<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-38716
PROSPECTUS
5,578,904 SHARES
NET VALUE HOLDINGS, INC.
COMMON STOCK
The following stockholders are offering and selling up to 5,578,904
shares of our common stock:
<TABLE>
<CAPTION>
<S> <C>
Brown Simpson Partners I, Ltd. Aspen International, Ltd.
Catalyst Partners, L.P. Gilston Corporation, Ltd.
TGT Capital Partners, LP The Altar Rock Fund, L.P.
Narragansett I, LP Raptor Global Portfolio, Ltd.
Emergent Capital Investment Management, LLC Martin H. Garvey
Gavleborgs Lansforsakingar Eric Hauser
Scout Partners, L.P. Michael Lauer
Asset Management Holding Co. Bridgewater Partners, L.P.
Edward O. Thorp CSL Associates
Lancer Offshore, Inc. Jeffrey Thorp
Gladstone Equity Funds, Inc. Halifax Fund, LP
Ogden Properties, Inc. Fisher Partners Fondkommission, AB
Schottenfeld Associates, LP ACIE/NETVALUE, LLC
Anegada Fund, Ltd. Montrose Investments, Ltd.
BNY Capital Partners, Inc. Tonga Partners, LP
Nicholas Stiassini and Suzanne Stiassini Co., Lancer Partners, LP
Trustees of the Stiassini Family Trust N. Herrick Irreovcable Securities Trust
Austost Anstalt Schaan (Howard Herrick, Trustee)
Amro International, S.A. Balmore Funds, S.A.
</TABLE>
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, 416,667 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 $11,075,008.
Our common stock is listed on the NASDAQ Over-the-Counter Bulletin Board
Trading System under the symbol "NETV." On June 27, 2000, the closing sale price
for our common stock, as quoted on the NASDAQ Over-the-Counter Bulletin Board
Trading System was $5.625 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 10.
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 June 30, 2000.
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
ABOUT THIS PROSPECTUS..........................................................3
SUMMARY........................................................................3
FORWARD-LOOKING STATEMENTS....................................................10
RISK FACTORS..................................................................10
USE OF PROCEEDS...............................................................22
MARKET PRICE AND DIVIDEND INFORMATION.........................................22
CAPITALIZATION................................................................24
SELECTED CONSOLIDATED FINANCIAL DATA..........................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................27
BUSINESS......................................................................38
MANAGEMENT....................................................................60
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK.............71
SELLING STOCKHOLDERS..........................................................73
PLAN OF DISTRIBUTION..........................................................77
TRANSACTIONS WITH OFFICERS AND DIRECTORS
AND OTHER BUSINESS RELATIONSHIPS.........................................78
DESCRIPTION OF CAPITAL STOCK..................................................82
SHARES ELIGIBLE FOR FUTURE SALE...............................................86
EXPERTS.......................................................................87
LEGAL MATTERS.................................................................88
WHERE YOU CAN FIND MORE INFORMATION...........................................88
<PAGE>
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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 were outstanding as
of the date of this prospectus.
General
We are actively engaged in building a network of technology businesses
which offer significant growth opportunities. To date, we have focused on
technology businesses with significant Internet features and applications. Our
operating strategy, however, is to expand the scope of our business to include
Internet businesses, as well as a broad range of other technology oriented
businesses.
Through the collective experience of our management team, we promote the
development of these businesses by offering business development services that
cover the core management disciplines of:
o Strategic Consulting;
o Operations;
o Finance;
o Business Development;
o Marketing/Public Relations;
o Technology; and
o Recruiting.
Additionally, we are able to apply the experience of both our management
team and network of affiliate companies to:
o Review and formulate business models;
o Create specific performance benchmarks;
o Provide introductions to strategic partners;
o Advise on, and facilitate the completion of secondary rounds
of financing; and
o Develop Internet businesses in joint ventures with
non-technology companies.
Our operating strategy is to acquire a significant equity interest in early
stage technology companies and to provide the services listed above to these
companies. We believe this will accelerate the achievement of their business
goals and objectives. We intend to take an active role in the management and
development of these businesses. Each business will be managed as part of an
integrated supportive network of "affiliate companies" that build on our initial
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support and develop interrelationships among themselves, thereby accelerating
their growth and development. This network is intended to leverage the
collective financial, strategic, management and industry experience of our
management team, which has over 30 years of collective experience in developing
technology businesses. We also intend to establish relationships with companies
outside of our network that will enable us to deliver additional services to our
affiliate companies that they might not otherwise be able to obtain.
We also expect to create a business that provides information technology
consulting services. This would enable us to expand the services which we offer
internally to our affiliate companies, and to establish a separate business unit
that provides a broad range of technology solutions to third parties. These
services may be internally developed by us through training and hiring of
qualified and experienced staff. Alternatively, we are exploring the feasibility
of acquiring an established business with demonstrated capabilities in the
information technology/consulting field.
Generally, we will be identifying early stage businesses that have been
started by others and that have sought our financial and management assistance.
We will also fund business models that our management team conceives which fit
within our business model. Our target level of investment will generally be
$2,500,000 or less per initial round of financing. We may also participate in
subsequent rounds of financing, involving potentially larger investments.
Generally our capital and services enable us to secure a significant
interest in the affiliate company. While we remain a significant stockholder of
an affiliate company, we intend to exercise varying degrees of control over its
operations by retaining:
o approval rights over significant corporate decisions such as
annual budgets, executive compensation, indebtedness,
capital expenditures and new securities issuances;
o the right to establish and maintain the size of the Board of
Directors;
o the right to elect one or more members to the Board of
Directors;
o the right to participate in future fundings;
o certain enhanced voting rights; and
o the right to designate outside accountants and approval
rights over attorneys, public relations firms and other
outside consultants.
Although we recognize that the development of early stage businesses are
subject to material risks, we expect our value in the affiliate companies to
increase when they:
o commence initial stage operations and begin to execute on
their business plans;
o enter later stages of operations and begin to realize
significant revenues and capture meaningful market share;
o secure subsequent rounds of venture funding at higher levels
of valuation;
o complete initial public offerings; or
o are sold to a third party.
As of May 31, 2000, our affiliate companies included:
AlarmX.com, Inc. (www.alarmx.com). AlarmX.com is developing a full service
vertical portal for the security alarm and low voltage systems industries. The
portal will provide one-stop shopping, content and services to improve
operational efficiencies for both industry buyers and sellers. Through various
vendors, AlarmX.com will offer low voltage control equipment, intrusion devices,
wire, audio, video and communicator products. AlarmX.com commenced operations in
March 2000 and has not generated any revenues. AlarmX.com plans to launch its
Internet website in August 2000.
AssetExchange, Inc. (www.AssetExchange.com). AssetExchange, Inc. provides
banks and other financial institutions with an Internet-based listing service
which allows them to more efficiently trade loan portfolio assets. AssetExchange
launched its Internet website in August 1999. As of May 31, 2000, AssetExchange
had a working
4
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deficit of $7,687, shareholders' equity of $16,852 and losses since inception of
$439,363. We do not intend to provide any additional funding to AssetExchange,
Inc. These circumstances and AssetExchange's dependence on outside sources of
financing raise substantial doubt about AssetExchange's ability to continue as a
going concern and we intend to record impairment of our investment during the
second quarter of 2000.
BrightStreet.com, Inc. (www.brightstreet.com). BrightStreet.com develops
and distributes online promotional campaigns. BrightStreet commenced business
upon the purchase of the former assets and business of our Net Value, Inc.
subsidiary. Simultaneous with this transaction, BrightStreet completed a $17
million equity financing provided by Cox Enterprises, Inc., McClatchy Company
(NYSE:MNI), CNI Ventures (NYSE:ECP) and Sandler Capital Management. Through our
Net Value, Inc. subsidiary, we own a 14% interest in BrightStreet. As of
December 31, 1999, BrightStreet had assets of approximately $19.1 million
(unaudited), had generated minimal revenues, had net losses of $349,209
(unaudited) for the year ended December 31, 1999 and had an accumulated deficit
of $349,209 (unaudited).
IndustrialVortex.com, Inc. (www.industrialvortex.com).
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 launched its Internet website in March 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.
metacat.com, Inc. (www.metacat.com). metacat.com, Inc. is an Internet-based
e-commerce super-boutique that aggregates and searches the product offerings of
specialty retail, catalog and mail order businesses and will allow consumers to
purchase these products through its Internet website. metacat launched its
Internet website in December 1999. As of December 31, 1999, metacat had not
recognized any revenues, had minimal assets, had net losses of $266,000 for the
year ended December 31, 1999 and had an accumulated deficit of $266,000.
Swapit.com Inc. (www.swapit.com). 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. launched its Internet website in April
2000. As of December 31, 1999, Swapit.com had not generated any revenue, had
assets of $1,392,058 and had an accumulated deficit of $222,336.
Webmodal, Inc. (www.Webmodal.com). Webmodal, Inc. has developed an Internet
application for use by shippers in purchasing and executing domestic
full-truckload intermodal freight shipments. This application allows shippers to
input their specific transportation needs and receive all of the information
necessary for them to schedule and execute intermodal shipments in a
cost-effective manner. Webmodal launched its Internet website in June 2000. As
of December 31, 1999, Webmodal had not generated any revenues, had assets of
$1,460,333, net losses of $504,246 for the period from July 28, 1999 (inception)
through December 31, 1999 and had an accumulated deficit of $504,246.
YesAsia, Inc. (www.yesasia.com). YesAsia, Inc. is a leading e-commerce
company for the Asian community in the United States as well as throughout Asia.
YesAsia provides these individuals with easy access to a broad range of media
titles at competitive prices which include local rather than international
shipping costs. YesAsia's Internet website is fully functional and for the year
ended December 31, 1999 it generated $2,278,429 (unaudited) in revenues.
YesAsia's net losses for the year ended December 31, 1999 were $572,634
(unaudited). As of December 31, 1999, YesAsia's accumulated deficit was $716,124
(unaudited).
Our principal executive office is located at 1085 Mission Street, San
Francisco, California 94103. The phone number of our principal executive office
is (415) 335-4700. We also maintain offices at the following locations:
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Address Phone Number
------- ------------
Two Penn Center Plaza 215-564-9190
Suite 605
Philadelphia, PA 19102
601 West 26th Street 646-486-6000
11 South
New York, NY 10001
1000 Winter Street 781-895-1663
Suite 1100
Waltham, MA 02451
We maintain an Internet website at www.netvalueholdings.com. The
information on our Internet website is not part of this prospectus. For
informational purposes, we have listed the Internet website addresses of our
affiliate companies in this prospectus. The information on the Internet websites
of our affiliate companies is not part of this prospectus.
Recent Financial Results
Our affiliate companies are early stage technology companies with limited
or no revenues. Accordingly, we expect that we will continue to experience net
losses for at least 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. For the three months
ended March 31, 2000 and the year ended December 31, 1999, we experienced net
losses to common stockholders of $51.2 million and $30.4 million respectively.
The three months ended March 31, 2000 and year ended December 31, 1999 results
included non-cash charges totaling $48.9 million and $25.5 million,
respectively, relating to stock-based compensation, preferred stock dividends,
and imputed interest expense. Through March 31, 2000, we have not generated any
revenues from our operations and have not received any dividends from our
affiliate companies.
