliate Companies in which the Company directly or indirectly owns more than
50% of the outstanding voting securities are generally accounted for under the
consolidation method of accounting. Under this method, an Affiliate Company's
results of operations are reflected within the Company's Consolidated Statement
of Operations. All significant intercompany accounts and transactions have been
eliminated.
Equity Method
Affiliate Companies whose results are not consolidated, but over whom the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence
with respect to the Affiliate Company depends on an evaluation of several
factors including, among others, representation on the Affiliate Company's Board
of Directors and the Company's ownership level, which is generally a 20% to 50%
interest in the voting securities of the Affiliate Company, including voting
rights associated with the Company's holdings in common, preferred and other
convertible instruments in the Affiliate Company. Under the equity method of
accounting, an Affiliate Company's results of operations are not reflected
within the Company's Consolidated Statements of Operations; however, the
Company's share of the earnings or losses of the Affiliate Company is reflected
in the caption "Equity loss" in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Affiliate Companies accounted for under the
consolidation or equity method of accounting is amortized on a straight-line
basis over three years, which adjusts the Company's share of the Affiliate
Company's earnings or losses.
Cost Method
Affiliate Companies not accounted for under the consolidation or the equity
method of accounting are accounted for under the cost method of accounting.
Under this method, the Company's share of the earnings or losses of such
Affiliate Companies is not included in the Consolidated Statements of
Operations.
-F11-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Evaluations
The Company is continuously evaluating the carrying costs of its ownership
interest in its Affiliate Companies. The evaluation consists of possible
impairment based on the lack of the achievement of business plan objectives, the
value of each ownership interest in the Affiliate Company relative to carrying
value, the Affiliate Company's financial condition and prospects, and other
relative factors. The business plan objectives considered by the Company include
achievement of planned financial results, successful completion of fundraising
activities, the hiring of key personnel, and other financial and non-financial
performance objectives. The fair market value of the Company'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 the Affiliate Companies. If impairment is determined, the
carrying value is adjusted to fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid instruments with an original maturity of
90 days or less at the time of purchase to be cash equivalents.
Statements of Stockholders' Deficit
The recapitalization resulted in Net Value, Inc.'s equity accounts being
restated based on the ratio of the shares exchanged in the Share Exchanges. The
number of shares restated was equivalent to the amount of shares exchanged under
the Share Exchanges. Every four shares of Net Value, Inc. common stock have been
reflected as one share of Holdings' common stock and one share of Holding's
preferred stock (similar to a reverse stock split). While not changing
stockholders' deficit in the aggregate, the restatement changed the allocation
of capital between par value and additional paid-in capital. The par values of
Holdings' securities and Net Value, Inc.'s securities are identical.
Loss Per Share
The Company reports loss per share utilizing Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"), which requires companies to
present basic earnings per share and diluted earnings per share (as defined in
SFAS 128). Both presentations under SFAS 128 require the use of the weighted
average number of shares outstanding for each period presented in the
computation of earnings per share; however, when including the dilutive effect
of options and warrants issued, the computation of diluted earnings per share
under SFAS 128 increases the weighted average number of shares.
The Company formerly presented loss per share in accordance with Staff
Accounting Bulletin No. 83. Staff Accounting Bulletin No. 98 "Earnings Per Share
Computations in an Initial Public Offering," issued in February 1998, amended
SAB 83 to require that historical earnings per share be presented in accordance
with SFAS 128. The Company has therefore followed the requirements of SFAS 128
for all applicable periods presented in these financial statements.
Fair Value of Financial Instruments
The carrying value of the Company's cash and cash equivalents, accounts payable
and accrued expenses approximates the fair market value due to the relatively
short maturity of these instruments. The carrying value of the Company's notes
payable and long term debt is less than fair value when discounts have been
netted against the maturity amount of the debt. The fair value of the Company's
notes payable and long term debt approximates fair market value due to the
relatively short maturity of these instruments.
-F12-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Prepaid Expenses and Financing Fees
Prepaid expenses consist of prepaid insurance premiums and consulting fees.
These prepaid expenses are charged to expense over the service term of each
respective agreement. Prepaid financing fees include commissions, placement
fees, professional fees and other consideration incurred by the Company on
borrowings received during 1997 and 1998. These prepaid financing fees are being
charged to expense over the remaining term of the outstanding borrowings.
Intangibles
Goodwill is defined as the excess of cost over net assets of the businesses
being acquired. Goodwill is being amortized on a straight-line basis over a
three-year period. There was no goodwill at December 31, 1998.
Property and Equipment
Property and equipment are recorded at cost. The Company's policy is to
depreciate these assets over their estimated useful lives, as indicated in the
following table, using straight-line methods. The Company's policy is to
amortize leasehold improvements over the shorter of their useful lives or the
remaining periods of the related leases.
Years
-----
Leasehold improvements 3
Computer hardware 4
Office furniture and equipment 5
Equipment acquired under long-term capital lease arrangements is recorded at
amounts equal to the net present value of the future minimum lease payments
using the interest rate implicit in the lease. Amortization is provided by use
of the straight-line method over the estimated useful lives of the related
assets.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," ("SFAS
131") during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company has
determined that it has three reportable segments. The Company's three reportable
segments consist of consolidated operating company operations, discontinued
software development operations and holding company operations. The holding
company operations include the cost and equity investments and the related
expenses of providing strategic and operational support and administrative
functions.
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes." Income taxes are
recorded in the period in which the related transactions are recognized in the
financial statements, net of the valuation allowances which have been recorded
against deferred tax assets. Deferred tax assets and liabilities are recorded
for the expected future tax consequences of temporary differences between the
tax basis and the financial reporting of assets and liabilities. Net deferred
tax assets and liabilities, relating primarily to federal and state net
operating loss carryforwards, stock-based compensation, financing costs
associated with stock issuances, and depreciation differences that have been
deferred for tax purposes, have been offset by a valuation reserve because the
future utilization of these assets and liabilities cannot be determined.
-F13-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
During 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(" SFAS 123".) As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Board No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants and
common stock issuances as of the grant date. APB 25 recognizes the intrinsic
value of the instruments issued by the Company as of the measurement date, which
is generally the date at which both the number of shares that an individual is
entitled to receive and the purchase price are known.
Credit Risk
The Company has maintained cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to a maximum of $100,000. The Company had an uninsured cash
balance of $981,459 at September 30, 1999. Cash and cash equivalents at
September 30, 1999 were invested principally in money market funds.
Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards Board No. 121,
the Company records impairment losses on long-lived assets used in operations
when indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the asset's carrying
amount.
Recent Accounting Pronouncements
A recently issued accounting pronouncement which may continue to have a
significant impact on the Company's results of operations and financial position
is Emerging Issues Task Force No. 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" ("EITF 98-5") which was applicable in May 1999. EITF 98-5 requires
certain beneficial conversion amounts to be expensed over the period from date
of issue to the date the instrument is convertible.
Pro Forma Financial Information
The LLC was originally organized in the form of a limited liability company.
Upon the Initial Merger, its capital structure changed to that of a corporation.
The change resulted in the Company retaining the tax benefit for subsequent net
operating losses whereas the previous losses were passed through to the LLC
members. A pro forma condensed income statement for the year ended December 31,
1996 has been presented in the statement of operations which reflects the impact
of the Company's change in capital structure as if it had occurred December 16,
1994 (the Company's inception). This presentation reflects the Company
generating a tax benefit for the net operating losses which were incurred by the
LLC during 1996 prior to the LLC's termination.
NOTE 3 - CONTINGENCY - GOING CONCERN
At December 31, 1997 and 1998 and at September 30, 1999, the Company had
significant liabilities and an accumulated deficit. The Company's management
expects to obtain additional financing from future private offerings and to
utilize the proceeds of its future offerings to facilitate a business
combination, pay certain obligations, invest in other companies and fund cash
requirements. Management believes that this is a viable plan that removes the
threat to the continuation of the business through September 30, 2000. There can
be no assurance that the Company will obtain such additional financing or
complete a business combination. The failure of the Company to raise additional
financing would require the Company to adjust its business plan, may require the
Company to sell some of its investments at liquidation values, may require the
Company to adjust its current course of action, or may require the Company to
cease operations and liquidate. As a result of the foregoing, there is
substantial doubt about the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
-F14-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 4 - DISCONTINUED OPERATIONS AND THE SALE OF SUBSTANTIALLY ALL OF THE
ASSETS OF NET VALUE, INC.
On December 3, 1999, Net Value, Inc. sold substantially all of its assets to
Promotions Acquisitions, Inc. ("Promotions"), a Delaware corporation which was
formed by the former management team of Net Value, Inc. in connection with a $17
million investment in Promotions by outside investors. In exchange for
substantially all of its assets, Net Value, Inc. received $2 million in cash,
the assumption by Promotions of approximately $1.6 million of Net Value, Inc.
liabilities, shares of Promotions' common stock equal to a 14.3% ownership
interest in Promotions, cancellation of all Net Value, Inc. stock options held
by Net Value, Inc. employees, and the release by Net Value, Inc. of all
obligations to all employees and consultants who were employed or engaged as of
the closing date of this transaction. As a result of the transaction, Net Value,
Inc. no longer has any operations nor any obligations to consultants or
employees that were engaged or employed by Net Value, Inc. as of the closing
date of this transaction. Management intends to use the $2 million of proceeds
to purchase equity interests in additional affiliate companies and to satisfy
Net Value, Inc.'s existing obligations of approximately $2 million which were
not assumed by Promotions. The Company is contractually bound to satisfy the
obligations of Net Value, Inc. Subsequent to the completion of the sale,
Promotions changed its name to BrightStreet.com, Inc. and Net Value, Inc.
changed its name from BrightStreet.com, Inc. to Net Value, Inc. The results of
operations for Net Value, Inc. for the respective periods presented are reported
as discontinued operations in the consolidated statements of operations.
Summarized results of operations for Net Value, Inc. for the years ended
December 31, 1998, 1997 and 1996 and for the nine months ended September 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ 1,330,367 $ 77,667 $ -
============= ============= ============= ============= =============
Operating Loss $(3,316,522) $(9,364,898) $(7,784,925) $(7,519,260) $(5,494,663)
============= ============= ============= ============= =============
Loss from Discontinued
Operations $(3,314,094) $(11,235,237) $(11,106,826) $(10,195,343) $(5,582,166)
============= ============= ============= ============= =============
</TABLE>
NOTE 5 - LOAN RECEIVABLE - RELATED PARTIES
In May 1999, Strategicus loaned $310,000 to one of its officers. The loan
accrued interest at 9% per annum and was due on July 30, 1999. In connection
with the Company's merger with Strategicus, the Company assumed the loan and
entered into an employment agreement with the officer whereby the Company agreed
not to demand repayment on the loan during the employment period. The Company
also agreed to forgive 50% of the loan principal, plus all accrued interest
thereon, on January 1, 2000 and the remaining 50% plus accrued interest on the
first anniversary of the officer's employment, provided that the agreement had
not been terminated.
In June 1999, the Company loaned $267,000 to another officer of Strategicus. In
connection with the Company's merger with Strategicus, the officer entered into
a consulting agreement with the Company and the Company agreed not to demand
repayment of the loan during the term of the consulting agreement. The Company
also agreed to forgive the loan principal and accrued interest thereon ratably
over the first three-year period of the consulting agreement.
-F15-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 6 - LOAN AND ADVANCE RECEIVABLE
In December 1998, the Company made a non-interest bearing, unsecured loan of
$200,000 to a stockholder. The loan was outstanding as of December 31, 1998 and
repaid during March and April of 1999.
In July 1999, the Company made a non-interest bearing, unsecured advance of
$60,000 to a potential future investee company. The advance remained outstanding
as of September 30, 1999.
NOTE 7 - OWNERSHIP INTERESTS AND ADVANCES IN INVESTMENTS
The following summarizes the Company's ownership interests in Affiliated
Companies accounted for under the equity method or cost method of accounting.
The ownership interests are classified according to applicable accounting
methods at December 31, 1998 and September 30, 1999. Cost basis represents the
Company's original acquisition cost less any impairment charges in such
companies.
<TABLE>
<CAPTION>
September 30, 1999
December 31, 1998 (Unaudited)
------------------------------------------ -------------------------------------------
Percentage Percentage
Value of Carrying of
Carrying Cost Basis Ownership Value Cost Basis Ownership
----------- ------------ ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Equity Method
College 411 $ - $ - - $ 864,380 $ 916,110 22
Asset Exchange - - - 396,542 400,000 20
--------- --------- ------------ ------------
- - - 1,260,922 1,316,100
Cost Method
Asia CD - - - 3,964,440 3,964,440 12
--------- --------- ------------ ------------
$ - $ - $ 5,225,362 $ 5,280,540
========= ========= =========== ===========
</TABLE>
-F16-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 7 - OWNERSHIP INTERESTS AND ADVANCES IN INVESTMENTS (Continued)
The following summarized financial information for Affiliate Companies accounted
for under the equity method of accounting at December 31, 1998 and September 30,
1999 (unaudited) has been compiled from the financial statements of the
respective companies:
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 (Unaudited)
December 31, -----------------------------------------------
1998 College411 Asset Exchange Combined
------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Current Assets $ - $60,497 $179,127 $239,624
Noncurrent Assets - 31,782 10,106 41,888
---------- ------- --------- --------
Total Assets $ - $92,279 $189,233 $281,512
========== ====== ======== ========
Current Liabilities $ - $8,046 $36,762 $44,808
Stockholders' Equity - 84,233 152,471 236,704
---------- ------- --------- --------
Total Liabilities and
Stockholders' Equity $ - $92,279 $189,233 $281,512
========== ====== ======== ========
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30, 1999 (Unaudited)
December 31, ----------------------------------------------------
1998 College411 Asset Exchange Combined
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
Net Loss - (100,017) (48,529) (148,546)
=========== =========== =========== ===========
Loss Attributable to the Company
Company $ - $(29,470) $(3,458) $(32,928)
=========== =========== =========== ===========
</TABLE>
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ ----------- ----------
(Unaudited)
<S> <C> <C> <C>
Computer Equipment $ - $ - $ 27,898
Office Furniture - - 15,791
--------- --------- --------
- - 43,689
Less Accumulated Depreciation - - (2,277)
--------- --------- --------
$ - $ - $ 41,412
========= ========= ========
</TABLE>
Depreciation expense for 1998 was $0 and $2,277 for the nine-month period ended
September 30, 1999 for continuing operations. Depreciation expense for
discontinued operations for 1996, 1997, 1998 and for the nine-month periods
ended September 30, 1998 and 1999 was $11,452, $177,491, $224,291, $168,515 and
$174,565 respectively.
-F17-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 9 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement carrying amounts of assets and liabilities and
the amounts used for income tax purposes. The tax effects of temporary
differences and carryforwards that give rise to significant portions of the
deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------- September 30,
1997 1998 1999
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets (liabilities)
Temporary differences:
Amortization of financing fees $ - $ 16,000 $ 35,000
Losses from equity investments - - 22,000
Deferred compensation - - 488,000
Deferred tax assets (liabilities) Temporary
differences discontinued operations:
Vesting of non-qualified stock options 72,000 82,000 87,000
Accrued salaries and compensation to related parties - 37,000 (37,000)
Amortization of discount 21,000 132,000 132,000
Common stock and warrants issued 1,000 20,000 107,000
Depreciation (27,000) (29,000) (45,000)
----------- --------- ----------
Total temporary differences 67,000 258,000 789,000
Federal and state deferred tax benefits arising from
net operating loss carryforwards - 75,700 1,060,000
Federal and state deferred tax benefits arising from net
operating loss carryforwards of discontinued operations 4,043,000 6,781,300 8,483,000
Research and development credits from discontinued
operations
168,000 278,000 328,000
----------- --------- ----------
4,278,000 7,393,000 10,660,000
Less valuation allowance (4,278,000) (7,393,000) (10,660,000)
----------- ---------- -----------
Net deferred tax asset $ - $ - $ -
=========== =========== ===========
</TABLE>
In accordance with federal income tax regulations, the net loss incurred by the
LLC from inception to the date of the Initial Merger has been excluded from the
benefits of the net operating loss carryforwards reflected above.
-F18-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 9 - INCOME TAXES (Continued)
The following table presents the principal reasons for the difference between
the income tax benefit using the Company's effective tax rates and the United
States federal statutory income tax rate of 35%:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30, Pro Forma
----------------------------------------- --------------------------- December 31,
1996 1997 1998 1998 1999 1996
------------- ------------- ------------- ------------- ------------- ---------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit at
statutory rate $ - $ - $ 74,000 $ 2,000 $ 5,856,000 $ 1,160,000
State and local income tax benefits, net
of effect of federal income tax benefit - - 11,000 - 837,000 166,000
Nondeductible research and
development costs - - - - - (354,000)
Nondeductible stock-based
compensation and interest - - - - (5,089,000) -
Tax benefit from discontinued operations 767,000 3,511,000 3,030,000 2,754,000 1,663,000 -
------------- ------------- ------------- ------------- ------------- ---------------
767,000 3,511,000 3,115,000 2,756,000 3,267,000 972,000
Valuation allowance for deferred
income tax benefit (767,000) (3,511,000) (3,115,000) (2,756,000) (3,267,000) (972,000)
----------- ------------ ------------ ------------- ----------- ----------
Income tax benefit $ - $ - $ - $ - $ - $ -
=========== ============ ============ =========== =========== ==========
</TABLE>
Prior to September 18, 1996, the Company was a limited liability company and,
accordingly, losses were passed through to its members. For the period from
September 18, 1996 through December 31, 1998 and through September 30, 1999, the
Company had losses which resulted in net operating loss carryforwards for income
tax purposes amounting to approximately $17,144,000 and $23,000,000,
respectively, which expire during 2011 through 2019. However, this carryforward
may be significantly limited due to changes in the ownership of Net Value, Inc.
as a result of future equity offerings. Net Value, Inc. has also generated
research and development credits approximating $328,000 that expire in 2012
through 2020.
The pro forma presentation reflects the effect on the Company had the change in
capital structure to a corporation been effective as of December 16, 1994 (the
Company's inception) (see Note 2).
Recognition of the benefits of the net deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company has established valuation
allowances for deferred tax assets (net of liabilities) of approximately
$4,278,000, $7,393,000 and $10,660,000 as of December 31, 1997 and 1998, and
September 30, 1999, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Commitments and contingencies not disclosed elsewhere in the financial
statements are as follows:
Subsequent to the sale of substantially all of the assets of Net Value, Inc.
(see Note 4), Net Value, Inc. retained approximately $2 million of liabilities.
Included in these liabilities is an ongoing lease obligation for vacated office
space at Net Value, Inc.'s previous headquarters. On November 23, 1999, the
landlord filed a lawsuit against Net Value, Inc. seeking to recover damages and
costs related to an alleged breach of the lease. The entire remaining base lease
obligation has been included in net current liabilities of discontinued
operations as of September 30, 1999.
-F19-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Net Value, Inc. may also remain liable for an obligation to DMR Consulting
Group, Inc. ("DMR") in connection with consulting services which DMR was to
provide Net Value, Inc. According to a settlement agreement amended on December
3, 1998, Net Value, Inc. has a remaining outstanding balance of $170,000 due to
DMR. Net Value, Inc. did not make the required payments to DMR, and by the terms
of the amended settlement agreement, DMR may assert a claim against Net Value,
Inc. for an additional $475,000. At September 30, 1999, Net Value, Inc. had
recorded a liability due to DMR for the total potential liability of $645,000 on
its books and records.
Upon the contemplated Share Exchanges with the remaining Net Value, Inc.
stockholders and the completion of the Merger, any liabilities of Net Value,
Inc. will become liabilities of the Company.
Additional commitments and contingencies relating to discontinued operations are
disclosed in Note 21.
NOTE 11 - NOTES AND LOANS PAYABLE
Notes and loans payable consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Convertible Debt Offering (a) $ 1,402,500 $ 5,017,500
Rozel (b) 200,000 -
FAC Enterprises (c) 40,000 -
FEG (d) 900,000 900,000
Transamerica (e) - 100,336
Exchange Notes (f) - 2,038,969
Short-Term Borrowings (g) - 392,000
Discontinued Operations 4,275,000 5,199,327 815,816
------------ ---------- -----------
4,275,000 7,741,827 9,264,621
Less - Discount on notes payable (1,187,442 ) (1,645,620)
- Discount on notes payable -
discontinued operations (2,463,090) - -
------------ ---------- -----------
1,811,910 6,554,385 7,619,001
Less - Amount due within one year (1,140,000) (988,287)
- Amount due within one year -
discontinued operations (1,811,910) (5,120,293) (815,816)
------------ ---------- -----------
Noncurrent portion $ - $ 215,058 $5,814,898
=========== ========== ==========
Noncurrent portion-discontinued operations $ - $ 79,034 $ -
============= ========== ==========
</TABLE>
-F20-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 11 - NOTES AND LOANS PAYABLE (Continued)
(a) In October 1998, the Company commenced a private offering of
convertible debentures ("Debentures"). The Debentures are convertible
promissory notes that accrue simple interest at 8% per annum and are
convertible into the Company's common stock at any time by the holders
at a conversion price of $2.00 per share. The Company may force the
mandatory conversion of the Debentures into shares of its common stock
at a conversion price upon the occurrence of (i) the consummation of
the Merger (see Note 1); (ii) the acquisition of 80% of the issued and
outstanding capital stock of Net Value, Inc. by the Company; or (iii)
the effective date of a registration statement registering all shares
of common stock issuable upon conversion of the Debentures. The
maturity date of the convertible promissory notes is the earlier of (i)
the date on which the holder elects to convert all of the outstanding
unpaid principal and accrued interest on the note into shares of common
stock; (ii) the date upon which the Company elects to cause a mandatory
conversion of all of the outstanding principal and accrued interest on
the note into shares of common stock; or (iii) two years from the date
of the issuance of the Debentures. The Company completed the private
offering of the Debentures in January 1999. The aggregate principal
amount of the Debentures was $1,642,500, of which approximately
$1,402,500 was raised as of December 31, 1998. As of September 30,
1999, holders of these Debentures converted the aggregate principal
amount of $240,000 and the accrued interest thereon of $7,448 into
123,724 shares of the Company's common stock. From October 1, 1999
through February 4, 2000, holders of these Debentures converted
additional principal of $1,300,000 and accrued interest thereon of
$113,567 into 706,784 shares of the Company's common stock.
In the first quarter of 1999, the Company commenced a second private
offering of Debentures. Other than having a conversion price of $2.50
per share, these Debentures contain the same terms as the above
Debentures containing a $2.00 conversion price. Through this second
offering, the Company sold additional Debentures in the aggregate
principal amount of $6,215,000 as of September 30, 1999. As of
September 30, 1999, holders of these Debentures converted the aggregate
principal amount of $2,600,000 and the accrued interest thereon of
$30,159 into 1,051,943 shares of the Company's common stock. From
October 1, 1999 through February 4, 2000, holders of these Debentures
converted additional principal in the aggregate principal amount of
$767,000 and the accrued interest thereon of $32,479 into 319,792
shares of the Company's common stock.
In connection with these two offerings of Debentures, the Company paid
commissions ranging from 6% to 10% of the aggregate principal amount of
the Debentures sold by placement agents. These commissions and certain
professional fees related to the sale of the Debentures amounted to
$147,485 in 1998 and $495,877 for the nine-month period ended September
30, 1999, and are being amortized as financing fee expense over the
term of the Debentures. The unexpired portion of these financing fees
amounting to $129,049 and $216,477 at December 31, 1998 and September
30, 1999, respectively, have been reflected on these financial
statements as prepaid financing fees. Financing fee expense relating to
the Debentures in 1998 and for the nine months ended September 30, 1999
amounted to $18,436 and $414,595, respectively.
<PAGE>
The conversion rights provide the holders of the Debentures with a
beneficial conversion feature upon issuance in accordance with Emerging
Issues Task Force D-60 "Accounting for the Issuance of Series A
Convertible Preferred Stock and Debt Securities with a Nondetachable
Conversion Feature" ("EITF D-60"). A discount related to the beneficial
conversion feature was ascribed to the Debentures upon issuance, and is
being amortized as interest expense through March 1, 2000, the date the
Merger is expected to become effective. The discount related to the
beneficial conversion feature for the Debentures issued in 1998 and
during the nine months ended September 30, 1999 amounted to an
aggregate of $1,400,000 and $6,449,020, respectively, based upon a fair
market value for the Company's common stock on each issuance date,
which is the trading price less a 5% restricted share discount. The
fair market value ranged between $3.92 and $6.65 per share.
Amortization of the discount amounted to $212,558 and $7,094,046 in
1998 and for the nine-month period ended September 30, 1999,
respectively, and has been reflected as interest expense in the
accompanying statements of operations. At December 31, 1998 and
September 30, 1999, the unexpired portion of the discount amounted to
$1,187,442 and $542,416, respectively, and has been reflected on the
balance sheet as a reduction in notes payable. The effective interest
on the Debentures was limited to one hundred percent of the amount of
the proceeds that had been received on the debt.
(b) In December 1998, the Company borrowed $200,000 from Rozel
International Holdings Limited ("Rozel"), a related party. The loan was
non-interest bearing and was repaid in February 1999.
(c) In 1998, the Company borrowed $40,000 from FAC Enterprises, Inc. The
loan accrued simple interest at a rate of 10% per annum, and was repaid
in February 1999.
-F21-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the
Nine-Month Periods Ended September 30, 1998 and 1999 is Unaudited)
NOTE 11 - NOTES AND LOANS PAYABLE (Continued)
(d) In September 1999, the Company borrowed $900,000 from Founders Equity
Group, Inc. ("FEG"). The note accrued simple interest at 10% per annum
and had a maturity date of March 1, 1999 ("Founders' Note"). Interest
expense on the Founders' Note amounted to $27,616 in 1998 and $22,500
in 1999 through March 1. The entire interest expense was paid in March
1999. The Company incurred a $45,000 financing fee on the procurement
of this note, and this amount has been amortized over a six-month
period. The unexpired portion of this financing fee, amounting to
$15,000 at December 31, 1998, has been reflected on these financial
statements as prepaid financing fees at December 31, 1998. The
financing fee expense on the Founders' Note in 1998 and for the two
months ended March 1, 1999 amounted to $30,000 and $15,000,
respectively. An affiliate of a shareholder of the Company guaranteed
the Founders' Note and the accrued interest thereon.
On March 1, 1999, the Company issued a convertible promissory note in
the principal amount of $900,000 to FEG, and paid $50,334 in accrued
interest in full payment of the original Founders' Note. The
convertible promissory note accrues interest at the simple rate of 10%
per annum and matures on the earlier of (i) the date on which the
lender elects to exercise its conversion rights; (ii) the date on which
the Company elects to exercise its conversion rights; (iii) the
one-year anniversary of the consummation of the Merger; or (iv) March
1, 2000, if the Merger has not been consummated by that date. An
affiliate of a shareholder of the Company guaranteed the convertible
promissory note, including accrued interest. The Company is required to
pay all unpaid interest accrued on the convertible promissory note on a
quarterly basis commencing on July 1, 1999. At the noteholder's option,
such payments may be in cash or in shares of the Company's common stock
at a price equal to 80% of the bid price of the Company's common stock
on the interest payment due date. The noteholder may convert all or any
part of the outstanding principal amount of the convertible promissory
note, plus all accrued interest thereon through the date of conversion,
into shares of the Company's common stock at a conversion rate of $2.50
per share. The Company may require the holder to convert the entire
principal amount of the convertible promissory note, plus all accrued
interest thereon, upon the Company's common stock attaining certain
price and volume requirements and upon the registration for resale of
all shares of the Company's common stock issuable to the holder upon
such mandatory conversion of the convertible promissory note. The
holder is also entitled to piggyback registration rights on any
registration statement filed by the Company subsequent to the Merger,
with respect to all shares issuable upon its conversion of the
convertible promissory note. As additional consideration for the
agreement to cancel the Founders' Note and accept a convertible
promissory note in full satisfaction of the Company's obligations
pursuant to the Founders' Note, the Company issued a warrant to
purchase 90,000 shares of the Company's common stock at an exercise
price of $2.50 per share and a warrant to purchase 90,000 shares of the
Company's common stock at an exercise price of $5.00 per share
("Founders' Warrant"). Each of these warrants may be exercised at any
time prior to February 28, 2002. There are no registration rights
granted with respect to any shares of the Company's common stock issued
upon the exercise of either of these warrants. The value ascribed to
the Founders' Warrants, as determined by an independent valuation
company, aggregated $454,500 and is being expensed as financing fee
expense through March 1, 2000, the date the Merger is expected to
become effective and conversion of the promissory note is expected to
take place. Financing fee expense related to the Founders' Warrants for
the nine months ended September 30, 1999 amounted to $265,125 and the
unexpired portion of the financing fee at September 30, 1999 was
$189,375.
<PAGE>
The conversion rights under the convertible promissory note provides
the holder with a beneficial conversion feature in accordance with EITF
D-60. A discount related to the beneficial conversion feature was
ascribed to the convertible promissory note upon issuance, and is being
amortized as interest expense through March 1, 2000, the date the
Merger is expected to become effective and conversion of the promissory
note is expected to occur. The discount related to the beneficial
conversion feature for the convertible promissory note amounted to
$900,000, based upon a fair market value for the Company's common stock
of $5.70 per share, which is the trading price on the date of issuance
less a 5% restricted share discount. Amortization of the discount
amounted to $525,000 for the nine months ended September 30, 1999 and
has been reflected as interest expense in the accompanying statements
of operations. At September 30, 1999, the unexpired portion of the
discount amounted to $375,000 and has been reflected on the balance
sheet as a reduction in notes payable. The effective interest on the
convertible promissory note was limited to one hundred percent of the
proceeds that had been received on the debt. FEG converted the total
principal amount of the promissory note to common stock in February
2000.
(e) In May 1998, Net Value, Inc. financed $175,500 of a three-year
insurance premium, amounting to $197,500, for the liability coverage of
its directors and officers. In 1999, the binder was rewritten to cover
the directors and officers of the Company and all of the Company's
majority-owned subsidiaries effective October 1998, and
correspondingly, the financing liability was assumed by the Company in
1999. The financing accrues interest at 7.76% per annum, and requires
monthly installment payments of $5,923. Interest expense on the loan
amounted to $6,399 for the first nine months of 1999.
-F22-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the
Nine-Month Periods Ended September 30, 1998 and 1999 is Unaudited)
NOTE 11 - NOTES AND LOANS PAYABLE (Continued)
(f) On January 7, 1999, the Company offered the holders of certain
promissory notes previously issued by Net Value, Inc. an exchange of
their existing promissory notes for promissory notes issued by the
Company through a private offering ("Exchange Notes"). The principal
balances for each of the Exchange Notes was equivalent to the principal
balances on the Net Value, Inc. notes, plus the accrued interest on the
notes through December 31, 1998. The holders of the Exchange Notes may
convert all or any part of the outstanding principal plus the accrued
interest thereon into shares of the Company's common stock at a
conversion rate of $2.00 per share at any time. The Company may convert
the principal and accrued interest on the Exchange Notes into shares of
the Company's common stock at a rate of $2.00 per share, upon the
Company's common stock achieving certain market price targets. The
Exchange Notes accrue simple interest at 12% per annum, and have a
maturity date of the earlier of (i) the date on which either the holder
or the Company exercise their respective conversion rights under the
Exchange Notes; or (ii) the one-year anniversary of the closing of the
Merger. The terms of the Exchange Notes also provide that the Company
issue to the holders of the Exchange Notes warrants to purchase
one-half of one share of the Company's common stock for each share
purchased through conversion ("Exchange Warrants"). The Exchange
Warrants will be exercisable over a period of three years from the date
of issuance, and will carry an exercise price of $6.00 per share. The
shares of stock purchased through the conversion of the Exchange Notes
or through the Exchange Warrants are subject to a lockup agreement for
a one-year period subsequent to the effective date of the Merger,
unless prior written agreement from American Maple Leaf ("AML") is
obtained. AML had served as the investment banker for Net Value, Inc.
and had been responsible for all fundraising efforts involving the
promissory notes. As of April 30, 1999, $4,270,125 of Exchange Notes
had been issued by the Company, which replaced $3,800,000 of principal
and $470,125 of accrued interest on the Net Value, Inc. promissory
notes. The remaining holders of the Net Value, Inc. promissory notes
elected not to participate in the offering of the Exchange Notes. In
December 1999, Net Value, Inc. repaid $225,000 of outstanding principal
and the accrued interest thereon in full satisfaction of these
remaining Net Value, Inc. notes.
The conversion rights under the Exchange Notes provide the holders a
beneficial conversion feature upon issuance in accordance with EITF
D-60. A discount related to the beneficial conversion feature was
ascribed to the Exchange Notes upon issuance, and is being amortized as
interest expense through March 1, 2000, the date the Merger is expected
to become effective. The discount related to the beneficial conversion
feature for the Exchange Notes issued during the nine months ended
September 30, 1999 amounted to $4,270,125, based upon a fair market
value for the Company's common stock of $5.34 per share, which is the
trading price less a 5% restricted share discount. Amortization of the
discount amounted to $3,541,922 for the nine months ended September 30,
1999 and is reflected as interest expense in the accompanying
statements of operations. At September 30, 1999, the unexpired portion
of the discount amounted to $728,203 and has been reflected as a
reduction in notes payable in the accompanying balance sheet. The
effective interest on the Exchange Notes was limited to one hundred
percent of the amount of the debt. Interest incurred on the Exchange
Notes, exclusive of amortization on the debt discount, amounted to
$181,820 for the nine months ended September 30, 1999. Exchange
Warrants to acquire 586,228 shares were outstanding at September 30,
1999.
(g) From July 1999 through September 1999, the Company borrowed $392,000 in
the form of non-interest bearing advances from three of its
shareholders. $380,000 of these advances were repaid in October 1999.
NOTE 12 - CAPITAL STOCK ACTIVITY
As more fully described in Notes 1 and 2, the combination of Net Value, Inc. and
Holdings was treated as a recapitalization of Net Value, Inc., whereby a limited
number of Net Value, Inc. shareholders exchanged four shares of Net Value, Inc.
common stock for one share of Holdings' common stock and one share of Holdings'
Series A convertible preferred stock. Upon the consummation of the Merger in
2000, the recapitalization of Net Value, Inc. is expected to be completed. The
following capital stock transactions for the years ended December 31, 1996, 1997
and 1998 and for the nine months ended September 30, 1999, have been restated to
reflect the recapitalization, whereby Holdings issued one share of common stock
and one share of Series A convertible preferred stock for every four shares of
Net Value, Inc. common stock originally issued.
-F23-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
On July 16, 1996, Net Value, Inc. was formed solely for the purpose of merging
with the LLC. On August 2, 1996, in exchange for $1,090, the initial
stockholders ("the Founders") received an aggregate of the equivalent of 272,500
shares of common stock and preferred stock (the "Founders' Shares"). In
connection with Net Value, Inc.'s formation, APP Investments, Inc. ("APP"), an
affiliate of American Maple Leaf Financial Corporation ("AML"), a related party
and one of the Founders, was issued warrants to acquire the equivalent of
500,000 shares of Net Value, Inc.'s common stock at an exercise price of $6.00
per share. The warrants are currently exercisable, expire in August 2001 and
carry antidilutive rights. At December 31, 1998, the antidilutive provisions
entitle APP to obtain 1,060,222 shares of Net Value, Inc.'s common stock at an
exercise price of $2.83 per share.
On September 6, 1996, Net Value, Inc. sold an aggregate of the equivalent of
145,357 shares of common stock and preferred stock to a group of Accredited
Investors [as defined under Regulation D of the Securities Act of 1933, as
amended ("Accredited Investors")] for an aggregate price of $100,000. This
Accredited Investor group consisted of certain Founders and a group of other
initial investors. These funds were utilized to fund operating and formation
costs.
On September 6, 1996, Net Value, Inc. sold an aggregate of the equivalent of
62,500 shares of common stock and preferred stock to a group of Accredited
Investors for an aggregate price of $350,000.
On September 6, 1996, Net Value, Inc. sold the equivalent of 162,500 shares of
common stock and preferred stock to VDC Corporation, LTD ("VDC") for an
aggregate purchase price of $650,000. At the time of the sale, VDC was a
strategic investor that the Company was considering for a business combination.
All shares held by VDC were sold to Rozel, a related party, on December 18, 1997
(see Note 21).