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 accounted
for under the cost method. We may also generate cash proceeds from the sale of
interests in our affiliate companies. We do not expect to receive dividends from
our affiliate companies over the next twelve months given the nature of early
stage companies. We believe that our cash and cash equivalents as of May 31,
2000 will be sufficient to meet our operating expenses and current investment
requirements through June 30, 2001. However, our future liquidity needs are
dependant primarily on the number of future acquisitions of equity interests in
new affiliate companies and the extent to which we participate in subsequent
rounds of financings of our existing affiliate companies. We may be required to
curtail or reduce the scope of our investment activities to satisfy our
liquidity needs through June 30, 2001. Thereafter, we will be required to seek
additional funds through sale of our securities to outside sources of capital,
which could result in substantial dilution to stockholders.
History of Net Value Holdings, Inc.
We were formed as a Florida corporation in 1991. We did not have any
operations until our change of domicile into Delaware in October 1998. This
occurred in conjunction with our acquisition of a controlling interest in Net
Value, Inc. during the fourth quarter of 1998.
The operation of Net Value, Inc. was the primary focus of our activities
during the first half of 1999. In recognition, however, of the evolving growth
opportunities within the Internet industry, during the second half of 1999, we
shifted the focus of our business strategy to the development and management of
a network of early stage
6
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technology businesses. We commenced this business by acquiring our equity
interests in metacat.com, Inc., YesAsia, Inc. and College411.com, Inc. in July
1999 when we merged with Strategicus Partners, Inc. We acquired the remainder of
our affiliate companies thereafter in 1999 and 2000 in separately negotiated
independent transactions. As of May 31, 2000, we owned equity interests in eight
affiliate companies.
Description of Selling Stockholders
In this registration statement we are registering the resale of up to
5,578,904 shares of our common stock by 36 of our stockholders. The following 33
stockholders acquired their shares of our common stock which they are offering
for resale in a transaction which closed on March 3, 2000. In this transaction,
we sold the following number of shares of our Series C Preferred Stock, each of
which is convertible into one share of our common stock, and issued common stock
purchase warrants to the following individuals and entities:
<TABLE>
<CAPTION>
Selling Stockholder Series C Preferred Warrants Consideration
------------------- ------------------ -------- -------------
<S> <C> <C> <C>
Brown Simpson Partners I, Ltd. 833,334 83,334 $10,000,000
Catalyst Partners, L.P. 83,333 8,333 1,000,000
TGT Capital Partners, LP 166,667 16,667 2,000,000
Narragansett I, LP 83,333 8,333 1,000,000
Emergent Capital Investment Management,
LLC 166,667 16,667 2,000,000
Gavleborgs Lansforsakringar 83,333 8,333 1,000,000
N. Herrick Irrevocable Securities Trust,
Howard Herrick Trustee 166,667 16,667 2,000,000
Scout Capital Partners, L.P. 25,000 2,500 300,000
Asset Management Holding Co. 16,667 1,667 200,000
Edward O. Thorp 29,167 2,917 350,000
Jeffrey Thorp 12,500 1,250 150,000
Halifax Fund, L.P. 166,667 16,667 2,000,000
Fisher Partners Fondkommission, AB 83,333 8,333 1,000,000
ACIE/NET VALUE, LLC 125,000 12,500 1,500,000
Montrose Investments Ltd. 583,333 58,333 7,000,000
Anegada Fund, Ltd. 25,000 2,500 300,000
Tonga Partners, LP 58,335 5,833 700,000
Aspen International Ltd. 85,500 8,550 1,026,000
Gilston Corporation Ltd. 83,333 8,333 1,000,000
The Raptor Global Portfolio, Ltd. 414,833 41,483 4,978,000
The Altar Rock Fund, L.P. 1,833 183 22,000
Martin H. Garvey 9,000 900 108,000
Eric Hauser 9,000 900 108,000
</TABLE>
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<TABLE>
<CAPTION>
Selling Stockholder Series C Preferred Warrants Consideration
------------------- ------------------ -------- -------------
<S> <C> <C> <C>
Michael Lauer 72,000 7,200 864,000
Lancer Partners, L.P. 125,000 12,500 1,500,000
Lancer Offshore Inc. 202,000 20,200 2,424,000
Bridgewater Partners, L.P. 83,333 8,333 1,000,000
CSL Associates 83,333 8,333 1,000,000
Gladstone Equity Funds, Inc. 20,833 2,083 250,000
Ogden Properties, Inc. 83,333 8,333 1,000,000
Schottenfeld Associates, L.P. 125,000 12,500 1,500,000
Nicholas Stiassni & Suzanne Stiassni Co.,
Trustees of the Stiassni Family Trust 25,000 2,500 300,000
BNY Capital Markets, Inc. 35,000 3,500 420,000
---------------------------------------------------------
TOTAL 4,166,667 416,667 $50,000,000
=========================================================
</TABLE>
Our Series C Preferred Stock accrues dividends at the rate of 8% per annum.
These dividends are payable in-kind in additional shares of our Series C
Preferred Stock on a quarterly basis. This prospectus covers 358,904 shares of
our common stock which represents all shares issuable upon conversion of the
shares of our Series C Preferred Stock which will be issued in payment of
dividends through March 31, 2001, assuming that our Series C Preferred Stock
remains issued and outstanding through March 31, 2001. For purposes of the
disclosures in this prospectus, these shares which we are registering for resale
have been allocated among the holders of our Series C Preferred Stock based on
the dividends which they will receive if they hold the shares of Series C
Preferred Stock which they currently own through March 31, 2001. These shares
may or may not actually be issued depending on whether or not we are required to
pay these dividends.
The following three stockholders acquired their shares of our common stock
which they are offering for resale as a result of the conversion of the
principal amount and all accrued interest related to convertible debentures
which were issued on June 1, 1999 into the following number of shares of our
common stock on March 6, 2000:
Selling Stockholder Common Stock Consideration
------------------- ------------ -------------
Austost Anstalt Schaan 212,222 $ 500,000
Balmore Funds, S.A. 212,222 $ 500,000
Amro International 212,222 $ 500,000
------- --------
TOTAL 636,666 $1,500,000
======= =========
Summary of Selected Consolidated Financial Data
The following summary of selected 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.
8
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<TABLE>
<CAPTION>
Summary of Selected Consolidated Financial Data
Year Ended December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Statement of
Operations Data
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
Operating
expenses - - - 140,484 11,040,192
-----------------------------------------------------------------------------------------
Loss from operations - - - 140,484 11,040,192
Equity in losses of
affiliate companies - - - - 79,559
Other income
(expense) - - - (1,489,835) (12,843,232)
-----------------------------------------------------------------------------------------
Net loss from continuing
operations - - - 1,630,319 23,962,983
-----------------------------------------------------------------------------------------
Loss from discontinued
operations 747,560 3,314,094 11,235,237 11,106,826 6,370,776
Gain on disposal of
discontinued
operations - - - - 6,502,663
-----------------------------------------------------------------------------------------
Net loss 747,560 3,314,094 11,235,237 12,737,145 23,831,096
Preferred stock
dividend-continuing
operations - - - - 6,605,261
Preferred stock
dividend-discontinued
operations - - 1,181,250 15,250,500 -
-----------------------------------------------------------------------------------------
Net loss to common
stockholders $747,560 $3,314,094 $12,416,487 $ 27,987,645 $ 30,436,357
=========================================================================================
Basic and diluted net
(loss) per common
share-continuing
operations n/a $ - $ - $ (0.35) $ (2.90)
=========================================================================================
Basic and diluted net
earnings (loss) per
common share-
discontinued
operations n/a $ (3.55) $ (6.88) $ (5.59) $ 0.01
=========================================================================================
Basic and diluted
weighted average
common shares
outstanding n/a 934,810 1,804,700 4,711,351 10,557,953
=========================================================================================
March 31, 2000
--------------
(Unaudited)
-----------
Balance Sheet Data
Cash and cash equivalents $45,715,612
Ownership interests and advances to Affiliate Companies 11,091,706
Total assets 60,379,278
Current liabilities 2,164,832
Non-current liabilities -
Total liabilities 2,164,832
Redeemable convertible preferred stock, Series C 40,883,087
Stockholders' equity 16,995,464
Total liabilities, redeemable convertible preferred stock and
stockholders' equity 60,379,278
Working capital 43,988,091
</TABLE>
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1999 2000
---- ----
Statement of
Operations Data
<S> <C> <C>
Revenues $ - $ -
Operating
expenses 44,441 7,997,665
---------------------------------
Loss from operations 44,441 7,997,665
Equity in losses of
affiliate companies - 298,851
Other income
(expense) (1,383,959) 138,181
---------------------------------
Net loss from continuing
operations 1,428,400 8,158,335
---------------------------------
Loss from discontinued
operations 1,498,593 -
Gain on disposal of
discontinued
operations - -
---------------------------------
Net loss 2,926,993 8,158,335
Preferred stock
dividend-continuing
operations - 43,052,686
Preferred stock
dividend-discontinued
operations - -
---------------------------------
Net loss to common
stockholders $ 2,926,993 $51,211,021
=================================
Basic and diluted net
(loss) per common
share-continuing
operations $ (1.38) $ (3.01)
=================================
Basic and diluted net
earnings (loss) per
common share-
discontinued
operations $ (1.44) $ -
=================================
Basic and diluted
weighted average
common shares
outstanding 1,037,338 16,986,005
=================================
</TABLE>
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<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 affiliate 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;
o adoption of the Internet as an advertising medium; and
o our ability to locate additional sources of capital.
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 early stage companies that have limited operating histories and
have generated very limited, if any, revenues or earnings from operations since
inception. Accordingly, you will only be able to examine limited operating
results of our affiliate companies in making your investment decision.
Our proposed operations are speculative in nature and may not ever result in any
operating revenues or profits.
10
<PAGE>
We are not certain that our business model, even if successful, will
result in operating revenues or profits. Our success depends upon our ability to
develop or select affiliate companies that are ultimately successful. As a
holding company without significant income from operations, we expect to
ultimately derive the cash flow necessary to fund our operations from the
operations and/or sale of our affiliate companies. As of the date of this
prospectus, none of our affiliate companies have generated operating revenues
sufficient to pay dividends to us. Furthermore, we have not generated any
significant revenues from the sale of our equity interests in our affiliate
companies. Accordingly, we do not have an established history of selecting and
developing successful affiliate companies. Economic, governmental, regulatory
and industry factors outside our control affect each of our affiliate companies.
If our affiliate companies do not successfully implement their business plans
with the assistance of our experiences and methodologies, then we will not be
able to achieve our business plan. Accordingly, if these events occur, then we
will not generate any revenues and the value of our assets and the market price
of our common stock will decline. There are also material risks relating to the
businesses of our affiliate companies. Accordingly, the success of our
operations will be dependent upon the management and operations of our affiliate
companies, the timing of the marketing of our affiliate companies' products and
numerous other factors beyond our control.
We have had a history of losses and expect continued losses in the foreseeable
future.
For the three months ended March 31, 2000 and the year ended December
31, 1999, we experienced net losses to common stockholders of $51.2 million and
$30.4 million respectively. We expect to continue to incur losses for the
foreseeable future and, if we ever have profits, we may not be able to sustain
them. Our expenses will increase as we continue in the development stage of our
business model and as we continue to build an infrastructure for our network of
affiliate companies. For example, we expect to hire additional employees to
manage both our operations and the operations of our majority-owned affiliate
companies and to provide services to our minority-owned affiliate companies. If
any of these and other expenses are not accompanied by increased revenues, then
our losses will be greater than we anticipate.
Our success could be impaired by valuations placed on Internet-related companies
by the investment community.