On September 12, 1996, the LLC entered into an agreement with Muzak Limited
Partnership ("Muzak") (the "Muzak Agreement") whereby Muzak was appointed as the
exclusive sales agent for a three-year period. In connection with the Muzak
Agreement and the Initial Merger (see Note 1), Muzak, in its capacity as a
member of the LLC, received the equivalent of 118,500 shares of common stock and
preferred stock in the Initial Merger, and options to purchase shares of Net
Value, Inc.'s common stock. On April 3, 1997, Net Value, Inc. and Muzak mutually
agreed to terminate the Muzak Agreement. Upon the termination of the Muzak
Agreement, Muzak retained the equivalent of 118,500 shares of common stock and
preferred stock; however, all options granted to Muzak automatically expired and
were canceled.
On September 18, 1996, Net Value, Inc. entered into an agreement with AML, a
related party, pursuant to which AML agreed to provide investment banking
services to Net Value, Inc. for the nine-month period commencing September 18,
1996 in exchange for the equivalent of 87,500 shares of common stock and
preferred stock valued at $1,225,000. Such shares were issuable to AML in six
equal installments over the term of the agreement which commenced on October 17,
1996 and ended on March 17, 1997. During 1996, Net Value, Inc. recorded
consulting expense of approximately $671,000 in a noncash transaction
representing the cost of the equivalent of 43,750 shares issued to AML as of
December 31, 1996. During 1997, the remaining equivalent of 43,750 shares of
common stock and preferred stock were issued, resulting in consulting expense of
approximately $554,000 in 1997.
In connection with the Initial Merger, the members of the LLC exchanged all of
their issued and outstanding membership interests, representing cumulative
capital contributions of $500,000, plus the termination and waiver of all
related party agreements, pre-existing rights, claims and causes of action
(except for some predetermined surviving claims) for the equivalent of 768,500
shares of common stock and preferred stock of Net Value, Inc. The Initial Merger
was a reverse acquisition, whereby the legal acquirer, the LLC, was the
accounting acquirer in the transaction. The equivalent of 150,000 of these
shares were issuable pending verification of certain representations and
warranties made by two former executives of the LLC, who are also significant
shareholders of Net Value, Inc. ("Co-Founders"), which was accomplished in July
1997.
-F24-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
On September 19, 1996, after the Initial Merger and subsequent to the first
three private offerings, Net Value, Inc. sold an aggregate of the equivalent of
112,500 shares of common stock and preferred stock to a group of unrelated
Accredited Investors for an aggregate amount of $1,575,000 ($14.00 per common
share).
During the first quarter of 1997, Net Value, Inc. sold an aggregate of the
equivalent of 48,125 shares of common stock and preferred stock to a group of
Accredited Investors for an aggregate purchase price of $385,000 (the equivalent
of $8.00 per common share) less approximately $18,852 in commissions paid.
On May 31, 1997, Net Value, Inc. sold an aggregate of the equivalent of 25,625
shares of common stock and preferred stock to a group of Accredited Investors
for an aggregate purchase price of $205,000 ($8.00 per common share).
Commissions of $4,500 were paid on this offering.
During 1997, Net Value, Inc. issued the equivalent of 25,000 shares of common
stock and preferred stock to VDC and the equivalent of 7,500 shares to a private
investor in connection with the requirements of each of their respective loan
agreements (see Note 21).
In accordance with the terms of the Bridge Offerings, Net Value, Inc. issued the
equivalent of 100,625 shares of common stock and preferred stock and the
equivalent of 402,500 warrants to purchase Net Value, Inc. common stock to a
group of Accredited Investors (see Note 21). The warrants have an exercise price
equal to the lower of $4.00 per share or an initial public offering price
("IPO") per share, should Net Value, Inc. participate in an IPO. The warrants
are exercisable for a period of five years commencing on the date the common
stock issued in connection with the Bridge Offerings is first registered with
the Securities and Exchange Commission.
On November 14, 1997, in a noncash transaction, Net Value, Inc. and VDC agreed
to convert the outstanding Bridge Financing principal and accrued interest due
VDC amounting to $2,578,301 into the equivalent of 805,719 shares of Net Value,
Inc.'s common stock and preferred stock (see Note 21).
On December 15, 1997, in a noncash transaction, Net Value, Inc. issued the
equivalent of 47,550 shares of common stock and preferred stock to AML as
consideration to AML for the issuance of unsecured advances to Net Value, Inc.
(see Note 21).
On December 18, 1997, Rozel acquired the equivalent of all 993,219 shares of
Net Value, Inc.'s common stock and preferred stock which had been owned by VDC
(see Note 21).
On April 13, 1998, Net Value, Inc. issued the equivalent of 688 shares of common
stock and preferred stock as compensation for interest to the lender of a debt
obligation.
In April of 1998, Net Value, Inc. issued the equivalent of 7,500 shares of
common stock and preferred stock to a consultant in exchange for consulting
services performed in 1997.
On June 1, 1998, Rozel converted the equivalent of 80,000 shares of Net Value,
Inc.'s Series A preferred stock into the equivalent of 250,000 shares of Net
Value, Inc.'s common stock (see Note 21).
On July 28, 1998, Net Value, Inc. issued the equivalent of 37,500 shares of its
common stock and preferred stock to Rozel pursuant to the terms of its Series A
preferred stock agreement (see Note 21).
In September 1998, in connection with the recapitalization (see Notes 1 and 2),
Net Value, Inc. reflected an additional 1,000,000 shares of common stock which
represent the Holdings shares outstanding prior to the recapitalization.
-F25-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
In accordance with the terms of the Amended IQ Agreement, in 1998 Net Value,
Inc. issued the equivalent of 90,000 shares of common stock and warrants to
purchase 360,000 shares of Net Value, Inc. common stock to IQ (see Note 21).
In September and October 1998, the Company sold an aggregate of 2,950,000 shares
of common stock for an aggregate purchase price of $590,000 ($0.20 per share),
less approximately $60,570 in commissions paid, to a group of Accredited
Investors. Such shares are subject to a lockup agreement for one year from the
first anniversary of the proposed Merger unless prior written consent of the
Underwriter is obtained.
On November 15, 1998, in accordance with a share exchange agreement between Net
Value, Inc. and the Company, Rozel exchanged all of its Net Value, Inc. Series A
preferred shares for 1,000,000 shares of the Company's common stock and 500,000
shares of the Company's Series A Convertible Preferred Stock. As a result of the
exchange, the Company obtained 100% of the issued and outstanding Series A
preferred stock of Net Value, Inc.
As of December 31, 1998, the Company had entered into share exchange agreements
with twenty Net Value, Inc. shareholders. The Company exchanged 2,019,852 shares
of common stock and 2,019,852 shares of Series A preferred stock for
approximately 66% of the issued and outstanding shares of common stock of Net
Value, Inc.
Costs of issuance relating to the above transactions amounted to $189,090 in
1996, $38,167 in 1997 and $60,570 in 1998. AML, a related party, received
$31,150 and $23,352 of these costs in 1996 and 1997, respectively.
From March 1999 through September 1999, certain holders of the Debentures from
both offerings converted the principal amount of $2,840,000 and accrued interest
thereon of $37,607 into 1,175,668 shares of the Company's common stock (see Note
11).
In the period May 1999 through September 1999, holders of Exchange Notes (see
Note 11) converted principal and accrued interest of $2,344,910 into 1,172,455
shares of the Company's common stock and 586,228 Exchange Warrants. From October
1999 through February 5, 2000, an additional $1,326,822 of principal and
interest was exchanged for 663,411 shares of the Company's common stock and
303,537 Exchange Warrants.
On July 30, 1999, the Company issued 184,627 vested shares of Series A preferred
stock and 601,029 vested shares of common stock, 6,923,599 unvested shares of
common stock and 2,126,833 unvested shares of Series A preferred stock to the
stockholders of Strategicus, in connection with the merger with Strategicus. The
unvested shares for everyone except for one principal were converted to common
stock and then to options. Upon consummation of the merger, each of the former
Strategicus stockholders was appointed to the Company's Board of Directors. In
connection with the Strategicus merger, the principal signed an employment
agreement with the Company and was issued 1,641,310 shares of common stock and
504,187 shares of the Company's Series A preferred stock (all included above).
Subsequently, the principal agreed to exchange his preferred shares for an
additional 302,512 shares of the Company's common stock. In September 1999, the
principal agreed to reduce his common stock shares to 1,763,822.
In July 1999, the Company issued 6,138 shares of the Company's common stock at
the request of the Founders' Note noteholders as payment for $30,084 of accrued
interest which was due on July 1, 1999 (see Note 11).
Pursuant to an offering by the Company in August and September 1999, all of the
outstanding Series A preferred stock was exchanged at a rate of one share of
Series A preferred stock for the equivalent of .6 of a share of the Company's
common stock (the "Preferred Exchange"). The basis of the conversion ratio was
as a result of a negotiated transaction between the Company and the Series A
preferred stockholders.
In September 1999, the Company issued 4,000 shares of its common stock as
consideration for the extension of a Net Value, Inc. note payable. Net Value,
Inc. recognized $17,320 as a loss from discontinued operations, based upon a
fair market value for the Company's common stock of $4.33 per share which is the
trading price on the date of issuance less a 5% discount.
-F26-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
In September 1999, the Company issued 3,750 shares of its common stock to a
former employee of Net Value, Inc. as consideration for entering into a
settlement agreement regarding his employment with Net Value, Inc. Net Value,
Inc. recognized $18,750 as a loss from discontinued operations, based upon a
fair market value for the Company's common stock of $5.00 per share, which is
the trading value on the date of issuance.
In September 1999, the Company issued 6,250 shares of its common stock to each
of two consultants in exchange for consulting services rendered. Net Value, Inc.
recognized $54,126 as a loss from discontinued operations, which is the trading
value on the date of issuance less a 5% restricted share discount.
The Company intends to file a registration statement with the Securities and
Exchange Commission to register shares of its common stock previously issued to
certain shareholders. In August through September 1999, the Company issued an
aggregate of 40,000 shares of its common stock to two such shareholders for
failing to meet an agreed-upon deadline for the filing. The agreed-upon deadline
and associated penalty were negotiated in connection with the issuance of shares
of the Company's common stock. The Company recorded expense of $178,800 which
represents the fair value of the penalty shares issued. An additional 14,000
shares were issued in October 1999.
Holdings plans to complete the Merger with Net Value, Inc. by acquiring the
remaining outstanding shares of common stock on the same terms and conditions as
the Share Exchange transactions, and by exchanging warrants and options to
acquire common stock in Net Value, Inc for warrants and options to acquire
common stock in Holdings. Immediately subsequent to the sale of substantially
all of the assets of Net Value, Inc., there were 4,149,350 shares of Net Value,
Inc. common stock which the Company did not own, outstanding warrants to
purchase 1,822,722 shares of Net Value, Inc. common stock at prices ranging from
$1.50 to $4.00 per share and outstanding options to acquire 1,396,250 shares of
Net Value, Inc. common stock at prices ranging from $0.63 through $7.00 per
share. Included in the outstanding options of Net Value, Inc. are options to
acquire 180,000 shares of common stock that have been granted to the current
officer of Net Value, Inc. who is also an officer of the Company, and two former
officers of Net Value, Inc. Included in the outstanding warrants of Net Value,
Inc. are warrants to acquire 1,060,222 shares of common stock that have been
granted to an affiliate of the Company's Chief Executive Officer (see Note 21
for additional disclosures).
<TABLE>
<CAPTION>
Exercise
Grant Date Price per Expiration
Warrants Granted and Outstanding Shares Date Exercisable Share Date
- -------------------------------- ------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Granted [See Note 11d] 90,000 3/1/99 3/1/99 $ 2.50 2/28/2002
Granted [See Note 11d] 90,000 3/1/99 3/1/99 $ 5.00 2/28/2002
Granted [See Note 11f] 586,228 5/99-9/99 5/99-9/99 $ 6.00 5/2002-9/2002
Granted [See Note 14] 110,498 9/99 9/99 $4.25-$4.875 9/2004
--------------
Balance at September 30, 1999
(Unaudited) 876,726
==============
</TABLE>
-F27-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
Stock Option Plan
The Company is contractually obligated as of September 30, 1999 to grant the
following options under a stock option plan yet to be approved by the Company's
stockholders (see note 13). The following is a reconciliation of options to be
granted, restricted stock, deferred compensation and stock compensation as of
September 30, 1999 (unaudited).
<TABLE>
<CAPTION>
Options & Amor- Total Stock
Grant Exercise Restricted tization Deferred Compensation Deferred
Date Price Stock Earned Period Compensation Expense Compensation
-------- ------- ------------- ---------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[see Note 20] Options 6/99 $1.00 1,020,000 120,000 3 years $6,252,600 $1,348,600 $4,904,000
[see Note 19] Options 8/99 $1.00 5,715,876 - 4 years 11,889,021 495,375 11,393,646
[see Note 20] Options 9/99 $1.00 900,000 90,000 3 years 3,204,000 - 3,204,000
------------- ------------ ---------- -----------
7,635,876 21,345,621 1,843,975 19,501,646
=============
[see Note 19] Unvested
Stock 7/99 1,763,822 2 years 11,253,184 937,765 10,315,419
============= ------------ ----------- ------------
Balance as of
September 30, 1999 (Unaudited) $32,598,805 $2,781,740 $29,817,065
============ ========== ===========
</TABLE>
A summary of the stock options that the Company is contractually obligated to
grant is as follows:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999 (Unaudited)
------------------------- --------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
Contractually obligated to grant at beginning of $ - $ - $ - $ -
period
Contractually obligated to grant - - 7,635,876 1.00
Cancelled - - - -
---------- --------- ---------- ---------
Contractually obligated to grant at end of period - $ - 7,635,876 $ 1.00
========== ========= ========== =========
Options contractually exercisable at end of period - 120,000
========== ==========
Shares available for grant is unknown as the
Company's Stock Option Plan has yet to be
approved by the Company's Board of Directors - -
========== ==========
Weighted average fair value of options contractually
obligated to be granted during the years as
determined by an independent valuation company $ - $ 0.41
========== ==========
</TABLE>
-F28-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
The following table summarizes information about fixed stock options which are
contractually obligated to be granted as of September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------------
Number of Weighted Number of
Options Average Weighted Options Weighted
Contractually Remaining Average Contractually Average
Obligated to Contractual Exercise Obligated to Exercise
Exercise Price Be Granted Life Price Be Granted Price
-------------- --------------- ------------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$1.00 7,635,876 7.22 $1.00 120,000 $1.00
========= ========
</TABLE>
Under the stock option plan that the Company expects to be adopted by the Board
of Directors, options to purchase shares of the Company's common stock may be
granted to officers, directors, employees, consultants and independent
contractors. Accordingly, the Company will reserve shares of it's common stock
for issuance upon the exercise of options granted pursuant to this plan. Options
granted under this plan expire no more than ten years following the date of
vesting and are subject to limitations on transfer. Options granted under this
plan will be subject to various vesting provisions. The exercise price of
options granted under this plan will be determined by the Board of Directors or
a committee thereof. The Board anticipates having the ability to amend, suspend
or terminate this plan at any time, subject to restrictions imposed by
applicable law.
Preferred Stock
As of December 31, 1998, the Company had 5,000,000 shares of preferred stock
authorized, having a par value of $.001 per share. Dividends, voting rights and
other terms, rights and preferences of the preferred stock may be designated by
the Company's Board of Directors from time to time. As of December 31, 1998, the
Company had 2,519,852 issued and outstanding shares of Series A convertible
preferred stock (see Note 20).
In September 1999, the Company entered into a convertible preferred stock
purchase agreement with certain investors to raise a maximum of $5,000,000.
2,000 Series B shares were issued and outstanding as of September 30, 1999 (see
Note 14).
Stock-Based Compensation
During 1998, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"). As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Boards No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants and
common stock issuances as of the grant date. APB 25 recognizes the intrinsic
value of the instruments issued by the Company as of the measurement date, which
is generally the date at which the number of shares that an individual is
entitled to receive and the purchase price are both known. Had compensation
expense for the years ended December 31, 1996, 1997 and 1998, and the nine month
periods ended September 30, 1998 and 1999 been determined under the fair value
provisions of SFAS 123, the Company's net loss and net loss per share would have
differed as follows:
-F29-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 12 - CAPITAL STOCK ACTIVITY (Continued)
<TABLE>
<CAPTION>
December 31, December 31, December 31, September 30, September 30,
1996 1997 1998 1998 (Unaudited) 1999 (Unaudited)
------------- ------------ ------------ ---------------- ----------------
Net Per Net Per Net Per Net Per Net Per
Loss Share Loss Share Loss Share Loss Share Loss Share
------ ----- ---- ----- ---- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As reported
Under APB 25 $ - $ - $ - $ - $(442,877) $ (0.09) $(5,805) $ - $(16,732,147) $(1.94)
======== ======= ========= ======== ========== ========= ======== ======= ============= =======
Pro Forma
Under
SFAS 123 $ - $ - $ - $ - $(442,877) $ (0.09) $(5,805) $ - $(16,819,314) $(1.95)
======== ======= ========= ======== ========== ========= ======== ======= ============= =======
</TABLE>
The fair market value of the options and warrants used in the above computation
was determined by an independent valuation company, using the Black Scholes
option pricing model. For each option grant date, the independent valuation
company used the stock price of freely trading shares on that date, less a 5%
restricted share discount, the stated exercise price, the stated vesting and
exercise periods, the three-month Treasury bill rate as the riskless rate for
that date, and a volatility factor of 1.5.
Loss Per Share
The Company has adopted SFAS 128, and has followed the guidelines of SFAS 128 in
the presentation of loss per share for all periods presented in the financial
statements. Options and warrants to purchase common stock and Series A
convertible preferred stock are not included in the computation of diluted loss
per share because the effect of these instruments would be antidilutive for all
periods presented. The common shares potentially issuable arising from these
instruments which were outstanding during the periods presented in the financial
statements are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30, (Unaudited)
Exercise ----------------------------------- --------------------------
Conversion Price 1996 1997 1998 1998 1999
------------------ ------------ ------------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options* $0.00 - - - - -
Warrants*** $2.50-6.00 - - - - 1,386,468
Series A preferred stock .6 common shares - - 1,511,911 - -
Series B mandatory redeemable
convertible preferred stock $4.0875 ** - - - - 489,297
Convertible debt $2.00-2.50 - - 701,250 - 3,610,984
Unvested common stock $0.00 - - - - 1,763,822
------------------ ------------ ------------ --------- --------- -----------
- - 2,213,161 - 7,250,571
============ ============ ========== ========== ===========
</TABLE>
* The Company is obligated to issue options to purchase 7,635,876 shares of
the Company's common stock at an exercise price of $1.00.
** The conversion price may be reset at the election of the holder to the
higher of the average closing bid price or $2.50. (See Note 14).
*** Includes warrants to purchase 509,742 shares of the Company's common stock
if the holders of the exchange notes were to convert the outstanding
principle at September 30, 1999.
-F30-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 13 - STOCK OPTION PLAN
The Company is contractually obligated to issue options under a stock option
plan yet to be approved by the Company's stockholders (see Notes 12, 19, and
20).
In June 1999, Metacat adopted a Stock Option Plan (the "Plan") which provides
for the granting of options to employees, officers and directors of Metacat. The
number of shares which can be purchased under this plan is limited to 50,000
shares of Metacat common stock and 50,000 shares of Metacat Series B preferred
stock. The Plan is intended to qualify as an "incentive stock option plan" under
Section 422 of the Internal Revenue Code. The exercise prices of the options
granted under the Plan are to be determined by the Board of Directors or other
Plan administrators but shall not be lower than one hundred percent of the fair
market value of a share of common stock on the date the option is granted for
employees and not less than one hundred and ten percent for officers and
directors with greater than ten percent voting power. The options under the Plan
vest immediately upon grant unless otherwise specified and are valid for ten
years, except for officers and directors with greater than ten percent voting
power, which options expire five years after the grant date. Through September
1999, Metacat issued options to purchase 27,025 shares of its Series B preferred
stock to one of its directors.
NOTE 14 - MANDATORY REDEEMABLE PREFERRED STOCK
In September 1999, the Company entered into a convertible preferred stock
purchase agreement with certain investors ("Preferred Agreement") to raise a
maximum of $5,000,000. Under the Preferred Agreement, investors purchased an
aggregate of 4,824 shares of the Company's Series B convertible preferred stock
("Series B Shares"), with a liquidation preference of $1,000 per share, and
related warrants (the "Series B Warrants"). Should the Company fail to maintain
the listing of its stock on the OTC Bulletin Board, or should its current
registration statement fail to become effective by February 14, 2000, the
holders of the Series B shares may force the Company to redeem their shares for
125% of their purchase price. If the Company's current registration statement is
not effective by February 23, 2000, the Company's stock may de-list from the OTC
Bulletin Board. The holders may elect not to exercise their redemption rights if
the Company fails to maintain the listing of its stock and the holders are then
entitled to receive 1% of the purchase price for the first thirty days the
Company shares are de-listed and 2% for the following sixty-day period.
The Series B Shares are convertible into the Company's common stock at a
conversion price equal to the average closing bid price of the Company's common
stock for a five-day period prior to the closing date, which was calculated to
be $4.0875 ("Conversion Price"). The holders of the Series B Shares have the
right, on a one-time basis, to elect to reset the Conversion Price to a price
not below $2.50. This election can be made within one year after the date the
shares of the Company's common stock, underlying the Series B Shares and the
Series B Warrants, are registered with the Securities and Exchange Commission
(the "Effective Date"). The reset Conversion Price is to be based on the average
closing bid price of the Company's common stock for a two-day period immediately
preceding the receipt by the Company of the holders' notice of exercise of their
reset option. Except as noted above, the Series B Shares may not be converted by
the holder until the earlier of 180 days from the closing date and 20 days after
the Effective Date and shall automatically convert on the third anniversary of
the Effective Date. However, the automatic conversion date may be extended in
certain circumstances.
The Series B Shares bear a dividend rate of 5% per annum, which may increase to
10% per annum in the event the closing bid price of the Company's common stock
falls below $2.50 for a period of ten consecutive trading days. The dividend
rate may then be reinstated at 5% if the closing bid price of the common stock
exceeds $2.50 for a period of five consecutive trading days. The Series B
warrants are exercisable at prices equivalent to a range between 110% to 140% of
the Conversion Price for a period of five years from the closing date; however,
after the registration statement becomes effective, the Company may terminate
the Series B Warrants upon 20 days' notice if the closing bid price of the
common stock exceeds 150% of the purchase price for the preceding 20 days. The
Series B Warrants are exercisable into 295,040 shares of common stock pursuant
to the terms of the Preferred Agreement. The shares of common stock to be issued
upon the conversion of the Series B Shares or upon the exercise of the Series B
Warrants have registration rights. The Company has the right to redeem the
Series B Shares at any time for an amount equivalent to 120% of the liquidation
preference plus accrued and unpaid dividends. 2,000 Series B Shares were issued
and outstanding and Series B Warrants to purchase 110,498 shares had been
granted as of September 30, 1999. The Series B offering was completed with
unrelated third parties and did not contain any beneficial conversion feature.
The offering was therefore deemed to have been at fair market value. Per an
independent valuation, the $1,000 per share proceeds were allocated as $866
attributable to the preferred stock and $134 attributable to the warrants.
-F31-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 15 - RELATED PARTIES
Related party transactions relating to discontinued operations are disclosed in
Note 21.
NOTE 16 - STOCK SUBSCRIPTION PAYABLE
On September 23, 1999, the Company acquired a 20% interest in AssetExchange,
Inc. for $400,000. At September 30, 1999, $250,000 of the acquisition price had
not yet been paid. The Company paid the balance in full on October 1, 1999. This
amount is reflected as a stock subscription payable on the September 30, 1999
balance sheet.
NOTE 17 - OPERATING SEGMENT INFORMATION
The following summarizes information relating to the Company's segments. All
significant intercompany activity has been eliminated. Assets are owned or
allocated assets are used by each operating segment. Total assets and result of
operations attributable to the discontinued operations, which was previously
considered a separate segment, are not included in the following information.
<TABLE>
<CAPTION>
September 30,
December 31, December 31, December 31, -----------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Consolidated Operating Company (Unaudited) (Unaudited)
Operations
Operating Expenses
Compensation and related expense $ - $ - $ - $ - $ 55,598
Professional fees - - - - 200
Consulting - - - - -
Selling, general and administrative - - - - 10,167
------------- ------------- -------------- ------------- --------------
Operating Loss - Consolidating Operating
Company Operations Before Equity Income - - - - (65,965)
Other Income (Expense)
Interest expense - - - - (1,065)
------------- ------------- -------------- ------------- --------------
Total Other Expense - - - - (1,065)
------------- ------------- -------------- ------------- --------------
Net Loss - Consolidated Operating Company
Operations $ - $ - $ - $ - $ (67,030)
============= ============= ============== ============= ==============
</TABLE>
-F32-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 17 - OPERATING SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
September 30,
December 31, December 31, December 31, -----------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Holding Company Operations
Operating Expenses
Compensation and related expense $ - $ - $ - $ - $ 3,066,493
Professional fees - - 129,878 - 513,733
Consulting - - - - 107,849
Selling, general and administrative - - 10,606 1,120 488,500
Equity loss - - - - 55,188
------------- ------------- -------------- -------------- --------------
Operating Loss - Holding Company - - (140,484) (1,120) (4,231,763)
Other Expense
Interest expense, net - - 253,957 4,685 11,730,175
Financing fees - - 48,436 - 703,179
------------- ------------- -------------- -------------- --------------
Total Other Expense - - (302,393) (4,685) (12,433,354)
------------- ------------- -------------- -------------- --------------
Net Loss - Holding Company Operations $ - $ - $ (442,877) $ (5,805) $ (16,665,117)
============= ============= ============== ============== ==============
Total Assets
Affiliate Company Operations $ - $ - $ 38,618
General Net Value Holdings Operations 371,648 7,670,878
Discontinued Operations 1,800,402 1,050,871 907,486
------------- -------------- --------------
Total Assets $ 1,800,402 $ 1,422,519 $ 8,616,982
============= ============== ==============
Net Loss - Consolidated Operation Company
Operations $ - $ - $ - $ - $ (67,030)
Net Loss - Holding Company Operations - - (442,877) (5,805) (16,665,117)
------------- ------------- -------------- -------------- --------------
Loss from Continuing Operations - - (442,877) (5,805) (16,732,147)
------------- ------------- -------------- -------------- --------------
Net Loss from Discontinued Operations (3,314,094) (11,235,237) (11,106,826) (10,195,343) (5,582,166)
------------- ------------- -------------- -------------- --------------
Total Net Loss $ (3,314,094) $ (11,235,237) $ (11,549,703) $ (10,201,148) $ (22,314,313)
============= ============= ============== ============== ==============
</TABLE>
-F33-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 18 - OPERATING LEASES
The Company shares office space for its principal executive offices in San
Francisco, California with a related party at no expense. The value of the
shared space is minimal. The Company also subleases office space in
Philadelphia, Pennsylvania on a month to month basis at a rate of $2,000 per
month.
In April 1999, Strategicus entered into a lease agreement on behalf of Metacat
for office space in Portland, Oregon. The monthly rent through April 2000 is
$1,200 and $1,248 through April 2001, the date the lease terminates.
NOTE 19 - SUBSEQUENT ACQUISITION (UNAUDITED)
As part of a step transaction to obtain an ownership interest in three unrelated
Internet companies, the Company entered into a letter of intent on May 28, 1999
with Strategicus and a principal of Strategicus ("Principal"), whereby the
Company intended to acquire all of the common stock of Strategicus in exchange
for shares of common and Series A convertible preferred stock ("Strategicus
Merger"). Strategicus was an Oregon corporation that was formed in August 1998,
was in the process of developing Internet operations of its own through its
wholly-owned subsidiary, Metacat, and which had the opportunity to consummate
transactions in two other Internet companies which the Company desired to
obtain. Under the terms of the agreement and as part of a step transaction, the
Company entered into a loan agreement with Strategicus. The loan agreement
permitted Strategicus to borrow a maximum amount of $2,000,000 on a revolving
credit basis, had a maturity date of July 30, 1999, and earned simple interest
at the rate of 10% per annum. The funds loaned to Strategicus under the loan
agreement amounted to $1,555,000, of which $310,000 was then loaned by
Strategicus to its Principal. The loan to the Principal bears simple interest at
9% per annum, and is to be forgiven subject to the Principal remaining an
employee of the Company through May 2000. Of the remaining amounts loaned to
Strategicus, $1,000,000 was used to acquire a 12% interest in AsiaCD, $100,000
was used to acquire an initial 14% interest in College411, and the balance
utilized to pay professional fees related to the Strategicus Merger and fund
certain operating expenses and a $60,000 advance to a potential future investee
company. In connection with the acquisitions, Strategicus also received warrants
to acquire additional shares of AsiaCD and College411 common stock for aggregate
purchase prices of $300,000 and $150,000, respectively. In September 1999, the
Company exercised the College411 warrant, and as a result, the Company's
ownership interest in College411 then increased to approximately 29%. The
Company also loaned $267,000 to a Strategicus shareholder. This loan bears
simple interest at a rate of 9% per annum and is to be forgiven ratably over a
three-year period which is equivalent to the period of the shareholder's
consulting agreement with the Company. The merger with Strategicus was completed
in July 1999 and as a result of the merger, Strategicus no longer exists as a
legal entity and the loan agreement between Strategicus and the Company has been
discharged. The operations of Strategicus and Metacat have been included in the
Company's results of operations beginning in July 1999.
In connection with the Strategicus Merger, the Principal and three other
Strategicus shareholders signed employment or consulting agreements with the
Company. The employment and consulting agreements provide for specified
compensation. In accordance with the merger agreement as amended, the Principal
and the remaining three shareholders of Strategicus collectively received
601,029 shares of the Company's common stock and 184,627 shares of Series A
convertible preferred stock as consideration for the Strategicus shares
received. The Company's common stock and preferred stock exchanged for
Strategicus stock was ascribed a value of $6.06 and $0.77 per share,
respectively, which is the trading price of the common stock on the date of
issuance less a 5% restricted share discount. The value of the Company's stock
issued in the transaction was allocated to the investments in Metacat, AsiaCD
and College411, which were investments held by Strategicus. Management allocated
$250,000 of consideration to Metacat with the balance of the consideration,
along with the legal fees related to the transaction, allocated to AsiaCD and
College411 based upon the underlying cash consideration paid for those
investments. The following schedule reflects management's allocation of the
total consideration paid to acquire the Strategicus stock:
-F34-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 19 - SUBSEQUENT ACQUISITION (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Cash Value of Legal Total
Paid Stock Issued Fees Consideration
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
AsiaCD $1,000,000 $2,827,520 $136,920 $3,964,440
College411* 250,000 706,880 34,230 991,110
Metacat - 250,000 - 250,000
---------- ---------- -------- ----------
$1,250,000 $3,784,400 $171,150 $5,205,550
========== ========== ======== ==========
</TABLE>
* Includes the stock acquired on October 1, 1999 for $75,000 upon the exercise
of warrants.
In August 1999, the shares of Series A convertible preferred stock were
converted into 110,776 shares of the Company's common stock in accordance with
the Preferred Exchange. Additionally, the Principal received 1,641,310 unvested
shares of the Company's common stock and 504,187 shares of Series A convertible
preferred stock, and the three remaining shareholders each received 1,760,763
shares of the Company's common stock and 540,882 shares of Series A convertible
preferred stock as additional consideration. The additional consideration was to
vest over the periods of their respective consulting and employment contracts.
The shares of Series A convertible preferred stock received as additional
consideration were exchanged in August 1999 for shares of common stock in
accordance with the Preferred Exchange. The Principal retained the shares of
common stock received in the Preferred Exchange; however, the three remaining
Strategicus shareholders subsequently agreed to exchange all of their unvested
shares of common stock received as additional consideration for options to
acquire an identical number of shares of common stock in the Company at an
exercise price of $1.00 per share. The unvested shares that the Principal
received and the options the three remaining shareholders received had an
ascribed value of $6.38 per unvested share and an average value of $2.08 per
option which was the trading price on the date of issuance. These agreements, as
well as a stock option plan, are subject to the approval of the Company's
shareholders. The additional consideration issued to the Principal and the three
remaining shareholders vests over 24 and 48 month periods, respectively. As of
September 30, 1999, options to acquire 5,715,876 shares were included in these
agreements. In connection with the additional consideration, the Company
recorded total deferred compensation of $23,142,205 (see Note 12).
<PAGE>
NOTE 20 - EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT
On June 1, 1999, the Company's Chief Executive Officer entered into an
employment agreement with the Company. The employment agreement provides that
the Chief Executive Officer will receive a specified annual salary along with
options to acquire 1,200,000 shares of the Company's common stock at an exercise
price of $1.00 per share, of which 120,000 options are to vest immediately and
the remaining options are to vest equally over a three-year period. The options
may be exercised over a five-year period commencing on the date the options
vest. These options are to have an exercise price that will be less than the
fair market value of the common stock at the date of grant, which resulted in
compensation expense of $1,348,600 for the nine months ended September 30, 1999.
In September 1999, the Chief Executive Officer agreed to reduce his option award
from 1,200,000 shares to 1,020,000 shares. The Company recorded total deferred
compensation of $6,252,600, based upon a fair market value for the Company's
common stock of $7.13 per share which was the trading price on the date of
issuance. The stock option plan is subject to the approval of the Company's
shareholders.
In August 1999, pursuant to a private offering by the Company and as the result
of negotiations between the Company and the Series A preferred shareholders, the
holders of the Series A convertible preferred stock agreed to exchange the
equivalent of one share of Series A convertible preferred stock for .6 share of
common stock.
In September 1999, the Company entered into a three-year employment agreement
with its Chief Operating Officer ("COO"). In accordance with the employment
agreement, the COO is to receive a salary at a specified amount and options to
purchase 900,000 shares of the Company's common stock at an exercise price of
$1.00 per share. The options may be exercised over a five-year period. In order
to facilitate the Company granting the COO these options, the Chief Executive
Officer and three former shareholders of Strategicus each agreed to the
cancellation of their options to purchase 180,000 shares of the Company's common
-F35-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 20 - EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT (Continued)
stock. In addition, the Principal agreed to the cancellation of 180,000 shares
of his shares of the Company's common stock. The Company recorded total deferred
compensation of $3,204,000, based upon a fair market value of $4.56 per share
which was the trading price on the date of issuance. The stock option plan is
subject to the approval of the Company's shareholders.
In September 1999, the Company entered into a Series B convertible preferred
stock purchase agreement with certain investors to raise a maximum of $5,000,000
(see Note 14).
In September 1999, the Company agreed to acquire convertible preferred stock in
Asset Exchange, a development stage company intending to provide banks and other
financial institutions with an Internet-based service which allows them to more
efficiently trade loan portfolio assets. The purchase price of the convertible
preferred stock of Asset Exchange was $400,000. If this preferred stock is
converted, the Company will own approximately 20% of Asset Exchange. The Company
has the right to convert the preferred stock at any time. The conversion price
is subject to adjustment in the event the capital structure of Asset Exchange is
modified.
In October 1999, the Company exercised warrants to purchase additional shares of
common stock in College411. The additional investment in College411was $75,000
and increased the Company's ownership interest to 29% for a total cost of
$991,110.
In October 1999, the Company purchased an approximate 11% interest in Webmodal
directly from the Strategicus Principal, a related party, for $250,000 and
purchased an additional 1% of Webmodal's common stock for $100,000 from
Webmodal. Webmodal is a development stage company intending to develop an
Internet application for use by shippers in purchasing and executing domestic
full-truckload intermodal freight shipments.
In October 1999, the Company sold a total of 676,374 shares of common stock at a
price of $1.00 per share to two entities that are affiliated with a consultant
who is to provide future investment banking services to the Company. The
services are to be provided over a three-year period, and the Company will
recognize consulting fee expense, amounting to the difference between the fair
market value of the common stock and the purchase price, ratably over the
three-year period. The Company recorded total deferred consulting fees of
$2,137,342 as of the date of issuance, based upon a fair market value of $4.16
per share which was the trading price on the date of issuance less a 5%
restricted share discount. The two entities also invested $1,324,000 in the
private placement offering of Series B Shares.