Our strategy involves creating value for our stockholders by developing
our affiliate companies and helping them to gain access to the capital markets
so that they can raise additional funds to satisfy their business plans. Since
our initial acquisitions have been equity interests in Internet companies, we
are dependent on the success of the market for Internet-related companies in
general and for initial public offerings of those companies in particular. Until
March 2000, there had been a substantial number of Internet-related initial
public offerings and private venture financings. Commencing during the second
half of March 2000, the domestic and international stock markets have generally
experienced a significant correction and the public trading prices, market
capitalizations and valuations of many technology and Internet-related companies
have significantly decreased. During this period, Internet-related initial
public offerings and private venture financings have decreased in both number
and size. If present market conditions continue for an extended period of time,
then the ability of our affiliate companies to grow and access the capital
markets may be impaired and we may need to provide additional capital to our
affiliate companies in order to ensure that they meet their business plans on a
timely basis and to protect the value of our equity holdings. Furthermore, if
present market conditions continue for an extended period of time, then we may
be unable to access the capital markets to raise sufficient funds to enable us
to provide additional capital to our affiliate companies on a timely basis. If
we are unable to provide additional capital to our affiliate companies in these
circumstances on a timely basis, then our affiliate companies' operations may
suffer, we will not successfully implement our business plan and the value of
our common stock may decrease.
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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.
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.
Our existing stockholders may experience dilution of their ownership interests
due to the issuance of additional shares of our common stock.
We may in the future issue our previously authorized and unissued
securities which will result in the dilution of the ownership interests of our
present stockholders. We currently have 50.0 million shares of common stock that
are authorized for issuance, of which we have issued approximately 17.7 million
shares as of March 31, 2000. At March 31, 2000, we had issued and outstanding
warrants, stock options and shares of preferred stock which are potentially
convertible into approximately 11.7 million shares of common stock. We also
intend to complete a proposed merger with Net Value, Inc. pursuant to which we
will issue approximately 1.7 million shares of our common stock to the
stockholders of Net Value, Inc. and approximately 1.2 million warrants and stock
options to the holders of Net Value, Inc.'s issued and outstanding warrants and
vested stock options. Additionally, we may issue additional shares of our common
stock in connection with:
o the hiring of additional personnel;
o future acquisitions;
o settlement or resolution of a pending legal proceeding
described on page 58 of this prospectus filed against us by
Douglas Spink, a former employee, whom we recently
terminated "for cause;" and
o for other valid business purposes within the discretion of
our Board of Directors.
Our issuance of these shares of common stock will also dilute the
ownership interests of our existing stockholders.
The influx of additional shares of our common stock onto the market may create
downward pressure on the trading price of our common stock.
The initial sale or secondary resale of substantial amounts of our
common stock in the public markets can have an adverse effect on the market
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price of our common stock and make it more difficult for us to sell our equity
securities in the future at prices which we deem appropriate. Since our
operations have been funded primarily through the sale of restricted securities,
a significant amount of our issued and outstanding securities have not been
eligible for public resale. By virtue of the shares covered by this prospectus,
as well as under Rule 144 of the Securities Act of 1933, we estimate that over
16 million shares of our common stock will become eligible for public resale.
The shares covered by this prospectus will become eligible for sale immediately.
The remaining shares are presently eligible for resale under Rule 144, however,
a significant number of these are subject to contractual restrictions on resale
discussed under "Shares Eligible for Future Sale." These shares will become
periodically eligible for public resale commencing June 2000 through June 30,
2001. The resale of shares into the public market, or the mere perception that
these resales could occur, could adversely affect the market price of our common
stock and could impair our ability to obtain capital through securities
offerings.
There is a scarcity of and competition for acquisition opportunities.
There are a limited number of technology-based businesses seeking
investment capital which we deem to be desirable candidates to become affiliate
companies and there is a very high level of competition among companies seeking
to acquire interests in these entities. We are and will continue to be a very
minor participant in the business of seeking business relationships with, and
acquisitions of interests in early stage technology businesses of which Internet
companies presently constitute the largest concentration. A large number of
established and well-financed entities, including venture capital firms, are
active in acquiring interests in companies which we may find to be desirable
candidates to become affiliate companies. Many of these investment-oriented
entities have significantly greater financial resources, technical expertise and
managerial capabilities than us. Consequently, we will be at a competitive
disadvantage in negotiating and executing possible investments in these entities
as they generally have easier access to capital, which entrepreneurs of
development stage companies generally place greater emphasis on than obtaining
the management skills and networking services that we provide to our affiliate
companies. Even if we are able to successfully compete with these venture
capital entities, this competition may affect the terms of completed
transactions and, as a result, we may pay more than we expected for interests in
affiliate companies. We may not be able to identify companies that complement
our strategy, and even if we identify a company that complements our strategy,
we may be unable to acquire an interest in the company for many reasons,
including:
o a failure to agree on the terms necessary for a transaction,
such as the amount or price of our equity interest;
o incompatibility between our operational strategies and
management philosophies and those of the affiliate company;
o competition from other acquirers of Internet companies;
o a lack of sufficient capital to acquire an interest in a
potential affiliate company; and
o the unwillingness of a potential affiliate company to
affiliate with our corporation or our other affiliate
companies.
If we are unable to successfully compete with other entities in
identifying and executing possible business opportunities, then we will not be
able to successfully implement our business plan.
We may be required to dispose of our interests in our affiliate companies or
take other actions which we would not otherwise take in order to avoid
classification as an investment company under the Investment Company Act of
1940.
Although we are primarily engaged in the business of e-commerce through
our affiliate companies, our ownership of equity interests in our affiliate
companies that are not majority interests could result in our classification as
an investment company under the Investment Company Act of 1940. If we are
required to register as an investment company, then we will incur substantial
additional expense as the result of the Investment Company Act of 1940's record
keeping, reporting, voting, proxy disclosure and other requirements. In
addition, restrictions on transactions between an investment company and its
affiliates under the Investment Company Act of 1940 would make it difficult, if
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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 our need to dispose of the
securities. A company is presumed to be an investment company under the
Investment Company Act of 1940 if more than 45% of its total assets consists of,
and more than 45% of its income/loss and revenue attributable to it over the
last four quarters is derived from, ownership interests in companies it does not
primarily control. Under the Investment Company Act of 1940, we are considered
to primarily control a company if we own more than 25% of that company's voting
securities and have more control than any other single owner. Prior to the sale
by Net Value, Inc. of its assets to BrightStreet, Net Value, Inc. alone
constituted greater than 55% of our total assets and substantially in excess of
55% of income/loss and revenues for the past four fiscal quarters. As a result
of the sale, we have more than 45% of our total assets comprised of and more
than 45% of our income/loss over the prior four fiscal quarters derived from
ownership interest in companies we do not primarily control.
The rules under the Investment Company Act of 1940 provide us with a
grace period of one year, at the end of which we must be primarily engaged in a
business other than that of investing, reinvesting, owning, holding or trading
in securities. We intend to meet the foregoing tests by expanding the range of
services that we provide and operating our business through our affiliate
companies in a manner that demonstrates that our primary business activity is
e-commerce, as well as through our ownership interests in companies which we
primarily control. However, because six of our affiliate companies are not
majority-owned subsidiaries and we may not retain a majority ownership interest
in our other two affiliate companies, changes in the value of our ownership
interests in our affiliate companies and the income/loss and revenue
attributable to our affiliate companies could require us to register as an
investment company under the Investment Company Act of 1940 unless we take
action to avoid registration requirements. For example, we may be forced to sell
our minority ownership interests in some of our affiliate companies which we do
not want to sell and any sale may be at less than fair market value as we will
be selling restricted securities in privately negotiated transactions. We may
also have to ensure that we retain at least a 25% voting ownership interest in
our majority-owned affiliate companies after their initial public offerings, if
any. In addition, we may have to acquire additional income or loss generating
assets that we might not otherwise have acquired or may have to forego
opportunities to acquire interests in companies that we would otherwise want to
acquire in connection with executing our business strategy.
In order to be certain of our status under the Investment Company Act
of 1940, we may apply to the Securities and Exchange Commission for an order
finding that we are primarily engaged in a business other than investing in
securities. We can give no assurance that such an order, if applied for, will be
granted.
We are not required to follow any specific criteria for identifying affiliate
companies, and therefore may acquire interests in affiliate companies that do
not meet the criteria we have described.
To date, we have focused our acquisition and affiliating efforts on
technology businesses whose operations are focused in the Internet industry and
generally meet the following criteria:
o early stage entity;
o seeking less than $2.5 million in capital;
o management that is experienced in the substantive industry
in which the affiliate company will operate; and
o offer compelling market opportunities.
However, we are not obligated to follow any particular operating, financial,
geographic or other criteria in evaluating candidates for potential business
combinations. In addition, we are not required to acquire interests in any
number of affiliate companies, complete any number of business combinations, or
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internally develop any number of affiliate companies in any calendar year. We
will determine which target companies provide the best potential financial
return for our stockholders and we will determine the amount of equity and other
terms and conditions of investments. Stockholders will not have the opportunity
to evaluate the relevant economic, financial and other information that our
management team will use and consider in deciding whether or not to enter into a
particular business combination or factors or strategies which they will
implement in developing such relationships. We are not certain that we will be
successful in identifying and evaluating suitable business opportunities and
consummating business combinations with or acquiring interests in additional
affiliate companies. We do not anticipate that our affiliate companies'
operations will have a short-term positive impact on our operations. Thus, we
continue to seek additional target companies and are continuing to develop
companies based on our internally conceived business ideas. These companies may
operate in industries in which members of our management team have little or no
prior experience.
We expect our affiliate companies to grow rapidly and if we are unable to assist
them in sustaining and managing their growth, our affiliate companies'
businesses will suffer, which will adversely affect our business.
Our affiliate companies may experience rapid growth as they introduce
new products and services and hire additional employees to manage expanded areas
of development and service a growing number of consumers. Since such growth may
not be accompanied by immediate increases in revenues, this growth is likely to
place significant strain on their resources and on the resources we allocate to
assist our affiliate companies. In addition, our management may be unable to
convince our affiliate companies to adopt our ideas effectively, and the
affiliate companies may fail in their attempt to execute our ideas or
successfully manage their growth. If we are unable to effectively assist our
affiliate companies in managing their growth, then they may not sustain
profitable operations and the value of our common stock may decrease.
Our Officers and Directors have acquired personal interests in our affiliate
companies which may create conflicts of interest that may adversely affect our
stockholders' best interests.
Darr Aley, Stephen George, Andrew P. Panzo and Lee Hansen, who are
among our Officers and Directors, personally own interests or rights to purchase
interests in YesAsia, Inc. Tom Aley, an Officer of our company, personally owns
an interest in Swapit.com. This may cause the interests of these individuals to
conflict with our stockholders' best interests. If the operations of YesAsia,
Inc. or Swapit.com are unsuccessful, it may be in our stockholders' best
interests for us to either divest our ownership interest in this affiliate
company or devote a smaller percentage of our management resources to assisting
in the development of this affiliate company. In addition, in order to avoid
registration under the Investment Company Act of 1940, we may have to divest our
ownership interest in a particular affiliate company. However, the officer(s) or
director(s) who own a personal interest in this affiliate company may vote not
to take this action or may seek to continue to devote management resources to
this affiliate company due to his personal interest. Our Board of Directors has
implemented a policy prohibiting our officers and directors from acquiring
personal interests in our affiliate companies in the future.
If we are unable to obtain additional financing, then our business will suffer.