In October 1999, the Company issued warrants to purchase 110,077 shares of
common stock to Montrose Capital Management, Ltd. in connection with the Series
B preferred stock private placement offering. The warrants have an exercise
price of $5.00 per share and are exercisable for a period of three years from
the date of issuance. The issuance of these warrants will be recorded in the
fourth quarter of 1999as an increase to additional paid in capital. Since this
issuance is deemed to have been a cost of raising capital, a corresponding entry
will be recorded to reduce additional paid in capital in an amount equal to the
increase.
In November 1999, the Company purchased an 11% interest in Swapit for $500,000.
Swapit is a development stage company intending to develop a consumer-driven
electronic barter exchange on the Internet.
In November 1999, the Company entered into a one-year employment agreement with
its Executive Vice President. In accordance with the employment agreement, the
Executive Vice President is to receive a specified salary.
On December 3, 1999, Net Value, Inc. sold substantially all of its assets (see
Note 4).
On December 4, 1999, three directors of Net Value, Inc. were each granted
options to acquire 60,000 shares of the common stock of Net Value, Inc.
In January 2000, the Company purchased 2,858,215 shares of Series A Convertible
Preferred Stock in Vortex, a development stage company which is developing a
business-to-business Internet websites that will facilitate the purchase and
sale of industrial automation products. The purchase price of the convertible
preferred stock was $1,000,000.
-F36-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 20 - EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT (Continued)
If the Company elects to exercise its conversion rights, the Company would own
25% of Vortex's common stock on a fully diluted basis. The Series A Convertible
Preferred Stock carries an 8% cumulative dividend. The Company has the right to
convert at any time. The Company also controls one seat on the Board of
Directors of Vortex.
In January 2000, the conversion rate of the FEG convertible promissory note into
shares of the Company's common stock was adjusted from $2.50 to $2.25 as the
result of certain anti dilution rights contained in the note. The adjustment
resulted in an increase of $132,000 to the debt discount related to the
beneficial conversion features. The increase is a change in accounting estimate
and will be expensed in full in January, 2000. FEG converted the total principal
amount of the promissory note to common stock in February 2000.
In January 2000, the Company and certain employees and consultants renegotiated
the stock options that the Company was obligated to grant to them. The
renegotiation resulted in the reduction of the amount of stock options to be
granted from 7,635,876 to 5,192,248 (see Notes 12 and 19).
AML agreed to convert its outstanding loan to Net Value, Inc. (see Note 21)
along with accrued interest of $24,158 into 450,000 shares of Net Value, Inc.'s
common stock, effective December 4, 1999.
On January 21, 2000, the former principal of Strategicus (see Note 19), who was
also an officer and director of the Company, was sent written notice of the
termination of his employment agreement, effective October 19, 1999, based on
his prior conduct. Pursuant to the terms of the principal's employment agreement
and the merger agreement with Strategicus, the principal is to forfeit his
unvested shares of common stock amounting to 1,332,781 shares. In addition, the
Company intends on pursuing legal action in order to obtain repayment of the
$310,000 loan, plus accrued interest, and advances in the amount of $185,000,
previously made to the principal by Strategicus.
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS
Research and Development Costs for Discontinued Operations
The Company has expensed its research and development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86").
Feasibility of the Company's software was to be demonstrated when the Company
earned significant revenue in the marketplace from its software. The Company
intended to continue expensing such costs until software feasibility would be
established, which was expected to take place in 2000. Thereafter, the Company
intended to capitalize the direct costs and allocate overhead associated with
the development of software products. Under SFAS 86, maintenance costs incurred
subsequent to the product feasibility are to be charged to operations. The
Company disposed of its software development operations on December 3, 1999.
Revenue Recognition for Discontinued Operations
The Company generated revenues in the form of license fees and transaction fees.
Revenue from license fees is recognized when the license agreement is in effect,
delivery of the product has occurred, the license fee is fixed or determinable
and collectibility is reasonably assured. Revenue representing transaction fees
is recognized as manufacturer promotions are requested for viewing on the
Internet. Certain customers paid the Company in advance for license and
transaction fees. These amounts have been recorded as deferred revenue until
earned. Revenue from licensing agreements is recognized ratably over the
applicable service periods when post-contract support is required.
Commitments and Contingencies for Discontinued Operations
On June 1, 1998, Net Value, Inc. and its former Chief Executive Officer ( "CEO")
entered into a separation agreement pursuant to which the CEO's employment
agreement was terminated. The CEO immediately resigned from his positions as an
officer and as a director of Net Value, Inc. Under the terms of the separation
agreement, Net Value, Inc. agreed to pay deferred compensation and severance
benefits to the CEO, and permitted all of the CEO's options to purchase Net
Value, Inc.'s common stock to immediately vest. In June 1998, Net Value, Inc.
made certain deferred compensation and severance payments to the
-F37-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
CEO and, in accordance with the terms of the separation agreement, the CEO
released all of his rights under a lien and security interests in certain of Net
Value, Inc.'s assets. Additional severance compensation payments were to be paid
to the CEO in monthly installments through October 1999 under the terms of the
separation agreement. Net Value, Inc. was obligated to the CEO in the amount of
$61,875 and $20,625 as of December 31, 1998 and September 30, 1999,
respectively, and those amounts have been included in net current liabilities of
discontinued operations. $158,000 of non-cash compensation, related to the
options which vested upon the CEO's termination, was expensed in 1998.
During 1996, the Company entered into an agreement with DMR Consulting Group,
Inc. ("DMR") pursuant to which DMR agreed to develop the material portion of the
core software for Net Value, Inc. and perform Net Value, Inc.'s initial systems
integration for its products. In October 1998, Net Value, Inc. and DMR entered
into a settlement agreement whereby DMR agreed to accept payment from Net Value,
Inc. in the amount of $270,000 as the final settlement of all outstanding
amounts then due DMR, which totaled $744,355. Net Value, Inc. was unable to
timely make the required settlement payment and on December 3, 1998, Net Value,
Inc. and DMR amended the settlement agreement ("Amended Settlement Agreement").
Under the terms of the Amended Settlement Agreement, in the event Net Value,
Inc. is in default, the previously outstanding balance due to DMR prior to the
execution of the settlement agreement will become fully due and payable. At
December 31, 1997 and 1998 and at September 30, 1999, Net Value, Inc. owed DMR
$818,368, $220,000 and $170,000, respectively, net of the agreed upon
prepayments and accrued interest. These amounts have been included in net
current liabilities of discontinued operations in the accompanying financial
statements. Net Value, Inc. did not make the required payments to DMR under the
Amended Settlement Agreement (see Note 10). The Company has therefore recorded
an additional liability of $445,000, due to DMR at September 30, 1999.
On April 7, 1998, Net Value, Inc. entered into a distribution and license
agreement with IQ Value, LLC ("IQ"), whereby IQ was granted the exclusive right
to the use of COL, one of Net Value, Inc.'s products, in providing services to
local merchants and the nonexclusive right to use COL and i-Value, another
Company product, elsewhere to provide fee-based marketing services to its
customers (the " IQ Agreement"). The IQ Agreement required Net Value, Inc. to
provide and manage a data center facility to be used to service IQ's customers.
Net Value, Inc. also agreed to provide IQ with one seat on its Board of
Directors during the term of the IQ Agreement or until such time that IQ no
longer retained any exclusivity under the IQ Agreement. Net Value, Inc. was to
receive a minimum licensing fee in the amount of $3,000,000, of which $1,250,000
was received in April 1998. In addition to the minimum licensing fee, Net Value,
Inc. was to receive a fee for each transaction processed under the IQ Agreement.
In order to maintain the exclusivity of the license for COL, IQ was required to
meet minimum annual levels of transaction fees. Due to contentious service
issues between Net Value, Inc. and IQ, IQ made no additional payments under the
terms of the IQ Agreement in 1998. On December 1, 1998 Net Value, Inc. and IQ
amended the IQ Agreement ("Amended IQ Agreement") whereby IQ agreed to
immediately terminate its exclusivity rights under the IQ Agreement, except for
certain exclusive rights that expired November 30, 1999, to solicit specified
merchant agreements. The Amended IQ Agreement provided that Net Value, Inc.
continue to support IQ promotions through June 30, 1999, and that Net Value,
Inc. would earn a minimum of $62,500 for its services in 1999. In addition, the
Amended IQ Agreement provided IQ with the right to use any intellectual property
rights contained within Net Value, Inc.'s patent rights on its software in order
for IQ to develop its own coupon delivery system. Upon the issuance of a patent
to Net Value, Inc., IQ has agreed to pay Net Value, Inc. a royalty for each
coupon or offer delivered by Net Value, Inc.'s proprietary system, subject to
the mutual agreement of Net Value, Inc. and IQ that Net Value, Inc.'s
proprietary technology was utilized in the process. The Amended IQ Agreement
also provided that Net Value, Inc. issue to IQ the equivalent of 90,000 shares
of common stock ("IQ Shares") and warrants to purchase 360,000 shares of Net
Value, Inc. common stock (the "IQ Warrants") for consulting services to be
performed by IQ. The IQ Warrants have exercise prices per share ranging from
$1.50 to $2.16 and have a two-year exercise period. The IQ Shares and the IQ
Warrants are not entitled to receive any shares of preferred stock upon any
share exchange or in connection with the Merger. Consulting expense in 1998
relating to the IQ Shares and the IQ Warrants amounted to $252,000 and $49,200,
respectively, based upon a valuation of these securities performed by an
independent valuation company. In May 1999, Net Value, Inc. entered into a
termination agreement with IQ that provided, among other things, the terms under
which the IQ Agreement was to be terminated.
In September 1999 a lawsuit was filed against Net Value, Inc. claiming that the
process used by Net Value, Inc.'s products to distribute online coupons
infringes upon existing patents. Management, along with Net Value, Inc.'s patent
attorneys, believes that Net Value, Inc.'s process does not infringe on the
existing patents, and that the claim is without merit. This liability was
assumed by Promotions Acquisition, Inc. as a result of the sale of substantially
all of the assets of Net Value, Inc.
-F38-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Notes and Loans Payable of Discontinued Operations
<TABLE>
<CAPTION>
December 31,
---------------------------------- September 30,
1997 1998 1999
---------------- ---------------- -----------------
(Unaudited)
<S> <C> <C> <C>
AML (a) $ - $ 783,000 $ 590,816
Golden Eagle Partners (b) 250,000 250,000 -
Transamerica (c) - 141,327 -
Bridge Offerings (d) 4,025,000 4,025,000 225,000
--------------- -------------- ----------------
4,275,000 5,199,327 815,816
Less discount on notes payable (2,463,090) - -
--------------- -------------- ----------------
1,811,910 5,199,327 815,816
Less amount due within one year (1,811,910) (5,120,293) (815,816)
--------------- -------------- ----------------
Noncurrent portion $ - $ 79,034 $ -
=============== ============== ===============
</TABLE>
(a) In 1998, AML, advanced $783,000 to Net Value, Inc. in unsecured advances.
In 1999, Net Value, Inc. paid $250,000 of principal and accrued interest to
AML, resulting in a balance due AML of $590,816 at September 30, 1999.
These advances accrue interest at a rate of 8% per annum. Interest expense
of $34,470 and $47,504 was incurred in 1998 and for the nine-month period
ended September 30, 1999, respectively, and these advances along with
accrued interest have been reflected in net current liabilities of
discontinued operations at December 31, 1998 and at September 30, 1999.
(b) On June 17, 1997, Net Value, Inc. obtained $250,000 in financing from
Golden Eagle Partners ("Golden Eagle") and executed a Loan and Security
Agreement ("Golden Eagle Agreement") which was subsequently modified in
December 1997. In consideration for the financing, Net Value, Inc. issued a
convertible promissory note which accrued interest at the rate of 10% per
annum. Pursuant to the terms of the Golden Eagle Agreement, Net Value, Inc.
executed an assignment of certain patents and trademarks for the benefit of
Golden Eagle. The modification of the Golden Eagle Agreement required Net
Value, Inc. to issue 10,000 shares of Net Value, Inc.'s common stock as
additional consideration at the time of the repayment. $50,000 of financing
fee expense related to Net Value, Inc.'s future stock issuance under this
modification was incurred in 1997 and is a noncash transaction, and has
been reflected in net current liabilities of discontinued operations at
December 31, 1997 and 1998. In September 1999, the Golden Eagle obligation
was paid in full.
(c) In May 1998, Net Value, Inc. financed $175,500 of a three-year insurance
premium, amounting to $197,500, for the liability coverage of its directors
and officers. In 1999, the binder was rewritten to cover the directors and
officers of Holdings and all of Holdings's majority-owned subsidiaries
effective October 1998. The financing accrues interest at 7.76% per annum,
and requires monthly installment payments of $5,923. Interest expense on
the loan amounted to $7,879 in 1998.
(d) In October 1997, Net Value, Inc. completed a $3,000,000 private placement
offering aggregating 120 units ("Units") at $25,000 per Unit. In December
1997, Net Value, Inc. completed a $1,025,000 private placement offering
aggregating 41 Units at $25,000 per Unit (collectively the "Bridge
Offerings"). Each Unit in the Bridge Offerings consisted of a promissory
note in the principal amount of $25,000 ("Note"), 625 shares of Net Value,
Inc.'s common stock, and a warrant to purchase 2,500 shares of Net Value,
Inc.'s common stock (collectively "Equity Instruments"). The Notes are
unsecured subordinated obligations of Net Value, Inc., which accrue
interest at the rate of 10% per annum or at a default rate of 15% per
annum. All principal and accrued interest became payable in full on the
one-year anniversary of their date of issuance.
-F39-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Proceeds of $2,696,750 were allocated to the Equity Instruments based upon
the relative fair market values of the Notes and Equity Instruments. Of
these proceeds, $2,012,500 has been allocated to common stock, based upon
an ascribed value of the equivalent of $20.00 per share, and $684,250 has
been allocated to the warrants based upon a value of the equivalent of
$6.80 per warrant. The remaining proceeds from the Bridge Offerings
amounting to $1,328,250 from the sale of the Units were recorded as notes
payable, reflecting an aggregate discount of $2,696,750 at the date of
issuance. The discount on the Notes has been amortized as interest expense
over the term of the Notes. Amortization of the discount for 1997 and 1998
amounted to $233,660 and $2,463,090, respectively, and is reflected in loss
from discontinued operations in the accompanying statements of operations.
At December 31, 1997, the unexpired portion of the discount amounting to
$2,463,090 had been reflected as a reduction in net current liabilities of
discontinued operations. There was no unexpired portion at December 31,
1998.
Financing fees, consisting of commissions and legal fees, amounting to
$427,028 were incurred in connection with the Bridge Offerings. $286,109 of
the financing fees have been prorated to Net Value, Inc.'s issuance of
Equity Instruments. The proration has been determined by an allocation
based on the fair market values of the Notes and Equity Instruments. These
financing fees have been recorded as an increase to the stockholder's
deficit in 1997. The remaining portion of the financing fees incurred in
the Bridge Offerings amounted to $140,919. The unexpired portion of these
financing fees amounting to $120,423 at December 31, 1997 had been
reflected in net current assets of discontinued operations. There was no
unexpired portion at December 31, 1998. Financing fee expense in 1997 and
1998 amounted to $20,496 and $120,423, respectively.
In 1998, Net Value, Inc. defaulted on the payment terms of the Notes. The
Notes were not paid within the one-year anniversary of the date of their
issuance. Pursuant to the terms of the Notes, Net Value, Inc. began
accruing interest as of the date of default at the default rate of 15%.
Interest expense incurred on the Notes, exclusive of the aforementioned
amortization of the discount on the Notes, amounted to $56,969, $438,707
and $25,313 in 1997, 1998 and for the nine months ended September 30, 1999,
respectively, including $93,146 and $25,313 of default interest in 1998 and
in the nine months ended September 30, 1999, respectively. Accrued interest
on the Notes amounted to $56,967, $495,646 and $50,834 at December 31, 1997
and 1998 and September 30, 1999, respectively.
On January 7, 1999, the Company offered the holders of the Notes an
exchange of their existing promissory notes for promissory notes issued by
Holdings through a private offering.
The following additional transactions occurred in 1997 and 1998:
In January 1997 and August 1997, VDC provided Net Value, Inc. with bridge
financing in the principal amount of $2,500,000 (the "Bridge Financing") and a
senior secured convertible loan in the amount of $100,000 (the "VDC Loan"). The
financing was made in anticipation of a statutory merger between Net Value, Inc.
and VDC. The Bridge Financing and the VDC Loan were secured by a lien on all of
Net Value, Inc.'s tangible and intangible assets. In consideration for the
receipt of the Bridge Financing, Net Value, Inc. issued 25,000 shares of common
stock to VDC, a non-cash transaction, which was recorded as interest expense of
$200,000 in 1997. Both the Bridge Financing and the VDC Loan accrued interest at
10% per annum.
On April 22, 1997, Net Value, Inc. entered into an agreement with VDC pursuant
to which VDC proposed to acquire Net Value, Inc. through a statutory merger or
similar business combination. This agreement was subsequently terminated in
order to allow Net Value, Inc. to proceed with other financing alternatives.
In December 1997, $2,400,000 of Bridge Financing principal and accrued interest
of $178,301 due to VDC was canceled and converted into 805,719 shares of common
stock. On December 18, 1997, all of Net Value, Inc.'s common stock and debt
obligations owned by VDC were acquired by Rozel, a related party. Subsequently
in December 1997, Net Value, Inc. repaid the remaining $200,000 of principal
outstanding on the Bridge Financing and the VDC Loan.
-F40-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
In 1997, Net Value, Inc. received and repaid $1,001,000 in unsecured advances
from AML, a related party. Net Value, Inc. also issued 47,550 shares of common
stock to AML in a noncash transaction as consideration to AML for the issuance
of the unsecured advances. The consideration amounting to $951,000 (based on an
ascribed value of $20.00 per share) had been recorded as interest expense in
1997.
On September 5, 1997, Net Value, Inc. obtained $300,000 in an unsecured
thirty-day loan at an interest rate of 10% from a private investor. As
additional consideration for such financings in 1997, Net Value, Inc. issued
7,500 shares of common stock to the investor in a noncash transaction resulting
in $150,000 of interest expense, based on an ascribed value of $20.00 per share.
On October 5, 1997, the note was acquired by another private investor, who
extended its maturity date to November 5, 1997. Net Value, Inc. retired the note
in October 1997 with the proceeds received from the Bridge Offerings.
In February 1998, Net Value, Inc. obtained $750,000 in financing from an
independent party and correspondingly issued a promissory note with an interest
rate of 10% per annum. Net Value, Inc. paid $50,000 of investment banking fees
relating to this financing to a shareholder owning approximately 1% of Net
Value, Inc.'s outstanding common stock at December 31, 1997. Expense related to
this financing fee is being recognized over the term of the note. Financing fee
expense of $43,182 was recorded in 1998. Upon repayment of the note, the lender
agreed to accept 2,750 shares of common stock as payment in full for $13,750 of
interest expense. The note was repaid on April 9, 1998.
Capital Stock Activity Not Disclosed in Note 12
Options and Warrants
A summary of Net Value, Inc. stock warrants as of December 31, 1996, 1997 and
1998 and September 30, 1999 (unaudited) is as follows:
<TABLE>
<CAPTION>
Grant Date Exercise Price Expiration
Warrants Granted and Outstanding Shares Date Exercisable per Share Date
- -------------------------------- ----------- ------------ ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 500,000
Five Years
Granted 402,500 10/97-12/97 IPO Date $4.00 from IPO
-----------
Balance at December 31, 1997 902,500
-----------
Granted 120,000 12/1/98 12/1/98 $1.50 11/30/2000
Granted 120,000 12/1/98 12/1/98 $1.80 11/30/2000
Granted 120,000 12/1/98 12/1/98 $2.16 11/30/2000
-----------
Balances at December 31, 1998
and September 30, 1999
(Unaudited) 1,262,500
-----------
Cumulative Antidilutive Effect
[see Note 12] 560,222
-----------
Balance at September 30, 1999
(Unaudited) 1,822,722
===========
</TABLE>
-F41-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Stock Option Plan
A summary of Net Value, Inc.'s Stock Option Plan as of December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1998
------------------------------ ------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 515,968 $ 3.25 1,674,000 $ 4.02
Granted 1,614,000 4.15 2,354,000 2.22
Canceled (455,968) 3.59 (901,750) 4.53
------------ ------------ ------------ ------------
Outstanding at end of year 1,674,000 $ 4.02 3,126,250 $ 2.51
============ ============ ============ ============
Options exercisable at end of year 407,500 1,314,917
============ ============
Shares available for grant 826,000 873,750
============ ============
Weighted average fair value of options
granted during the year as determined
by an independent valuation company $ 2.10 $ 1.61
============ ============
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Outstanding Contractual Exercise Outstanding Exercise
Options Life Price Options Price
------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
From $0.20 to $0.80 598,500 4.44 $ 0.51 428,500 $ 0.64
From $1.20 to $2.50 1,655,000 9.72 1.74 551,667 1.74
From $4.00 to $5.00 528,750 4.13 4.64 334,750 4.45
From $6.00 to $7.00 344,000 7.21 6.46 - -
------------ ------------ ---------- ------------ ------------
From $0.20 to $7.00 3,126,250 7.49 $ 2.51 1,314,917 $ 2.07
============ ============ ========== ============ ============
</TABLE>
A summary of Net Value, Inc.'s stock options as of September 30, 1999
(unaudited) is as follows:
Outstanding Exercisable
----------- -----------
Net Value, Inc.:
From $ .20 to $ .80 598,500 428,500
From $1.20 to $2.50 2,138,000 1,018,334
From $4.00 to $5.00 528,750 500,750
From $6.00 to $7.00 344,000 -
----------- ----------
3,609,250 1,947,584
=========== ==========
-F42-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Under Net Value, Inc.'s 1996 Stock Option Plan (the "Plan"), stock options to
purchase shares of Net Value, Inc.'s common stock may be granted to officers,
directors, employees, consultants and independent contractors. Accordingly, Net
Value, Inc., as of December 31, 1998, had reserved a total of 4,000,000 shares
of Net Value, Inc.'s common stock for issuance upon the exercise of options
granted pursuant to the Plan. Options granted under the Plan generally expire
five years following the date of vesting and are subject to limitations on
transfer. Option grants under the Plan are subject to various vesting
provisions. The exercise price of options granted under the Plan are determined
by the Board of Directors. The Board may amend, suspend or terminate the Plan at
any time, subject to restrictions imposed by applicable law.
On September 19, 1996, options to acquire 350,000 shares of Net Value, Inc.
common stock were granted to the former CEO in connection with his employment
agreement in effect at that time. In December 1997, 290,000 of these options
were canceled and reissued with new exercise prices. On September 19, 1997,
options to acquire an additional 550,000 shares of Net Value, Inc. common stock
were granted to the former CEO and 152,000 options were granted to the former
CTO in connection with their revised employment agreements. In addition to the
options granted to the former CEO and former CTO in 1997, Net Value, Inc.
granted compensatory options to acquire 622,000 shares of Net Value, Inc. common
stock to employees and other directors of Net Value, Inc., including the
Co-Founders.
In January 1998, Net Value, Inc. granted additional options to acquire 294,000
shares of Net Value, Inc. common stock to certain directors, officers, employees
and consultants. In February 1998, Net Value, Inc. entered into an agreement to
cancel options to acquire 90,000 shares of Net Value, Inc. common stock
originally granted to the Co-Founders and granted additional options to acquire
150,000 shares of Net Value, Inc. common stock with an exercise price equivalent
to the price per share to be ultimately realized in the event of an IPO by Net
Value, Inc.
Of the outstanding options as of December 31, 1997, 1998 and September 30, 1999
that had been granted by Net Value, Inc. to acquire 1,674,000, 3,126,250 and
3,609,250 shares of common stock, respectively, options to acquire 407,500,
1,314,917 and 1,336,552 shares of common stock, respectively, were exercisable.
Certain options that carry exercise prices that were less than the fair value of
the common stock at the date of grant resulted in compensation and consulting
expense of $1,434,400 and $1,582,457 in the years ended December 31, 1997 and
1998, and $904,148 and $1,235,226 for the nine months ended September 30, 1998
and 1999, respectively.
In March and April 1999, Net Value, Inc. granted options to acquire an aggregate
of 385,000 shares of common stock to certain Net Value, Inc. employees. Of the
total options to acquire common stock granted, 245,000 vest evenly over a
four-year period beginning on each employee's date of hire. The remaining
140,000 options were to vest upon Net Value, Inc. attaining certain performance
objectives.
As a result of the sale of substantially all of the assets of Net Value, Inc. on
December 3, 1999, all of the Net Value, Inc. stock options held by Net Value,
Inc.'s existing employees at the date of the sale were canceled. Therefore
immediately subsequent to the sale of the assets, options to acquire 1,396,250
shares of Net Value, Inc's common stock at prices ranging from $0.63 to $7.00
per share remained outstanding.
Preferred Stock
Net Value, Inc. authorized 1,000,000 shares of preferred stock with a par value
of $.001 per share. On December 15, 1997, Net Value, Inc. entered into a
preferred stock purchase agreement with Rozel (the "Preferred Stock Agreement").
Pursuant to the terms of the Preferred Stock Agreement, the Company's Board of
Directors designated 300,000 shares of Preferred Stock as Series A convertible
preferred stock at a $10.00 per share stated value with no voting or
registration rights ("Series A Shares"). The Series A Shares bear no dividends,
and the preferred shareholders receive the stated value of their shares as a
priority over common stock shareholders in the event of a liquidation of Net
Value, Inc. Each Series A Share was convertible into the equivalent of 3.125
shares of Net Value, Inc.'s common stock at the option of Net Value, Inc. or
Rozel. These conversion rights provided the Series A shareholders with a
beneficial conversion feature upon issuance, valued at $52.50 per Series A
Share, or the equivalent of $16.80 per each converted common share, based upon
the ascribed value of the equivalent of $20.00 per share of common stock. This
beneficial conversion feature resulted in a preferred dividend upon the issuance
of Series A Shares in accordance with EITF D-60.
-F43-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
The Preferred Stock Agreement permitted Net Value, Inc. to request that Rozel
periodically purchase up to an aggregate of the equivalent of 300,000 of Series
A shares at an aggregate purchase price of $3,000,000. In accordance with the
Preferred Stock Agreement, Rozel purchased 22,500 shares of Series A Shares for
$225,000 and 276,200 shares for $2,762,000 in 1997 and 1998, respectively,
exclusive of amounts repurchased. In September 1998, Net Value, Inc. repurchased
40,000 shares of Series A Shares from Rozel for $400,000. Pursuant to the terms
of the Preferred Stock Agreement, Net Value, Inc. issued the equivalent of
37,500 shares of common stock to Rozel in exchange for the satisfaction of
Rozel's funding obligations. Pursuant to the requirements of EITF D-60, the
issuance of the Series A Shares and the addition of the equivalent of 37,500
shares of common stock by Net Value, Inc. has been recorded as preferred stock
dividends of $1,181,250 and $15,250,500 in 1997 and 1998, respectively. On June
1, 1998, Rozel converted 80,000 Series A Shares into the equivalent of 250,000
shares of Net Value, Inc.'s common stock. On November 15, 1998, in accordance
with a Share Exchange agreement between Net Value, Inc. and Holdings, Rozel
exchanged the remaining balance of 178,700 Net Value, Inc. Series A Shares for
an additional 1,000,000 shares of Holdings common stock and 500,000 shares of
Holdings Series A convertible preferred stock (see Note 12).
Stock-Based Compensation
- ------------------------
During 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(" SFAS 123".) As permitted under SFAS 123, the Company has continued to follow
Accounting Principles Board No. 25 "Accounting for Stock-Based Compensation"
("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes
compensation expense using the fair market value of stock options, warrants and
common stock issuances as of the grant date. APB 25 recognizes the intrinsic
value of the instruments issued by the Company as of the measurement date, which
is generally the date at which both the number of shares that an individual is
entitled to receive and the purchase price are known. Had compensation expense
for 1996, 1997 and 1998 been determined under the fair value provisions of SFAS
123, the Company's net loss and net loss per share would have differed as
follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31, September 30, September 30,
1996 1997 1998 1998 1999
--------------------- -------------------- ---------------------- --------------------- -----------------------
Pro
Forma
Per Per Per Per Per
Net Loss Share Net Loss Share Net Loss Share Net Loss Share Net Loss Share
--------------------- -------------------- ---------------------- --------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
As reported
Under APB
25 $(3,314,094) $(3.55) $(12,416,487) $(6.88)$(26,800,203) $(5.69) $(25,445,843) $(6.70) $(5,582,166) $(0.65)
============ ======== ============= ====== ============= ======== ============= ======= ============ =======
Pro Forma
Under SFAS
123 $(3,149,487) $(3.37) $(14,036,064) $(7.78)$(27,426,132) $(5.82) $(25,915,289) $(6.82) $(4,616,435) $(0.53)
============ ======== ============= ====== ============= ======== ============= ======= ============ =======
</TABLE>
The fair market value of the options and warrants used in the above computation
were determined by an independent valuation company, using a simulation model
which simulates many potential outcomes for the value of Net Value, Inc.'s stock
over the period during which the options or warrants may be exercised. Because
of the expected high volatility of the value of Net Value, Inc.'s common stock
and the long-term nature of some of the options and warrants, standard models
were not deemed appropriate by the independent valuation company. The
independent valuation company determined the potential stock price outcomes
using a log-normal distribution with expected returns of between 23% (after Net
Value, Inc.'s stock price had reached an equivalent of $20.00 per share) and 50%
(prior to that), and a standard deviation of 26% to 100%. The independent
valuation company determined that there was also a 50% likelihood that the value
of the common stock would drop to zero in any one year before reaching an
equivalent of $20.00 per share level.
-F44-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
Related Parties Not Disclosed Elsewhere in the Financial Statements and Notes
AML was an employer of a former Director of Net Value, Inc. until September
1997. In 1998, the President of AML and APP Investments, Inc. became a Director
of Net Value, Inc. and in January 1999 became a Director and Chief Executive
Officer of Holdings.
On September 18, 1996, Net Value, Inc. entered into three-year consulting
agreements with the Co-Founders providing for compensation in the aggregate of
$168,000 annually. The aggregate amount paid on these agreements was $183,225 in
1997. In December 1997, the consulting agreements were canceled and replaced
with employment agreements providing each of the Co-Founders with an annual
salary of $85,000 plus commissions for the first year of the contract, and with
compensation solely on a commission basis thereafter. The employment agreements
also granted the Co-Founders options to acquire 120,000 shares of common stock.
In February 1998, Net Value, Inc. and the Co-Founders agreed to terminate the
Co-Founders' employment agreements. These terminations, which became effective
upon the execution of the IQ Agreement, provide that the Co-Founders receive
compensation of $40,000 which was paid in 1998. The Co-Founders continued to
receive their annual salaries through September 30, 1998 and their options to
acquire shares of Net Value, Inc. common stock have been renegotiated.
During 1998, Net Value, Inc. borrowed $1,528,000 from AML, of which $745,000 was
repaid as of December 31, 1998.
Loss Per Share
Net Value, Inc. adopted SFAS 128 in 1997, and has followed the guidelines of
SFAS 128 in the presentation of loss per share for all periods presented in the
financial statements. Options and warrants to purchase common stock and
convertible preferred stock are not included in the computation of diluted loss
per share because the effect of these instruments would be antidilutive for all
periods presented. The common shares potentially issuable arising from these
instruments which were outstanding during the period presented in the financial
statements are as follows:
<TABLE>
<CAPTION>
Exercise/ December 31,
Conversion ------------------------------------------
Price 1996 1997 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Options $0.63-$5.00 18,753 32,205 8,569
Convertible preferred stock $0.80 - 17,578 -
Warrants $4.00 - 2,927 -
Convertible debt $2.00 - - 87,656
----- ------ ------
Total common shares
potentially issuable 18,753 52,710 96,225
====== ====== ======
</TABLE>
Operating Leases
In November 1997, Net Value, Inc. executed an operating lease agreement for a
facility located in Fairfield, Connecticut. The agreement commenced December
1997 and expires December 2000. Monthly rent under this lease agreement amounts
to $13,284 plus additional rent for Net Value, Inc.'s pro rata portion of
certain property expenses. In 1999, Net Value, Inc. vacated the facility and
relocated to Mountain View, California. On November 23, 1999, the landlord filed
a lawsuit against Net Value, Inc. seeking to recover damages and costs related
to an alleged breach of the lease. The remaining base lease obligation of
$244,260 has been recorded as a liability on the books and records of Net Value,
Inc. as of September 30, 1999.
-F45-
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of September 30, 1999 and for the Nine-Month Periods
Ended September 30, 1998 and 1999 is Unaudited)
NOTE 21 - DISCLOSURES RELATED TO DISCONTINUED OPERATIONS (Continued)
In November 1998, Net Value, Inc. executed an operating sublease agreement for a
facility located in Mountain View, California. The agreement commenced November
1998, expired August 15, 1999 and a new lease became effective thereafter.
Monthly rent under this sublease agreement amounts to $4,816 plus additional
rent for the Company's pro rata portion of certain property expenses. As a
result of the sale of substantially all of the assets of Net Value, Inc. on
December 3, 1999, Net Value Inc. has no further liability under this lease
following the date of the sale.
In February and December 1998, Net Value, Inc. entered into operating lease
agreements for computer equipment. The lease agreements call for 36 monthly
payments of $4,285 and $460, respectively. As a result of the sale of
substantially all of the assets of Net Value, Inc. on December 3, 1999, Net
Value, Inc. has no further liability under these leases following the date of
the sale.
Total rental expense amounted to $29,300, $145,682 and $191,906 in 1996, 1997
and 1998 and $133,517 and $201,212 for the nine-month periods ended September
30, 1998 and 1999, respectively. There are no future minimum payments required
subsequent to December 3, 1999 under the terms of Net Value, Inc.'s lease
agreements as a result of the sale of substantially all of the assets of Net
Value, Inc.
-F46-
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet reflects
the historical balance sheet of Netvalue Holdings, Inc. and the balance sheet of
Net Value, Inc. after the adjustment for the sale of substantially all of the
business assets of Net Value Holdings, Inc. to Promotions Acquisition, Inc. as
if the transaction had occurred on September 30, 1999. The information presented
is derived from, should be read in conjunction with, and is qualified in its
entirety by reference to the separate historical financial statements and the
notes thereto appearing elsewhere in this Prospectus/S-1 or incorporated
elsewhere in this Prospectus/S-1 by reference. The unaudited pro forma condensed
consolidated balance sheet has been included for comparative purposes only and
does not purport to be indicative of the financial position or results of
operations which may be obtained in the future.
The financial statements of Net Value Holdings, Inc. are those of Net Value,
Inc. as the result of an in-process merger of the two entities which has been
recorded as a recapitalization. At September 30, 1999 Net Value Holdings, Inc.
owned 66% of the outstanding common stock of Net Value, Inc. Net Value Holdings,
Inc. plans on completing a merger with Net Value, Inc. in 2000 by acquiring the
remaining shares of Net Value, Inc. it does not own.
The presentation of the common shares of Net Value, Inc. not owned by Net Value
Holdings, Inc. reflect a minority interest of 34% in the assets and liabilities
related to Net Value, Inc. At September 30, 1999, 34% of the outstanding common
stock of Net Value, Inc. continued to be owned by stockholders other than Net
Value Holdings, Inc.
P-1
<PAGE>
Net Value Holdings, Inc.