We will need to raise substantial additional financing in the future to
support our working capital needs or our affiliate companies' working capital
needs and to provide us with sufficient funding to enter into additional
business relationships and start additional early stage companies. As of April
30, 2000, we had on hand existing cash and cash equivalents of approximately
$45.6 million. Based on our projected level of operations and funding
requirements, these funds should be sufficient to sustain our operations until
June 30, 2001. However, should the level of our operations or funding
requirements increase, we will require additional capital sooner than we expect.
This could occur for a number of reasons, including:
o We purchase an interest in a greater number of affiliate
companies than we presently anticipate;
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o Our level of investment in affiliate companies is greater
than we presently anticipate; or
o We participate in subsequent rounds of financing conducted
by our affiliate companies to a greater extent than we
presently anticipate.
If we are unable to secure additional financing on acceptable terms, then we
will not be able to fully implement our business plan.
Our success is dependent on our continued employment of Andrew P. Panzo and Lee
C. Hansen, and the continued employment by our affiliate companies of their key
personnel, and if we were to lose the services of these individuals, our
business and the businesses of our affiliate companies would be negatively
affected.
We believe that our success will depend on continued employment by us
and our affiliate companies of senior management and key technical personnel. If
one or more members of our management team or the management teams of any of our
affiliate companies are unable or unwilling to continue in their present
positions, then our business and operations could be disrupted.
As of May 31, 2000, our entire management team, other than Andrew P.
Panzo, has worked for us for less than one year. Andrew P. Panzo joined our
management team in January 1999. Other than Lee C. Hansen, our President who
joined us on October 1, 1999, the remainder of our management team and directors
joined our company in July 1999 in connection with our merger with Strategicus
Partners, Inc. and thereafter. Our efficiency may be limited while these
employees, directors and future employees are being integrated into our
operations. In addition, we may be unable to identify and hire additional
qualified management and professional personnel to help lead us and our
affiliate companies.
Our affiliate companies will need to continue to hire additional
qualified personnel as their businesses grow. A shortage in the number of
trained technical and marketing personnel could limit the ability of our
affiliate companies to increase the sales of their existing products and
services and launch new product offerings.
We have issued a significant amount of stock-based compensation to our
employees, consultants and members of our Board of Directors, and this
compensation has significantly decreased and will continue to significantly
decrease our earnings.
Through March 31, 2000, we have recorded deferred compensation of $62.6
million related to compensatory stock options and restricted stock awards to our
employees, consultants and members of our Board of Directors. As a result of
these compensatory option grants and restricted stock awards, we recorded
amortization of deferred compensation of $10.1 million to stock-based
compensation through March 31, 2000. We will continue to record amortization of
deferred compensation as these option and stock awards vest, thus reducing our
earnings in future years.
We will incur a significant expense in each of the next three years as a result
of amortization expense which we will record relating to our acquisition of
Strategicus Partners, Inc. and our acquisition of equity interests accounted for
under the equity method of accounting.
We will incur amortization expense of approximately $4.4 million from
March 31, 2000 through 2003 and our earnings will be reduced by this expense in
each year that it is recorded. This expense is the result of:
o the amortization of the goodwill which we have recorded in
connection with our acquisition of Strategicus Partners,
Inc.; and
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o the amortization of the amount by which the purchase price
of each of our equity interests accounted for under the
equity method of accounting exceeds our proportionate share
of the underlying net assets of each of these affiliate
companies.
Pursuant to our business plan, we contemplate acquiring equity
interests in additional affiliate companies over the next several years. If
these acquisitions result in our purchase of additional goodwill or our payment
of a purchase price which exceeds our share of the underlying net assets of
these affiliate companies, then we will record additional amortization expense
in future years. Sales of equity method investments will reduce additional
amortization expense in future years.
Fluctuations in our quarterly results may adversely affect our stock price.
Because we acquire significant interests in early stage companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. We do not know if
we will report net income in any period, and we expect that we will report net
losses in many quarters for the foreseeable future. While our affiliate
companies have consistently reported losses, we may have net income in certain
periods and may experience significant volatility from period to period due to
non-recurring transactions and other events incidental to our ownership
interests in and advances to affiliate companies. These transactions include
dispositions of, and changes to, our affiliate company ownership interests, and
impairment charges.
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.
RISKS PARTICULAR TO OUR AFFILIATE COMPANIES.
Each of our affiliate companies is subject to the risks described
below. In addition, we have set forth below the risks which Webmodal, Swapit.com
and IndustrialVortex.com, the affiliate companies which we deem to be material
to our operations as of the date of this prospectus, are presently subject to in
this early stage of their development.
Each of our affiliate companies has a very limited operating history and has
generated very limited, if any, revenues.
Other than BrightStreet.com, Inc., our affiliate companies were all
formed less than two years ago. Each of our affiliate companies is in the
development stage and has generated very limited, if any, revenues. Accordingly,
we have no historical basis on which to evaluate the future success of any of
our affiliate companies.
Most of our affiliate companies will require significant additional financing to
execute their business plans.
Other than BrightStreet and YesAsia, each of our affiliate companies
only has sufficient capital resources to meet operating expenses for less than
one year. Accordingly, most of our affiliate companies will require significant
additional financing to execute their business plans. Although we intend to
assist our affiliate companies in obtaining this financing, there is no
assurance that these affiliate companies will be able to obtain this financing
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on a timely basis. It is our understanding that Swapit.com, Industrial
Vortex.com and AssetExchange have either consumed all or substantially all of
the funds which they have raised in their initial rounds of capital financing.
We do not intend to provide any additional funding to AssetExchange, Inc. As a
result, we intend to record impairment of our investment in AssetExchange, Inc.
during the second quarter of 2000. If any of our affiliate companies are unable
to obtain the required financing on a timely basis, then they may not be able to
execute their business plans.
The success of our affiliate companies presently depends on the development of
the e-commerce market, which is uncertain.
All of our affiliate companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not continue to
develop, or if the Internet does not expand as an effective medium for the sale
of products and services, then our affiliate companies may not succeed. For
example, YesAsia, Swapit.com and metacat each allow consumers to purchase
products over the Internet. If consumer use of the Internet to purchase goods
and services does not continue to develop and expand, then these affiliate
companies may not attract a sufficient customer base and their businesses may be
adversely affected. In addition, if businesses do not continue to use or expand
their use of the Internet for conducting business then some of our affiliate
companies may not develop an adequate customer base to execute their business
plans.
A number of factors could prevent the long-term acceptance of
e-commerce business, including the following:
o the unwillingness of businesses to shift from traditional
business processes to e-commerce processes;
o the necessary network infrastructure for substantial growth
in usage of e-commerce may not be adequately developed;
o increased government and securities regulation or taxation
may adversely affect the viability of e-commerce;
o insufficient availability of telecommunication services or
changes in telecommunication services could result in slower
response times for the users of e-commerce; and
o concern and adverse publicity about the security of
e-commerce transactions.
Our affiliate companies may fail if their competitors provide superior
Internet-related products or continue to have greater resources than our
affiliate companies.
Competition for Internet products and services is intense and grows on
a daily basis. As the market for e-commerce grows, we expect that competition
will intensify. Barriers to entry are minimal and competitors can offer products
and services at a relatively low cost. As no physical presence is required to
commence operations, our affiliate companies' competitors may emerge without the
same degree of warning that competitors who are traditional bricks and mortar
businesses would provide to those businesses. Our affiliate companies compete
for a share of a customer's:
o purchasing budget for services, materials and supplies with
other online providers and traditional distribution
channels; and
o advertising budget with online services and traditional
off-line media, such as print and trade associations.
Many of our affiliate companies' existing competitors have greater
brand recognition and greater financial, marketing and other resources than our
affiliate companies. This may place our affiliate companies at a competitive
disadvantage in responding to other companies' pricing strategies, technological
advances, advertising campaigns, strategic partnerships and other initiatives.
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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.
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, YesAsia and Swapit.com and may
result in lower sales. Currently, these affiliate companies are not required to
charge any customer sales and usage tax, and there is a federally imposed
moratorium on taxation of Internet transactions. However, the growth of Internet
commerce is likely to lead state revenue agencies to pursue taxation on Internet
sales. To the extent that states are successful in imposing taxes on Internet
sales, the result will be an effective increase in the cost of goods purchased
through Internet websites. Consumers may respond by shifting to traditional
purchasing methods such as catalog sales which often do not impose sales tax or
interstate shipments or store purchases which do not involve shipping costs.
All of our affiliate companies anticipate rapid growth, and failure to manage
that growth could adversely affect their businesses.
Each of our affiliate companies anticipates rapid growth, which will
require continual enhancement to financial and management controls, reporting
systems and procedures and expansion, training and management of personnel. If
any affiliate company fails to have systems, procedures and controls which are
adequate to support its growth and operations, it may be unable to successfully
implement its business plan. In addition, it may lose customers who become
dissatisfied as the result of operational problems created by the failure to
manage growth, adversely impacting revenues, expenses and earnings.
Risks particular to Webmodal.
If intermodal railroads are unwilling to maintain relationships with Webmodal,
the attractiveness of Webmodal's products and services will be reduced.
Webmodal's business plan is dependent on maintaining relationships with
intermodal railroads so that it can market intermodal products and services.
"Intermodal" refers to shipment of goods by truck from the point of origin to a
railroad yard, where entire truck trailers are loaded on railcars and shipped by
rail to a destination yard, where the trailers are offloaded and trucked to the
shipping destination. Most intermodal railroads have contract minimum and
creditworthiness requirements. If Webmodal fails to either meet these
requirements or obtain exceptions to the requirements based on the potential
value to the railroads of its services, then it will be unable to maintain
relationships with the railroads. Webmodal has reached contractual relationships
with a number of the major U.S. railroads, a large Canadian/U.S. railroad, a
large U.S. passenger railroad and a large stack-train company. A failure to
maintain these relationships on a consistent basis will reduce the
attractiveness of Webmodal's products and services.
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If Webmodal is unable to maintain relationships with trucking companies in hub
cities, the attractiveness of Webmodal's products and services will be reduced.
Webmodal's business plan requires that it establish relationships for
online pricing and 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, then Webmodal's ability
to offer services in the applicable hub cities will be adversely affected until
such relationships can be established. Webmodal has established contractual
relationships with a number of leading intermodal trucking companies covering
the geographic markets which are targeted for Webmodal's launch.
Webmodal will not be successful unless it can convert shippers from traditional
methods of arranging for shipments.
Shippers of goods by intermodal means traditionally have relied on
intermodal marketing companies to negotiate pricing, arrange for shipping and
otherwise act as intermediaries in the shipping process. Webmodal's success will
be dependent on its ability to educate shippers regarding the advantages of
Webmodal's services and persuade them to adopt a new way of doing business. To
the extent that Webmodal is unsuccessful in this educational effort, its
business will suffer.
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. Also, six truckload trucking companies recently announced
their intent to merge their logistics business units into a commonly owned,
Internet-based global transportation logistics company called Transplace.com.
This company's initial focus will include a number of areas such as over the
road truckload and intermodal capabilities. Railroads, trucking companies and
other independent entities similar to Webmodal also could enter this market.
Recently, four railroads announced an investment in "Arzoon," which reportedly
is developing an Internet-based multi-modal transportation services company.
BNSF Railroad has formed a company called "Freightwise" which reportedly is
developing an online multi-modal transportation exchange. Several railroads
formed a consortium called "Steelroads" which reportedly is developing
Internet-based rail carload transportation services. Third party logistics
companies, to whom shippers sometimes outsource shipment management activities
and who are a primary source of potential customers for Webmodal, could become
competitors. Finally, other transportation-related e-commerce ventures, such as
National Transportation Exchange, FreightQuote and Celarix do not appear to be
currently directed at the intermodal shipping market but could develop
applications for that market. If any of these companies successfully enters this
market, then Webmodal may incur increased expenses or greater difficulty winning
customers as a result of this increased level of competition. This increase in
expenses or greater difficulty winning customers will adversely affect
Webmodal's operating results.