(A Development Stage Entity)
Pro forma Condensed Consolidated Balance Sheet
September 30 1999
ASSETS
<TABLE>
<CAPTION>
Pro forma
Historical Adjustments As Adjusted
---------------- ----------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $1,051,930 $2,000,000 $3,051,930
Loan receivable - related parties 469,833 - 469,833
Loan receivable 60,000 - 60,000
Prepaid financing fees, net 417,380 - 417,380
Prepaid expenses 127,956 - 127,956
Other 15,562 - 15,562
Net current assets of discontinued operations 428,337 (428,337) -
---------------- ----------------- ----------------
Total Current Assets 2,570,998 1,571,663 4,142,661
Property and Equipment, Net 41,412 - 41,412
Ownership Interests in Affiliate Companies 5,225,362 4,069,576 9,294,938
Intangibles, Net 227,863 - 227,863
Other Assets 65,746 - 65,746
Deposits 6,452 - 6,452
Net Other Assets of Discontinued Operations 479,149 (479,149) -
---------------- ----------------- ----------------
$8,616,982 $5,162,090 $13,779,072
================ ================= ================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C>
Current Liabilities
Short-term borrowings - other $380,000 $63,000 $443,000
Stock subscription payable to affiliated company 250,000 - 250,000
Notes payable, net of discounts 525,000 225,000 750,000
Notes payable - related party 12,000 533,000 545,000
Long-term debt due within one year 71,287 - 71,287
Accrued interest 404,890 - 404,890
Accounts Payable, Accrued Salaries and Other Expenses 384,630 1,179,000 1,563,630
Net current liabilities of discontinued operations 3,393,312 (3,393,312) -
---------------- ----------------- ----------------
Total Current Liabilities 5,421,119 (1,393,312) 4,027,807
---------------- ----------------- ----------------
Non-Current Liabilities
Long-term debt, net of discounts and portion included in current
liabilities 5,814,898 - 5,814,898
Net other liabilities of discontinued operations - - -
---------------- ----------------- ----------------
Total Non-Current Liabilities 5,814,898 - 5,814,898
---------------- ----------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Commitments and Contingencies - - -
Series B mandatory redeemable preferred stock,
Net Value Holdings, Inc., $.001 par value,
$1,000 liquidation value, $1,250 redemption value.
At September 30, 1999, 2000 shares issued and outstanding;
5,000 shares authorized 1,732,000 - 1,732,000
Stockholders' Equity (Deficit)
Preferred stock, Net Value, Inc., $.001 par value per share.
At December 31, 1997, 1997, 22,500 shares issued and
outstanding; 0 shares issued and outstanding at December 31,
1998 and September 30, 1999; $225,000 liquidation preference
at December 31, 1997 - - -
Series A preferred stock, Net Value Holdings, Inc., $.001 par
value per share. At December 31, 1997 and 1998 and September 30,
1999, 2,019,852, 2,519,852 and 0 shares issued and outstanding,
respectively - - -
Common stock, Net Value, Inc., $.001 par value per share. At
December 31, 1997, 1997 and 1998 and September 30, 1999,
651,650, 1,037,338 and 1,037,338 shares issued
shares issued and outstanding, respectively 1,038 - 1,038
Common stock, Net Value Holdings, Inc., $.001 par value share.
At December 31, 1997 and 1998 and September 30, 1999,
2,019,852, 6,969,852 and 13,371,901 shares issued and
outstanding, respectively 13,372 - 13,372
Additional paid-in capital 93,109,725 (2,048,306) 91,061,419
Deferred compensation (29,817,065) - (29,817,065)
Deferred compensation of discontinued operations (2,048,306) 2,048,306 -
Deficit accumulated during the development stage (65,609,799) 6,555,402 (59,054,397)
---------------- ----------------- ----------------
Total Stockholders' Equity (Deficit) (4,351,035) 6,555,402 2,204,367
---------------- ----------------- ----------------
$8,616,982 $5,162,090 $13,779,072
================ ================= ================
</TABLE>
The accompanying notes are an integral part of this unaudited
pro forma condensed consolidated balance sheet.
P-2
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The unaudited pro forma information for September 30, 1999 reflects the
adjustments to record the sale of substantially all the business assets of
Net Value, Inc. to Promotions Acquisitions, Inc. ("Promotions") as if the
sale had occurred on September 30, 1999.
(2) This presentation assumes that as stated in the sale agreement, Net Value
Inc. would sell all of its business assets and the rights to all of its
intellectual property and certain trade names, and in consideration would
receive $2,000,000 in cash at closing, the assumption of approximately
$1,600,000 of liabilities by Promotions and 2,958,819 shares of Promotions
common stock, representing a 12% ownership interest in Promotions on a
fully diluted basis. Additionally Net Value, Inc. would retain
approximately $2,000,000 in existing liabilities. The presentation also
assumes, as specified in the sale agreement, that all options to employees
issued after June 1, 1998 would be canceled, resulting in the elimination
of deferred compensation. The transaction would result in a gain on the
sale of the assets of approximately $6,080,402.
(3) This presentation assumes that Net Value Holdings, Inc. records a cost
basis investment in Promotions of $3,994,406 plus $75,170 of professional
fees based on a valuation of Promotion's common stock of $1.35 per share.
(4) The financial statements of Net Value Holdings, Inc. are those of Net
Value, Inc. as the result of an in-process merger of the two entities which
has been recorded as a recapitalization. At September 30, 1999 Net Value
Holdings, Inc. owned 66% of the outstanding common stock of Net Value, Inc.
Net Value Holdings, Inc. plans on completing a merger with Net Value, Inc.
in 2000 by acquiring the remaining shares of Net Value, Inc. it does not
own.
The presentation of the common shares of Net Value, Inc. not owned by Net
Value Holdings, Inc. reflect a minority interest of 34% in the assets and
liabilities related to Net Value, Inc. At September 30, 1999, 34% of the
outstanding common stock of Net Value, Inc. continued to be owned by
stockholders other than Net Value Holdings, Inc.
P-3
<PAGE>
To the Directors and Officers
ASSET EXCHANGE, INC.
310 SW 4th Avenue
Portland, OR 97204
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Asset Exchange, Inc. (A
Development Stage Company) as of September 30, 1999. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to in the first paragraph presents
fairly, in all material respects, the financial position of Asset Exchange, Inc.
(A Development Stage Company) as of September 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note D to the
financial statements, the Company has incurred losses in its development stage,
and will need to raise additional capital to complete its development
activities. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note D. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MORGENSTERN & ASSOCIATES
Certified Public Accountants
December 6, 1999
- F47 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 175,645
Prepaid expenses 2,482
---------
Total current assets 178,127
PROPERTY AND EQUIPMENT, NET 10,106
DEPOSITS 1,000
---------
TOTAL ASSETS $ 189,233
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 29,347
Accrued expenses 247
Loans payable - officers 7,168
---------
Total current liabilities 36,762
---------
COMMITMENTS AND CONTINGENCIES (NOTE D)
STOCKHOLDER'S EQUITY:
Preferred stock, $.0001 par value; 4,000,000 shares authorized,
290,323 shares issued and outstanding 29
Common stock, $.0001 par value; 10,000,000 shares authorized,
1,000,000 shares issued and outstanding 100
Additional paid-in capital 450,871
Stock subscriptions receivable (250,000)
Deficit accumulated during the development stage (48,529)
---------
Total stockholders' equity 152,471
---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 189,233
=========
</TABLE>
The accompanying notes are an integral part of the financial statements
- F48 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
From March 12, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
REVENUES $ 0
---------
<S> <C>
OPERATING EXPENSES
Bank charges 25
Conferences 976
Consulting 1,757
Depreciation 692
Dues and subscriptions 125
Interest 392
Internet service providers 2,638
Office 5,182
Payroll 24,000
Payroll processing fees 77
Professional fees 27,373
Rent 1,695
Tax and licenses 100
Tax on salaries 1,836
Travel and entertainment 370
Telephone 1,436
---------
Total operating expenses 68,674
---------
NET LOSS FROM OPERATONS BEFORE EXTRAORDINARY ITEM (68,674)
---------
EXTRAORDINARY ITEM - Debt extinguishment (NOTE F) 20,145
---------
NET LOSS TO COMMON STOCKHOLDERS $ (48,529)
=========
Basic and diluted net loss from operations per common share $ (0.0989)
Basic and diltued extraordinary gain per common share 0.0290
---------
Basic and diluted net loss per common share $ (0.0699)
=========
Basic and diluted weighted average number of common shares outstanding 694,581
=========
</TABLE>
- F49 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, 1999
<TABLE>
<CAPTION>
Additional Stock
Preferred Stock Common Stock Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
------------ ---------- -------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 12, 1999 - - - - - -
Common stock issued - - 1,000,000 $ 100 $ 900 -
Preferred stock issued 290,323 $ 29 - - 449,971 -
Stock subscription receivable - - - - - $(250,000)
Net loss for period (unaudited) - - - - - $ (48,529)
------- ---- --------- ----- -------- ---------
Balance at September 30, 1999 290,323 $ 29 1,000,000 $ 100 $450,871 $(250,000)
======= ==== ========= ===== ======== ==========
</TABLE>
[RESTUB]
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development
Stage Total
-------------- -------------
<S> <C> <C>
Balance, March 12, 1999 - -
Common stock issued - $ 1,000
Preferred stock issued - 450,000
Stock subscription receivable - (250,000)
Net loss for period (unaudited) $ (48,529)
--------- ---------
Balance at September 30, 1999 $ (48,529) $ 152,471
========= =========
</TABLE>
- F50 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(UNAUDITED)
From March 12, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (68,674)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation/amortization 692
Non-cash interest expense on debt extinguishment 145
Changes in assets and liabilities:
Prepaid expenses (2,482)
Deposits (1,000)
Accounts payable 29,347
Accrued expenses 247
---------
Net cash provided / (used) by operating activities (41,725)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of computer equipment and furniture and fixtures (10,798)
---------
Net cash provided / (used) by investing activities (10,798)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt extinguished 20,000
Proceeds from officers loans 7,168
Proceeds from the issuance of common stock 1,000
Proceeds from the issuance of preferred stock 200,000
---------
Net cash provided / (used) by financing activities 228,168
---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 175,645
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0
---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 175,645
=========
</TABLE>
- F51 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Asset Exchange, Inc., a Delaware corporation, was incorporated on March
12, 1999. Asset Exchange is a development stage company which, through the
Internet, allows financial institutions to buy and sell loan portfolios
and other assets among themselves. The Company's website provides matches
between buyers and sellers of these loan portfolios. The website allows
medium and small sized banks to participate in these markets. The Company
anticipates that its customer base will consist of banks, finance
companies thrifts, community banks, credit unions, and other financial
institutions. The Company intends to generate revenue from commissions on
the buying and selling of these instruments on its website.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to potential concentrations
of credit risk consist principally of cash. Cash consists of deposits with
a large United States financial institution that management believes is
credit worthy. The account is insured by the Federal Deposit Insurance
Corporation up to a maximum of $100,000. At September 30, 1999, the
Company had an uninsured cash balance of $75,645.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Computer equipment and software 3 years
Furniture and fixtures 7 years
Office equipment 7 years
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
stock subscriptions receivable, accounts payable and borrowings, are
carried at cost, which approximates fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
- F52 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," during 1999. SFAS 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," during 1999. SFAS 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. To date, the Company has not had any transactions that are
required to be reported in comprehensive income.
REVENUE RECOGNITION
The Company recognizes revenues when earned or when services performed,
provided no significant obligations remain, and collectibility is
probable.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities and operating losses available to
offset future taxable income, using enacted tax rates in effect in the
years in which the differences are expected to reverse. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
START-UP COSTS
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Cost of Start-up Activities", the Company expenses all start-up
activities, including organizational costs, as they are incurred.
LOSS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires presentation of basic loss per share and diluted loss
per share for the period presented. Basic net income (loss) per share is
computed by dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common
shares outstanding during the period. Incremental common shares issuable
upon the exercise of stock options and warrants, are included in the
computation of diluted net income (loss) loss per share to the extent such
shares are dilutive.
CONCENTRATIONS
Concentrations not disclosed elsewhere in the financial statements are as
follows:
The Company plans to generate income from one source which utilizes a
single medium. Lack of website (product) development or customer interest
could have a materially adverse effect on the Company.
- F53 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Computer hardware 8,483
Computer software 1,384
Office equipment 382
Furniture and fixtures 549
------
10,798
Less Accumulated Depreciation (692)
------
10,106
======
Depreciation expense for the period March 12, 1999 (Inception) through
September 30, 1999 was $692.
C. INCOME TAXES
For Federal income tax purposes start-up costs must be amortized over not
less than 60 months. The Company has recognized a deferred tax benefit for
start-up costs to be amortized over 60 months for tax purposes. However,
as it is not more likely than not that the deferred tax asset will be
utilized, management has established a full valuation reserve of
approximately $10,000.
D. COMMITMENTS AND CONTINGENCIES
GOING CONCERN:
Since March 12, 1999 (Inception), the Company has been in the development
stage and the principal activities have consisted of raising capital and
developing its Internet-based website.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
is not yet generating revenues from website operations and, at September
30, 1999, had accumulated a deficit from its operating activities.
Continuation of the Company as a going concern is dependent upon, among
other things, obtaining additional capital, achieving market acceptance of
its product and achieving satisfactory levels of profitable operations.
The financial statements do not contain any adjustments relating to the
realization of assets and liquidation of liabilities that may be necessary
should the Company be unable to continue as a going concern.
LEASES:
The Company leases two office facilities, both under operating leases.
One lease has a term of one year, expiring on July 12, 2000. The entire
amount for this lease has been paid in full and is being expensed over the
term of the lease. The monthly rental expense is $184.
The other lease has a term of one year, expiring on August 31, 2000.
Future minimum annual lease payments, as of September 30, 1999, were as
follows:
1999 $1,641
2000 $3,829
- F54 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
E. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes the issuance of
10,000,000 shares of Common Stock, $0.0001 par value per share, of which
1,000,000 were outstanding as of September 30, 1999. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be
voted on by the stockholders.
The Company issued 1,000,000 shares of common stock at $0.001 per share on
May 13, 1999 to various founders for a total cash contribution of $1,000.
The Company's Articles of Incorporation authorizes the issuance of
4,000,000 shares of "Series A Preferred Stock", $0.0001 par value per
share, of which 290,323 shares were outstanding as of September 30, 1999.
Holders of each share of "Series A Preferred Stock" are entitled to vote
on all matters at stockholder's meetings with the exception of directors.
So long as at least 100,000 shares of "Series A Preferred Stock" is
outstanding, the holders of a majority of the "Series A Preferred Stock"
shall be entitled to elect one member of the Board of Directors. Holders
of each share of the "Series A Preferred Stock" shall convert their shares
to common stock at the conversion price set forth in the Amended and
Restated Articles of Incorporation. The conversion price at September 30,
1999 was $1.55.
The Company issued 290,323 shares of "Series A Preferred Stock" at $1.55
per share on September 23, 1999. There was $250,000 still due from this
private placement on September 30, 1999. This amount was paid in full on
October 1, 1999.
F. EXTRAORDINARY ITEM (UNAUDITED)
The Company realized an extraordinary gain from debt extinguishment in the
amount $20,145 for the period March 12, 1999 (Inception) to September 30,
1999. On August 11, 1999, the Company received $20,000 cash in exchange
for an 8% promissory note payable in full on February 11, 2000. A
provision in the note called for the closing of the "Series A Preferred
Stock Purchase Agreement" (with same party) within thirty days of the
note. Failure to close the agreement, would cause the entire note, with
unpaid accrued interest, to be forgiven. The "Series A Preferred Stock
Purchase Agreement", closed on September 23, 1999, forty-three days after
the signed promissory note. Accrued interest amounted to $145 during this
period.
G. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the period March 12, 1999 (Inception) to September
30, 1999:
<TABLE>
<CAPTION>
Numerator:
<S> <C>
Numerator for basic and diluted earnings per share - net loss from operation ($ 68,674)
Numerator for basic and diluted earnings per share - extraordinary gain 20,145
---------
Numerator for basic and diluted earnings per share - net loss ($ 48,529)
=========
Denominator:
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding: 694,581
=========
</TABLE>
H. RELATED PARTY TRANSACTIONS
The Company had debt outstanding to it's shareholders on September 30,
1999 in the amount of $7,168. The loans accrue interest at the rate of 8%
per annum. The loans were subsequently paid back to the shareholders on
November 1, 1999.
The Company paid salaries to the top three majority shareholders in the
amount of $24,000 for services for the period March 12, 1999 (Inception)
to September 30, 1999.
- F55 -
<PAGE>
To the Directors and Officers
COLLEGE411. COM, INC.
1085 Mission Street
San Francisco, CA 94103
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of College411.com, Inc. (A
Development Stage Company) as of September 30, 1999. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to in the first paragraph presents
fairly, in all material respects, the financial position of College411.com, Inc.
(A Development Stage Company) as of September 30, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company has incurred losses in its development stage,
and will need to raise additional capital to complete its development
activities. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note C. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MORGENSTERN & ASSOCIATES
Certified Public Accountants
November 30, 1999
- F56 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 59,497
Prepaid expenses 1,000
--------
Total current assets 60,497
PROPERTY AND EQUIPMENT, NET 22,281
DEPOSITS 9,500
--------
TOTAL ASSETS $ 92,278
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,695
Accrued expenses 5,350
--------
Total current liabilities 8,045
--------
COMMITMENTS AND CONTINGENCIES (NOTE C)
STOCKHOLDER'S EQUITY:
Common stock, $.001 par value; 15,00,000 shares authorized,
11,875,000 shares issued and outstanding 11,875
Additional paid-in capital 172,375
Deficit accumulated during the development stage (100,017)
--------
Total stockholders' equity 84,233
--------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 92,278
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F57 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
From April 13, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
$ 300
-----------
Bank charges 65
Consulting 69,572
Depreciation 1,969
Dues and subscriptions 25
Insurance 517
Miscellaneous 585
Office 860
Payroll 5,350
Payroll processing fees 1,500
Professional fees 15,486
Software 311
Travel and entertainment 1,170
Telephone 2,907
-----------
Total operating expenses 100,317
-----------
$ (100,017)
===========
Basic and diluted net loss per common share $ (0.0100)
===========
Basic and diluted weighted average number of common shares outstanding 10,049,806
===========
</TABLE>
- F58 -
<PAGE>
College411.Com, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-In Development
Shares Amount Capital Stage Total
---------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance, April 13, 1999 - - - - -
Common stock granted for services 9,250,000 $ 9,250 - - $ 9,250
Common stock issued in private placements 2,625,000 2,625 172,375 - 175,000
Net loss for period (unaudited) - - - (100,017) (100,017)
---------- ------- -------- --------- --------
Balance at September 30, 1999 11,875,000 $11,875 $172,375 $(100,017) $ 84,233
========== ======== ======== ========= ========
</TABLE>
- F59 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(UNAUDITED)
From April 13, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(100,017)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation/amortization 1,969
Common stock issued for services 9,250
Changes in assets and liabilities:
Prepaid expenses (1,000)
Deposits (9,500)
Accounts payable 2,695
Accrued expenses 5,351
----------
Net cash provided / (used) by operating activities (91,252)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of computer equipment (24,251)
----------
----------
Net cash provided / (used) by investing activities (24,251)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of stock 175,000
----------
Net cash provided / (used) by financing activities 175,000
----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,497
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0
----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,497
==========
</TABLE>
- F60 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
College411.com, Inc., a Delaware corporation, was incorporated on April
13, 1999. College411.com is a development stage company which intends to
provide, through the Internet, a wide array of information, products and
services that are useful to college students. The Company's website
includes: news, research information, academic research, career
suggestions, online radio, travel guides, dating tips, movie tickets,
textbook finder, online tutoring, chat, procrastination tools, student
classifieds, auctions and game resources. The Company intends to generate
revenue from its website through six different sources: e-commerce,
chargeable services, affiliate programs, targeted advertising, sponsorship
fees, and syndication fees from its website.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to potential concentrations
of credit risk consist principally of cash. Cash consists of deposits with
a large United States financial institution that management believes is
credit worthy. At September 30, 1999, the Company had no significant
concentrations of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents
and accounts payable and borrowings, are carried at cost, which
approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Computer equipment 3 years
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities and operating losses available to
offset future taxable income, using enacted tax rates in effect in the
years in which the differences are expected to reverse. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
- F61 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
REVENUE RECOGNITION
The Company recognizes revenues when earned or when services performed,
provided no significant obligations remain, and collectibility is
probable.
START-UP COSTS
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Cost of Start-up Activities", the Company expenses all start-up
activities, including organizational costs, as they are incurred.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," during 1999. SFAS 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. To date, the Company has not had any transactions that are
required to be reported in comprehensive income.
LOSS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires presentation of basic loss per share and diluted loss
per share for the period presented. Basic net income (loss) per share is
computed by dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common
shares outstanding during the period. Incremental common shares issuable
upon the exercise of stock options and warrants, are included in the
computation of diluted net income (loss) loss per share to the extent such
shares are dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," during 1999. SFAS 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment.
CONCENTRATIONS
Concentrations not disclosed elsewhere in the financial statements are as
follows:
The Company plans to generate income from six sources. All of these
sources, both under development and currently offered to generate income,
utilize the same medium. Lack of product (website) development or customer
interest could have a materially adverse effect on the Company.
- F62 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
B. INCOME TAXES
For Federal income tax purposes start-up costs must be amortized over not
less than 60 months. The Company has recognized a deferred tax benefit for
start-up costs to be amortized over 60 months for tax purposes. However,
as it is not more likely than not that the deferred tax asset will be
utilized, management has established a full valuation reserve of
approximately $5,000.
C. CONTINGENCY - GOING CONCERN
Since April 13, 1999 (inception), the Company has been in the development
stage and the principal activities have consisted of raising capital and
developing its Internet-based website.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
is not yet generating significant revenues from website operations and, at
September 30, 1999, had accumulated a deficit from its operating
activities. Continuation of the Company as a going concern is dependent
upon, among other things, obtaining additional capital, achieving market
acceptance of its product and achieving satisfactory levels of profitable
operations. As discussed in Note H, the Company is in late stage
negotiations in closing its next round of financing. The financial
statements do not contain any adjustments relating to the realization of
assets and liquidation of liabilities that may be necessary should the
Company be unable to continue as a going concern.
D. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes the issuance of
15,000,000 shares of Common Stock, $0.001 par value per share, of which
11,875,000 were outstanding as of September 30, 1999. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be
voted on by the stockholders.
The Company issued 9,250,000 shares of common stock at $0.001 per share on
April 13, 1999 to its founders for intellectual property contributed to
the Company. The total fair market value of the property contributed
amounted to $9,250.00.
The Company issued 3,750,000 shares of common stock at $0.067 per share
between June 21, 1999 and October 6, 1999.
E. STOCK OPTIONS AND WARRANTS
The Company accounts for its stock option plan in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The exercise price of options granted under the Option Plan is
determined at the discretion of the Company, and is typically based on the
estimated fair value of the stock at the date of grant. The Company has
reserved 2,000,000 shares to be offered through the plan. Options expire
at the earlier of two events: (a) ninety days after the employee or
consultant terminates their services or (b) ten years after the options
vest. Compensation expense is recognized when the exercise price of
options is less than the fair value of the underlying stock on the date of
grant. Since the exercise price is based on estimated fair value, no
compensation cost has been recognized.
While the Company continues to apply APB Opinion No. 25, Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", requires the Company to provide pro-forma
information regarding net income (loss) as if compensation cost for the
Company's stock option plan had been determined in accordance with the
fair value based method prescribed by SFAS No. 123. Since the option price
is either greater than or equal to the fair value of both the underlying
stock and the option, no compensation expense would be recognized under
either APB 25 or SFAS 123. Thus, no pro-forma information has been
presented.
- F63 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
The following summarizes information about the Company's stock options at
September 30, 1999:
(a) EMPLOYEE OPTIONS
During the period ended September 30, 1999 the Company granted options to
thirteen employees. A summary of the status of the Company's stock options
as of September 30, 1999, and changes during the period is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at April 13, 1999 0 $ 0.000
Granted 595,000 $ 0.031
Exercised 0 $ 0.000
Forfeited (171,250) ($ 0.016)
-------- ------------
Outstanding at September 30, 1999 423,750 $ 0.036
======== ============
Options exercisable at September 30, 1999 72,500 $ 0.010
======== ============
</TABLE>
(b) NON-EMPLOYEE OPTIONS
During the period ended September 30, 1999 the Company granted options to
certain non-employees. A summary of the status of the Company's stock
options as of September 30, 1999, and changes during the period is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at April 13, 1999 0 $ 0.000
Granted 550,000 $ 0.011
Exercised 0 $ 0.000
Forfeited 0 $ 0.000
-------- -----------
Outstanding at September 30, 1999 550,000 $ 0.011
======== ===========
Options exercisable at September 30, 1999 56,250 $ 0.010
======== ===========
</TABLE>
Stock Options during the period ended September 30, 1999 are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at April 13, 1999 0 $ 0.000
Granted 1,145,000 $ 0.021
Exercised 0 $ 0.000
Forfeited ( 171,250) ($ 0.011)
--------- ------------
Outstanding at September 30, 1999 973,750 $ 0.022
========= ============
Options exercisable at September 30, 1999 128,750 $ 0.010
========= ============
</TABLE>
- F64 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Continued)
F. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the period April 13, 1999 (inception) to September
30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Numerator:
Numerator for basic and diluted earnings per share - net loss ($ 100,017)
==========
Denominator:
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding: 10,049,806
==========
</TABLE>
G. RELATED PARTY TRANSACTIONS
The Company has entered into a one year, non-binding agreement with
Epylon.com who has agreed to pay the cost of renting office space for the
Company. Stephen George, a member of Net Value Holding's board of
directors, is a 15% owner in Epylon.com. Currently, netValue Holdings,
Inc. owns 29% of the outstanding common stock of the company. This
agreement expires one year from the date of the Common Stock Purchase
Agreement between the Company and Net Value Holdings, Inc. (July 28,
2000).
During the period ended September 30, 1999, the Company paid approximately
$14,000 for consulting services from two shareholders.
H. SUBSEQUENT EVENTS (UNAUDITED)
The company is in late-stage negotiations to close its next round of
financing. At the time of this statement, the Company expects to raise an
additional $1,100,000 in equity financing during December 1999 to help
support expansion.
- F65 -
<PAGE>
To the Directors and Officers
SWAPIT. COM, INC.
Five Clock Tower Place, Fourth Floor
Maynard, MA 01754
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of SwapIt.com, Inc. (A
Development Stage Company) as of November 30, 1999. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to in the first paragraph presents
fairly, in all material respects, the financial position of SwapIt.com, Inc. (A
Development Stage Company) as of November 30, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note E to the
financial statements, the Company has incurred losses in its development stage,
and will need to raise additional capital to complete its development
activities. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note E. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MORGENSTERN & ASSOCIATES
Certified Public Accountants
December 7, 1999
- F66 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
BALANCE SHEET
November 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 454,549
Prepaid expenses 1,124
---------
Total current assets 455,673
PROPERTY AND EQUIPMENT, NET 2,075
DEPOSITS 21,300
---------
TOTAL ASSETS $ 479,048
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 30,537
Accrued payroll liabilities 11,505
---------
Total current liabilities 42,042
---------
COMMITMENTS AND CONTINGENCIES (NOTE E)
STOCKHOLDER'S EQUITY:
Preferred stock, $0.001 par value; 332,500 shares authorized,
132,941 shares issued and outstanding 13
Common stock, $0.001 par value; 1,667,500 shares authorized
975,000 shares issued and outstanding 975
Additional paid-in capital 516,112
Deferred compensation (2,078)
Deficit accumulated during the development stage (78,016)
---------
Total stockholders' equity 437,006
---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 479,048
=========
</TABLE>
The accompanying notes are an integral part of this balance sheet
- F67 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
SwapIt.com, Inc., a Delaware corporation, was incorporated on October 28,
1999. SwapIt.com, Inc. is a development stage company which intends to
create an electronic barter exchange marketplace on the Internet. The
Company intends to make available for barter, music CDs, movies, and
books, and plans to initially target their website to college students.
The Company intends to generate revenue from its website through the
following sources: transaction fees, advertising revenues, commissions on
referrals, and direct sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to potential concentrations
of credit risk consist principally of cash. Cash consists of deposits with
a large United States financial institution that is insured by the Federal
Deposit Insurance Company up to a maximum of $100,000. At November 30,
1999, the Company had an uninsured cash balance of $354,549.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
prepaid expenses, and accounts payable and borrowings, are carried at
cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Furniture and fixtures 7 years
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system.
START-UP COSTS
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Cost of Start-up Activities", the Company expenses all start-up
activities, including organizational costs, as they are incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities and operating losses available to
offset future taxable income, using enacted tax rates in effect in the
years in which the differences are expected to reverse. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
- F68 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
(Continued)
DEFERRED COMPENSATION
The Company has issued common stock to certain employees and consultants
in exchange for future services. The Company has recorded the aggregate
amount of the total fair market value of the stock issued as deferred
compensation. The amounts recorded as deferred compensation are then
amortized over the appropriate vesting period (generally four years).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," during 1999. SFAS 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment.
CONCENTRATIONS
Concentrations not disclosed elsewhere in the financial statements are as
follows:
The Company plans to generate income from various sources that utilizes
the same medium. Lack of product (website) development or customer
interest could have a materially adverse effect on the Company.
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Furniture and fixtures $2,100
Less Accumulated Depreciation (25)
------
$2,075
C. DEPOSITS
Deposits at November 30, 1999, consisted of the following:
Deposit for the URL name "swapit.com", money held in escrow $10,000
Rental deposit for lease signed December 4, 1999 11,300
-------
$21,300
D. INCOME TAXES
For Federal income tax purposes, start-up costs must be amortized over not
less than 60 months. The Company has recognized a deferred tax benefit for
start-up costs to be amortized over 60 months for tax purposes. However,
as it is not more likely than not that the deferred tax asset will be
utilized, management has established a full valuation reserve of
approximately $40,000.
- F69 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
(Continued)
E. COMMITMENTS AND CONTINGENCIES
GOING CONCERN:
Since October 28, 1999 (Inception), the Company has been in the
development stage and the principal activities have consisted of raising
capital. The Company is still in the process of developing its website.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
is not yet generating revenues and, at November 30, 1999, had accumulated
a deficit from its operating activities. Continuation of the Company as a
going concern is dependent upon, among other things, obtaining additional
capital, achieving market acceptance of its product and achieving
satisfactory levels of profitable operations. The financial statements do
not contain any adjustments relating to the realization of assets and
liquidation of liabilities that may be necessary should the Company be
unable to continue as a going concern.
LEASES:
The Company currently leases its office facility under an operating lease
signed on December 2, 1999 (see NOTE H).
The lease has a term of five years, expiring on December 31, 2004. The
monthly rental cost is $12,648. Future minimum annual lease payments for
the next five years is as follows:
2000 $151,771
2001 $151,771
2002 $151,771
2003 $151,771
2004 $151,771
F. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes the issuance of
1,667,500 shares of Common Stock, $0.001 par value per share, of which
975,000 were outstanding as of November 30, 1999. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be
voted on by the stockholders.
The Company issued 855,000 shares of common stock at $0.0175 per share on
November 12, 1999 to its founders for an aggregate purchase price of
$15,000.
The Company issued 120,000 shares of common stock at $0.0175 per share on
November 12, 1999 to various employees and contractors in exchange for
future services. The rights associated with the common stock shares (i.e.
- voting, dividends, etc.) were subsequently assigned back to the Company.
The common stock shares will revert back to each person based on a
bi-annual-four-year vesting schedule. Upon termination of services, all
unvested shares shall be forfeited to the Company. The fair market value
of the stock, on the grant date, was valued at $0.0175 per share. The
Company has treated the aggregate amount of $2,100 as deferred
compensation (see NOTE A) with respect to the assignment of shares.
- F70 -
<PAGE>
SwapIt.com, Inc.
(A Development Stage Company)
NOTES TO BALANCE SHEET
November 30, 1999
(Continued)
The Company's Articles of Incorporation authorizes the issuance of 332,500
shares of "Series A Preferred Stock", $0.001 par value per share, of which
132,941 shares were outstanding as of November 30, 1999. Holders of each
share of "Series A Preferred Stock" are entitled to vote on all matters at
stockholder's meetings. Holders of each share of the "Series A Preferred
Stock" shall convert their shares to common stock at the earliest of:
their own option or upon the first underwritten public offering pursuant
to an effective registration statement filed under the Securities Act of
1933. The conversion price varies as stated in the Amended and Restated
Articles of Incorporation. The conversion price at November 30, 1999 was
$3.761.
The Company issued 132,941 shares of "Series A Preferred Stock" at $3.761
per share on November 23, 1999 for a total purchase price of $500,000.
G. STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The exercise price of options granted under the Option Plan is
determined at the discretion of the Company, and in the case of Incentive
Stock Options, the amount will not be less than 100% of the fair market
value on the date of grant. The Company has reserved 155,000 shares to be
offered through the plan. Compensation expense is recognized when the
exercise price of options is less than the fair value of the underlying
stock on the date of grant. As of November 30, 1999, the Company had not
yet granted any options to employees or consultants.
H. SUBSEQUENT EVENTS (UNAUDITED)
The Company entered into a five year lease agreement for its office space
on December 2, 1999 (see NOTE E). The Company paid an additional $13,995
for the deposit on this lease. An additional deposit amount equal to one
month's rent, $12,648, is due to the lessor by March 31, 2000.
- F71 -
<PAGE>
To the Directors and Officers
INDUSTRIALVORTEX. COM, INC.
89 Panorama
Prabuco Canyon, CA 92679
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Industrialvortex.com, Inc. (A
Development Stage Company) as of December 31, 1999 and the related statement of
operations, stockholders' deficit and cash flows for the period May 20, 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of Industrialvortex.com, Inc. (A
Development Stage Company) as of December 31, 1999, and the results of their
operations and their cash flows for the period May 20, 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 F 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 F. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MORGENSTERN & ASSOCIATES
Certified Public Accountants
January 31, 2000
- F72 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 10,018
--------
Total current assets 10,018
PROPERTY AND EQUIPMENT, NET 2,593
OTHER ASSETS
Intangible assets, net of amortization 8,090
Deposits 930
--------
Total other assets 9,020
TOTAL ASSETS $ 21,631
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 6,838
Note payable 10,000
Accrued expenses 6,841
--------
Total current liabilities 23,679
--------
COMMITMENTS AND CONTINGENCIES (NOTE F)
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value; 1,000 shares authorized,
904 shares issued and outstanding 1
Additional paid-in capital 115,499
Deferred compensation (69,500)
Deficit accumulated during the development stage (48,048)
--------
Total stockholders' deficit (2,048)
--------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 21,631
========
</TABLE>
The accompanying notes are an integral part of the financial statements
- F73 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
STATEMENT OF OPERATIONS
From May 20, 1999 (Inception) to December 31, 1999
REVENUES $ 0
---------
OPERATING EXPENSES
Amortization 459
Bank charges 245
Consulting 10,000
Depreciation 519
Dues and subscriptions 3,280
Interest expense 46
Office 2,158
Professional fees 16,995
Travel and entertainment 3,219
Telephone 1,127
Website development 10,000
---------
Total operating expenses 48,048
---------
NET (LOSS) $ (48,048)
=========
The accompanying notes are an integral part of the financial statements
- F74 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIT
December 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-In Deferred Development
Shares Amount Capital Compensation Stage Total
--------- --------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 20, 1999 - - - - - -
Common stock granted for services 392 $ 0 $ 79,500 $ (69,500) - $ 10,000
Common stock issued for intellectual property 440 0 5,000 - - 5,000
Common stock issued in private placements 72 0 31,000 - - 31,000
Net loss for year - - - - (48,048) (48,048)
------ ------ -------- --------- --------- --------
Balance at December 31, 1999 904 $ 1 $115,499 $ (69,500) $ (48,048) $ (2,048)
======= ======= ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements
- F75 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
From May 20, 1999 (Inception) to December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (48,048)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation/amortization 978
Compensatory common stock issued 10,000
Changes in assets and liabilities:
Deposits (930)
Intangible assets (3,549)
Accounts payable 6,838
Accrued expenses 6,841
---------
Net cash provided / (used) by operating activities (27,870)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of computer equipment and software (3,112)
---------
Net cash provided / (used) by investing activities (3,112)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 10,000
Proceeds from the issuance of common stock 31,000
---------
Net cash provided / (used) by financing activities 41,000
---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,018
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,018
=========
SUPPLEMENTAL CASH FLOW DATA
Cash paid for interest $ 0
=========
Cash paid for taxes $ 0
=========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for intellectual property $ 5,000
=========
</TABLE>
The accompanying notes are an integral part of the financial statements
- F76 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Industrialvortex.com, Inc., a Delaware corporation, was incorporated on
May 20, 1999. Industrialvortex.com is a development stage company which
intends to provide, through the Internet, a service to help facilitate the
buying and selling of Industrial Products for the Manufacturing Industry.