Risks particular to Swapit.com.
Swapit.com may overvalue goods taken in trade, resulting in accumulation of
inventory and write-offs.
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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 their 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.
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's prior
to or after Swapit.com's appearance. Some current and many potential competitors
have longer company operating histories, larger customer bases and greater brand
recognition in other business and Internet markets than Swapit.com does. Some of
these competitors also have significantly greater financial, marketing,
technical and other resources. Other online trading services may be acquired by,
receive investments from or enter into other commercial relationships with
larger, well established and well financed companies. As a result, some of its
competitors with other revenue 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 IndustrialVortex.com
Buyers and sellers of industrial products may not accept IndustrialVortex.com's
services, resulting in lower than anticipated revenues.
A number of 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. However, IndustrialVortex.com has not recorded
21
<PAGE>
any revenues from services provided to these buyers and sellers. 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
Industria.com and IndustrialAmerican.com. IndustrialVortex.com anticipates that
additional websites offering industrial automation products will be established.
IndustrialVortex.com's ability to compete with these Internet websites will be
dependent on its ability to provide an efficient marketplace for buyers and
sellers of these products. If its competitors provide a more efficient
marketplace, then IndustrialVortex.com's revenues and results of operations will
be adversely affected.
USE OF PROCEEDS
We will not receive any proceeds from the sale of up to 5,578,904
shares of our common stock which are being offered for sale by 36 of our
stockholders pursuant to this registration statement. However, 416,667 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 $11,075,008. We
will use these proceeds for general corporate expenses and to acquire additional
equity interests in affiliate companies.
MARKET PRICE AND DIVIDEND INFORMATION
As of the date of this prospectus, our common stock is traded through
the NASDAQ Over-the-Counter Bulletin Board Trading System under the symbol
"NETV." The market for our common stock on the NASDAQ Over-the-Counter Bulletin
Board Trading System is sporadic and the quarterly average daily volume of
shares traded since inception ranged from a low of 31,539 shares to a high of
237,180 shares. The following table presents the range of the high and low bid
and average daily volume information for our common stock for the periods
indicated, which information was provided by NASDAQ Trading and Market Services.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Average Daily
High Low Volume (Shares)
---- --- ---------------
Year Ended December 31, 1998
Fourth Quarter $ 5.7500 $4.0000 31,539
Year Ended December 31, 1999
First Quarter 6.3750 4.7500 38,393
Second Quarter 7.6875 4.5000 55,695
Third Quarter 6.3125 3.8125 49,461
Fourth Quarter 13.4375 3.5625 120,817
Year Ending December 31, 2000
First Quarter 35.7500 7.1250 237,180
Second Quarter (through
May 31, 2000) 17.7500 3.8125 113,007
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 May 31, 2000, there were approximately 269
22
<PAGE>
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.
23
<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization as of March 31,
2000:
Debt:
<TABLE>
<CAPTION>
Current debt-continuing operations $ 103,446
<S> <C>
Net Liabilities of discontinued operations 1,693,807
Redeemable convertible preferred stock, Series C
$.001 par value per share (4,166,667 shares authorized, issued and
outstanding at March 31, 2000) net of costs of issuance and proceeds
allocated to Series C warrants. Liquidation preference $50,000,000 at
March 31, 2000 40,883,087
Accrued redeemable convertible preferred stock dividend, Series C 335,895
Stockholders' equity:
Common stock, Net Value, Inc., $.001 par value per share (49,000,000
shares authorized, 898,338 shares issued and outstanding). 899
Common stock, $.001 par value per share (50,000,000 shares authorized,
19,281,807 shares issued and outstanding at March 31, 2000). 19,281
Additional paid-in capital 195,662,668
Deferred compensation (52,539,583)
Accumulated deficit (126,130,306)
Treasury stock, Net Value, Inc., at cost (5,000 shares at March 31, 2000) (17,495)
--------------
Total stockholders equity 16,995,464
--------------
Total capitalization $ 60,011,699
==============
</TABLE>
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included elsewhere in this prospectus. The selected
data as of and for each of the years ended December 31, 1995, 1996, 1997, 1998
and 1999 have been derived from our audited financial statements. The statement
of operations data for each of the three-month periods ended March 31, 1999 and
2000, and the balance data sheet at March 31, 2000 are derived from our
unaudited interim financial statements included elsewhere in this prospectus. In
management's opinion, the unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements included
elsewhere in this prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for such periods.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ - $ -
Operating expenses
Stock based compensation - - - - 7,320,695
General and administrative - - - 140,484 3,719,497
--------------------------------------------------------------------------------
Total operating expenses - - - 140,484 11,040,192
Interest income - - - - 60,526
Interest expense - - - 1,441,399 12,380,157
Financing fees - - - 48,436 523,601
--------------------------------------------------------------------------------
Loss before equity in losses of
Affiliate Companies - - - 1,630,319 23,883,424
Equity in losses of Affiliate
Companies - - - - 79,559
--------------------------------------------------------------------------------
Net loss from continuing
operations - - - 1,630,319 23,962,983
Discontinued operations
Loss from discontinued
operations 747,560 3,314,094 11,235,237 11,106,826 6,370,776
Gain on disposal of
discontinued operations - - - - 6,502,663
--------------------------------------------------------------------------------
Net loss 747,560 3,314,094 11,235,237 12,737,145 23,831,096
--------------------------------------------------------------------------------
Preferred stock dividends
Continuing operations - - - - 6,605,261
Discontinued operations - - 1,181,250 15,250,500 -
--------------------------------------------------------------------------------
Net loss to common shareholders $747,560 $3,314,094 $12,416,487 $27,987,645 $30,436,357
================================================================================
Basic and diluted net (loss) per
common share - continuing
operations N/A $ - $ - $ (0.35) $ (2.90)
================================================================================
Basic and diluted net earnings
(loss) per common share -
discontinued operations N/A $ (3.55) $ (6.88) $ (5.59) $ 0.01
================================================================================
Basic and diluted weighted
average common shares
outstanding N/A 934,810 1,804,700 4,711,351 10,557,953
================================================================================
</TABLE>
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------------
1999 2000
---- ----
---------------------------------
<S> <C> <C>
Revenue $ - $ -
Operating expenses
Stock based compensation - 5,894,187
General and administrative 44,441 2,103,478
---------------------------------
Total operating expenses 44,441 7,997,665
Interest income - 211,957
Interest expense 1,383,959 73,776
Financing fees - -
---------------------------------
Loss before equity in losses of
Affiliate Companies 1,428,400 7,859,484
Equity in losses of Affiliate
Companies - 298,851
---------------------------------
Net loss from continuing
operations 1,428,400 8,158,335
Discontinued operations
Loss from discontinued
operations 1,498,593 -
Gain on disposal of
discontinued operations - -
---------------------------------
Net loss 2,926,993 8,158,335
---------------------------------
Preferred stock dividends
Continuing operations - 43,052,686
Discontinued operations - -
---------------------------------
Net loss to common shareholders 2,926,993 51,211,021
==================================
Basic and diluted net (loss) per
common share - continuing
operations $ (1.38) $ (3.01)
==================================
Basic and diluted net earnings
(loss) per common share -
discontinued operations $ (1.44) -
==================================
Basic and diluted weighted
average common shares
outstanding 1,037,338 16,986,005
==================================
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data December 31, December 31, December 31, December 31, December 31, March 31,
1995 1996 1997 1998 1999 2000
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Working capital
(deficit) $(279,702) $(305,092) $(2,426,656) $(8,750,164) $(4,212,869) $43,988,091
Total assets - - - 371,648 13,989,368 60,379,278
Total liabilities 279,702 305,092 2,426,656 9,121,812 7,839,258 2,164,832
Long-term debt, net of
current portion - - - - 67,302 -
Redeemable
convertible preferred
stock, Series B - - - - 4,448,872 -
Redeemable
convertible preferred
stock, Series C - - - - - 40,833,087
Stockholders' equity
(deficit) (279,702) (305,092) (2,426,656) (8,750,164) 1,701,240 16,995,464
</TABLE>
26
<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 elsewhere in this prospectus and the risks
discussed in our other SEC filings. The following discussion should be read in
conjunction with our audited Consolidated Financial Statements and related Notes
thereto included elsewhere in this prospectus.
General
We were originally formed as a Florida corporation in 1991. We did not
have any operations until our change of domicile into Delaware in October 1998.
This occurred in conjunction with our acquisition of a controlling interest in
Net Value, Inc. which commenced in October 1998. Net Value, Inc. was engaged in
the development and distribution of online promotional campaigns.
We obtained control of Net Value, Inc. when we acquired 66% of its
outstanding common stock through share exchange transactions with 20 of its
largest stockholders. Since as a result of these transactions the former Net
Value, Inc. stockholders obtained a majority ownership interest of our company,
the transaction was accounted for as a recapitalization. Under a
recapitalization, the historical financial statements presented are those of the
company acquired, not those of the legal acquiror. Accordingly, the financial
information included in our financial statements prior to October 1998 is that
of Net Value, Inc.
We plan to complete a merger with Net Value, Inc. within three to six
months pursuant to which we intend to offer .4 shares of our common stock for
every share of Net Value, Inc. common stock tendered to us by the existing Net
Value, Inc. stockholders. This is being done in order to acquire the remaining
minority interest in Net Value, Inc. Additionally, we will issue common stock
purchase warrants and stock options to the holders of Net Value, Inc.'s common
stock purchase warrants and vested stock options at the same exchange ratio.
Since we already own a majority of Net Value, Inc.'s capital stock, we can
assure that the merger will be completed. Accordingly, our 1999 financial
statements reflect the results of our in-process merger with Net Value, Inc.
At March 31, 2000, we owned approximately 67% of the outstanding common
stock of Net Value, Inc. Because the total net assets of Net Value, Inc. are
negative and because it is unlikely that the minority shareholders of Net Value,
Inc. will make additional capital contributions to erase subsequent Net Value,
Inc. losses, no amount has been ascribed to the 33% minority interest.
Our financial statements also reflect the operations of Net Value, Inc.
as a discontinued operation. This was necessitated when, in November 1999, we
made the strategic decision to exit the development and distribution of online
promotional campaigns operations of Net Value, Inc. In December 1999, we sold
the business and assets of Net Value, Inc. to BrightStreet.com, Inc., a new
company formed by members of Net Value, Inc.'s then senior management team and a
group of third party investors. Through Net Value, Inc., we retained a 14%
interest in the common stock of BrightStreet.com.
We have segregated the operating results of the discontinued operations
of Net Value, Inc. from continuing operations and have reported these operating
results as a separate line item on the statements of operations. Upon the
completion of our merger with Net Value, Inc., we will own all of Net Value,
Inc.'s assets and liabilities. This will not change our financial statement
presentations as these items are already reflected on our balance sheet.
Because we acquire significant interests in early-stage companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. We do not
27
<PAGE>
know if we will report net income in any period, and we expect that we will
report net losses in many quarters for the foreseeable future. While our
affiliate companies have consistently reported losses, we may have net income in
certain periods and may experience significant volatility from period to period
due to non-recurring transactions and other events incidental to our ownership
interests in and advances to affiliate companies. These transactions include
dispositions of, and changes to, our affiliate company ownership interests, and
impairment charges.