The Company intends to generate revenue from its website through the
following sources: transaction fees, advertising revenues, and commissions
on sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to potential concentrations
of credit risk consist principally of cash. Cash consists of deposits with
a large United States financial institution that management believes is
credit worthy. At December 31, 1999, the Company had no significant
concentrations of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
intangible assets, and accounts payable and borrowings, are carried at
cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Computer equipment 3 years
For federal income tax purposes, depreciation is computed using the
modified accelerated cost recovery system.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over the
following estimated useful lives:
Intellectual property 7 years
Domain name registrations 7 years
The intellectual property acquired by the Company is used on the Company's
website. These documents are to be used in generating revenues from
various activities conducted on the site.
As of the balance sheet date, management assessed the recoverability of
intangible assets by comparing the amount of estimated future revenues to
be generated from the assets acquired, less the future costs of
maintenance, to the unamortized costs for each intangible asset to
determine whether any impairment has occurred, and if so, unamortized
costs are written down to their net realizable value and the resulting
adjustment is charged to amortization expense for the period presented.
Once an impairment has been recorded, its recorded unamortized balance is
not increased.
- F77 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(Continued)
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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee and consultant
compensation arrangements in accordance with provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
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.
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 three years).
REVENUE RECOGNITION
The Company recognizes revenues when earned or when services performed,
provided no significant obligations remain, and collectibility is
probable.
START-UP COSTS
In accordance with AICPA Statement of Position 98-5, "Reporting on the
Cost of Start-up Activities", the Company expenses all start-up
activities, including organizational costs, as they are incurred.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," during 1999. SFAS 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. To date, the Company has not had any transactions that are
required to be reported in comprehensive income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," during 1999. SFAS 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment.
- F78 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(Continued)
CONCENTRATIONS
Concentrations not disclosed elsewhere in the financial statements are as
follows:
The Company plans to generate income from various sources that utilizes
the same medium. Lack of product (website) development or customer
interest could have a materially adverse effect on the Company.
B. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Computer equipment $ 2,325
Computer software 787
-------
3,112
Less accumulated depreciation (519)
-------
$ 2,593
Depreciation expense for the period May 20, 1999 (Inception) through
December 31, 1999 was $519.
C. INCOME TAXES
For Federal income tax purposes start-up costs must be amortized over not
less than 60 months. The Company has recognized a deferred tax benefit for
start-up costs to be amortized over 60 months for tax purposes. However,
as it is not more likely than not that the deferred tax asset will be
utilized, management has established a full valuation reserve of
approximately $5,000.
D. NOTE PAYABLE
The Note payable at December 31, 1999 consisted of the following:
Note payable, Jim Steinberger, $10,000, due March 1, 2000 with 8% annual
interest. This note is guaranteed by one of the principal shareholders.
E. RELATED PARTY TRANSACTION
The Company had borrowed funds from an immediate family member of its
principal shareholder. $10,000 was advanced to the Company on December 10,
1999. The note is payable on March 1, 2000 and bears an annual interest
rate of 8%.
F. CONTINGENCY - GOING CONCERN
Since May 20, 1999 (inception), the Company has been in the development
stage and the principal activities have consisted of raising capital and
developing its Internet-based website.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The Company
is not yet generating significant revenues from website operations and, at
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. As discussed in Note H, the Company has signed a term sheet
for its next round of financing. The financial statements do not contain
any adjustments relating to the realization of assets and liquidation of
liabilities that may be necessary should the Company be unable to continue
as a going concern.
- F79 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(Continued)
G. STOCKHOLDERS' DEFICIT
The Company's Articles of Incorporation authorizes the issuance of 1,000
shares of Common Stock, $0.001 par value per share, of which 904 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 440 shares of common stock at $0.001 per share on June
11, 1999 to its founder for intellectual property contributed to the
Company. The total fair market value of the property contributed amounted
to $5,000.
The Company issued 72 shares of common stock to various investors during
June 1999 for an aggregate amount of $31,000. The purchase price varied
from $400 to $500 per share.
The Company issued 20 shares of common stock to two separate consultants
during June 1999 in consideration of services performed by the
consultants. The fair market value of the services performed amounted to
$10,000 in the aggregate.
During 1999, the Company had entered into various employment agreements
where the Company had issued stock in exchange for future services. There
were 372 shares of common stock issued under these agreements. Management
has estimated the fair value of services to be performed at $187 per
share, or $69,500 for the entire 372 shares issued.
H. SUBSEQUENT EVENTS
Effective January 10, 2000 the Company amended its Articles of
Incorporation to authorize 20,000,000 shares of common stock and
10,000,000 shares of preferred stock.
In addition, effective January 10, 2000 the Company approved a stock split
of its shares of common stock on a 5,113 for 1 ratio.
During January 2000, the Company entered into various employment
agreements where the Company issued stock in exchange for future services.
There were 90.7 shares of common stock (463,749 adjusted for stock split
on January 11, 2000) issued under these agreements. Management has
estimated the fair value of services to be performed at $513 per share
($0.10 adjusted for stock split on January 11, 2000), or $46,616 for the
entire 90.7 shares issued.
On January 11, 2000, the Company entered into a "Software License
Agreement" with IBO$, Inc. where IBO$ has granted a license to the Company
to use its software in exchange for $50,000 cash, 20% percent of the
Company's common stock (1,291,943 shares) on a fully diluted basis, and
warrants to purchase up to 500,000 shares of common stock at a price per
share equal to the price per share paid by investors in connection with
the next financing transaction involving the sale of equity securities of
at least $2,000,000. The term of the warrants are five years.
Certain investors from the first round of financing had anti-dilution
measures on shares of common stock purchased. Additional shares of stock
were issued to these investors in regards to the issuance of stock to
IBO$. A total of 18.4 shares of common stock (94,079 shares adjusted for
stock split on January 11, 2000) were issued as a result of the
anti-dilution agreement.
The Company has entered into a Series A Convertible Preferred Stock
Purchase Agreement on January 31, 2000 with Net Value Holdings, Inc.
2,858,215 shares of the Company's Series A preferred stock has been issued
in exchange for $1,000,000. These shares of preferred stock may be
converted into shares of common stock at any time. The preferred stock has
the following rights: cumulative dividends accrued at a rate of 8% per
annum, one vote for each share of preferred stock, and veto voting rights
with respect to certain matters.
On January 18, 2000, certain consultants contributed 21,130 (post stock
split) shares of common stock back to the Company.
- F80 -
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with the offer made by this prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by Net Value Holdings, Inc. This prospectus does not constitute an
offer to sell or solicitation of an offer to buy any securities in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of Net Value Holdings, Inc. or that information contained herein is
correct as of any time subsequent to the date hereof.
-------------------
Until _______, 2000 (90 days after the date of this prospectus), all dealers
effecting transactions in the shares of our common stock registered in this
registration statement, whether or not participating in this distribution, may
be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters.
================================================================================
<PAGE>
================================================================================
-------------------
NET VALUE HOLDINGS, INC.
3,722,560 SHARES OF COMMON STOCK
-------------
PROSPECTUS
--------------
February 7, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSE OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all estimated expenses which we have
incurred or expect to incur in connection with the issuance and distribution of
the securities which we are registering in this registration statement. All
amounts are estimated except for the Securities and Exchange Commission
Registration Fee
Securities and Exchange Commission Registration Fee....... $ 4,527.56
EDGAR and Printing Expenses............................... 5,000.00
Legal Fees and Expenses................................... 200,000.00
Accounting Fees and Expenses.............................. 160,000.00
Blue Sky Fees and Expenses................................ 5,000.00
Transfer Agent's Fees and Expenses........................ 1,000.00
Miscellaneous Expenses.................................... 4,472.44
-----------
Total*................................ $380,000.00
===========
*All expenses other than the Securities and Exchange
Commission Registration Fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the General Corporate Law of the State of
Delaware, Net Value Holdings, Inc. has broad powers to indemnify its directors
and officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act of 1933. Net Value Holding, Inc.'s bylaws
(Exhibit 3.1 hereto) also provide for mandatory indemnification of its
directors, officers, employees and agents to the fullest extent permissible
under Delaware Law.
Net Value Holdings, Inc.'s Amended and Restated Certificate of
Incorporation (Exhibit 3.2 hereto) provides that the liability of its directors
for monetary damages shall be eliminated to the fullest extent permissible under
Delaware law. Pursuant to Delaware law, this includes elimination of liability
for monetary damages for breach of the directors' fiduciary duty of care to Net
Value Holdings, Inc. and its stockholders. These provisions do not eliminate the
directors' duty of care and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to Net Value Holdings,
Inc., for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
Net Value Holdings, Inc. intends to obtain in conjunction with
the effectiveness of the registration statement, a policy of directors' and
officers' liability insurance that insures our directors and officers against
the cost of defense, settlement or payment of a judgment under certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In September 1998, we issued and sold an aggregate of
2,950,000 shares of our common stock at an offering price of $.20 per share to
the following accredited investors pursuant to Rule 504: West Tropical
Investments Corp., Azura Investment Corp., Thibault-Petite Capital Corp., Godwin
Finance Ltd., Clifton Capital Ltd., Millworth Investments, Inc., 101
II-1
<PAGE>
Investments, Inc., Westin Investors Profit Sharing Trust, Harpings Management
Limited, Euroswiss Securities Limited, Deremie Enterprises Limited, Myderry
Investments Company Limited, Golden Claw Investments Company Limited, Benmad,
Inc. and the Elanken Family Trust. This offering generated gross proceeds of
$590,000 of which we paid an aggregate of $47,200 in commissions to registered
broker-dealers.
In September 1998, we issued a promissory note in the
principal amount of $900,000 to Founders Equity Group, Inc. pursuant to Section
4(2) of the Securities Act of 1933 in exchange for $900,000. This promissory
note matured on March 1, 1999 and on that date we issued four convertible
promissory notes in the aggregate principal amount of $900,000 to Founders
Equity Group, Inc., Founders Mezzanine Investors III, LLC, George & Nancy
Moorehead Charitable Trust and Donald & Shelley Moorehead Charitable Trust, and
paid $50,334 (representing all accrued interest on the original promissory note
through February 28, 1999) in exchange for the lender's cancellation of the
promissory note and its release of our corporation and our present and future
officers and directors from any claims related to payment of principal and
accrued interest pursuant to the promissory note. The lenders may convert all or
any part of the outstanding principal amount of the convertible promissory
notes, plus all accrued interest thereon through the date of conversion, into
shares of our common stock at a conversion price of $2.50 per share. The
conversion price of these convertible promissory notes was subsequently adjusted
to $2.25 pursuant to anti-dilution provisions in the convertible promissory
notes. We may force the lenders to convert the entire principal amount of the
convertible promissory notes, plus all accrued interest thereon, upon our common
stock's satisfaction of certain price and volume requirements and the
registration of the resale of all shares of our common stock issuable to the
lenders upon such mandatory conversion of the convertible promissory note. The
lenders are also entitled to piggyback registration rights with respect to all
shares issuable upon any conversion of the convertible promissory notes. As
additional consideration for the lender's agreement to cancel the original
promissory note and accept convertible promissory notes in full satisfaction of
our obligations pursuant to the original promissory note, we issued the lender a
warrant to purchase 90,000 shares of our common stock at an exercise price of
$2.50 per share and a warrant to purchase 90,000 shares of our common stock at
an exercise price of $5.00 per share. The lender may exercise each of these
warrants at any time prior to February 28, 2002. The lenders are not entitled to
any registration rights with respect to any shares of our common stock issued
upon the exercise of either of these warrants. In July 1999, we issued an
aggregate total of 6,138 shares of our common stock to the lenders as payment of
accrued interest on the convertible promissory notes for the quarter ended June
30, 1999. On February 4, 2000, the lenders converted their convertible
promissory notes into 400,000 shares of our common stock.
In October 1998 we issued 1,000,000 shares of our common stock
and 500,000 shares of our preferred stock to Rozel International Holdings
Limited pursuant to Rule 506 in exchange for 178,700 shares of Series A
Preferred Stock of BrightStreet.
In October 1998, November 1998 and December 1998, we issued
2,019,852 shares of our common stock and 2,019,852 shares of our Series A
Preferred Stock to the following accredited investors pursuant to Rule 506 in
exchange for 8,079,408 shares of common stock of BrightStreet: Rozel
International Holdings Limited, Craig Barnett, American Maple Leaf Financial
Corporation, Mark Braunstein, Founders Partners IV, Capital Growth Trust,
Hanover Associates, Steve Rosner, Clifton Capital Ltd., Millworth Investments,
Inc., Steven Rosner Money Purchase Plan, HPC Corporate Services Ltd., The D.A.R.
Group, Mark Dutton, SPH Investments, Inc., SPH Equities, Inc., Bermuda Trust
Company (Trustee for the Elanken Family Trust), Burton Turk, Azurra Investments
Corp. and Lenart Haggegard.
In November 1998 and January 1999, we issued convertible
debentures in the aggregate principal amount of $1,642,500 pursuant to Rule 506
to the following accredited investors: Brarrison, Inc., Fredric J. Mintz, Burton
Turk, Gary Rein, Lancer Partners, L.P., Lancer Offshore, Inc., Steven Rolfe,
Taylor Oil Products, Ltd., Salicor, Inc. and Edgar W. Allen. We issued these
convertible debentures in exchange for $1,642,500 of which we paid $112,000 in
commissions to registered broker-dealers. The principal amount of these
convertible debentures plus the accrued interest thereon is convertible by the
holders at any time and by us upon the completion of our merger with
BrightStreet at a conversion price of $2.00 per share. As of February 4, 2000,
holders of five convertible debentures issued in this offering have converted
their debentures in the principal amount of $1,540,000 and the accrued interest
thereon into 830,508 shares of our common stock.
II-2
<PAGE>
During the period from January 1999 through June 1999, we
issued convertible debentures in the aggregate principal amount of $6,215,000
pursuant to Rule 506 to the following accredited investors: Gary Rein, Jeffrey &
Jessica Goldstein, Richard J. Bennett, 4WR-DG Limited Partnership, Gary
Hollander, Douglas Martin, Sven Behrendt, Juergen Jaekel, Straub Family Trust,
Carmine Adimando, Scott & Patricia Kane, Marc Roberts, Founders Equity Group,
Balmore Funds, S.A., Austost Apstalt Schaan, Amro International, S.A., CSL
Associates, L.P., Bridgewater Partners, L.P., Nottinghill Resources, Ltd.,
Gladstone Equities Fund, L.P., Lori Tabatchnick, Peter T. Roselle, Joseph G.
Ferrante, Robert M. Crozer, Gary Hollander, Gary Scharf, Cary & Melissa
Silverman, Roy Roberts, Joseph Weiss, Gary Markman, Louis Borbas, Jr., Jeffrey &
Jessica Goldstein, IHN Partners, Vincent Adimado. We issued these convertible
debentures in exchange for $6,215,000 of which we paid $410,100 in commissions
to registered broker-dealers. The principal amount of these convertible
debentures plus the accrued interest thereon is convertible by the holders at
any time and by us upon the completion of our merger with BrightStreet at a
conversion price of $2.50 per share. As of February 4, 2000, holders of 12
convertible debentures issued in this offering have converted their debentures
in the principal amount of $3,367,000 plus accrued interest into 1,371,735
shares of our common stock.
In April 1999, we issued convertible promissory notes in the
aggregate principal amount of $4,270,125 pursuant to Rule 506 to the following
accredited investors: Tyrone Adams, A. Arnold Agree, Robert M. Alloway, Emil P.
Angel, Gerald A. Benarcik, Michael J. Benenson, Ronald Berk, Frank J. Bauerlein,
Yancey R. Black, John L. & Jetha M. Black, Thomas E. Bonar, David W. Boydston,
Vincent Brandeis, Thomas Cannon, LG Trust, Howard Chang, Lynn Chidester, Allergy
Medical Group Profit Sharing Plan, Raymond C. Clabberbuck, Edward G. Cook,
Christopher W. Craven, Eugene D. Crittenden, Mark Curry, Saquaro Asset Holding
I, Steven A. Dawes, Epiphany Deluca, Dennis Desmond, Anand Dhanda, Ronald S.
Dugan, David Easton, Alan C. Espy, CKF Living Trust, Elliot H. Fishkin, Ronald
F. Gagnon, Max H. Ghezzi, Ray Haase, Neal B. Hambleton, John Hunter, Richard S.
Incandela Trust (DTD 9/15/91), Rhyaz Jinnah, Daniel Kane, Michael L. B. Kaplan,
Bernard & Rosemary Kayne, Gary D. Ditchell, John B. Kogut, Paul J. Kuehn,
Lawrence B. Lewis, Sigma Services, Gary E. Markman, Sheri Perl Migdol, David F.
Miller, Morton M. Mower, Giovanni Mucciacciaro, William A. Murphy, Arthur J.
Notini, Anthony J. Parkinson, Poul Pederson, Robert Perl, William D. Prevost,
James R. Ratliff, David & Barbara Rosen, Joseph Santomarco, James & Bernadette
Schenk, C. David Schenkel, Douglas K. Schwegel, Louis A. Shpritz, Fast Eddie's
Investment Club LLP, Edward Silberman, Thomas Sixsmith, Gary L. Smidt, Ilkar
Sonmez, Henry Styskal, Herme O. Sylora, Edmond Tennenhaus, James F. Van
Middlesworth, Martin C. Watz, Melvin E. Weinstein, Micro-Comp Industries and Kal
Zeff. We issued these convertible promissory notes in exchange for their
cancellation of matured promissory notes which were issued by Net Value, Inc. in
October, November and December 1997 and their agreement to release us, Net
Value, Inc. and the present and future officers and directors of each
corporation from any claims related to their Net Value, Inc. promissory notes.
Each participant in this offering received a convertible promissory note with a
principal amount equal to the principal amount of their Net Value, Inc.
promissory note plus all accrued interest thereon as of December 31, 1998. Each
noteholder may convert all or any part of the outstanding principal amount of
their convertible promissory note, plus all accrued interest thereon through the
date of conversion, into shares of our common stock at any time at a conversion
rate of $2.00 per share. We may force the noteholders to convert the entire
principal amount of their convertible promissory notes, plus all accrued
interest thereon at a conversion price of $2.00 per share upon the trading of
our common stock at a price per share of at least $5.00 for 20 consecutive
trading days and the registration of the resale of all shares of our common
stock issuable to the noteholders upon such mandatory conversion of the
convertible promissory notes with the Securities and Exchange Commission. We are
obligated to issue a warrant to purchase one-half of one share of our common
stock for each share of our common stock issued to the noteholders upon any
conversion of the convertible promissory notes. These warrants are exercisable
for a period of three years from the date of issuance at an exercise price of
$6.00 per share. As of February 4, 2000, holders of convertible promissory notes
issued in this offering have converted their promissory notes in the principal
amount of $3,434,448, plus accrued interest into 1,835,863 shares of our common
stock and we issued warrants to purchase 917,941 shares of our common stock to
these holders.
In July 1999, we issued an aggregate of 601,029 vested shares
of our common stock, an aggregate of 6,923,599 unvested shares of our common
stock, an aggregate of 184,627 vested shares of our Series A Preferred Stock and
an aggregate of 2,126,833 unvested shares of our Series A Preferred Stock to
Darr Aley, Stephen George, Douglas Spink and Barry Uphoff pursuant to Rule 506
in exchange for their tender of all of the issued and outstanding capital stock
of Strategicus Partners, Inc.
II-3
<PAGE>
In August 1999, we issued an aggregate of 2,898,788 shares of
our common stock to the following stockholders: Darr Aley, Mary Lane Alvarino,
American Maple Leaf Financial Corp., Frank Astorino, Azurra Investments, Inc.,
Craig Barnett, Mark Berry & Nancy Berry (TEN COM), Mark Braunstein, Quinn
Brennan, John & Mary Burlingame, Ben Campagnuolo, Capital Growth Trust, Wayne
Churyk, Clifton Capital, Inc., Jose Costa, Neil Costa, The DAR Group, Inc., John
Dearden, Mark Dutton, Elanken Family Trust, Richard Elgart, Founders Partners
IV, LLC, Stephen George, Leonart Haggegard, Hanover Associates, Eleanor Harvey,
IHN Partners, Douglas Love, Russell Lucas & Christina Lucas (TEN COM), Henry
McCarl, Millworth Investments, Inc., Clayton Moran, Fred Moran & Joan Moran (TEN
COM), Frederick W. Moran, Kent Moran, Luke Moran, Andrew P. Panzo & Patricia
Panzo (TEN COM), Fernando Presser, Steven Rosner, Rozel International Holdings,
Ltd., Margaret Sellig, Robert Smith, Andrew Sorrentino, SPH Equities, Inc., SPH
Investments, Inc., Douglas Spink, Michael Stanley, William Steif, Steven B.
Rosner Money Purchase Plan, Charles L. Tinker & Mitch Tinker (TEN COM), Burton
Turk, Barry Uphoff and Dean Ward. These shares were issued pursuant to Rule 506
in exchange for their tender of an aggregate of 4,831,312 shares of our Series A
Preferred Stock and their agreement to release us and our present and future
officers and directors from any claims related to these rights and any shares of
common stock that were to be issuable upon conversion of these shares of Series
A Preferred Stock.
In September and October 1999, we issued an aggregate of
74,250 shares of our common stock to Sven Behrendt, Juergen Jaekel, Golden Eagle
Partners, Laura D'Antona, Don Berman and Bruce Malinowski pursuant to Section
4(2) of the Securities Act of 1933 in settlement of various debts and other
obligations.
In September and October 1999, we issued an aggregate of 4,824
shares of our Series B Preferred Stock and warrants to purchase 295,040 shares
of our common stock to Tonga Partners, L.P., Yeoman Ventures, Ltd., Lightline
Limited, Little Wing LP, Little Wing Too LP, Tradewinds Fund, LLC, JDN Partners,
L.P., Bayhill, Ltd., RS Orphan Fund, L.P. and RS Orphan Offshore Fund, L.P.,
pursuant to Rule 506 in exchange for $5,000,000, of which we paid $250,000 and
warrants to purchase 110,077 shares of our common stock in commissions to a
registered broker-dealer.
In October 1999, we issued an aggregate of 676,374 shares of
our common stock to RS Orphan Fund, L.P. and RS Orphan Offshore Fund, L.P.
pursuant to Section 4(2) of the Securities Act of 1933 in exchange for $676,374.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Document
- ------ --------
<S> <C>
2.1* Merger Agreement and Plan of Reorganization dated as of June 21, 1999 among Net Value Holdings,
Inc. and Strategicus Partners Inc. and Douglas Spink
2.2* Amendment No. 1 to Merger Agreement and Plan of Reorganization
2.3* Amendment No. 2 to Merger Agreement and Plan of Reorganization
2.4* Fairness Opinion of Ferris Baker Watts, dated July 30, 1999, Regarding the Merger Between Net
Value Holdings, Inc. and Strategicus Partners Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen Certificate for Net Value Holdings, Inc.'s Common Stock
4.2* Form of Convertible Promissory Note of Net Value Holdings, Inc. convertible into shares of
common stock at a conversion price of $2.00 per share
4.3* Form of Convertible Promissory Note of Net Value Holdings, Inc. convertible into shares of
common stock at a conversion price of $2.50 per share
4.4* Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
4.5* Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock
5 Form of Opinion of Klehr Harrison Harvey Branzburg & Ellers as to the legality of the shares of
common stock being registered
10.1* Employment Agreement with Andrew P. Panzo, dated June 1, 1999
10.2* Amended and Restated Employment Agreement with Douglas Spink, dated June 17, 1999
10.3* Employment Agreement with Lee Hansen, dated September 15, 1999
10.4* Consulting Agreement with Barry Uphoff, dated June 30, 1999
10.5* Consulting Agreement with Darr Aley, dated June 30, 1999
10.6* Consulting Agreement with Stephen George, dated June 21, 1999
10.7* Loan Agreement between Strategicus Partners Inc. and Net Value Holdings, Inc., dated as of May
28, 1999
10.8* Amendment No. 1 to the Loan Agreement between Strategicus Partners Inc. and Net Value Holdings,
Inc.
10.9* Amendment No. 2 to the Loan Agreement between Strategicus Partners Inc. and Net Value Holdings,
Inc.
10.10* Promissory Note in the amount of $310,000 issued by Douglas Spink in favor of Strategicus
Partners Inc., dated May 28, 1999
10.11* Promissory Note in the amount of $267,000 issued by Darr Aley in favor of Net Value Holdings,
Inc., dated June 16, 1999
10.12* Promissory Note issued by Net Value, Inc. in favor of SUNCL, Inc., dated October 1, 1998
10.13* Loan Agreement by and among Net Value, Inc., American Maple Leaf Financial Corporation and the
other signatories thereto, dated June 26, 1998
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14* Promissory Note issued by Net Value, Inc. in favor of American Maple Leaf Financial
Corporation, dated June 26, 1998
10.15* Stock Purchase Agreement By and Between AsiaCD, Inc. and Strategicus Partners, Inc., dated July
29, 1999
10.16* Common Stock Purchase Agreement By and Between College 411.com, Inc. and Strategicus Partners,
Inc., dated July 28, 1999
10.17* AssetExchange, Inc. Series A Preferred Stock Purchase Agreement, dated September 10, 1999
10.18* AssetExchange. Inc. Investor Rights Agreement, dated September 10, 1999
10.19* Series B Convertible Preferred Stock Purchase Agreement, dated as of September 17, 1999
10.20* Registration Rights Agreement
10.21* Form of Warrant
10.22* Employment Agreement with Tom Aley dated November 22, 1999
10.23* Amended and Restated Shareholders' Agreement by and between Merus Partners, Inc., Chris R.
Kravas, Net Value Holdings, Inc. and Webmodal, Inc. dated as of October 11, 1999
10.24* Stock Purchase Agreement between Merus Partners, Inc. and Net Value Holdings, Inc. dated as of
October 11, 1999
10.25* Stock Purchase Agreement between Net Value Holdings, Inc. and Webmodal, Inc. dated as of
October 11, 1999
10.26* Series A Convertible Preferred Stock Purchase Agreement by and between Swapit.com, Inc. and Net
Value Holdings, Inc. dated as of November 23, 1999
10.27* Investor Rights Agreement by and between Swapit.com, Inc. and Net Value Holdings, Inc. dated as
of November 23, 1999
10.28* Co-Sale Agreement by and among Net Value Holdings, Inc., Swapit.com, Inc. and the principal
stockholders of Swapit.com, Inc. dated as of November 23, 1999
10.29* Agreement for Purchase and Sale of Assets by and among Promotions Acquisitions, Inc.,
BrightStreet.com, Inc. and Net Value Holdings, Inc. dated as of December 3, 1999
10.30* Stockholders Agreement by and among Promotions Acquisitions, Inc. and certain stockholders
dated as of December 3, 1999.
10.31* Registration Rights Agreement dated as of December 3, 1999
10.32* Common Stock Purchase Agreement dated as of October 1, 1999
10.33* Consulting Agreement dated as of October 1, 1999
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.34 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 Investor Rights Agreement by and between IndustrialVortex.com, Inc,. and Net Value Holdings,
Inc. dated as of January 31, 2000
10.36 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
11 Statement re: computation of per share earnings
16* Letter from Barry L. Friedman, PC dated November 23, 1999
21.1* Subsidiaries of Net Value Holdings, Inc.
23.1 Consent of L.J. Soldinger Associates regarding Net Value Holdings, Inc. dated February 7, 2000
23.2 Consent of Morgenstern & Associates regarding College 411.com, Inc. dated February 7, 2000
23.3 Consent of Morgenstern & Associates regarding AssetExchange, Inc. dated February 7, 2000
23.4 Consent of Morgenstern & Associates regarding Swapit.com, Inc. dated February 7, 2000
23.5 Consent of Morganstern & Associates regarding IndustrialVortex.com, Inc. dated February 7, 2000
24.1* Power of Attorney, included on the signature page hereof
27.1 Financial Data Schedule
</TABLE>
* Previously filed
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(i) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(A) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(B) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement.
(C) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(ii) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
<PAGE>
(iii) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(c) The registrant further undertakes that:
(i) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to
be part of this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania, on February 7, 2000.
NET VALUE HOLDINGS, INC.
BY: /s/ Andrew P. Panzo
----------------------------------------------
Andrew P. Panzo
Chairman of the Board of Directors,
Chief Executive Officer and Chief Financial
Officer (Principal Financial and Account Officer)
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ Andrew P. Panzo Chairman of the Board of Directors, Chief Executive Officer
- --------------------------- and Chief Financial Officer (Principal Executive, Financial and
Andrew P. Panzo Accounting Officer)
/s/ Barry Uphoff * Director
- ---------------------------
Barry Uphoff
/s/ Darr Aley* Executive Vice President, Business Development and Director
- ---------------------------
Darr Aley
/s/ Stephen George* Director
- ---------------------------
Stephen George
* By: Andrew P. Panzo, as power of attorney
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document
- ------ --------
<S> <C>
2.1* Merger Agreement and Plan of Reorganization dated as of June 21, 1999 among Net Value Holdings,
Inc. and Strategicus Partners Inc. and Douglas Spink
2.2* Amendment No. 1 to Merger Agreement and Plan of Reorganization
2.3* Amendment No. 2 to Merger Agreement and Plan of Reorganization
2.4* Fairness Opinion of Ferris Baker Watts, dated July 30, 1999, Regarding the Merger Between Net
Value Holdings, Inc. and Strategicus Partners Inc.
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen Certificate for Net Value Holdings, Inc.'s Common Stock
4.2* Form of Convertible Promissory Note of Net Value Holdings, Inc. convertible into shares of
common stock at a conversion price of $2.00 per share
4.3* Form of Convertible Promissory Note of Net Value Holdings, Inc. convertible into shares of
common stock at a conversion price of $2.50 per share
4.4* Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
4.5* Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock
5 Form of Opinion of Klehr Harrison Harvey Branzburg & Ellers as to the legality of the shares of
common stock being registered
10.1* Employment Agreement with Andrew P. Panzo, dated June 1, 1999
10.2* Amended and Restated Employment Agreement with Douglas Spink, dated June 17, 1999
10.3* Employment Agreement with Lee Hansen, dated September 15, 1999
10.4* Consulting Agreement with Barry Uphoff, dated June 30, 1999
10.5* Consulting Agreement with Darr Aley, dated June 30, 1999
10.6* Consulting Agreement with Stephen George, dated June 21, 1999
10.7* Loan Agreement between Strategicus Partners Inc. and Net Value Holdings, Inc., dated as of May
28, 1999
10.8* Amendment No. 1 to the Loan Agreement between Strategicus Partners Inc. and Net Value Holdings,
Inc.
10.9* Amendment No. 2 to the Loan Agreement between Strategicus Partners Inc. and Net Value Holdings,
Inc.
10.10* Promissory Note in the amount of $310,000 issued by Douglas Spink in favor of Strategicus
Partners Inc., dated May 28, 1999
10.11* Promissory Note in the amount of $267,000 issued by Darr Aley in favor of Net Value Holdings,
Inc., dated June 16, 1999
10.12* Promissory Note issued by Net Value, Inc. in favor of SUNCL, Inc., dated October 1, 1998
10.13* Loan Agreement by and among Net Value, Inc., American Maple Leaf Financial Corporation and the
other signatories thereto, dated June 26, 1998
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14* Promissory Note issued by Net Value, Inc. in favor of American Maple Leaf Financial
Corporation, dated June 26, 1998
10.15* Stock Purchase Agreement By and Between AsiaCD, Inc. and Strategicus Partners, Inc., dated July
29, 1999
10.16* Common Stock Purchase Agreement By and Between College 411.com, Inc. and Strategicus Partners,
Inc., dated July 28, 1999
10.17* AssetExchange, Inc. Series A Preferred Stock Purchase Agreement, dated September 10, 1999
10.18* AssetExchange. Inc. Investor Rights Agreement, dated September 10, 1999
10.19* Series B Convertible Preferred Stock Purchase Agreement, dated as of September 17, 1999
10.20* Registration Rights Agreement
10.21* Form of Warrant
10.22* Employment Agreement with Tom Aley dated November 22, 1999
10.23* Amended and Restated Shareholders' Agreement by and between Merus Partners, Inc., Chris R.
Kravas, Net Value Holdings, Inc. and Webmodal, Inc. dated as of October 11, 1999
10.24* Stock Purchase Agreement between Merus Partners, Inc. and Net Value Holdings, Inc. dated as of
October 11, 1999
10.25* Stock Purchase Agreement between Net Value Holdings, Inc. and Webmodal, Inc. dated as of
October 11, 1999
10.26* Series A Convertible Preferred Stock Purchase Agreement by and between Swapit.com, Inc. and Net
Value Holdings, Inc. dated as of November 23, 1999
10.27* Investor Rights Agreement by and between Swapit.com, Inc. and Net Value Holdings, Inc. dated as
of November 23, 1999
10.28* Co-Sale Agreement by and among Net Value Holdings, Inc., Swapit.com, Inc. and the principal
stockholders of Swapit.com, Inc. dated as of November 23, 1999
10.29* Agreement for Purchase and Sale of Assets by and among Promotions Acquisitions, Inc.,
BrightStreet.com, Inc. and Net Value Holdings, Inc. dated as of December 3, 1999
10.30* Stockholders Agreement by and among Promotions Acquisitions, Inc. and certain stockholders
dated as of December 3, 1999.
10.31* Registration Rights Agreement dated as of December 3, 1999
10.32* Common Stock Purchase Agreement dated as of October 1, 1999
10.33* Consulting Agreement dated as of October 1, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.34 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 Investor Rights Agreement by and between IndustrialVortex.com, Inc,. and Net Value Holdings,
Inc. dated as of January 31, 2000
10.36 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
11 Statement re: computation of per share earnings
16* Letter from Barry L. Friedman, PC dated November 23, 1999
21.1* Subsidiaries of Net Value Holdings, Inc.
23.1 Consent of L.J. Soldinger Associates regarding Net Value Holdings, Inc. dated February 7, 2000
23.2 Consent of Morgenstern & Associates regarding College 411.com, Inc. dated February 7, 2000
23.3 Consent of Morgenstern & Associates regarding AssetExchange, Inc. dated February 7, 2000
23.4 Consent of Morgenstern & Associates regarding Swapit.com, Inc. dated February 7, 2000
23.5 Consent of Morganstern & Associates regarding IndustrialVortex.com, Inc. dated February 7, 2000
24.1* Power of Attorney, included on the signature page hereof
27.1 Financial Data Schedule
</TABLE>
* Previously filed
<PAGE>
EXHIBIT 5
[LETTERHEAD OF KLEHR, HARRISON, HARVEY, BRANZBURG & ELLERS LLP]
February 7, 2000
Board of Directors
Net Value Holdings, Inc.
Two Penn Center
Suite 605
Philadelphia, PA 19102
RE: Registration Statement on Form S-1
-----------------------------------
Gentlemen:
We have acted as counsel to Net Value Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-1 (the "Registration Statement") being filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). The Registration Statement
relates to (i) the resale of up to 1,069,360 shares of the Company's common
stock, par value $.001 per share (the "Common Stock"), which were issued upon
conversion of convertible debentures of the Company in the aggregate principal
amount of $2,600,000 (the "Debenture Shares"), and (ii) the resale of up to
2,653,200 shares of Common Stock issuable upon conversion of 4,824 shares of the
Company's Series B Convertible Preferred Stock and the exercise of related
warrants (the "Series B Shares").
In connection with this opinion, we have examined and relied upon the
original or copies of (i) the Certificate of Incorporation and the By-laws of
the Company, (ii) minutes and records of the corporate proceedings with respect
to the issuance of the Debenture Shares and the Series B Shares, and (iii) such
other documents as we have deemed necessary as a basis for the opinion
hereinafter set forth.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to any facts material
to the opinions expressed herein that were not independently established or
verified, we have relied upon oral or written statements and representations of
officers and other representatives of the Company and others.
<PAGE>
Page 2
Board of Directors
Net Value Holdings, Inc.
February 7, 2000
- -------------------------
This opinion is limited to the laws of the State of Delaware and we
express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that (i)
the Debenture Shares were validly issued, are fully paid and non-assessable, and
(ii) the Series B Shares issuable in connection with the Series B Preferred
Stock and the warrants when issued in accordance with the terms of the Series B
Preferred Stock and the warrants will be validly issued, fully paid and
non-assessable.
This opinion is being furnished to you solely for your benefit in
connection with the Registration Statement and is not to be used, circulated,
quoted or referred to or relief upon for any other purpose without our express
written permission.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Act, or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Klehr, Harrison, Harvey, Branzburg & Ellers LLP
<PAGE>
SERIES A CONVERTIBLE PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this
"Agreement") is made and entered into as of January 31, 2000, by and between
INDUSTRIALVORTEX.COM, INC., a Delaware corporation (the "Company") and NET VALUE
HOLDINGS, INC., a Delaware corporation (the "Investor").
RECITALS
The Company desires to sell to the Investor, and the Investor desires
to purchase from the Company, shares of the Company's Series A Convertible
Preferred Stock on the terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. AGREEMENT TO PURCHASE AND SELL STOCK.
1.1 Authorization. As of the Closing (as defined below), the
Company will have authorized the issuance, pursuant to the terms and conditions
of this Agreement, of up to Three Million (3,000,000) shares of the Company's
Series A Convertible Preferred Stock, $.001 par value per share (the "Series A
Stock") having the rights, preferences, privileges and restrictions set forth in
the Certificate of Designation designating the Series A Stock of the Company
attached to this Agreement as Exhibit A (the "Series A Certificate").
1.2 Agreement to Purchase and Sell. The Company agrees to sell
to the Investor at the Closing, and the Investor agrees to purchase from the
Company at the Closing, 2,858,215 shares of Series A Stock which shall equal 25%
of the Company's Common Stock on a post-investment fully diluted basis at a
price of $0.35 per share, or an aggregate price of $1,000,000 as part of the
first round of the Company's financing, which round shall end on or before
February 28, 2000 (the "First Round Offering"). The shares of Series A Stock
purchased and sold pursuant to this Agreement will be collectively referred to
as the "Purchased Shares" and the shares of Common Stock issuable upon
conversion of the Purchased Shares will be collectively referred to as the
"Conversion Shares".
2. CLOSING. The purchase and sale of the Purchased Shares will take
place at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP,
counsel to the Investor, at 260 S. Broad Street, Philadelphia, Pennsylvania
19102 at 9:00 a.m. Eastern Time, on January 31, 2000, or at such other time and
<PAGE>
place as the Company and the Investor mutually agree upon (which time and place
are referred to in this Agreement as the "Closing"). At the Closing, the Company
will deliver to the Investor certificates representing the Purchased Shares
against delivery to the Company by the Investor of the full purchase price of
the Purchased Shares, paid by (i) a wire transfer of funds to the Company or
(ii) certified bank check.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investor that the statements in the following
paragraphs of this Section 3 are all true and correct:
3.1 Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own its properties and assets and to carry on its business as now
conducted and as presently proposed to be conducted. The Company is duly
qualified and in good standing to do business as a foreign corporation in each
jurisdiction where failure to be so qualified would have a material adverse
effect on its financial condition, business, prospects or operations.
3.2 Capitalization. Upon filing the Series A Certificate,
immediately prior to the Closing, the capitalization of the Company will consist
of the following:
(a) Preferred Stock. A total of Ten Million
(10,000,000) authorized shares of preferred stock, $.001 par value per share, of
which Three Million (3,000,000) shares are designated as Series A Stock, none of
which will be issued and outstanding. The rights, preferences and privileges of
the Series A Stock will be as stated in the Series A Certificate and as provided
by law.
(b) Common Stock. A total of Twenty Million
(20,000,000) authorized shares of common stock, $0.001 par value per share (the
"Common Stock"), of which Six Million Four Hundred Fifty-nine Thousand Seven
Hundred Fifteen (6,459,715) shares are issued and outstanding.
(c) Options, Warrants, Reserved Shares. Except as set
forth on Schedule 3.2(c), there are not outstanding any options, warrants,
rights (including conversion or preemptive rights) or agreements for the
purchase or acquisition from the Company of any shares of its capital stock or
any securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company's capital stock. Except as set forth on Schedule
3.2(c), no shares of the Company's outstanding capital stock, or stock issuable
upon exercise or exchange of any outstanding options, warrants or rights, or
other stock issuable by the Company, are subject to any rights of first refusal
or other rights to purchase such stock (whether in favor of the Company or any
other person), pursuant to any agreement or commitment of the Company.
(d) Outstanding Security Holders. Attached to this
Agreement as Schedule 3.2(d) is a complete list of all outstanding stockholders,
option holders, warrant holders, convertible note holders and other security
2
<PAGE>
holders of the Company as of immediately prior to the Closing, which schedule
lists the type of instruments, certificate numbers in sequential order (if
applicable), the dates of issuance, the names of holders and the number of
Shares held or to be held upon exercise of such instrument.
3.3 Subsidiaries. Except as set forth on Schedule 3.3, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, trust, joint venture, association, or
other entity.
3.4 Due Authorization. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery of, and the performance of all obligations of
the Company under, this Agreement, the Investor Rights Agreement (as defined in
Section 5.14) and the Co-Sale Agreement (as defined in Section 5.15), and the
Employment Agreements (as defined in Section 5.9), (collectively, the "Related
Agreements") and the authorization, issuance, reservation for issuance and
delivery of all of the Purchased Shares being sold under this Agreement and of
the Conversion Shares has been taken or will be taken prior to the Closing, and
this Agreement constitutes, and the Related Agreements, when executed, will
constitute, valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except as may be limited by (i)
applicable bankruptcy, insolvency, reorganization or others laws of general
application relating to or affecting the enforcement of creditors' rights
generally and (ii) the effect of rules of law governing the availability of
equitable remedies.
3.5 Valid Issuance of Stock.
(a) The Purchased Shares, when issued, sold and
delivered in accordance with the terms of this Agreement for the consideration
provided for herein, will be duly and validly issued, fully paid and
nonassessable. The Conversion Shares have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Series A
Certificate, will be duly and validly issued, fully paid and nonassessable.
(b) Based in part on the representations made by the
Investor in Section 4 hereof, the Purchased Shares and (assuming no change in
applicable law and no unlawful distribution of Purchased Shares by the Investor
or other parties) the Conversion Shares will be issued in full compliance with
the registration and prospectus delivery requirements of the U.S. Securities Act
of 1933, as amended (the "1933 Act") and the registration and qualification
requirements of all applicable state securities laws; provided that, with
respect to the Conversion Shares, no commission or other remuneration is paid or
given, directly or indirectly, for soliciting the issuance of Conversion Shares
upon the conversion of the Purchased Shares and no additional consideration is
paid for the Conversion Shares other than surrender of the applicable Purchased
Shares upon conversion thereof in accordance with the Series A Certificate.
3
<PAGE>
(c) The outstanding shares of the capital stock of
the Company are duly and validly issued, fully paid and nonassessable, and such
shares of capital stock, and all outstanding options, warrants, convertible
notes and other securities of the Company, have been issued in full compliance
with the registration and prospectus delivery requirements of the 1933 Act or in
compliance with applicable exemptions therefrom, the registration and
qualification requirements of all applicable securities laws of states of the
United States and all other provisions of applicable securities laws of States
of the United States, including, without limitation, anti-fraud provisions.
3.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement and the Related Agreements, except for such
qualifications or filings under the 1933 Act and the regulations thereunder and
all other applicable securities laws of states of the United States as may be
required in connection with the transactions contemplated by this Agreement. All
such qualifications and filings will, in the case of qualifications, be
effective on the Closing and will, in the case of filings, be made within the
time prescribed by law.
3.7 Litigation. Except as set forth on Schedule 3.7, there is
no action, suit, proceeding, claim, arbitration or investigation ("Action")
pending or, to the best of the Company's Knowledge (as defined below), currently
threatened against the Company, its activities, properties or assets or, to the
best of the Company's Knowledge, against any officer, director or employee of
the Company in connection with such officer's, director's or employee's
relationship with, or actions taken on behalf of, the Company. Except as set
forth on Schedule 3.7, to the best of the Company's Knowledge, there is no
factual or legal basis for any such Action that might result, individually or in
the aggregate, in any material adverse change in the business, properties,
assets, financial condition, affairs or prospects of the Company. By way of
example but not by way of limitation, there are no Actions pending or, to the
best of the Company's Knowledge, threatened (or any basis therefor known to the
Company) relating to the prior employment of any of the Company's employees or
consultants, their use in connection with the Company's business of any
information, technology or techniques allegedly proprietary to any of their
former employers, clients or other parties, or their obligations under any
agreements with prior employers, clients or other parties. The Company is not a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality and there is no
Action by the Company currently pending or which the Company intends to
initiate. For the purposes of this Agreement, "Knowledge" means (i) the actual
knowledge of such party's partners, officers, directors, principals, affiliates
or agents; and (ii) the knowledge that a prudent business person would have
obtained in the conduct of his or her business after making reasonable inquiry
and exercising reasonable diligence with respect to the particular matter in
question.
3.8 Proprietary Information and Inventions Agreement. Each
employee, officer, consultant and contractor of the Company identified on
Schedule 3.8 has entered into and executed a Proprietary Information and
Inventions Agreement in the form attached to this Agreement as Exhibit B or an
employment or consulting agreement containing substantially similar terms.
4
<PAGE>
3.9 Status of Proprietary Assets.
(a) Ownership. Except as set forth on Schedule
3.9(a), the Company has full title and ownership of, or has license to, all
patents, patent applications, trademarks, service marks, trade names,
copyrights, moral rights, mask works, trade secrets, confidential and
proprietary information, compositions of matter, formulas, designs, proprietary
rights, know-how and processes (all of the foregoing collectively referred to as
the "Proprietary Assets") necessary to enable it to carry on its business as now
conducted and as presently proposed to be conducted, without any conflict with
or infringement of the rights of others. A complete list of all the Company's
Proprietary Assets is set forth on Schedule 3.9(a) to this Agreement. To the
best of the Company's Knowledge, no third party has any ownership right, title,
interest, claim in or lien on any of the Company's Proprietary Assets and the
Company has taken, and in the future the Company will use its best efforts to
take, all steps reasonably necessary to preserve its legal rights in, and the
secrecy of, all its Proprietary Assets, except those for which disclosure is
required for legitimate business or legal reasons.
(b) Licenses; Other Agreements. Except as set forth
on Schedule 3.9(b), the Company has not granted, and, there are not outstanding,
any options, licenses or agreements of any kind relating to any Proprietary
Asset of the Company, nor is the Company bound by or a party to any option,
license or agreement of any kind with respect to any of its Proprietary Assets.
The Company is not obligated to pay any royalties or other payments to third
parties with respect to the marketing, sale, distribution, manufacture, license
or use of any Proprietary Asset or any other property or rights.
(c) No Infringement. To the best of the Company's
Knowledge, the Company has not violated or infringed, and is not currently
violating or infringing, and the Company has not received any communications
alleging that the Company (or any of its employees or consultants) has violated
or infringed or, by conducting its business as proposed, would violate or
infringe, any Proprietary Asset of any other person or entity.
(d) No Breach by Employee. The Company is not aware
that any employee or consultant of the Company is obligated under any agreement
(including licenses, covenants or commitments of any nature) or subject to any
judgment, decree or order of any court or administrative agency, or any other
restriction that would interfere with the use of his or her best efforts to
carry out his or her duties for the Company or to promote the interests of the
Company or that would conflict with the Company's business as proposed to be
conducted. The carrying on of the Company's business by the employees and
contractors of the Company and the conduct of the Company business as presently
proposed, will not, to the best of the Company's Knowledge, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
5
<PAGE>
default under, any contract, covenant or instrument under which any of such
employees or contractors or the Company is now obligated. The Company does not
believe it is or will be necessary to utilize any inventions of any employees of
the Company (or persons the Company currently intends to hire) made prior to
their employment by the Company which have not otherwise become property of the
Company. At no time during the conception of or reduction of any of the
Proprietary Assets to practice was any developer, inventor or other contributor
to such patents operating under any grants from any governmental entity or
agency or private source, performing research sponsored by any governmental
entity or agency or private source or subject to any employment agreement or
invention assignment or nondisclosure agreement or other obligation with any
third party that could adversely affect the Company's rights in such Proprietary
Assets.
3.10 Compliance with Law and Charter Documents. The Company is
not in violation or default of any provisions of its Certificate of
Incorporation or Bylaws, both as amended, and to the best of the Company's
Knowledge, the Company is in compliance with all applicable statutes, laws,
regulations and executive orders of the United States of America and all states,
foreign countries or other governmental bodies and agencies having jurisdiction
over the Company's business or properties. The Company has not received any
notice of any violation of such statutes, laws, regulations or orders which has
not been remedied prior to the date hereof. The execution, delivery and
performance of this Agreement and the Related Agreements and the consummation of
the transactions contemplated hereby or thereby will not result in any such
violation or default, or be in conflict with or constitute, with or without the
passage of time or the giving of notice or both, either a default under the
Company's Certificate of Incorporation or Bylaws, or any agreement or contract
of the Company, or, to the best of the Company's Knowledge, a violation of any
statutes, laws, regulations or orders, or an event which results in the creation
of any lien, charge or encumbrance upon any asset of the Company.
3.11 Material Agreements.
(a) List of Material Agreements. Attached to this
Agreement as Schedule 3.11 is a complete list of all agreements, contracts,
leases, licenses, instruments and commitments (oral or written) to which the
Company is a party or is bound that, individually or in the aggregate, are
material to the business, properties, financial condition, results of operation,
affairs or prospects of the Company ("Material Agreements"); provided that for
purposes of this Section 3.11 only, no agreement under which the only remaining
obligation of the Company is to make a payment of money in the amount of $5,000
or less will be deemed to be material to its business, properties, financial
condition or results of operations if the failure to make such payment will not
result in the loss by the Company of any rights that are material to the conduct
of its business.
(b) No Breach. The Company has not breached, nor does
the Company have any Knowledge of any claim or threat that the Company has
breached, any term or condition of (i) any Material Agreement set forth in
Schedule 3.11 or (ii) any other agreement, contract, lease, license, instrument
or commitment that, individually or in the aggregate, would have a material
6
<PAGE>
adverse effect on the business, properties, financial condition, results of
operations or affairs or prospects of the Company. Each Material Agreement set
forth in Schedule 3.11 is in full force and effect and, to the Company's
Knowledge, no other party to such Material Agreement is in default thereunder.
The Company is not a party to any agreement that restricts its ability to market
or sell any of its products (whether by territorial restriction or otherwise).
3.12 Registration Rights. Except as provided in the Investor
Rights Agreement, the Company has not granted or agreed to grant to any person
or entity any rights (including piggyback registration rights) to have any
securities of the Company registered with the United States Securities and
Exchange Commission ("SEC") or any other governmental authority.
3.13 Charter Documents; Minutes. The Certificate of
Incorporation and the Bylaws of the Company are in the form previously provided
to the Investor. The minute books of the Company provided to the Investor
contain a complete summary of all meetings, consents and actions of the board of
directors and the stockholders of the Company since the time of its
incorporation, accurately reflecting all transactions referred to in such
minutes in all material respects.
3.14 Title to Property and Assets. The Company owns its
properties and assets free and clear of all mortgages, deeds of trust, liens,
encumbrances, security interests and claims except for statutory liens for the
payment of current taxes that are not yet delinquent and liens, encumbrances and
security interests which arise in the ordinary course of business and which do
not affect material properties and assets of the Company. With respect to the
property and assets it leases, the Company is in compliance with such leases
and, to the best of the Company's Knowledge, the Company holds valid leasehold
interests in such assets free of any liens, encumbrances, security interests or
claims of any party other than the lessors of such property and assets.
3.15 Financial Statements. Attached to this Agreement as
Schedule 3.15 is an audited balance sheet of the Company dated December 31, 1999
(the "Balance Sheet Date") and an audited income, statement of changes in
stockholder equity and statement of cash flows of the Company for the period
ended December 31,1999 (all such financial statements being collectively
referred to herein as the "Financial Statements"). Such financial statements (a)
are in accordance with the books and records of the Company; (b) are true,
correct and complete and present fairly the financial condition of the Company
at the date or dates therein indicated and the results of operations for the
period or periods therein specified and (c) have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis,
except, as to the unaudited financial statement, for the omission of notes
thereto and normal year-end audit adjustments. The Company has good and
marketable title to all assets set forth on the balance sheets of the Financial
Statements, except for such assets as have been spent, sold or transferred in
the ordinary course of business since the Balance Sheet Date.
3.16 Certain Actions. Except as set forth on Schedule 3.16,
since the Balance Sheet Date, the Company has not: (a) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
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class or series of its capital stock; (b) incurred any indebtedness for money
borrowed or incurred any other liabilities individually in excess of $5,000 or
in excess of $10,000 in the aggregate; (c) made any loans or advances to any
person, other than ordinary advances for travel expenses; (d) sold, exchanged or
otherwise disposed of any material assets or rights other than the sale of
inventory in the ordinary course of its business; or (d) entered into any
transactions with any of its officers, directors or employees or any entity
controlled by any of such individuals.
3.17 Activities Since Balance Sheet Date. Except as set forth
on Schedule 3.17, since the Balance Sheet Date, the Company has not:
(a) formed or acquired or disposed of any interest in
any corporation, partnership, joint venture, or other entity;
(b) written up, written down, or written off the book
value of any amount of assets;
(c) declared, paid, or set aside for payment any
dividend or distribution with respect to its capital stock;
(d) redeemed, purchased, or otherwise acquired, or
sold, granted, or otherwise disposed of, directly or indirectly, any of its
capital stock or securities or any rights to acquire such capital stock or
securities, or agreed to changes in the terms and conditions of any such rights;
(e) increased the compensation of or paid or accrued
any bonus to any employee or contributed or accrued or contributed to any
employee benefit plan, other than in accordance with policies, practices, or
requirements established and in effect on the Balance Sheet Date;
(f) entered into any employment, compensation,
consulting or collective bargaining agreement with any person or group;
(g) entered into, adopted, or materially amended any
employee benefit plan; or
(h) entered into any other material commitment or
transaction not disclosed elsewhere herein.
In addition to the foregoing, since the Balance Sheet Date,
there has not been:
(i) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the assets, properties,
financial condition, operating results, prospects or business of the Company (as
presently conducted and as presently proposed to be conducted);
8
<PAGE>
(j) any waiver by the Company of a valuable right or
of a material debt owed to it;
(k) any satisfaction or discharge of any lien, claim
or encumbrance or payment of any obligation by the Company, except such a
satisfaction, discharge or payment made in the ordinary course of business that
is not material to the assets, properties, financial condition, operating
results or business of the Company;
(l) any material change or amendment to a material
agreement or arrangement by which the Company or any of its assets or properties
is bound or subject, except for changes or amendments which are expressly
provided for or disclosed in this Agreement; or
(m) to the Company's Knowledge, any other event or
condition of any character which would materially and adversely affect the
assets, properties, financial condition, operating results or business of the
Company.
3.18 ERISA Plans. Schedule 3.18 identifies all employee
benefit plans or arrangements applicable to the employees of the Company, and
all material fixed or contingent liabilities or obligations of the Company with
respect to any person now or formerly employed by the Company, including pension
or thrift plans, individual or supplemental pension or accrued compensation
arrangements, contributions to hospitalization or other health or life insurance
programs, incentive plans, bonus arrangements, and vacation, sick leave,
disability, and termination arrangements or policies, including workers'
compensation policies. The Company shall furnish or make available to the
Investor true and complete copies of all written documents or information with
respect to employee matters and arrangements, including without limitation all
employee handbooks, rules, policies, plan documents, trust agreements,
employment agreements, summary plan descriptions, and descriptions of any
unwritten plans identified in Schedule 3.18. Any employee benefits and welfare
plans or arrangements identified in Schedule 3.18 were established and have been
executed, managed, and administered without material exception in accordance
with all applicable requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), and the Employee Retirement Income Security Act of 1974,
as amended, and other applicable laws. There is no governmental audit or
examination of any of such plans or arrangements pending, nor, to the Knowledge
of the Company, threatened. There exists no action, suit, or claim (other than
routine claims for benefits) with respect to any of such plans or arrangements
pending, or, to the Knowledge of the Company, threatened, against any of such
plans or arrangements, and the Company knows of no facts which could give rise
to any such action, suit, or claim.
3.19 Insurance. The Company intends to obtain and maintain in
full force and effect fire and casualty insurance policies as is customary for
the type of business engaged in by the Company, with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow it to replace
9
<PAGE>
any of its properties that might be damaged or destroyed. True and complete
copies of all such insurance policies have previously been furnished to the
Investor and notice of any termination or threatened termination of such
policies has been made known to the Investor.
3.20 Tax Returns and Payments. Neither the Company, nor any
entity to whose liabilities the Company has succeeded or assumed, has filed or
been included in a consolidated, unitary, or combined tax return with another
person. Except as set forth on Schedule 3.20, the Company represents and
warrants that: (a) the Company has filed all tax returns and reports required to
have been filed by or for it; including but not limited to those with respect to
income, payroll, property, employee withholding, social security, unemployment,
franchise, excise, use, and sales taxes, and has either paid in full all taxes
that have become due as reflected on any such return or report (including any
interest and penalties with respect thereto shown to be due) or has fully
accrued on its books or has established adequate reserves for all taxes payable
but not yet due; (b) all material information set forth in such returns or
reports is accurate and complete; (c) the Company has paid or made adequate
provision for all taxes, additions to tax, penalties, and interest payable by
the Company; (d) to the best of the Company's Knowledge, no unpaid tax
deficiency has been asserted against or with respect to the Company by any
taxing authority, and the Company has not received written notice of any such
assertion; (e) the Company has collected or withheld all amounts required to be
collected or withheld by it for any taxes, and to the extent required by law,
all such amounts have been paid to the appropriate governmental agencies or set
aside in appropriate accounts for future payment when due; (f) the Company is in
compliance with, and its records contain all information and documents necessary
to comply with, all applicable information reporting and tax withholding
requirements; (g) the balance sheets contained in the Company Financial
Statements fully and properly reflect, as of the dates thereof, the liabilities
of the Company for all accrued taxes, additions to tax, penalties, and interest;
(h) for periods ending after the date of the most recent Financial Statements,
the books and records of the Company fully and properly reflect its liability
for all accrued taxes, additions to tax, penalties, and interest; (i) the
Company has not granted, nor is it subject to, any waiver of the period of
limitations for the assessment of tax for any currently open taxable period; (j)
the Company has not made or entered into, and holds no asset subject to, a
consent filed pursuant to Section 341(f) of the Code and the regulations
thereunder or a "safe harbor lease" subject to former Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended before the Tax Reform Act of 1986, and
the regulations thereunder; (k) the Company is not required to include in income
any amount for an adjustment pursuant to Section 481 of the Code or the
regulations thereunder; and (l) the Company is not a party to, or obligated
under, any agreement or other arrangement providing for the payment of any
amount that would be an "excess parachute payment" under Section 280G of the
Code.
3.21 Employee Matters.
(a) The Company is not bound by or subject to any
contract, commitment or arrangement with any labor union, and to the Company's
Knowledge, no labor union has requested, sought or attempted to represent any
employees, representatives or agents of the Company. There is no strike or other
labor dispute involving the Company pending nor, to the Company's Knowledge,
threatened, nor is the Company aware of any labor organization activity
involving its employees.
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(b) The Company is not aware that any officer or
employee intends to terminate his or her employment with the Company, nor does
the Company have any present intention to terminate the employment of any of its
officers or employees. Schedule 3.21(b) identifies all employees and consultants
of the Company and the title, term (if other than at will) and compensation of
each.
(c) After due inquiry, to the Company's Knowledge,
the Company (i) is in full compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment, and
wages and hours; (ii) is in full compliance with all of its obligations under
applicable workers compensation laws, rules, and regulations; and (iii) is not
engaged in any unfair labor practice.
(d) To the Company's Knowledge, no current employee,
director or officer has been indicted or convicted of a felony or misdemeanor
(other than traffic violations).
3.22 Environmental Matters.
(a) During the period that the Company has leased or
owned its properties or owned or operated any facilities, there have been no
disposals, releases or threatened releases of Hazardous Materials (as defined
below) on, from or under such properties or facilities. The Company has no
Knowledge of any presence, disposals, releases or threatened releases of
Hazardous Materials on, from or under any of such properties or facilities,
which may have occurred prior to the Company having taken possession of any of
such properties or facilities. For purposes of this Agreement, the terms
"disposal", "release", and "threatened release" shall have the definitions
assigned thereto by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. ss. 9601 et seq., as amended ("CERCLA"). For
the purposes of this Section, "Hazardous Materials" shall mean any hazardous or
toxic substance, material or waste which is or becomes prior to the Closing
regulated under, or defined as a "hazardous substance", "pollutant",
"contaminant", "toxic chemical", "hazardous material", "toxic substance", or
"hazardous chemical" under (i) CERCLA; (ii) the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001 et seq.; (iii) the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; (iv) the Toxic
Substances Control Act, 15 U.S.C. Section 2601 et seq.; (v) the Occupational
Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq.; (vi) regulations
promulgated under any of the above statutes; or (vii) any applicable state or
local statute, ordinance, rule, or regulation that has a scope or purpose
similar to those statutes identified above.
(b) None of the Company's properties or facilities is
in material violation of any federal, state, or local law, ordinance,
regulation, or order relating to industrial hygiene or to the environmental
conditions on, under or about such properties or facilities, including, but not
limited to, soil and ground water condition. During the time that the Company
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has owned or leased its properties and facilities, neither the Company nor, to
the Company's Knowledge, any third party, has used, generated, manufactured or
stored on, under or about such properties or facilities or transported to or
from such properties or facilities any Hazardous Materials.
(c) During the time that the Company has owned or
leased its properties and facilities, there has been no litigation brought or
threatened against the Company, or any settlement reached by the Company with,
any party or parties alleging the presence, disposal, release or threatened
release of any Hazardous Materials on, from or under any of such properties or
facilities.
(d) During the period that the Company has owned or
leased its properties and facilities, no Hazardous Materials have been
transported from such properties or facilities to any site or facility now
listed or proposed for listing on the National Priorities List, at 40 C.F.R.
Part 300, or any list with a similar scope or purpose published by any state
authority.
3.23 Interested Party Transactions. To the Company's
Knowledge,
(a) no officer, employee or director of the Company
or any "affiliate" or "associate" (as those terms are defined in Rule 405 of the
1933 Act) has had, either directly or indirectly, a material interest in: (i)
any person or entity which purchases from or sells, licenses or furnishes to the
Company any goods, property, technology, intellectual or other property rights
or services; or (ii) any contract or agreement to which the Company is a party
or by which it may be bound or affected.
(b) the Company has no indebtedness to or with an
officer, employee, director, affiliate or associate.
3.24 Use of Proceeds. The Company shall use the proceeds from
the sale of the Purchased Shares for the purposes identified on Schedule 3.24.
3.25 Disclosure. This Agreement and the Schedules and Exhibits
hereto (when read together) do not contain any untrue statement of a material
fact and do not omit to state a material fact necessary to make the statements
therein or herein not misleading. To the Company's Knowledge, the financial
projections contained in the Business Plan, attached hereto as Schedule 3.25 (as
supplemented through the date hereof, the "Business Plan"), fairly present its
management's good faith estimates as of the date of the Business Plan and as of
the date of this Agreement.
3.26 Real Property Holding Corporation Status. Since its
inception, the Company has not been a "United States real property holding
corporation", as defined in Section 897(c)(2) of the Code, and in Section
1.897-2(b) of the Treasury Regulations issued thereunder (the "Regulations"),
and the Company has filed with the Internal Revenue Service all statements, if
any, with its United States income tax returns which are required under Section
1.897-2(h) of the Regulations.
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3.27 Tax Elections. The Company has not elected pursuant to
the Code, to be treated as an "S" corporation or a collapsible corporation
pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any
other elections pursuant to the Code (other than elections which relate solely
to matters of accounting, depreciation or amortization) which would have a
material affect on the Company, its financial condition, its business as
presently conducted or presently properties or material assets.
3.28 No Material Undisclosed Liabilities.
(a) There is no liability or obligation of the
Company of any nature, whether absolute, accrued, contingent, or otherwise, in
the amount of $5,000 or more individually, or $10,000 or more in the aggregate,
other than:
(i) the liabilities and obligations that are
fully reflected, accrued or reserved against on the balance sheets of the
Financial Statements, for which the reserves are appropriate and reasonable, or
incurred in the ordinary course of business and consistent with past practices;
(ii) the contractual obligations disclosed
on Schedules 3.11; and
(iii) the litigation and claims described on
Schedule 3.7.
(b) The Company is not signatory to, and is not in
any manner a guarantor, endorser, assumptor or otherwise primarily or
secondarily liable for or responsible for the payment of, any notes payable or
other obligations other than those set forth in the Financial Statements.
3.29 Accounts Receivable. The accounts receivable of the
Company reflected on the Financial Statements or otherwise arising in the
ordinary course of business after the date hereof reflect valid sales of
products and services made on or before such date.
4. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF INVESTOR. The
Investor hereby represents and warrants to, and agree with, the Company that:
4.1 Authorization. This Agreement constitutes the Investor's
valid and legally binding obligation, enforceable in accordance with its terms
except as may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting the
enforcement of creditors' rights generally and (ii) the effect of rules of law
governing the availability of equitable remedies. The Investor represents that
it has full power and authority to enter into this Agreement and the Related
Agreements.
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4.2 Purchase for Own Account. The Purchased Shares to be
purchased by the Investor hereunder will be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
public resale or distribution thereof within the meaning of the Act, and the
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. The Investor also represents that it has not
been formed for the specific purpose of acquiring the Purchased Shares.
4.3 Disclosure of Information. The Investor has received or
has had full access to all the information it considers necessary or appropriate
to make an informed investment decision with respect to the Purchased Shares to
be purchased by the Investor under this Agreement. The Investor further has had
an opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering of the Purchased Shares and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify any
information furnished to the Investor or to which the Investor had access. The
foregoing, however, does not in any way limit or modify the representations and
warranties made by the Company in Section 3.
4.4 Accredited Investor Status. The Investor is an "accredited
investor" within the meaning of Regulation D promulgated under the Act.
4.5 Investment Experience. The Investor understands that the
acquisition of the Purchased Shares involves substantial risk. The Investor: (i)
has experience as an investor in securities of companies in the development
stage and acknowledges that it is able to fend for itself, can bear the economic
risk of its acquisition of the Purchased Shares and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of this acquisition of the Purchased Shares and protecting its
own interests in connection with this acquisition and/or (ii) has a preexisting
personal or business relationship with the Company and certain of its officers,
directors or controlling persons of a nature and duration that enables the
Investor to be aware of the character, business acumen and financial
circumstances of such persons.
4.6 Restricted Securities. The Investor understands that the
Purchased Shares are characterized as "restricted securities" under the Act
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under the Act and applicable rules and
regulations thereunder such securities may be resold without registration under
the Act only in certain limited circumstances. In this connection, the Investor
represents that it is familiar with Rule 144 of the rules and regulations
promulgated under the Act ("Rule 144"), as presently in effect, and understands
the resale limitations imposed thereby and by the Act. The Investor understands
that the Company is under no obligation to register any of the securities sold
hereunder except as provided in the Investor Rights Agreement. The Investor
understands that no public market now exists for any of the Purchased Shares and
that it is uncertain whether a public market will ever exist for the Purchased
Shares or the Conversion Shares.
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4.7 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, the Investor further agrees not to
make any disposition of all or any portion of the Purchased Shares or the
Conversion Shares unless and until:
(a) there is then in effect a registration statement
under the 1933 Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(b) (i) the Investor shall have notified the Company
of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition, and (ii)
the Investor shall have furnished the Company, at the expense of the Investor or
its transferees, with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such securities
under the Act.
Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be required:
(i) for any transfer of any Purchased Shares or Conversion Shares in compliance
with Rule 144 or Rule 144A; or (ii) for any transfer of any Purchased Shares or
Conversion Shares by the Investor to (A) a partner or member of such Investor,
(B) a retired partner of such Investor who retires after the date hereof, or (C)
the estate of any such partner or member; provided that in each of the foregoing
cases the transferee agrees in writing to be subject to the terms of this
Section 4 (other than Section 4.4) to the same extent as if the transferee were
an original Investor hereunder.
4.8 Legends. It is understood that the certificates evidencing
the Purchased Shares and the Conversion Shares will bear the legends set forth
below:
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER
THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
(b) Any legend required by state securities laws,
including a legend substantially in the form of the following:
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE: (1) ARE CONVERTIBLE
INTO SHARES OF COMMON STOCK OF THE COMPANY AT THE OPTION OF THE HOLDER
AT ANY TIME PRIOR TO AUTOMATIC CONVERSION THEREOF; AND (2)
AUTOMATICALLY CONVERT INTO COMMON STOCK OF THE COMPANY IN THE EVENT OF
A PUBLIC OFFERING MEETING CERTAIN REQUIREMENTS OR UPON CERTAIN CONSENTS
OF THE HOLDERS OF THE COMPANY'S PREFERRED STOCK ALL PURSUANT TO AND
UPON THE TERMS AND CONDITIONS SPECIFIED IN THE COMPANY'S CERTIFICATE OF
DESIGNATION. A COPY OF SUCH CERTIFICATE OF DESIGNATION MAY BE OBTAINED,
WITHOUT CHARGE, AT THE COMPANY'S PRINCIPAL OFFICE.
The legend set forth in (a) above shall be removed by the Company from
any certificate evidencing Purchased Shares or Conversion Shares upon delivery
to the Company of an opinion by counsel, reasonably satisfactory to the Company,
that a registration statement under the Act is at that time in effect with
respect to the legended security or that such security can be freely transferred
in a public sale without such a registration statement being in effect and that
such transfer will not jeopardize the exemption or exemptions from registration
pursuant to which the Company issued the Purchased Shares or Conversion Shares.
5. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of
the Investor to the Company under this Agreement are subject to the fulfillment
or waiver, on or before the Closing, of each of the following conditions, the
waiver of which shall not be effective against the Investor if the Investor does
not consent to such waiver, which consent may be given by written communication
to the Company or its counsel:
5.1 Representations and Warranties True. Each of the
representations and warranties of the Company contained in Section 3 shall be
true and correct on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the date of the
Closing.
5.2 Due Diligence. The Investor shall have completed, to its
sole satisfaction, its due diligence of the Company.
5.3 Proprietary Information and Inventions Agreements. As
provided in Section 3.8 above, the Company shall have furnished the Investor
with copies of the Proprietary Information and Inventions Agreement signed by
each employee, officer, consultant or contractor of the Company identified on
Schedule 3.8.
5.4 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing and
shall have obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
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5.5 Series A Certificate. The Series A Certificate shall have
been duly adopted by the Company by all necessary corporate action of its Board
of Directors and stockholders, and shall have been duly filed with and accepted
by the Delaware Secretary of State.
5.6 Compliance Certificate. The Company shall have delivered
to the Investor at the Closing a certificate signed on its behalf by its
President, Chief Executive Officer, or Chief Financial Officer certifying that
the conditions specified in Section 5.1 and Sections 5.3 through 5.6 have been
fulfilled and stating that there shall have been no material adverse change in
the business, affairs, prospects, operations, properties, assets or condition of
the Company.
5.7 Securities Exemptions. The offer and sale of the Purchased
Shares to the Investor pursuant to this Agreement shall be exempt from the
registration requirements of the Act and the registration and/or qualification
requirements of all other applicable state securities laws.
5.8 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor and to the counsel for the Investor, and they shall
each have received all such counterpart originals and certified or other copies
of such documents as they may reasonably request. Such documents shall include
(but not be limited to) the following:
(a) Certified Charter Documents. A copy of the
Certificate of Incorporation, Series A Certificate and Bylaws of the Company (as
amended through the date of the Closing), certified by the Secretary of the
Company as true and correct copies thereof as of the Closing.
(b) Secretary's Incumbency Certificate. A certificate
of the Secretary or an Assistant Secretary or other officer of the Company
certifying the names of the officers of the Company authorized to sign this
Agreement, the certificates for the Purchased Shares and the other documents,
instruments or certificates to be delivered pursuant to this Agreement by the
Company or any of its officers, together with the true signatures of such
officers.
(c) Corporate Actions. A copy of the resolutions of
the Board of Directors and the stockholders of the Company evidencing the
approval of the Series A Certificate, the approval of this Agreement, the
Related Agreements, the issuance of the Purchased Shares and the other matters
contemplated hereby, certified by the Secretary of the Company to be true,
complete and correct.
(d) Good Standing Certificates. A certificate of good
standing of the Company issued by the Delaware Secretary of State, dated no
earlier than ten (10) days prior to the date of Closing.