On a continuous basis, but no less frequently than at the end of each
reporting period, we evaluate:
o the carrying value of our ownership interest in and advances to each
of affiliate companies for possible impairment based on achievement
of business plan objectives and milestones;
o the value of each ownership interest in the affiliate company
relative to carrying value;
o the financial condition and prospects of the affiliate company; and
o other relevant factors.
The business plan objectives and milestones we consider include those
related to financial performance such as achievement of planned financial
results or completion of capital raising activities, and those that are not
primarily financial in nature such as the launching of an Internet website or
the hiring of key employees. The fair value of our ownership interests in and
advances to privately held affiliate companies is generally determined based on
the value at which independent third parties have or have committed to invest in
its affiliate companies. If impairment is determined, then the carrying value of
our ownership interest is adjusted to fair value.
Effect of Various Accounting Methods on our Results of Continuing Operations
Accounting for Stock Based Compensation.
Stock based compensation is a non-cash charge relating to the
amortization of deferred compensation. We record deferred compensation when we
make restricted stock awards or compensatory stock option grants to employees,
members of our Board of Directors, consultants or advisory board members. In the
case of stock option grants to employees, the amount of deferred compensation
initially recorded is the difference between the exercise price and fair market
value of our common stock on the date of grant. In the case of options granted
to consultants or advisory board members, the amount of deferred compensation
recorded is the fair value of the stock options on the grant date as determined
using a Black-Scholes option pricing model. We record deferred compensation as a
reduction to shareholders' equity and an offsetting increase to additional
paid-in capital. We then amortize deferred compensation into stock based
compensation over the performance period, which typically coincides with the
vesting period of the stock based award of 3 to 4 years.
Grants to Employees. All awards to employees are fixed awards. This
means that the number and exercise price of the stock options are known on the
date of grant. Under these fixed awards, the amount of deferred compensation
which we record is similarly fixed and represents the total amount of future
amortization to stock based compensation.
Grants to Consultants and Advisory Board. In accordance with the
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services, stock based awards to consultants and advisory board
members for future professional services are considered variable. This means
that the amount of deferred compensation is periodically adjusted to the current
fair value of the unvested awards as determined using a Black-Scholes option
pricing model. Similarly, the amortization to stock based compensation for
variable awards also fluctuates in direct proportion to the increase or decrease
in deferred compensation resulting from changes in fair value. These
fluctuations are largely dependent on the fair market value of our common stock
and therefore makes future prediction or estimate of the amortization charge to
stock based compensation extremely difficult.
28
<PAGE>
Accounting for Affiliate Company Ownership
The various interests that we acquire in our affiliate companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in an affiliate company.
Consolidation. Affiliate companies in which we directly or indirectly
own more than 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting. Under this method, an
affiliate company's financial statements are reflected within our Consolidated
Statements of Operations. None of our affiliated companies were consolidated as
of December 31, 1998. As of March 31, 2000, metacat.com, Inc. is our only
consolidated affiliate company.
The effect of an affiliate company's net results of operations on our
net results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each of
these methods only our share of the earnings or losses of an affiliate company
is reflected in our results of operations in the Consolidated Statements of
Operations.
Equity Method. Affiliate companies whose results we do not consolidate,
but over whom we exercise significant influence, are generally accounted for
under the equity method of accounting. Whether or not we exercise significant
influence with respect to an affiliate company depends on an evaluation of
several factors including, among others, representation on the affiliate
company's board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the affiliate company, including voting
rights associated with our holdings in common stock and preferred stock in the
affiliate company. Under the equity method of accounting, an affiliate company's
results of operations are not reflected within our consolidated statements of
operations; however, our share of the earnings or losses of the company is
reflected in the caption "Equity in Losses of Affiliate Companies" in the
Consolidated Statements of Operations. Additionally, our excess investment cost
over equity in each affiliate company's net assets is amortized over three years
to "Equity in Losses of Affiliate Companies." As of March 31, 2000 and December
31, 1999 we accounted for the following affiliate companies under this method:
<TABLE>
<CAPTION>
Voting Ownership
Affiliate Company Since March 31, 2000 December 31, 1999
----------------------- -------------- -----------------
<S> <C> <C> <C>
AlarmX.com (1) 2000 69% ---
AssetExchange 1999 20% 20%
College411.com 1999 29% 29%
IndustrialVortex.com 2000 31% ---
SwapIt.com (2) 1999 11% 11%
</TABLE>
(1) AlarmX.com is not consolidated because we anticipate that our
majority ownership is temporary and will be reduced below 50%
within the next 12 months.
(2) SwapIt.com is accounted for under the equity method since our
Executive Vice President, Business Development holds a 16%
ownership interest for which he has assigned the voting rights
to us.
We have representation on the board of directors of all of the above
affiliate companies. Most of our equity method affiliate companies are in a very
early stage of development and have not generated any revenues. All of our
equity method affiliate companies were formed less than two years ago and are
expected to incur substantial losses in 2000.
29
<PAGE>
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. Our affiliate companies accounted for under the cost method of
accounting at March 31, 2000 and December 31, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership
Affiliate Company Since March 31, 2000 December 31, 1999
----------------------- -------------- -----------------
<S> <C> <C> <C>
Brightstreet.com 1999 14% 14%
Webmodal 1999 10% 12%
YesAsia 1999 13% 11%
</TABLE>
Our cost method affiliate companies are in a very early stage of
development and have not generated significant revenues. In addition, our cost
method affiliate companies have incurred substantial losses and are expected to
continue to incur substantial losses in 2000.
Results of Operations
Three Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999
Continuing Operations
Stock-Based Compensation. Stock-based compensation totaled $5,894,187
for the three months ended March 31, 2000. We did not incur this expense for the
corresponding period in 1999 due to the fact that our management team had not
yet been hired. Stock-based compensation is a non-cash expense resulting from
the amortization of deferred compensation and the issuance of stock for
services. The following table shows the components of deferred compensation and
related amortization to stock-based compensation:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
--------- --------------- -----
<S> <C> <C> <C>
Balance at beginning of year $ 7,137,600 $20,180,172 $27,317,772
Additions to deferred compensation 13,207,675 17,198,948 30,406,623
Amortization to stock-based compensation (2,530,355) (2,654,457) (5,184,812)
----------- ----------- -----------
Balance at end of quarter $17,814,920 $34,724,663 $52,539,583
=========== =========== ===========
</TABLE>
We also recorded stock-based compensation of $709,375 relating to
investment banking services that were paid via the issuance of 25,000 shares of
our common stock. We valued these services based on our closing stock market
price of $28.375 on the date of issuance.
Of the total unamortized deferred compensation relating to employees of
$17,814,920, we expect to amortize into stock-based compensation $4,297,036,
$5,729,381, $4,416,331, $2,926,431 and $445,741 during the remainder of 2000,
2001, 2002, 2003 and 2004, respectively. These amounts correspond to the vesting
schedule of the underlying stock-based award. The amount of deferred
compensation recorded and related amortization to stock-based compensation will
be increased by any future compensatory grants and decreased by any
cancellations.
As discussed above in "Effects of Various Accounting Methods on our
Results of Continuing Operations," stock-based awards to consultants and
advisory board members for future professional services are considered variable,
meaning the amount of deferred compensation is periodically adjusted to the fair
30
<PAGE>
market value of the unvested awards. Of the total additions to deferred
compensation for consultants and advisory board members of $17,198,948, during
the three months ended March 31, 2000, $12,772,336 resulted from adjusting
unvested awards to their then fair market value, and $4,426,612 resulted from
new stock-based awards. The fair market value adjustments are determined using a
Black-Scholes option pricing model and generally increase or decrease with
corresponding increases and decreases in the market price of our common stock.
Due to this market variability, we cannot accurately predict the future
amortization to stock-based compensation associated with these awards.
General and Administrative Expenses. Our general and administrative
expenses have increased to $2,103,478 for the three months ended March 31, 2000
compared to $44,441 for the corresponding period in 1999. This increase is due
to the execution of our operating plan and the expansion of our operations which
began in late 1999 and continued through March 2000. We anticipate that our
general and administrative expenses will continue to grow as we solidify our
infrastructure, hire additional employees and acquire additional interests in
affiliate companies. The following is a schedule of the significant components
that comprise general and administrative expense:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,2000 March 31,1999
------------- -------------
<S> <C> <C>
Professional fees $ 756,191 $ -
Salaries and benefits 332,145 -
Depreciation and amortization 322,993 -
Other general and administrative 692,149 44,441
---------- -------
Total $2,103,478 $44,441
========== =======
</TABLE>
Professional fees consist primarily of legal and accounting fees
associated with our filing of our Registration Statement on Form S-1 which was
declared effective in February 2000 and annual audit services.
The increase in salaries and benefits expense over the prior year is
due to our active recruitment of executive personnel throughout the first
quarter of 2000. We had 19 more full-time employees at March 31, 2000 than March
31, 1999. Salaries and benefits include employee cash compensation and medical
and dental coverage.
Depreciation and amortization consists primarily of the amortization of
goodwill attributable to our acquisition of Strategicus Partners, Inc. in July
1999. Total goodwill for the Strategicus transaction was approximately $3.8
million, which is being amortized on a straight-line basis over three years.
Other general and administrative consists primarily of general
operating expenses and travel-related expenses.
Interest Income and Expense. Interest income consists of the interest
earned on our cash and cash equivalents balances, with the change quarter over
quarter due to significant increases in our cash balances over 1999. Interest
expense consists of:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,2000 March 31,1999
------------- -------------
<S> <C> <C>
Interest expense based on stated interest rates $73,776 $ 208,442
Non-cash charge: beneficial conversion features
on convertible promissory notes and debentures - 1,175,517
------- ----------
Total $73,776 $1,383,959
======= ==========
</TABLE>
The non-cash charge is the result of beneficial conversion features
attached to our convertible promissory notes and convertible debentures issued
in the first quarter of 1999 that allowed the holders to convert their notes and
debentures into shares of our common stock at below market rates. These
31
<PAGE>
promissory notes and debentures were substantially repaid during the first
quarter of 2000 through cash payments or the issuance of stock pursuant to the
original conversion terms. We expect to fund our future operations through the
use of equity financings and do not anticipate that we will incur these interest
expense charges in the future.
Equity in losses of affiliate companies. Equity in losses of affiliate
companies amounted to $298,851. This amount represents our proportionate share
of the losses of our affiliate companies and the amortization of the excess of
the cost of our investment over our equity interest in the net assets of the
affiliate companies accounted for under the equity method of accounting. For the
three months ended March 31, 2000, College411.com, AssetExchange, Inc.,
AlarmX.com, IndustrialVortex.com, and SwapIt.com were accounted for under the
equity method of accounting. For the three months ended March 31, 1999, we did
not account for any of our ownership interests in our affiliate companies under
the equity method. We expect our equity in losses to increase as we continue to
purchase equity interests in early stage affiliate companies.
Net Loss From Continuing Operations
We have had a net loss from continuing operations for each period since
inception. This amount could fluctuate significantly from period to period,
depending on the operating results of our affiliate companies and other
non-recurring transactions. For the three months ended March 31, 2000, our net
loss from continuing operations was $8,158,335. We are aggregating this amount
into our federal and state net loss carry forwards to be available to offset
future taxable income, if any.
Discontinued Operations
In December 1999, we completed the sale of substantially all of the
assets of Net Value, Inc. to BrightStreet.com (f/k/a Promotions Acquisitions,
Inc.), a newly formed corporation formed by the former management team of Net
Value, Inc. With the sale of Net Value, Inc. to BrightStreet.com, all operations
relating to the discontinued operations were effectively ceased.
Preferred Stock Dividends
The components of the preferred stock dividends are as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,2000 March 31,1999
------------- -------------
<S> <C> <C>
Series B preferred stock dividend $ 108,464 $ -
Series C preferred stock dividend 335,895 -
Non-cash charge: beneficial conversion
feature on Series C Shares 42,608,327 -
------------ -----------
$43,052,686 $ -
========== ===========
</TABLE>
The Series B preferred stock dividend was paid in cash in February
2000, when the holders converted their Series B Shares into shares of our common
stock. We will not incur this dividend in future periods as the Series B Shares
have been entirely converted into common shares.
The Series C preferred stock dividend is payable in additional Series C
Shares on a quarterly basis and therefore does not represent a cash obligation.
At the time of issuance of our the Series C Preferred Stock, the fair
market value of our common stock was higher than the offering price of our
Series C Preferred Stock of $12 per share. This differential in price
constitutes a beneficial conversion as defined in the Emerging Issues Task Force
Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
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Conversion Features or Contingently Adjustable Conversion Ratios" (EITF 98-5).
Accordingly, we recorded $42,608,327 as additional paid in capital for the
discount deemed related to a preferential dividend for the beneficial conversion
feature. In accordance with EITF 98-5, this discount was limited to the proceeds
allocated to the Series C Preferred Stock and was recognized immediately as a
preferred stock dividend as the Series C Preferred Stock is convertible into
shares of common stock at any time at the election of the shareholder.
Twelve Months Ended December 31, 1999 Compared to the Twelve Months Ended
December 31, 1998
Continuing Operations
Stock Based Compensation. Stock-based compensation totaled $7,320,695
for the year ended December 31, 1999. We did not incur a corresponding expense
for the year ended December 31, 1998 due to the fact that our management team
was not hired until 1999. Stock-based compensation is a non-cash charge
resulting from the amortization of deferred compensation and the issuance of
stock for services. The following table shows the components of deferred
compensation and related amortization to stock-based compensation. Amortization
of deferred compensation relating to Net Value, Inc.'s discontinued operations
for the year ended December 31, 1999 of $1,771,168 is not reflected in the
schedule below. In addition, the cancellation of stock options held by former
Net Value, Inc. employees resulted in a reduction of deferred stock-based
compensation of $1,487,984, which also is not reflected below. The components of
deferred compensation are as follows:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
--------- --------------- -----
<S> <C> <C> <C>
Deferred compensation recorded during 1999 $10,916,048 $21,433,095 $32,349,143
Amortization to stock-based compensation in 1999 (3,778,448) (1,252,923) (5,031,371)
----------- ----------- -----------
Balance at December 31, 1999 $ 7,137,600 $20,180,172 $27,317,772
=========== =========== ===========
</TABLE>
We also recorded stock-based compensation of $2,289,324 relating to
services provided by a member of our Advisory Board for assistance with locating
strategic investors and potential affiliate companies. The terms of the
consulting agreement allowed the Advisory Board member's investment company to
purchase 676,374 shares of common stock at a price of $1.00 per share, which was
less than the fair market value of our common stock on the date of the sale.
Accordingly, we recognized a non-cash charge to stock-based compensation for the
difference between the stock purchase price and the fair market value of our
common stock on the date of this sale. We entered into this consulting agreement
during the early stages of our operations and do not expect to enter into
similar agreements in the future.
Of the total unamortized deferred compensation relating to employees of
$7,137,600, we expect to amortize into stock based compensation $2,813,400,
$2,813,400, $1,500,350 and $10,450 during 2000, 2001, 2002 and 2003,
respectively. These amounts correspond to the vesting schedule of presently
issued and outstanding stock based awards. This amount will be increased by any
future compensatory grants and decreased by any cancellations. As discussed
above in "Effects of Various Accounting Methods on our Results of Continuing
Operations," stock based awards to consultants and advisory board members for
future professional services are considered variable. This means that the amount
of deferred compensation is periodically adjusted to the fair market value of
the unvested awards. Accordingly, due to the variability associated with these
awards, we cannot accurately predict the future amortization to stock based
compensation of the deferred compensation which we recorded in 1999. This amount
will generally increase and decrease with corresponding increases and decreases
in the market price of our common stock.
General and Administrative Expenses. Our general and administrative
expenses have increased significantly from $140,484 in 1998 to $3,719,497 in
1999 due to the execution of our operating plan and the expansion of our
operations. We anticipate that our general and administrative expenses will
continue to grow as we solidify our infrastructure and acquire additional
interests in affiliate companies. The following is a schedule of the significant
components that comprise general and administrative expenses:
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<PAGE>
Year Ended
December 31, December 31,
1999 1998
---- ----
Professional fees $1,150,315 $129,878
Goodwill amortization 578,906 -
Salaries and benefits 387,828 -
Other general and administrative 1,602,448 10,606
---------- --------
Total $3,719,497 $140,484
========== ========
Professional fees consist primarily of legal and accounting fees
associated with our corporate transactions and audit services. We expect these
fees to increase as we expand our operations.
Goodwill amortization includes the amortization expense attributable to
our acquisition of Strategicus Partners, Inc. in July 1999. Total goodwill for
the Strategicus transaction was approximately $3.8 million which is being
amortized on a straight-line basis over three years.
The increase in salaries and benefits expense is due to our active
recruitment of executive personnel in 1999, resulting in the addition of seven
full-time employees. Salaries and benefits include employee cash compensation
and medical and dental coverage.
Other general and administrative consists primarily of general
operating expenses and travel-related expenses.
Interest Income and Expense. Interest income consists of the interest
earned on our cash and cash equivalents balances, with the change year over year
due to significant increases in our cash balances over 1998. Interest expense,
which was primarily a non-cash expense, increased as a result of the issuance of
our convertible promissory notes and convertible debentures in the fourth
quarter of 1998 and the first nine months of 1999. These non-cash charges are
the result of beneficial conversion features included in our convertible
promissory notes and convertible debentures that allowed the holders to convert
their notes and debentures into shares of our common stock at below market
rates. We expect to fund our future operations through the use of equity
financings and do not anticipate that we will incur these interest expense
charges in the future.
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The following is a schedule of the significant components that comprise
interest expense:
Year Ended
December 31, December 31,
1999 1998
---- ----
Beneficial conversion features:
8% convertible debentures $6,449,020 $1,400,000
12% convertible promissory notes 4,270,625 -
10% convertible promissory note 445,500 -
Value of warrants related to the 10%
convertible promissory note 454,500 -
Interest expense based on stated interest rates
of convertible debentures and promissory
notes 761,512 41,399
-------------------------------
Total $ 12,380,157 $1,441,399
===============================
Financing Fees. Amortization of financing fees increased to $523,601
during the year ended December 31, 1999. The increase in financing fees was
primarily due to the amortization of issuance costs paid in relation to the
issuance of the convertible promissory notes and convertible debentures we
issued in the fourth quarter of 1998 and the first nine months of 1999.
Equity in losses of affiliate companies. Equity in losses of affiliate
companies amounted to $79,559. This amount represents our proportionate share of
the losses of the affiliate companies and the amortization of the excess of the
cost of our investment over our equity interest in the net assets of the
affiliate companies accounted for under the equity method of accounting. For the
year ended December 31, 1999, College411.com, AssetExchange, Inc. and Swapit.com
were accounted for under the equity method of accounting. During the year ended
December 31, 1998, we did not account for any of our ownership interests in our
affiliate companies under the equity method. We expect these expenses to
increase as we continue to purchase equity interests in affiliate companies.
Discontinued Operations
In 1999 we incurred a loss from discontinued operations relating to Net
Value, Inc. of $6,370,776 compared to a loss of $11,106,826 in 1998. Net Value,
Inc. did not recognize any revenues in 1999. The decreased loss was primarily
due to decreased operating, consulting, and system development expenses incurred
by Net Value, Inc. following management's decision to sell its operations to
third party investors. Gain on disposal of discontinued operations relates to
the December 1999 sale of substantially all of the assets of Net Value, Inc. to
BrightStreet.com (f/k/a Promotions Acquisitions, Inc.), a newly formed
corporation formed by the former management team of Net Value, Inc. Net Value,
Inc. received $2 million in cash and 2,958,819 shares of common stock of
BrightStreet.com in exchange for substantially all of Net Value Inc's assets and
assumption by BrightStreet.com of approximately $1.6 million of liabilities. We
recognized a gain on the sale of $6,502,663, representing the excess of the fair
value of the stock and cash received over the carrying value of the assets sold
and liabilities assumed.
Net Loss From Continuing Operations
We have had a net loss from continuing operations for each period since
inception. This amount could fluctuate significantly from period to period,
depending on the operating results of our affiliate companies and other
non-recurring transactions. For the year ended December 31, 1999, our net loss
from continuing operations was $23,962,983. We are aggregating this amount into
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our federal and state net loss carryforwards to offset future taxable income, if
any. These net loss carryforwards will start to expire in 2011. Because of the
uncertainty regarding reliability we have provided a full valuation allowance on
our deferred tax assets consisting primarily of net operating loss
carryforwards.
Twelve Months Ended December 31, 1998 Compared to the Twelve Months Ended
December 31, 1997
Continuing Operations
The only operations that existed during 1997 were from discontinued
operations.
We did not generate any operating revenues in 1998.
The results from continuing operations for the years ended December 31,
1998 and 1997 are not directly comparable as all operations during periods prior
to 1998 have been discontinued. We incurred a net loss from continuing
operations of $1,630,319 in 1998. Approximately $129,900 was paid for
professional fees related to our merger with Net Value, Inc. An additional
$11,000 was used for our normal operating expenditures in our attempts to
acquire interests in affiliate companies. The remaining $1,490,000 was primarily
related to interest expense and financing fees on convertible debentures issued
during the fourth quarter of 1998.
Discontinued Operations
We incurred a loss from discontinued operations of $11,106,826 in 1998
compared to a loss of $11,235,237 during 1997. The decrease of $128,411 was
primarily due to a decrease in research and development costs of $894,250, a
decrease in advertising costs of $545,118 and an increase in revenues of
$1,330,367, offset primarily by an increase in compensation and related expenses
of $483,444, an increase in professional fees of $611,006 and an increase in
interest and financing costs of $1,570,715. Revenues recognized in 1998 resulted
from a licensing agreement Net Value, Inc held with IQ Value. Net Value, Inc.
received $1,250,000 in licensing fees from IQ Value L.L.C. pursuant to the terms
of a Distribution and License Agreement which the parties entered into in April
1998. Net Value, Inc. used these funds to pay commercial accounts payable and to
fund continuing operations. In December 1998, the parties determined that it
would be in each of their best interests to terminate their relationship, and no
further revenues were generated from the licensing agreement.
Changes in Financial Position, Liquidity and Capital Resources
Our current operations do not generate sufficient operating funds to
meet our cash needs and, as a result, we have funded our operations with a
combination of equity and debt proceeds. We ultimately expect to fund our
operations from the cash flows of our affiliate companies. Currently however,
our affiliate companies do not generate sufficient earnings to pay dividends or
otherwise distribute amounts which are sufficient to cover our operating
expenses. Furthermore, we do not expect to receive such dividends within the
next twelve months due to the fact that each of our affiliate companies is in
the developmental stage of operations. We may also generate cash proceeds from
the sale of interests in our affiliate companies. Until we receive dividends
from our affiliate companies or realize cash proceeds from the sale of interests
in our affiliate companies, if at all, we will remain dependant on outside
sources of capital to fund our operations. We are not certain that such funds
will be available on terms that are satisfactory to us or at all.