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5.9 Ownership of Technology. The Investor shall have received
from the Company all documents and other materials requested by the Investor in
writing for the purpose of examining and determining the Company's rights in and
to any technology, product and Proprietary Assets now used, proposed to be used
in, or necessary to, the Company's business as now conducted and proposed to be
conducted, and the status of the Company's ownership rights in and to all such
technology, products and Proprietary Assets shall be reasonably satisfactory to
the Investor.
5.10 Board of Directors. All appropriate action shall be taken
to ensure that the Company's Board of Directors consists of: Charles
Steinberger, David Smith, Inder Sharma, and Allison Stollmeyer following the
Closing.
5.11 Officers' Certificates. The Company shall deliver to the
Investor certificates executed by each of its officers and directors in which
each of them represents that he or she (i) has not made a personal filing or
been an officer or director, partner or member of an entity that has filed an
action seeking protection under the Bankruptcy Code of the United States of
America or analogous law of any jurisdiction not subject to the laws of the
United States of America during the past seven (7) years and (ii) has never been
convicted of any action that is defined as a crime that would adversely affect
the company or its public image or would be required to be disclosed under
Paragraph 401(f) of Regulation 5-K under the Act.
5.12 No Material Change. There shall have been no material
adverse change in the business, affairs, prospects, operations, properties,
assets or condition of the Company.
5.13 Opinion of Company Counsel. The Investor shall have
received an opinion from Luce, Forward, Hamilton & Scripps LLP, counsel for the
Company, dated as of the date of the Closing, in the form satisfactory to the
Investor and its counsel.
5.14 Investor Rights Agreement. The Company and the Investor
shall have executed and delivered the Investor Rights Agreement in the form
attached to this Agreement as Exhibit D (the "Investor Rights Agreement").
5.15 Co-Sale Agreement. The Company, the stockholders of the
Company named therein and the Investor shall have executed and delivered the
Co-Sale Agreement in the form attached as Exhibit E (the "Co-Sale Agreement").
5.16 Strategic Plan. The Company and the Investor shall have
commenced mutually developing a Strategic Plan for the Company. The Company
covenants and agrees to continue mutual development of the strategic Plan
following Closing. The Strategic Plan shall be inserted in the Company's minute
books for reference and be updated on an annual basis.
5.17 Payment of Expenses. The Company shall have paid the
commissions, fees, costs and expenses identified in Section 7.9 of this
Agreement.
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5.18 Employment Agreements. The Company shall have executed
with each of the individuals set forth on Schedule 5.18 (the "Founders")
employment agreements, and stock restriction agreements, in form satisfactory to
the Investor (collectively, the "Employment Agreements").
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations
of the Company to the Investor under this Agreement are subject to the
fulfillment or waiver, on or before the Closing, of each of the following
conditions, the waiver of which shall not be effective against the Company if
the Company does not consent to such waiver, which consent may be given by
written communication to the Investor or its counsel:
6.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 5 shall be true and correct on
the date of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
6.2 Payment of Purchase Price. The Investor shall have
delivered to the Company one million dollars ($1,000,000) in accordance with the
provisions of Section 2.
6.3 Series A Certificate. The Series A Certificate shall have
been duly adopted by the Company by all necessary corporate action of its Board
of Directors and stockholders, and shall have been duly filed with and accepted
by the Delaware Secretary of State.
6.4 Securities Exemptions. The offer and sale of the Purchased
Shares to the Investor pursuant to this Agreement shall be exempt from the
registration requirements of the Act and the registration and/or qualification
requirements of all other applicable state securities laws.
6.5 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Company and to the Company's legal counsel, and the Company
shall have received all such counterpart originals and certified or other copies
of such documents as it may reasonably request.
6.6 Investor Rights Agreement. The Company and the Investor
shall have executed and delivered the Investor Rights Agreement.
6.7 Co-Sale Agreement. The Company, the stockholders of the
Company named therein and the Investor shall have executed and delivered the
Co-Sale Agreement.
7. MISCELLANEOUS.
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7.1 Year 2000 Budget. Promptly following the Closing, the
Company shall provide the Investor with operating and capital budgets for the
calendar year 2000 which are acceptable to the Investor.
7.2 D&O Insurance. As soon as practicable following the
Closing, the Company shall procure and maintain at all times Directors and
Officers Liability Insurance with industry standard coverage limits for
companies that are similar to the Company, but in no event less than $2,000,000
per occurrence.
7.3 Survival of Warranties. The representations, warranties
and covenants of the Company and the Investor contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investor, its counsel or the Company,
as the case may be.
7.4 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties.
7.5 Governing Law; Venue; Waiver of Jury Trial. This Agreement
and the Related Agreements shall be governed by and construed under the internal
laws of the State of Delaware, without reference to principles of conflict of
laws or choice of laws. The venue for any claim, controversy or dispute which
arises between the parties hereto (with respect to this Agreement or any Related
Agreement) shall be the United States District Court for the District of
Delaware (or state court if federal jurisdiction does not apply) or the State of
California and the parties hereby consent to the jurisdiction of such courts and
waive any objection to such venue. THE PARTIES TO THIS AGREEMENT HEREBY WAIVE
THEIR RIGHT TO A TRIAL BY JURY WITH RESPECT TO DISPUTES ARISING UNDER THIS
AGREEMENT AND THE RELATED AGREEMENTS AND CONSENT TO A BENCH TRIAL WITH THE
APPROPRIATE JUDGE ACTING AS THE FINDER OF FACT.
7.6 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.7 Headings. The headings and captions used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement. All references in this Agreement to sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.
7.8 Notices. Any notice, request or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or if deposited in the U.S. mail by
registered or certified mail, return receipt requested, postage prepaid, as
follows:
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If to the Investor: Net Value Holdings, Inc.
2 Penn Center Plaza
Suite 605
Philadelphia, PA 19103
Attention: President
with a copy (which shall not constitute notice hereunder) to:
Klehr, Harrison, Harvey, Branzburg & Ellers, LLP
260 S. Broad Street
Philadelphia, Pennsylvania 19102
Attention: Michael C. Forman, Esq.
If to the Company: IndustrialVortex.Com, Inc.
89 Panorama
Trabuco Canyon, CA 92679
Attention: David Smith
with a copy (which shall not constitute notice hereunder) to:
Luce, Forward, Hamilton & Scripps, LLP
600 W. Broadway, Suite 2600
San Diego, CA 92101
Attention: Michael Fraunces, Esquire
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the mail in the manner set forth above.
7.9 No Finder's Fees. Neither the Investor, the Company, or
any officer, director, or employee of the Investor or the Company (i) employed
any broker or finder, or (ii) incurred any liability whatsoever, for any
brokerage fees, commissions, or finders' fees in connection with the
transactions contemplated hereby. The Investor agrees to indemnify and to hold
harmless the Company from any liability for any commission or compensation in
the nature of a finders' or broker's fee (and any asserted liability) for which
the Investor or any of its officers, partners, employees, or representatives is
responsible. The Company agrees to indemnify and hold harmless the Investor from
any liability for any commission or compensation in the nature of a finder's or
broker's fee (and any asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
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7.10 Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the Related
Agreements or the Series A Certificate, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
7.11 Costs, Expenses. The Company shall pay, or reimburse the
Investor, for all costs and out-of pocket expenses of the Investor incurred in
connection with (i) the Investor's due diligence performed in connection with
its proposed investment in the Company; and (ii) the negotiation, preparation,
execution and delivery of this Agreement, the Related Agreements and the Series
A Certificate (including without limitation, the fees and expenses of counsel to
the Investor), such fees and expenses not to exceed $25,000.
7.12 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
Any amendment or waiver effected in accordance with this Section 8.10 shall be
binding upon each holder of any Purchased Shares and/or Conversion Shares at the
time outstanding, each future holder of such securities, and the Company.
7.13 Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision(s) shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
7.14 Entire Agreement. This Agreement, together with all
exhibits and schedules hereto, constitutes the entire agreement and
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior negotiations, correspondence, agreements,
understandings duties or obligations between the parties with respect to the
subject matter hereof.
7.15 Further Assurances. From and after the date of this
Agreement, upon the request of the Investor or the Company, the Company and the
Investor shall execute and deliver such instruments, documents or other writings
as may be reasonably necessary or desirable to confirm and carry out and to
effectuate fully the intent and purposes of this Agreement.
7.16 Mutual Drafting. This Agreement is the result of the
joint efforts of the Company and the Investor, and each provision hereof has
been subject to the mutual consultation, negotiation and agreement of the
parties and there shall be no construction against any party based on any
presumption of the party's involvement in the drafting thereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Series A
Convertible Preferred Stock Purchase Agreement as of the date first above
written.
THE COMPANY:
INDUSTRIALVORTEX.COM, INC.,
a Delaware corporation
By: /s/ David Smith
---------------------------
David Smith, President
THE INVESTOR:
NET VALUE HOLDINGS, INC.,
a Delaware corporation
By: /s/ Andrew P. Panzo
---------------------------
Andrew P. Panzo, President
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LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
Schedule 3.2(c) Outstanding Warrants, Options and Reserved Shares
Schedule 3.2(d) Outstanding Security Holders
Schedule 3.7 Litigation
Schedule 3.8 Key Employees
Schedule 3.9(a) Ownership of Proprietary Assets
Schedule 3.9(b) Licenses, Other Agreements relating to Proprietary Assets
Schedule 3.11 List of Material Contracts
Schedule 3.15A Year End Financial Statements
Schedule 3.15B Interim Financial Statements
Schedule 3.16 Certain Actions
Schedule 3.17 Activities Since Balance Sheet Date
Schedule 3.18 ERISA Plans
Schedule 3.20 Tax Matters
Schedule 3.21(b) Employee Matters
Schedule 3.24 Use of Proceeds
Schedule 3.25 Business Plan
EXHIBITS
Exhibit A Series A Certificate
Exhibit B Form of Invention Assignment and Confidentiality Agreement
Exhibit C Form of Investor Rights Agreement
Exhibit D Form of Co-Sale Agreement
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INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT (this "Agreement ") is made and entered
into as of this 31st day of January, 2000, by and between INDUSTRIALVORTEX.COM,
INC. a Delaware corporation (the "Company") and NET VALUE HOLDINGS, INC., a
Delaware corporation (the "Investor").
RECITALS
A. The Investor has agreed to purchase from the Company, and the
Company has agreed to sell to the Investor, Two Million Eight Hundred
Fifty-Eight Thousand Two Hundred Fifteen (2,858,215) shares of the Company's
Series A Convertible Preferred Stock, par value $0.001 per share (the "Series A
Stock"), on the terms and conditions set forth in that certain Series A
Convertible Preferred Stock Purchase Agreement, of even date herewith, by and
between the Company and the Investor (the "Series A Agreement"). Capitalized
terms used herein but not otherwise defined shall have the meaning given such
terms in the Series A Agreement.
B. The Series A Agreement provides that the Investor shall be granted
certain information, registration rights and rights of first refusal, all as
more fully set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. INFORMATION RIGHTS.
1.1. Financial Information. The Company covenants and agrees that,
commencing on the date of this Agreement, for so long as the Investor holds any
shares of Series A Preferred Stock and/or shares of Common Stock of the Company
issued upon the conversion of such shares of Series A Preferred Stock, the
Company will:
(a) Annual Reports. Furnish to the Investor, as soon as
practicable and in any event within sixty (60) days after the end of each fiscal
year of the Company, a Balance Sheet as of the end of such fiscal year, a
Statement of Income and a Statement of Cash Flows of the Company for such year,
setting forth in each case in comparative form the figures from the Company's
previous fiscal year (if any), all prepared in accordance with generally
accepted accounting principles and practices and audited by an independent
certified public accountant selected by the Company and acceptable to the
Investor. Draft copies of the annual Balance Sheet, Statement of Income and
Statement of Cash Flows, if any, shall be furnished to the Investor immediately
following their receipt by the Company.
<PAGE>
(b) Quarterly Reports. Furnish to the Investor as soon as
practicable, and in any case within thirty (30) days of the end of each fiscal
quarter of the Company (except the last quarter of the Company's fiscal year),
quarterly and year-to-date unaudited financial statements, including an
unaudited Balance Sheet, an unaudited Statement of Income and an unaudited
Statement of Cash Flows, together with a management report thereon. Management
reports shall include a budget variance analysis and a discussion and analysis
of the related financial statements.
(c) Monthly Reports. Furnish to the Investor within twenty (20)
days of the end of each calendar month, monthly and year-to-date unaudited
financial statements, including an unaudited Balance Sheet, an unaudited
Statement of Income and an unaudited Statement of Cash Flows, together with an
unaudited management report thereon (including a budget variance analysis and
management's discussion and analysis).
(d) Annual Budget and Management Reports . Furnish to the
Investor, as soon as practicable and in any event no later than forty-five (45)
days before the close of each fiscal year of the Company, a management report
and an annual operating plan and budget, prepared on a quarterly basis, for the
next immediate fiscal year, and on a basis consistent with prior periods
(including, among other items, appropriate reserves, accruals and provisions for
income taxes). The Company shall also furnish to the Investor, within a
reasonable time of its preparation, any amendments to the annual budget that
have been prepared at the discretion of or for presentation to the Board. Such
budget shall include underlying assumptions and a qualitative description of the
Company's plan by the Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer or Controller in support of that budget.
(e) Material Events. The Company will notify the Investor, as soon
as possible and in any event within ten (10) days, of (i) the existence and
status of any litigation, pending or threatened, which could, in the event of an
unfavorable outcome, have a material adverse effect upon the financial condition
or results of operations of the Company considered in the aggregate, (ii) any
material change in any material fact or circumstance represented or warranted in
this Agreement and (iii) a default or any event or occurrence which with lapse
of time or notice or both could become a default under the Series A Agreement.
Such notice shall contain a reasonably detailed statement outlining such default
or event, and the Company's proposed response.
(f) Confidentiality. The Investor agrees to hold all information
received pursuant to this Agreement in confidence, and not to use or disclose
any of such information to any third party, except to the extent such
information may be made publicly available by the Company; provided, however,
that the Investor may, in the ordinary course of business, provide the financial
results of the Company to third parties in the same manner such information is
provided by the Investor with respect to its portfolio companies.
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(g) Substitute Financials. In the event the Company fails to
provide the reports required by Section 1.1, the Investor may give the Company
notice requesting immediate delivery of such reports. If the Company fails to
deliver such reports within a two-week period after receipt of such notice from
the Investor, then the Investor, shall have the right and authority, at the
Company's sole expense, to retain the services of attorneys and/or a nationally
recognized accounting firm of its choice (the expense of which shall not exceed
the usual and customary expenses associated with such an audit), to make any
require filings such that the reports are produced to the satisfaction of the
Investor. All fees and costs associated with such actions by Investor shall be
the sole expense of the Company.
(h) Other Information. The Company shall provide such other
financial data and operational information as may reasonably be requested in
writing by the Investor within twenty (20) days after the later of (i) the close
of each calendar month and (ii) the date of the Investor's request. The Company
shall provide to the Investor, promptly upon request, such other information as
the Investor shall reasonably request in order for the preparation of annual,
quarterly and other reports filed by the Investor under the Securities Act of
1933 and the Securities Exchange Act of 1934.
(i) Variance Reports; Certifications. Each of the financial
statements and other reports described in this Section 1.1 shall be accompanied
by a report of the Chief Financial Officer, Chief Accounting Officer or
Controller of the Company explaining any material variances in such financial
statement or report from the Company's operating plan and budget for the quarter
covered and stating that such financial statement or report fairly presents the
financial position and financial results of the Company for the period covered.
(j) Company's Failure to Comply. In the event that the Company
fails to provide any information required by this Section 1.1, it shall
reimburse the Investor for all fees and expenses of attorneys and accountants
incurred in the preparation of such financial statement and management reports
necessary for the Investor to comply with its reporting requirements.
1.2. Inspection Rights. The Company shall permit a designated
representative of the Investor, at the Investor's expense, to visit and inspect
the Company's properties, to examine its books of account, operational records,
and reports and to discuss the business, operations, and financial affairs of
the Company with its respective officers, all at such reasonable times as may be
requested by the Investor. The Company will provide the Investor's
representatives with any additional information, opinions, certifications, and
documents, in addition to those herein mentioned, relating to the operation of
the Company as may be reasonably requested.
1.3. Termination of Certain Rights. The Company's obligations under
Sections 1.1 and 1.2 above will terminate upon (a) the consummation of a
Qualifying IPO (as defined in Section 5(b) of the Company's Series A
Certificate) or (b) a consolidation or merger of the Company with or into any
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other corporation in which the holders of record of the Company's outstanding
shares of stock immediately before such consolidation or merger hold (by virtue
of securities issued as consideration in such transaction or otherwise) less
than a majority of the voting power of the surviving corporation of such
consolidation or merger, or the sale of all or substantially all of the assets
of the Company (a "Change of Control Event"). After a Qualifying IPO, the
Company shall provide the Investor with all reports normally provided to its
shareholders.
1.4. Rule 144A Information, PORTAL. At all times during which the
Company is neither subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), nor
exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, provide
in written form, upon the written request of the Investor, or a prospective
purchaser of securities of the Company from the Investor, all information
required by Rule 144A(d)(4)(i) of the Rules and Regulations promulgated under
the Securities Act (the "144A Information"); the Company further agrees, upon
written request, to cooperate with and assist the Investor or any member of the
National Association of Securities Dealers, Inc. system for Private Offerings
Resales and Trading through Automated Linkages ("PORTAL") in applying to
designate and thereafter maintaining the eligibility of the Company's securities
for trading through PORTAL. With respect to each, the Company's obligations
under this Section 1.4 shall at all times be contingent upon the Investor's
obtaining from a prospective purchaser an agreement to use its commercially
reasonable efforts to safeguard the 144A Information from disclosure to anyone
other than employees of the prospective purchaser who require access to the 144A
Information for the sole purpose of evaluating its purchase of the Company's
securities.
2. REGISTRATION RIGHTS.
2.1. Definitions. For purposes of this Section 2.1:
(a) Registration. The terms "register", "registered", and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.
(b) Registrable Securities. The term "Registrable Securities"
means: (i) all the shares of Common Stock of the Company issued or issuable upon
the conversion of any shares of Series A Stock issued under the Series A
Agreement that are now owned or may hereafter be acquired by the Investor or the
Investor's permitted successors and assigns; and (ii) any shares of Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, all such
shares of Common Stock described in clause (i) of this Section 2.1(b), excluding
in all cases, however, any Registrable Securities sold by a person in a
transaction in which rights under this Section 2.1 are not assigned in
accordance with this Agreement or any Registrable Securities sold to the public
or sold pursuant to Rule 144 promulgated under the Securities Act.
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(c) Registrable Securities Then Outstanding. The number of shares
of "Registrable Securities Then Outstanding" shall mean the number of shares of
Common Stock which are Registrable Securities and are then (i) issued and
outstanding or (ii) issuable pursuant to the exercise or conversion of then
outstanding and then exercisable options, warrants or convertible securities.
(d) Holder. The term "Holder" means any person owning of record
Registrable Securities that have not been sold to the public or pursuant to Rule
144 promulgated under the Securities Act or any assignee of record of such
Registrable Securities to whom rights under this Section 2 have been duly
assigned in accordance with this Agreement; provided, however, that for purposes
of this Agreement, a record holder of shares of Series A Stock convertible into
such Registrable Securities shall be deemed to be the Holder of such Registrable
Securities; provided, further, that the Company shall in no event be obligated
to register shares of Series A Stock, and that Holders of Registrable Securities
will not be required to convert their shares of Series A Stock into Common Stock
in order to exercise the registration rights granted hereunder, until
immediately before the closing of the offering to which the registration
relates.
(e) Form S-3. The term "Form S-3" means such form under the
Securities Act as is in effect on the date hereof or any successor registration
form under the Securities Act subsequently adopted by the SEC which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
(f) Securities Act. The term "Securities Act" means the Securities
Act of 1933, as amended.
(g) SEC. The term "SEC" or "Commission" means the U.S. Securities
and Exchange Commission.
2.2. Demand Registration.
(a) Request by Holders. If the Company shall receive at any time
after one hundred eighty (180) days after the effective date of the Company's
initial public offering of its securities pursuant to a registration filed under
the Securities Act, a written request from the Holders of at least a majority of
the Registrable Securities Then Outstanding that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities pursuant to this Section 2.2 then the Company shall, within ten (10)
business days of the receipt of such written request, give written notice of
such request ("Request Notice") to all Holders, and effect, as soon as
practicable, the registration under the Securities Act of all Registrable
Securities which Holders request to be registered and included in such
registration by written notice given such Holders to the Company within twenty
(20) days after receipt of the Request Notice, subject only to the limitations
of this Section 2.2.
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(b) Underwriting. If the Holders initiating the registration
request under this Section 2.2 ("Initiating Holders"), intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
then they shall so advise the Company as a part of their request made pursuant
to this Section 2.2 and the Company shall include such information in the
written notice referred to in Section 2.2(a). In such event, the right of any
Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the managing underwriter or
underwriters selected for such underwriting by the Company and a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
Section 2.2 to the contrary, if the underwriter(s) advise(s) the Company in
writing that marketing factors require a limitation of the number of securities
to be underwritten then the Company shall so advise all Holders of Registrable
Securities which would otherwise be registered and underwritten pursuant hereto,
and the number of Registrable Securities that may be included in the
underwriting shall be reduced as required by the underwriter(s) and allocated
among the Holders of Registrable Securities on a pro rata basis according to the
number of Registrable Securities Then Outstanding held by each Holder requesting
registration (including the Initiating Holders); provided, however, that the
number of shares of Registrable Securities to be included in such underwriting
and registration shall not be reduced unless all other securities of the Company
are first entirely excluded from the underwriting and registration. Any
Registrable Securities excluded and withdrawn from such underwriting shall be
withdrawn from the registration.
(c) Maximum Number of Demand Registrations. The Company is
obligated to effect only one (1) Demand Registration pursuant to this Section
2.2.
(d) Deferral. Notwithstanding anything to the contrary contained
in the preceding subsection (c), if the Company shall furnish to Holders
requesting the filing of a registration statement pursuant to this Section 2.2,
a certificate signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such registration statement to be filed and it is, therefore, essential to
defer the filing of such registration statement, then the Company shall have the
right to defer such filing for a period of not more than 120 days after receipt
of the request of the Initiating Holders; provided, however, that the Company
may not utilize this right more than once in any twelve (12) month period.
(e) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 2.2, including without limitation all
registration and qualification fees, printers' and accounting fees, fees and
disbursements of counsel for the Company and the reasonable fees and
disbursements of one counsel for the selling Holders (excluding underwriters'
discounts and commissions), shall be borne by the Company. Each Holder
participating in a registration pursuant to this Section 2.2 shall bear such
Holder's proportionate share (based on the total number of shares sold in such
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registration other than for the account of the Company), of all discounts,
commissions or other amounts payable to underwriters or brokers in connection
with such offering. Notwithstanding the foregoing, the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to this Section 2.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities requested to
be registered; provided however, that if at the time of such withdrawal, the
Holders have learned of a material adverse change in the condition, business, or
prospects of the Company not known to the Holders at the time of their request
for such registration and have withdrawn their request for registration with
reasonable promptness after learning of such material adverse change, then the
Holders shall not be required to pay any of such expenses and shall retain their
rights pursuant to this Section 2.2.
2.3. Piggyback Registrations.
(a) Registration Rights. The Company shall notify all Holders
of Registrable Securities in writing at least thirty (30) days prior to filing
any registration statement under the Securities Act for purposes of effecting a
public offering of securities of the Company, including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but specifically excluding registration statements relating to: (i) any
registration under Section 2.2 or Section 2.4 of this Agreement; or (ii) any
employee benefit plan, corporate reorganization or acquisition or other
transactions under Rule 145 of the Securities Act of 1933, and will afford each
such Holder an opportunity to include in such registration statement all or any
part of the Registrable Securities then held by such Holder. Each Holder
desiring to include in any such registration statement all or any part of the
Registrable Securities held by such Holder shall, within twenty (20) days after
receipt of the above-described notice from the Company, so notify the Company in
writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(b) Underwriting. If a registration statement under which the
Company gives notice under this Section 2.3 is for an underwritten offering,
then the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determines in good faith that marketing factors require a limitation
of the number of shares to be underwritten, then the managing underwriter may
exclude shares (including Registrable Securities) from the registration and the
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underwriting, and the number of shares that may be included in the registration
and the underwriting shall be allocated, first, to any holders of registration
rights who exercised such rights to cause the Company to file the registration
statement; second, to the Company, and third, to each of the Holders and any
other holders of similar "piggyback" registration rights ("Other Holders")
requesting inclusion of their Registrable Securities in such registration
statement on a pro rata basis based on the total number of Registrable
Securities then held by each such Holder and Other Holders; provided, however,
that the right of the underwriters to exclude shares (including Registrable
Securities) from the registration and underwriting as described above shall be
restricted so that (i) the number of Registrable Securities included in any such
registration is not reduced below ten percent (10%) of the shares included in
the registration, except for a registration relating to the Company's initial
public offering from which all Registrable Securities shall be excluded; and
(ii) all shares that are not Registrable Securities and are held by persons who
are employees or directors of the Company (or any subsidiary of the Company)
shall first be excluded from such registration and underwriting before any
Registrable Securities are so excluded. If any Holder disapproves of the terms
of any such underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company and the underwriter, delivered at least ten (10) business
days prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration. For any Holder which is a partnership or
corporation, the partners, retired partners and stockholders of such Holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "Holder", and any pro rata reduction with respect to such "Holder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such "Holder", as defined in this
sentence.
(c) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 2.3 (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and ""blue
sky"" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company and reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company.
2.4. Form S-3 Registration. In case the Company shall receive from any
Holder or Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, then the Company will:
(a) Notice. Promptly give written notice of the proposed
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable Securities; and
(b) Registration. As soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within twenty (20) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance pursuant to this Section 2.4:
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(i) if Form S-3 is not available for such offering by the
Holders;
(ii) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected one (1) registration on
Form S-3 for the Holders pursuant to this Section 2.4; or
(iii) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance.
(c) Expenses. Subject to the foregoing, the Company shall file a
Form S-3 registration statement covering the Registrable Securities and other
securities so requested to be registered pursuant to this Section 2.4 as soon as
practicable after receipt of the request or requests of the Holders for such
registration. The Company shall pay all expenses incurred in connection with
each registration requested pursuant to this Section 2.4, (excluding
underwriters' or brokers' discounts and commissions), including without
limitation all filing, registration and qualification, printers' and accounting
fees and the reasonable fees and disbursements of one counsel for the selling
Holder or Holders and counsel for the Company.
(d) Not Demand Registration. Form S-3 registrations shall not be
deemed to be a demand registration as described in Section 2.2 above.
(e) Number of Form S-3 Registrations. Upon request in accordance
with this Section 2.4, the Company is obligated to effect one (1) such
registration annually pursuant to this Section 2.4.
2.5. Obligations of the Company. Whenever required, upon request in
accordance with this Section 2.5, to effect the registration of any Registrable
Securities under this Agreement, the Company shall, as expeditiously and as
reasonably as possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement for the period set forth in paragraph (a) above.
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(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of the Registrable Securities owned by them that
are included in such registration.
(d) Use its reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
"blue sky" laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Furnish, at the request of any Holder requesting registration
of Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (ii) a "comfort"
letter dated as of such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering
and reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
2.6. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2.2, 2.3 or
2.4 that the selling Holders shall furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be required to timely effect
the registration of their Registrable Securities.
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2.7. Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 2.
2.8. Indemnification. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) By the Company. To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, the partners, officers and
directors of each Holder, any underwriter (as defined in the Securities Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended, (the "1934 Act"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto;
(ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or
(iii) any violation or alleged violation by the Company of the
Securities Act, the 1934 Act, any federal or state securities law or any rule or
regulation promulgated under the Securities Act, the 1934 Act or any federal or
state securities law in connection with the offering covered by such
registration statement; and the Company will reimburse each such Holder,
partner, officer or director, underwriter or controlling person for any legal or
other expenses reasonably incurred by them, as incurred, in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 2.8(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Holder, partner,
officer, director, underwriter or controlling person of such Holder, including
without limitation, any information furnished by any Holder of the Company
pursuant to Section 2.6 hereof.
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(b) By Selling Holders . To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the Securities
Act, any underwriter and any other Holder selling securities under such
registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder within the meaning of the
Securities Act or the 1934 Act (collectively "Company Indemnitee"), against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such Company Indemnitee may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will reimburse any legal or other expenses reasonably
incurred by the Company or any such Company Indemnitee in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 2.8(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; and provided, further,
that the total amounts payable in indemnity by a Holder under this Section
2.8(b) in respect of any Violation shall not exceed the gross proceeds received
by such Holder in the registered offering out of which such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party under
this Section 2.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 2.8, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 2.8.
(d) Defect Eliminated in Final Prospectus. The foregoing indemnity
agreement of the Holders is subject to the conditions that, insofar as it
relates to: (i) any Violation made in a prospectus in which the Company is
selling securities; and (ii) any Violation made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus"), such indemnity agreement shall not inure to the benefit of the
Company if a copy of the Final Prospectus was furnished to the Holders and was
not furnished by the Company to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities Act.
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(e) Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to this
Section 2.8, but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding the fact that this Section 2.8
provides for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any such selling Holder or any
such controlling person in circumstances for which indemnification is provided
under this Section 2.8; then, and in each such case, the Company and such Holder
will contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so that
such Holder is responsible for the portion represented by the percentage that
the public offering price of its Registrable Securities offered by and sold
under the registration statement bears to the public offering price of all
securities offered by and sold under such registration statement, and the
Company and other selling Holders are responsible for the remaining portion;
provided, however, that, in any such case, (a) no such Holder will be required
to contribute any amount in excess of the public offering price of all such
Registrable Securities offered and sold by such Holder pursuant to such
registration statement; and (b) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
(f) Survival. The obligations of the Company and Holders under
this Section 2.8 shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.
2.9. "Lock-up" Agreement. Each Holder hereby agrees that it shall not,
to the extent requested by the Company or an underwriter of securities of the
Company, sell or otherwise transfer or dispose of any Registrable Securities or
other shares of stock of the Company then owned by such Holder (other than to
donees or partners of the Holder who agree to be similarly bound) for up to one
hundred eighty (180) days following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however,
that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers securities to be sold on its
behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
(b) all officers, directors then holding Common Stock and all
holders of more than one percent (1%) of the outstanding capital stock of the
Company enter into similar agreements.
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In order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
2.10. Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the 1934 Act (at any time after it has become subject to such
reporting requirements); and
(c) So long as a Holder owns any Registrable Securities, furnish
to the Holder forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public), and of
the Securities Act and the 1934 Act (at any time after it has become subject to
the reporting requirements of the 1934 Act), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration (at any time after the Company has become subject to the
reporting requirements of the 1934 Act).
2.11. Termination of the Company's Obligations. The Company shall have
no obligations pursuant to Sections 2.2 through 2.4 with respect to: (a) any
request or requests for registration made by any Holder on a date more than five
(5) years after the closing date of a Qualifying IPO; (b) any Registrable
Securities proposed to be sold by a Holder in a registration pursuant to Section
2.2, 2.3 or 2.4 if, in the opinion of counsel to the Company, all such
Registrable Securities proposed to be sold by a Holder may be sold in a three
(3) month period without registration under the Securities Act pursuant to Rule
144 under the Securities Act, or under any replacement rule promulgated by the
SEC permitting the resale of restricted securities without the necessity of a
registration statement; or (c), in connection with any particular registration
undertaken by the Company, any Holder who fails to provide promptly the Company
such information as the Company may reasonably request at any time to enable the
Company to comply with any applicable law or regulation or to facilitate
preparation and filing of said registration.
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2.12. Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of at least sixty-six and two-thirds percent (66-2/3%) of the
Registrable Securities Then Outstanding, enter into any agreement with any
holder or prospective holder of any securities of the Company which would allow
such holder or prospective holder (a) to include such securities in any
registration filed under Section 2.2 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Registrable Securities of the Holders which is
included, or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the earlier of either
of the dates set forth in Section 2.2(a), or within one hundred twenty (120)
days of the effective date of any registration effected pursuant to Section 2.2.
3. PREEMPTIVE RIGHT.
3.1. General. Each Holder and any party to whom such Holder's rights
under this Section 3.1 have been duly assigned in accordance with Section 4.1(b)
(each such Holder or assignee being hereinafter referred to as a "Rights
Holder") shall have the right of first refusal to purchase such Rights Holder's
Pro Rata Share (as defined below), of all (or any part) of any "New Securities"
(as defined in Section 3.2) that the Company may from time to time issue after
the date of this Agreement. A Rights Holder's "Pro Rata Share" for purposes of
this right of first refusal shall mean a fraction, the numerator of which is (a)
the number of Registrable Securities as to which such Rights Holder is the
Holder (or is deemed to be the Holder under Section 2.1(d)), and the denominator
of which is (b) the number of shares of common stock of the Company equal to the
sum of (i) the total number of shares of common stock of the Company then
outstanding plus (ii) the total number of shares of common stock of the Company
into which all then outstanding shares of Series A Stock of the Company are then
convertible plus (iii) the total number of shares of common stock of the Company
issuable upon the conversion of any other capital stock of the Company then
convertible and upon the exercise of any outstanding options, warrants or rights
issued by the Company.
3.2. New Securities. "New Securities" shall mean any common stock or
preferred stock of the Company, whether now authorized or not, and rights,
options or warrants to purchase such common stock or preferred stock, and
securities of any type whatsoever that are, or may become, convertible or
exchangeable into such common stock or preferred Stock; provided, however, that
the term "New Securities" does not include:
(a) up to 2,114,929 shares of the Company's Common Stock (or
options or warrants therefor) issued to employees, officers, directors,
contractors, advisors or consultants of the Company pursuant to incentive
agreements or plans approved by the Board of Directors of the Company, and
including in such number all Warrant Securities (as defined below);
(b) any shares of Series A Stock issued under the Series A
Agreement, as such agreement may be amended;
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(c) any securities issuable upon conversion of or with respect to
any then outstanding shares of Series A Stock of the Company or Common Stock or
other securities issuable upon conversion thereof;
(d) any securities issuable upon exercise of any options, warrants
or rights to purchase any securities of the Company outstanding on the date of
this Agreement ("Warrant Securities"), and any securities issuable upon the
conversion of any Warrant Securities;
(e) shares of the Company's Common Stock or Series A Stock issued
in connection with any stock split or stock dividend or similar event;
(f) securities offered by the Company to the public pursuant to a
registration statement filed under the Securities Act; or
(g) securities issued pursuant to the acquisition of another
corporation or entity by the Company by consolidation, merger, purchase of all
or substantially all of the assets, or other reorganization in which the Company
acquires, in a single transaction or series of related transactions, all or
substantially all of the assets of such other corporation or entity or fifty-one
percent (51%), or more of the voting power of such other corporation or entity
or fifty-one percent (51%), or more of the equity ownership of such other
entity, provided that , such acquisition was approved by (i) the Company's
Series A Director (as defined below) or (ii) by holders of a majority of the
outstanding shares of Series A Stock.
3.3. Procedures. In the event that the Company proposes to undertake an
issuance of New Securities, it shall give to each Rights Holder written notice
of its intention to issue New Securities (the "Notice"), describing the type of
New Securities and the price and the general terms upon which the Company
proposes to issue such New Securities. Each Rights Holder shall have ten (10)
days from the date of mailing of any such Notice to agree in writing to purchase
such Rights Holder's Pro Rata Share of such New Securities for the price and
upon the general terms specified in the Notice by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased (not
to exceed such Rights Holder's Pro Rata Share). If any Rights Holder fails to so
agree in writing within such ten (10) day period to purchase such Rights
Holder's full Pro Rata Share of an offering of New Securities (a "Nonpurchasing
Holder"), then such Nonpurchasing Holder shall forfeit the right hereunder to
purchase that part of his Pro Rata Share of such New Securities that he did not
so agree to purchase and the Company shall promptly give each Rights Holder who
has timely agreed to purchase his full Pro Rata Share of such offering of New
Securities (a "Purchasing Holder") written notice of the failure of any
Nonpurchasing Holder to purchase such Nonpurchasing Rights Holder's full Pro
Rata Share of such offering of New Securities (the "Overallotment Notice"). Each
Purchasing Holder shall have a right of overallotment such that such Purchasing
Holder may agree to purchase a portion of the Nonpurchasing Holders' unpurchased
Pro Rata Shares of such offering on a pro rata basis according to the relative
Pro Rata Shares of the Purchasing Rights Holders, at any time within five (5)
days after receiving the Overallotment Notice.
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3.4. Failure to Exercise. To the extent that the Rights Holders fail to
exercise in full the right of first refusal within such ten (10) plus five (5)
day period, then the Company shall have 120 days thereafter to sell the New
Securities with respect to which the Rights Holders' rights of first refusal
hereunder were not exercised, at a price and upon general terms not materially
more favorable to the purchasers thereof than specified in the Company's Notice
to the Rights Holders. In the event that the Company has not issued and sold the
New Securities within such 120 day period, then the Company shall not thereafter
issue or sell any New Securities without again first offering such New
Securities to the Rights Holders pursuant to this Section 3.4. If any Rights
Holder fails to exercise its right of first refusal with respect to any New
Securities in full (but not including any right of overallotment), and such New
Securities are either purchased by other Rights Holders or issued and sold in
full by the Company under the terms of this Section, such Rights Holder shall
have no further right of first refusal with respect to New Securities.
3.5. Termination. This right of first refusal shall terminate (a) upon
consummation of a Qualifying IPO, or (b) upon a merger, consolidation or sale of
the stock or substantially all of the assets of the Company in which the
shareholders of the Company immediately prior to such transaction do not retain
a majority of voting power in the surviving entity( a "Change of Control
Event").
4. ASSIGNMENT AND AMENDMENT.
4.1. Assignment. Notwithstanding anything herein to the contrary:
(a) Information Rights. The rights of the Investor under Section 1
hereof may be assigned only to (i) a Related Party (as defined below) or (ii) a
party who acquires from the Investor (or the Investor's permitted assigns) at
least ten percent (10%) of the Series A Stock or the equivalent number (on an
as-converted basis) of shares of Common Stock of the Company issued upon the
conversion of such shares of Series A Stock.
(b) Registration Rights; Preemptive Rights. The registration
rights of a Holder under Section 2 hereof and the preemptive rights of a Rights
Holder under Section 3 hereof may be assigned only to a party who acquires at
least ten percent (10%), of the Series A Stock or an equivalent number (on an
as-converted basis) of Registrable Securities issued upon conversion thereof;
provided, however, that no party may be assigned any of rights under Section 4.1
unless the Company is given written notice by the assigning party at the time of
such assignment stating the name and address of the assignee and identifying the
securities of the Company as to which the rights in question are being assigned;
and provided, further that any such assignee shall receive such assigned rights
subject to all the terms and conditions of this Agreement, including without
limitation the provisions of this Section 4.1.
4.2. Amendment of Rights. Any provision of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Holders holding shares of Series A Stock or
Conversion Stock representing or convertible into a majority of all the
Investor's Shares (as defined below) as of the date of any proposed amendment.
As used herein, the term "Investor's Shares" shall mean the shares of Common
Stock then issuable upon conversion of all then outstanding shares of Series A
Stock issued under the Series A Agreement plus all then outstanding shares of
Conversion Stock that were issued upon the conversion of any shares of Series A
Stock issued under the Series A Agreement. Any amendment or waiver effected in
accordance with this Section 4.2 shall be binding upon the Investor, each
Holder, each permitted successor or assignee of the Investor or Holder and the
Company.
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4.3. Related Party. As used herein, the term "Related Party" with
respect to any Holder means (i) any person or entity that, directly or
indirectly, through one or more intermediaries, has voting control of, or is
under common voting control with, such Holder; or (ii) a trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners or owners
or persons or entities holding controlling interest of which consist of any
Holder and/or such other persons or entities referred to in the immediately
preceding clause (i); and (iii) any Holders' current partners, stockholders or
members as the case may be, pro rata in accordance with the current distribution
provision of such entities charter documents.
5. COVENANTS OF THE COMPANY.
5.1. Board of Directors; Meetings.
(a) So long as the Investor or its assignee holds shares of Series
A Preferred Stock, the Company will use its best efforts to cause promptly the
election to its Board of Directors and maintenance in office one (1) person
designated by the Investor (the "Investor Director"). The Company shall cause
the Board of Directors to meet at least once every fiscal quarter.
(b) Special Voting Rights. The Company shall not, without the
approval, by vote or written consent, of the Investor Director:
(i) amend its Certificate of Incorporation in any manner that
would alter or change any of the rights, preferences, privileges or restrictions
of the Series A Preferred Stock;
(ii) reclassify any outstanding shares of securities of the
Company into shares having rights, preferences or privileges senior to or on
parity with the Series A Preferred Stock;
(iii) authorize or issue any additional Series A Preferred
Stock or any other stock having rights or preferences senior to or on parity
with the Series A Preferred Stock;
(iv) merge or consolidate with or into any corporation;
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(v) sell all or substantially all the Company's assets in a
single transaction or series of related transactions;
(vi) liquidate or dissolve;
(vii) declare or pay any dividends (other than dividends
payable solely in shares of Common Stock) on or declare or make any other
distribution (other than Permitted Repurchases), directly or indirectly, on
account of any shares of Common Stock now or hereafter outstanding;
(viii) redeem or repurchase any outstanding shares of the
Company's capital stock (other than Permitted Repurchases);
(ix) adopt any annual operating or capital budget or approve
any material modifications thereto;
(x) pay any bonuses to officers, directors or employees of the
Company not contemplated in an approved annual operating and budgets;
(xi) award stock options, stock appreciation rights or similar
employee benefits or determine vesting schedules, exercise prices or similar
features; provided that the Company shall have the right to issue or grant such
stock options, stock appreciation rights or similar employee benefits
convertible into up to an aggregate of fifteen percent (15%) of the shares of
Common Stock as of January 12, 2000, on a fully diluted basis;
(xii) pledge its assets or guarantee the obligations of any
other individual or entity;
(xiii) incur indebtedness (other than trade payables) in
excess of $1,000,000 in the aggregate, including (A) the execution of any
promissory note, loan agreement or other agreement evidencing indebtedness, (B)
drawing upon a line of credit or similar credit facility, or (C) causing a
letter of credit to be issued in the Company's name;
(xiv) amend the Company's Bylaws to alter any rights of the
Investor Director or the holders of the Series A Preferred Stock or to increase
the size of the Board to more than five (5) directors;
(xv) hire, retain or amend the compensation arrangements with
new executive officers of the Company or modify or extend any existing
arrangement with current executive officers of the Company; or
(xvi) enter into a new line of business unrelated to its
contemplated core business as of December 28, 1999.
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5.2. Minutes. The Company will deliver to the Investor copies of the
complete minutes of all meetings of the Company's Board of Directors (including
all committees thereof) and stockholders no later than the earlier of: (i)
thirty (30) days after any such meeting; or (ii) the next successive board or
stockholder meeting, as applicable.
5.3. Additional Board Members. Any appointment or nomination of
additional directors, whether outside industry representatives or as a condition
of securing additional financing, must be acceptable to the Investor, such
approval not to be unreasonably withheld.
5.4. Board Committees. The Investor shall have one (1) representative
appointed to the audit and executive committees of the Board of Directors, each
committee to consist of not more than three (3) members, if such committees
exist.
5.5. Bylaws. The Company shall at all times cause its By-laws to
provide that, (a) unless otherwise required by the laws of the State of
Delaware, the holders of at least fifty percent (50%) of the Series A Stock then
outstanding shall be entitled to call a special meeting of the Board of
Directors or stockholders of the Company and (b) the number of directors fixed
in accordance therewith shall in no event conflict with any of the terms or
provisions of the Series A Stock as set forth in the Series A Certificate. The
Company shall at all times maintain provisions in its Bylaws or Certificate of
Incorporation indemnifying all directors against liability and absolving all
directors from liability to the Company and its stockholders to the maximum
extent permitted under the laws of the State of Delaware. To the extent that
such coverage is available on commercially reasonable terms, the Company shall
purchase, and at all times maintain, directors and officers liability insurance
with coverage limits customary for similarly situated companies, but in no event
less than $2,000,000 per occurrence.
5.6. Investor's Expenses. Following the Closing, any reasonable
expenses incurred by the Investor or its representatives on behalf of the
Company, including reasonable expenses associated with attendance at meetings of
the Board of Directors (other than observer expenses if the Investor no longer
has a representative elected to the Board), trade shows or similar meetings or
events, shall be borne by the Company.
5.7. Subsidiaries or Joint Ventures. The Company will not, without the
prior approval of the Board of Directors, establish or invest in any subsidiary
or joint venture.
5.8. Conduct of Business. The Company will duly observe and conform to
or cause to be observed or conformed to all valid requirements of all
governmental authorities relative to the conduct of the business of the Company
or to its properties or assets, the failure to observe or conform to which would
have a materially adverse effect on the business of the Company, and will
maintain and keep in full force and effect all licenses and permits necessary to
the proper conduct of the business of the Company.
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5.9. Preservation of Corporate Existence. The Company shall preserve
and maintain its respective corporate existence, rights, franchises and
privileges in its jurisdiction of incorporation, and will qualify and remain
qualified as a foreign corporation in every jurisdiction in which such
qualification is necessary in view of the business and operations of the Company
or the ownership of their respective properties.
5.10. Performance Under Other Documents. The Company will promptly pay
or perform or cause to be performed all payments and obligations required of it
under the terms, agreements and covenants of the Series A Agreement, the Related
Agreements and the Series A Certificate.
5.11. Performance of Obligations. The Company will promptly perform or
cause to be performed every commitment, undertaking, agreement or covenant of
the Company with any third person whether or not specifically referred to in
this Agreement, the non-performance of which could cause the acceleration of
indebtedness of the Company; provided, however, that (unless and until
foreclosure, sale or similar proceedings have been commenced) the Company shall
have the right in good faith to contest the obligation to perform any such
commitment, undertaking, agreement or covenant.
5.12. Payment of Taxes and Accounts. The Company will pay or cause to
be paid all taxes, assessments, and governmental charges or levies imposed upon
the Company or upon its respective income, profits, or properties before the
same shall become delinquent; provided, however, that (unless and until
foreclosure, sale or similar proceedings have been commended) nothing herein
shall require the Company to pay or cause to be paid any such tax, assessment,
charge, levy or account so long as the validity thereof shall be contested in
good faith by appropriate proceedings and the Company has set aside on its books
and maintained adequate reserves with respect thereto.
5.13. Maintenance of Property. The Company will maintain or cause to be
maintained the real and personal property which is required for the business of
the Company in good repair, working order and condition, and from time to time
will make or cause to be made all repairs, renewals, and replacements that are
necessary and proper.
5.14. Insurance on Properties. Within a reasonable time from the date
hereof, the Company shall obtain and maintain or cause to be maintained
insurance with reputable insurance companies on such of the properties of the
Company in such amounts and against such risks as is deemed sufficient by the
Company's management and as is satisfactory to the Investor. The Company will
furnish to the Investor, upon request, certificates signed by the President or
the Chief Financial Officer of the Company setting forth a list of all insurance
in force on the properties of the Company and containing a general schedule of
property insured, risks insured against and amount of insurance then in force.
5.15. Authorized Capital Stock. The Company covenants that it shall at
all times reserve and keep available out of its authorized but unissued Common
Stock, solely for the purpose of effecting the exercise of the Series A Stock,
such number of shares of Common Stock as shall from time to time be issuable
upon the exercise of all of the Series A Stock, as the case may be.
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5.16. Taxes and Costs. The Company shall pay all taxes which may be
imposed with respect to the issuance and delivery of shares of Common Stock upon
conversion of the Series A Stock; provided, however, that the Company shall not
be required, in any event, to pay any transfer or other taxes by reason of
issuance of such shares of Common Stock in a name or names other than the name
of the holder of the Series A Stock surrendered for exchange.
5.17. Proprietary Assets. The Company shall take all steps reasonably
necessary to preserve and protect all of its intellectual property, including
without limitation all patents, copyrights, trade secrets, trademarks,
tradenames, and servicemarks used in its business.
5.18. Guarantees. The Company shall not, without the prior approval of
the Board of Directors (including all Series A Directors) at any time become a
guarantor or surety of or pledge its credit on any undertaking of a third party.
5.19 Liquidation and Dissolution. The Company will take no action to
place the Company or any subsidiary in dissolution, liquidation, or
receivership.
5.20. New Businesses. The Company will not, without the prior approval
of the Board of Directors (including the Investor Director), directly or
indirectly, engage in any business other than the business in which it is
presently engaged.
5.21. Fiscal Year and Accounting Methods. The Company will not change
its fiscal year or method of accounting (other than immaterial changes in
methods), except to the extent necessary to comply with generally accepted
accounting principles.
5.22. Loans, Advances and Investments. The Company will not, without
the prior approval of the Board of Directors (including the Investor Director),
directly or indirectly, make any loan or advance to, or invest in, any person
who is a stockholder, director, or officer (or a relative of any such person) of
the Company, other than advances to employees for travel and other expenses
incurred in the ordinary course of business.
5.23. Pension Reform Act. The Company will not permit (a) the funding
requirements under ERISA with respect to any employee benefit plan established
or maintained by the Company or any subsidiary to be less than the minimum
required by ERISA or the regulations thereunder, or (b) any employee benefit
plan established or maintained by the Company to be subject to involuntary
termination proceedings.
5.24. Restrictive Assignments. The Company will not, without the prior
approval of the Board of Directors (including the Investor Director), enter into
or become obligated under any agreement or contract, including (without
limitation) any loan agreement, promissory note (or other evidence of
indebtedness), mortgage, security agreement, or lease, which either (a)
precludes or prevents the Investor from curing (on behalf of the Company)
defaults, breaches or failures to perform, or (b) by its terms prevents or
restricts the Company from performing its obligations under the Series A
Agreement.
22
<PAGE>
5.25. Termination. The covenants in this Section 5 shall terminate (a)
upon consummation of a Qualifying IPO, or (b) Change of Control Event.
5.26. Professional Advisors. The Investor shall have the right to
approve (which shall not be unreasonably withheld or delayed) all of the
Company's professional advisors, including but not limited to, the Company's
accountants, attorneys, investment bankers and public relations consultants. The
Company agrees that KPMG Peat Marwick is hereby approved to provide any and all
accounting services.
6. GENERAL PROVISIONS.
6.1. Notices. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if deposited in the U.S. mail by registered or
certified mail, return receipt requested, postage prepaid, as follows:
(a) if to the Investor, at: Net Value Holdings, Inc.
2 Penn Center Plaza
Suite 605
Philadelphia, PA 19103
Attention: President
with a copy (which shall not constitute notice hereunder)
to:
Klehr, Harrison, Harvey,
Branzburg & Ellers, LLP
260 S. Broad Street
Philadelphia, PA 19102
Attention: Michael C. Forman,
Esquire
(b) if to the Company, at: IndustrialVortex.Com, Inc.
89 Panorama
Trabuco Canyon, CA 92679
Attention: David Smith
23
<PAGE>
with a copy (which shall not constitute notice hereunder)
to:
Luce, Forward, Hamilton &
Scripps, LLP
600 West Broadway, Suite 2600
San Diego, CA 92101
Attention: Michael Fraunces,
Esquire
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the manner set forth above.
6.2. Entire Agreement. This Agreement, together with all the Exhibits
hereto, constitutes and contains the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the subject matter hereof.
6.3. Governing Law; Jurisdiction. This Agreement shall be governed by a
construed exclusively in accordance with the internal laws of the State of
Delaware, excluding that body of law relating to conflict of laws and choice of
law. The parties consent to the exclusive jurisdiction of either Delaware and
California in which to bring a cause of action.
6.4. Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, then such provision(s) shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
6.5. Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
6.6. Successors and Assigns. Subject to the provisions of Section 4.1,
the provisions of this Agreement shall inure to the benefit of, and shall be
binding upon, the successors and permitted assigns of the parties hereto.
6.7. Captions. The captions to sections of this Agreement have been
inserted for identification and reference purposes only and shall not be used to
construe or interpret this Agreement.
6.8. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original, but both of which together shall
constitute one and the same instrument.
24
<PAGE>
6.9. Costs and Attorneys' Fees. In the event that any action, suit or
other proceeding is instituted concerning or arising out of this Agreement or
any transaction contemplated hereunder, the prevailing party shall recover all
of such party's costs and attorneys' fees incurred in each such action, suit or
other proceeding, including any and all appeals or petitions therefrom.
6.10. Adjustments for Stock Splits, Etc. Wherever in this Agreement
there is a reference to a specific number of shares of Common Stock or Series A
Stock of the Company of any class or series, then, upon the occurrence of any
subdivision, combination or stock dividend of such class or series of stock, the
specific number of shares so referenced in this Agreement shall automatically be
proportionally adjusted to reflect the affect on the outstanding shares of such
class or series of stock by such subdivision, combination or stock dividend.
6.11. Aggregation of Stock. All shares held or acquired by affiliated
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Investor
Rights Agreement as of the date and year first above written.
THE COMPANY: THE INVESTOR:
INDUSTRIALVORTEX.COM, INC., NET VALUE HOLDINGS, INC.,
a Delaware corporation a Delaware corporation
By: /s/ David Smith By: /s/ Andrew P. Panzo
--------------------------- ---------------------------
David Smith, President Andrew P. Panzo, President
25
<PAGE>
CO-SALE AGREEMENT
THIS CO-SALE AGREEMENT (this "Agreement") is made this 31st day of
January, 2000, by and among NET VALUE HOLDINGS, INC., a Delaware corporation
(the "Investor"), the individuals and entities identified as Principal
Stockholders on Schedule A hereto (each, a "Principal Stockholder," and
collectively, the "Principal Stockholders") and INDUSTRIALVORTEX.COM, INC., a
Delaware corporation (the "Company").
RECITALS
A. Concurrently with the execution hereof, the Company and the Investor
have entered into that certain Series A Convertible Preferred Stock Purchase
Agreement (the "Series A Agreement"), pursuant to which the Investor will
purchase 2,858,215 shares of Series A Convertible Preferred Stock of the Company
(the "Series A Preferred Stock"). Capitalized terms used herein, but not
otherwise defined, shall have the meaning given such terms in the Series A
Agreement.
B. The Principal Stockholders are presently the legal or beneficial
owners of 5,616,467 shares of the outstanding Common Stock of the Company
(including shares issuable upon exercise of warrants). They each have at least
ten percent (10%) of the outstanding common shares of the Company.
C. To induce the Investor to make the proposed investment, the
Principal Stockholders have agreed to grant the Investor the opportunity to
participate upon the terms and conditions set forth in this Agreement, in
subsequent sales of the Common Stock by the Principal Stockholders.
AGREEMENT
NOW, THEREFORE, for and in consideration of the premises, covenants and
obligations contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
1. SALES BY PRINCIPAL STOCKHOLDERS
1.1 Notice of Purchase Offers. Should any of the Principal
Stockholders propose to accept one or more bona fide offers (collectively, a
"Purchase Offer"), from any persons to purchase shares of the Company's Common
Stock from such Principal Stockholder (a "Purchase Offeror"), then the Principal
Stockholder or Principal Stockholders shall promptly notify the Investor in
writing of the terms and conditions of such Purchase Offer.
1.2 Right to Participate. The Investor shall have the right,
exercisable upon written notice to such selling Principal Stockholder or
Principal Stockholders within thirty (30) business days after receipt of the
notice of the Purchase Offer, to participate in the Principal Stockholder's or
Principal Stockholders' sale of Common Stock on the same terms and conditions.
To the extent the Investor exercises such right of participation, the number of
shares of Common Stock which the Principal Stockholder or Principal Stockholders
may sell pursuant to the Purchase Offer shall be correspondingly reduced. The
right of participation of the Investor shall be subject to the following terms
and conditions:
<PAGE>
(a) The Investor may sell up to that number of shares
of Common Stock equal to the product obtained by multiplying (i) the aggregate
number of shares of Common Stock covered by the Purchase Offer, by (ii) a
fraction, the numerator of which is the number of shares of Common Stock of the
Company at the time owned by the Investor together with all shares of Common
Stock then issuable to the Investor upon the exercise of vested rights, options
or convertible securities other than the Series A Preferred Stock, and the
denominator of which is the sum of (a) the combined number of shares of Common
Stock of the Company at the time owned by all the selling Principal Stockholders
(including shares transferred to Permitted Transferees as defined below) and the
Investor, and (b) the number of shares of Common Stock then issuable to the
Investor and the Selling Principal Stockholders upon the exercise of vested
rights, options and convertible securities other than Series A Preferred Stock.
For the purposes of making such computation, the Investor shall be deemed to own
the number of shares of Common Stock into which the Series A Preferred Stock
held by the Investor is at the time convertible.
(b) The Investor may participate in the sale by
delivering to the Principal Stockholder at the time of the sale for transfer to
the Purchase Offeror one or more certificates, properly endorsed for transfer,
which represent:
(i) the number of shares of Common Stock which
the Investor elects to sell pursuant to this Section 1.2; or
(ii) the number of shares of Series A Preferred
Stock, which is at such time is convertible into the number of shares of Common
Stock that the Investor elects to sell pursuant to this Section 1.2; together
with written notice of the Investor's election to convert such shares into
shares of Common Stock. Such certificates and written notice shall be forwarded
to the Company, and the Company shall deliver to the Principal Stockholder
certificates representing that number of shares of Common Stock which the
Investor has elected to sell.
1.3 Consummation of Sale. The stock certificate or
certificates which the Investor delivers to the selling Principal Stockholder or
Principal Stockholders pursuant to Section 1.2 shall be transferred by the
selling Principal Stockholder or Principal Stockholders to the Purchase Offeror
in consummation of the sale of the Common Stock pursuant to the terms and
conditions specified in the Section 1.1 notice to the Investor, and the selling
Principal Stockholder or Principal Stockholders shall promptly thereafter remit
to the Investor that portion of the sale proceeds to which the Investor is
entitled by reason of its participation in such sale, net of a pro rata share of
all expenses incurred in connection with such sale. To the extent that any
Purchase Offeror prevents such assignment or otherwise refuses to purchase
shares from the Investor, the Principal Stockholder(s) shall not sell to such
Purchase Offeror unless and until, simultaneously with such sale, the Principal
Stockholder shall purchase such shares from the participating Investor.
2
<PAGE>
1.4 Ongoing Rights. The exercise or non-exercise of the rights
of the Investor hereunder to participate in one or more sales of Common Stock
made by a Principal Stockholder shall not adversely affect its right to
participate in subsequent Common Stock sales by a Principal Stockholder pursuant
to Section 1.1 hereof.
1.5 Permitted Exemptions. The participation rights of the
Investor shall not apply to (a) any pledge of Common Stock made by a Principal
Stockholder pursuant to a bona fide loan transaction which creates a mere
security interest, (b) any transfer of Common Stock to the Company pursuant to a
written agreement between the Company and a Principal Stockholder providing for
the right of such repurchase or to the Principal Stockholder's ancestors or
descendants or spouse or to a trustee for their benefit, (c) any bona fide gift
of Common Stock; provided, that (i) the Principal Stockholder shall inform the
Investor of such pledge, transfer or gift prior to effecting it and (ii) the
pledgee, transferee or donee (collectively, the "Permitted Transferees"), shall
furnish the Investor with a written agreement to be bound by and comply with all
provisions of this Agreement applicable to the Principal Stockholders, or (d)
any transfer between parties to this Agreement. Such transferred shares shall
remain subject to this Agreement and the Permitted Transferees shall be treated
as "Principal Stockholders" for purposes of this Agreement.
2. PROHIBITED TRANSFERS
2.1 Treatment of Prohibited Transfers. In the event a
Principal Stockholder should sell any Common Stock in contravention of the
participation rights of the Investor under this Agreement (a "Prohibited
Transfer"), the Investor, in addition to such other remedies as may be available
at law, in equity or hereunder, shall have the put option provided in Section
2.2 below, and a Principal Stockholder shall be bound by the applicable
provisions of such put option.
2.2 Put Option. In the event of a Prohibited Transfer, the
Investor shall have the right to sell to the selling Principal Stockholder(s) a
number of shares of Common Stock (either directly or through delivery of
convertible Preferred Stock) equal to the number of shares the Investor would
have been entitled to transfer to the Purchase Offeror in the Prohibited
Transfer pursuant to the terms hereof. Such sale shall be made on the following
terms and conditions:
(a) The price per share at which the shares are to be
sold to the selling Principal Stockholder or Principal Stockholders shall be
equal to the price per share paid by the purchaser to the selling Principal
Stockholder or Principal Stockholders in the Prohibited Transfer. The selling
Principal Stockholder or Principal Stockholders shall also reimburse the selling
Investor for any and all fees and expenses, including legal fees and expenses,
incurred pursuant to the exercise or the attempted exercise of such Investor's
rights under this Section 2.
3
<PAGE>
(b) Within sixty (60) days after the later of the
dates on which the Investor (i) receives notice from a Principal Stockholder of
the Prohibited Transfer, or (ii) otherwise becomes aware of the Prohibited
Transfer, the Investor shall, if exercising the put option created hereby,
deliver to the selling Principal Stockholder or Principal Stockholders the
certificate or certificates representing shares to be sold, each certificate to
be properly endorsed for transfer, together with notice of and documentation for
reimbursable expenses.
(c) The selling Principal Stockholder(s) shall, upon
receipt of the certificate or certificates for the shares to be sold by the
Investor, pursuant to Section 2.2(b), pay the aggregate purchase price therefor
and the amount of reimbursable fees and expenses, as specified in Section
2.2(a), by certified check or bank draft made payable to the order of the
Investor.
3. LEGENDED CERTIFICATES
3.1 Legend. Each certificate representing shares of the Common
Stock of the Company now or hereafter owned by a Principal Stockholder or issued
to any Permitted Transferee pursuant to Section 1.5 shall be endorsed with the
following legend:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND
BETWEEN THE STOCKHOLDERS, THE CORPORATION AND CERTAIN HOLDERS OF PREFERRED STOCK
OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN
REQUEST TO THE SECRETARY OF THE CORPORATION."
Each Principal Stockholder agrees that the Company may instruct its
transfer agent to impose transfer restrictions on the shares represented by
certificates bearing this legend to enforce the provisions of this Agreement and
the Company agrees to promptly do so.
3.2 Legend Removal. The Section 3.1 legend shall be removed
upon termination of this Agreement in accordance with the provisions of Section
4.1.
4. MISCELLANEOUS PROVISIONS
4.1 Termination of Co-Sale Rights. The rights of the Investor
under this Agreement and the obligations of a Principal Stockholder with respect
to the Investor shall terminate at such time as the Investor shall no longer be
the owner of any shares of capital stock of the Company. Unless sooner
terminated in accordance with the preceding sentence, this Agreement shall
terminate upon the occurrence of any one of the following events:
(a) the consummation of a Qualifying
IPO (as defined in Section 5(b)(1) of the Series A Certificate);
4
<PAGE>
(b) the fourth-year anniversary of
the date of this Agreement; or
(c) the closing of a merger,
consolidation or sale of the stock or substantially all of the assets of the
Company in which the shareholders of the Company immediately prior to such
transaction do not retain a majority of voting power in the surviving entity.
4.2 Notices. Any notice required or permitted to be given to a
party pursuant to the provisions of this Agreement shall be in writing and shall
be effective upon facsimile delivery, personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified as
set forth below such party's signature or at such other address as such party
may designate by ten (10) days' advance written notice to the other parties
hereto.
4.3 Successors and Assigns. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
The Investor shall be entitled to assign its rights under this Agreement to any
Related Party. As used herein, the term "Related Party" shall mean (i) any
person or entity that, directly or indirectly, through one or more
intermediaries, has voting control of, or is under common voting control with,
the Investor; or (ii) a trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, or owners, or persons or entities holding
controlling interest of which consist of the Investor and/or such other persons
or entities referred to in the immediately preceding clause (i); and (iii) the
Investor's current partners, stockholders or members, pro rata in accordance
with the current distribution provision of such entities' charter documents.
4.4 Severability. In the event one or more of the provisions
of this Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
4.5 Adjustments for Stock Splits, Etc. Wherever in this
Agreement there is a reference to a specific number of shares of Common Stock or
Series A Preferred Stock of the Company of any class or series, then, upon the
occurrence of any subdivision, combination or stock dividend of such class or
series of stock, the specific number of shares so referenced in this Agreement
shall automatically be proportionally adjusted to reflect the effect on the
outstanding shares of such class or series of stock by such subdivision,
combination or stock dividend.
4.6 Aggregation of Stock. All shares held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
4.7 Amendments. Any amendment or modification of this
Agreement shall be effective only if evidenced by a written instrument executed
by duly authorized representatives of the parties hereto. Any waiver by a party
of its rights hereunder shall be effective only if evidenced by a written
instrument executed by a duly authorized representative of such party. In no
event shall such waiver of any rights hereunder constitute the waiver of such
rights in any future instance unless the waiver so specifies in writing.
5
<PAGE>
4.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware, without
regard to that body of law relating to conflict of law or choice of law.
4.9 Other Obligations of Company. The Company agrees to use
its best efforts to enforce the terms of this Agreement, to inform the Investor
of any breach hereof and to assist the Investor in the exercise of its rights
and performance of its obligations under Section 2 hereof.
4.10 Attorney Fees. In the event that any dispute among the
parties to this Agreement should result in litigation, the prevailing party in
such dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including without limitation, such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
4.11 Ownership. Each Principal Stockholder represents and
warrants that such Principal Stockholder is the sole legal and beneficial owner
of the shares of stock subject to this Agreement and that no other person has
any interest (other than a community property interest, if the law of a
community property state is applicable) in such shares.
4.12 Entire Agreement. This Agreement constitutes the entire
agreement between the parties relative to the specific subject matter hereof. To
the extent this Agreement conflicts with any previous agreement among the
parties relative to the specific subject matter hereof, this Agreement shall
control.
4.13 Mutual Drafting. This Agreement is the result of the
joint efforts of the Company, the Investor and the Principal Stockholders and
each provision hereof has been subject to the mutual consultation, negotiation
and agreement of the parties and there shall be no construction against any
party based on any presumption of the party's involvement in the drafting
thereof.
[SIGNATURE PAGE FOLLOWS]
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Co-Sale Agreement on
the day and year indicated above.
THE COMPANY:
INDUSTRIALVORTEX.COM, INC.,
a Delaware corporation
By: /s/ David Smith
----------------------
David Smith
President
Address: 89 Panorama
Trabuco Canyon, CA 92679
THE PRINCIPAL STOCKHOLDERS:
/s/ David Smith
----------------------
David Smith
Address: 23 Larkfield Lane
Laguna Niguel, CA 92677-5324
/s/ Charles Steinberger
----------------------
Charles Steinberger
Address: 89 Panorama
Trabuco Canyon, CA 92679
IBO$, INC.
By: /s/ Inder Sharma
----------------------
Name: Inder Sharma
Title:
Address: 2854 N. Santiago Boulevard, Suite 203
Orange, CA 92867
7
<PAGE>
THE INVESTOR:
NET VALUE HOLDINGS, INC.,
a Delaware corporation
By: /s/ Andrew P. Panzo
----------------------
Name: Andrew P. Panzo
Title: President
Address: Two Penn Center
Philadelphia, PA 19102
8
<PAGE>
SCHEDULE A
PRINCIPAL STOCKHOLDERS
NAME NUMBER OF SHARES PERCENTAGE OF OWNERSHIP
David Smith 1,574,804 13.8
Charles Steinberger 2,249,720 19.7
IBO$, Inc. 1,791,943(1) 15.7(1)
---------- ----
TOTAL 5,616,467 49.2
SERIES A PREFERRED STOCK
Net Value Holdings 2,858,215 25.0
- ---------------------
(1) Includes 500,000 shares issuable upon exercise of warrants.
9
<PAGE>
EXHIBIT 11
Computation of Net Loss For Share
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------- ----------------------------
1996 1997 1998 1997 1998
------------- ------------- ------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Loss from Continuing Operation $ - $ (442,877) $ (5,805) $(16,732,147)
Loss from Discontinued Operations $ (3,314,094) (11,285,237) (11,106,826) (10,195,343) (5,582,166)
Preferred Stock Dividend - Discontinued Operations - (1,181,250) (15,250,500) (15,250,500) -
------------ ------------ ------------ ------------ ------------
Net Loss to Common Stockholders -
Discontinued Operations $(12,416,487) $(26,800,203) $(25,451,648) $(22,314,313)
============ ============ ============ ============
Basic and Diluted Weighted Average
Number of Common Shares Outstanding $ 1,804,700 $ 4,711,351 $ 3,796,197 $ 8,647,063
============ ============ ============ ============
Basic and Diluted Net Loss Per Common Share -
Continuing Operations $ 0.00 $ (0.09) $ 0.00 $ (1.94)
============ ============ ============ ============
Basic and Diluted Net Loss Per Common Share -
Discontinued Operations $ (6.88) $ (5.59) $ (6.70) $ (0.65)
============ ============ ============ ============
Pro Forma Information (Unaudited):
Net loss - discontinued operations (3,314,094)
Pro forma tax provision -
------------
Pro forma net loss - discontinued operations $ (3,314,094)
============
Net Loss Per Share Data:
Basic and diluted weighted average number
of common shares outstanding 934,810
============
Basic and diluted net loss per share common
share - discontinued operations $ (3.55)
============
</TABLE>
* In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" for all applicable periods presented in the
accompanying financial statements. See Note 2 to the Company's financial
statements included herein.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and the use
of our report dated April 30, 1999, in the Registration Statement (Form S-1 No.
333-88629) and related Prospectus of Net Value Holdings, Inc. for the
registration of 3,722,560 shares of its common stock.
LJ SOLDINGER ASSOCIATES
Arlington Heights, Illinois
February 7, 2000
<PAGE>
[LETTERHEAD OF MORGENSTERN & ASSOCIATES]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated November 30, 1999 accompanying the financial
statements of College411.com, Inc. contained in this Registration Statement, and
we consent to the use of the aforementioned report in this Registration
Statement and Prospectus, and to the use of our name as it appears under the
captions "selected Financial Data" and "Experts".
MORGENSTERN & ASSOCIATES
Certified Public Accountants
February 7, 2000
<PAGE>
[LETTERHEAD OF MORGENSTERN & ASSOCIATES]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated December 6, 1999 accompanying the financial
statements of Asset Exchange, Inc. contained in this Registration Statement, and
we consent to the use of the aforementioned report in this Registration
Statement and Prospectus, and to the use of our name as it appears under the
captions "selected Financial Data" and "Experts".
MORGENSTERN & ASSOCIATES
Certified Public Accountants
February 7, 2000
<PAGE>
[LETTERHEAD OF MORGENSTERN & ASSOCIATES]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated December 7, 1999 accompanying the balance
sheet of SwapIt.com, Inc. contained in this Registration Statement, and we
consent to the use of the aforementioned report in this Registration Statement
and Prospectus, and to the use of our name as it appears under the captions
"selected Financial Data" and "Experts".
MORGENSTERN & ASSOCIATES
Certified Public Accountants
February 7, 2000
<PAGE>
[LETTERHEAD OF MORGENSTERN & ASSOCIATES]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated January 31, 2000 accompanying the balance
sheet of IndustrialVortex.com, Inc. contained in this Registration Statement,
and we consent to the use of the aforementioned report in this Registration
Statement and Prospectus, and to the use of our name as it appears under the
captions "selected Financial Data" and "Experts".
MORGENSTERN & ASSOCIATES
Certified Public Accountants
February 7, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 1,466 1,051,930
<SECURITIES> 0 0
<RECEIVABLES> 200,000 529,833
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 706,769 2,570,998
<PP&E> 0 43,689
<DEPRECIATION> 0 2,277
<TOTAL-ASSETS> 1,422,519 8,616,982
<CURRENT-LIABILITIES> 8,691,149 5,421,119
<BONDS> 294,092 5,814,898
0 1,732,000
2,520 0
<COMMON> 8,008 14,410
<OTHER-SE> (7,573,250) (4,365,445)
<TOTAL-LIABILITY-AND-EQUITY> 1,422,519 8,616,982
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 140,484 4,297,728
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 253,957 11,750,930
<INCOME-PRETAX> (442,877) (16,732,147)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (442,877) (16,732,147)
<DISCONTINUED> (11,106,826) (5,582,166)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,549,703) (22,314,313)
<EPS-BASIC> (5.68) (2.59)
<EPS-DILUTED> (5.68) (2.59)
</TABLE>