In March 2000, we sold 4,166,667 shares of our Series C Preferred Stock
and warrants to purchase 416,667 shares of our common stock for net proceeds of
approximately $48.3 million after payment of offering costs. Each share of our
Series C Preferred Stock is convertible into one share of our common stock at
any time at the election of the shareholder. Our Series C Preferred Stock bears
a cumulative dividend of 8% per annum payable in kind on a quarterly basis and
has a liquidation preference of $12 per share.
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<PAGE>
During the three months ended March 31, 2000, we used approximately
$2.2 million to fund our general corporate expenses, including salaries and
wages, professional and consulting fees and interest expense. In addition, in
March 2000, we repaid substantially all of our outstanding convertible
debentures and convertible promissory notes through payments of $44,150 and the
issuance of 2,338,633 shares of our common stock and warrants to purchase
273,390 shares of our common stock.
During the first quarter of 2000, we advanced approximately $2.0
million to SwapIt.com, Inc. We may request payment on these advances at any time
or we may elect to convert these advances into capital stock of SwapIt.com, Inc.
on the same terms and conditions as any subsequent offering of securities made
by SwapIt.com, Inc. that generates proceeds of at least $3 million.
In addition, we acquired equity ownership interests in two new
affiliate companies:
o On January 31, 2000, we acquired a 31% voting interest in
IndustrialVortex.com, Inc. for $1 million.
o On March 14, 2000, we acquired a 69% voting interest in AlarmX.com,
Inc. for $1 million.
On May 9, 2000, we invested $4 million cash and $1 million in common
stock in Webmodal, thus increasing our voting interest from approximately 10% to
approximately 44%.
As of March 31, 2000, we had on hand existing cash and cash equivalents
of approximately $45.7 million. We believe that our cash and cash equivalents
will be sufficient to meet our operating expenses and investment requirements
through June 30, 2001. However, our future liquidity needs are dependant
primarily on the number of future acquisitions of equity interests in new
affiliate companies and the extent to which we participate in subsequent rounds
of financings of our existing affiliate companies. We may be required to curtail
or reduce the scope of our investment activities to satisfy our liquidity needs
beginning June 30, 2001. Thereafter, we will be required to seek additional
funds through the sale of our securities to outside sources of capital, which
could result in substantial dilution to stockholders. We are not certain that
these funds will be available on terms that are satisfactory to us, or at all.
If we are unable to obtain these funds, then we will be required to reduce our
acquisitions of equity interests in affiliate companies and reduce our operating
activities.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to changes in interest
rates and the resulting impact on our invested cash. We place our cash with high
credit quality financial institutions and invest that cash in short term fixed
income investments with remaining maturities of less than 90 days. We are averse
to principal loss and ensure the safety and preservation of our invested funds
by investing in only highly rated investments and by limiting our exposure in
any one issuance. If market interest rates were to increase immediately and
uniformly by 10% from levels at March 31, 2000, the fair value of our portfolio
would decline by an immaterial amount. We do not invest in derivative financial
instruments.
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<PAGE>
BUSINESS
General
We are actively engaged in building a network of technology businesses
which offer significant growth opportunities. To date, we have focused on
technology businesses with significant Internet features and applications. Our
operating strategy, however, is to expand the scope of our business to include
Internet businesses, as well as a broad range of other technology oriented
businesses.
Through the collective experience of our management team, we promote
the development of these businesses by offering business development services
that cover the core management disciplines of:
o Strategic Consulting;
o Operations;
o Finance;
o Business Development;
o Marketing/Public Relations;
o Technology; and
o Recruiting.
Additionally, we are able to apply the experience of both our
management team and network of affiliate companies to:
o Review and formulate business models;
o Create specific performance benchmarks;
o Provide introductions to strategic partners;
o Advise on, and facilitate the completion of secondary rounds
of financing; and
o Develop Internet businesses in joint ventures with
non-technology companies.
Our operating strategy is to acquire a significant equity interest in
early stage technology companies and to provide the services listed above to
these companies. We believe this will accelerate the achievement of their
business goals and objectives. We intend to take an active role in the
management and development of these businesses. Each business will be managed as
part of an integrated supportive network of "affiliate companies" that build on
our initial support and develop interrelationships among themselves, thereby
accelerating their growth and development. This network is intended to leverage
the collective financial, strategic, management and industry experience of our
management team, which has over 30 years of collective experience in developing
technology businesses. We also intend to establish relationships with companies
outside of our network that will enable us to deliver additional services to our
affiliate companies that they might not otherwise be able to obtain.
We also expect to create a business that provides information
technology consulting services. This would enable us to expand the services
which we offer internally to our affiliate companies, and to establish a
separate business unit that provides a broad range of technology solutions to
third parties. These services may be internally developed by us through training
and hiring of qualified and experienced staff. Alternatively, we are exploring
the feasibility of acquiring an established business with demonstrated
capabilities in the information technology/consulting field.
Generally, we will be identifying early stage businesses that have been
started by others and that have sought our financial and management assistance.
We will also fund business models that our management team conceives which fit
within our business model. Our target level of investment will generally be
$2,500,000 or less per initial round of financing. We may also participate in
subsequent rounds of financing, involving potentially larger investments.
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<PAGE>
Generally our capital and services enable us to secure a significant
interest in the affiliate company. While we remain a significant stockholder of
an affiliate company, we intend to exercise varying degrees of control over its
operations by retaining:
o approval rights over significant corporate decisions
such as annual budgets, executive compensation,
indebtedness, capital expenditures and new securities
issuances;
o the right to establish and maintain the size of the Board of
Directors;
o the right to elect one or more members to the Board of
Directors;
o the right to participate in future fundings;
o certain enhanced voting rights; and
o the right to designate outside accountants and approval
rights over attorneys, public relations firms and other
outside consultants.
Although we recognize that the development of early stage businesses
are subject to potential risks, we expect our value in the affiliate companies
to increase when they:
o commence initial stage operations and begin to execute on
their business plans;
o enter later stages of operations and begin to realize
significant revenues and capture meaningful market share;
o secure subsequent rounds of venture funding at higher levels
of valuation;
o complete initial public offerings; or
o are sold to a third party.
As of May 31, 2000, our affiliate companies included:
AlarmX.com, Inc. (www.alarmx.com). Founded in 2000, AlarmX.com is
developing a full service vertical portal for security alarm and low voltage
systems industries. The portal will provide one-stop-shopping, content and
services to improve operational efficiencies for both industry buyers and
sellers. Through various vendors, AlarmX.com will offer low voltage control
equipment, intrusion devices, wire, audio, video and communication products.
Based in San Francisco, California, AlarmX.com currently has seven employees.
AssetExchange, Inc. (www.AssetExchange.com). Founded in 1999,
AssetExchange provides banks and other financial institutions with an
Internet-based listing service which allows them to more efficiently trade loan
portfolio assets. Based in Portland, Oregon, AssetExchange currently has seven
employees. AssetExchange's working deficit, losses since inception and
dependence on outside sources of financing raise substantial doubt about
AssetExchange's ability to continue as a going concern and we intend to record
impairment of our investment in AssetExchange during the second quarter of 2000.
BrightStreet.com, Inc. (www.brightstreet.com). Founded in 1999 by third
party investors and the former managers of our Net Value, Inc. subsidiary,
BrightStreet develops and distributes online promotional campaigns. BrightStreet
commenced business upon the purchase of the former assets and business of our
Net Value, Inc. subsidiary. Simultaneous with this transaction, BrightStreet
completed a $17 million equity financing provided by Cox Enterprises, Inc.,
McClatchy Company (NYSE:MNI), CNI Ventures (NYSE:ECP) and Sandler Capital
Management. Through our Net Value, Inc. subsidiary, we own a 14% interest in
BrightStreet. Based in Cupertino, California, BrightStreet currently has 60
employees.
IndustrialVortex.com, Inc. (www.industrialvortex.com). Founded in 1999,
IndustrialVortex.com is developing an Internet website that will facilitate the
purchase and sale of industrial automation products. This application will
provide purchasers of these products with relevant content that will permit them
to make informed and cost-effective purchasing decisions. Based in Laguna Hills,
California, IndustrialVortex.com currently has 32 employees.
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<PAGE>
metacat.com, Inc. (www.metacat.com). Founded in 1998, metacat is an
Internet-based e-commerce super-boutique that aggregates and searches the
product offerings of specialty retail, catalog and mail order businesses and
will allow consumers to purchase these products through its Internet website.
Based in Portland, Oregon, metacat currently has five employees.
Swapit.com, Inc. (www.swapit.com). Founded in 1999, Swapit.com is
developing a consumer-driven electronic barter exchange on the Internet.
Swapit.com believes that this service will allow the swap and sale of consumer
goods between a centralized warehouse and individuals. Based in Boston,
Massachusetts, Swapit.com currently has 36 employees.
Webmodal, Inc. (www.webmodal.com). Founded in 1999, Webmodal has
developed an Internet application for use by shippers in purchasing and
executing domestic full truckload intermodal freight shipments. This application
allows shippers to input their specific transportation needs and receive all of
the information necessary for them to schedule and execute intermodal shipments
in a cost-effective manner. Based in Woodstock, Illinois, Webmodal currently has
22 employees.
YesAsia, Inc. (f/k/a AsiaCD, Inc.)(www.yesasia.com). Founded in 1998,
YesAsia is a leading e-commerce company for the Asian community in the United
States as well as throughout Asia. Based in San Francisco, California, YesAsia
currently has 90 employees.
Identifying Affiliate Companies
We seek to acquire an interest in early stage technology companies that
offer a combination of a compelling market opportunity, a strategic plan for
maximizing the opportunity, and a management team with domain experience capable
of executing that plan.
Early stage companies. Venture capital transactions dramatically
increased both in number and size over the last four years. Increasingly,
traditional venture capital firms seek to invest approximately $2.5 million to
$5 million in the early stage financing of early stage technology companies. The
size of these investments significantly dilutes the ownership interest of the
founders of the issuing company. In additional, traditional venture capital
firms provide little assistance in areas such as marketing, public relations,
technology, recruiting and business development. As a result, most venture
capital firms are an unattractive source of capital for companies that require
less than several million dollars of capital to build the foundation of a new
business. Accordingly, these companies often turn to "friends and family"
investors, usually consisting of a patchwork of friends, family and high net
worth investors who accept the risks associated with investing in development
stage companies. These "friends and family" and "angel" investors typically
provide funding and generally do not provide any of the management and strategic
services which we can provide. With a significant equity position, board
representation and voting rights, we can play a substantial role in directing
the course of a company's development with resources not otherwise available to
the company. Thus, we believe that our services and business model will be
attractive to such early-stage businesses.
We view the penetration of the Internet and its information
capabilities into business to still be in its earliest stage. Compelling
opportunities exist in markets within virtually all industries. The true
investment challenge is to identify the markets within an industry which are
best suited to the Internet's capabilities.
Desirable markets can be characterized by one or more of the following:
o Many disconnected participants;
o High transaction volume or high transaction costs;
o Inefficient flow of information;
o Relatively price sensitive customers; and
o Traditional broker intermediaries.
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Business plans targeting these characteristics are the most likely to add value
to both buyers and sellers in their respective markets all the while creating a
significant revenue opportunity for the new business.
We look for well crafted plans designed to create value for the end
users of the products or services offered, and demonstrate a clear road to
profitability. The design of a strong plan is likely to be focused on "owning"
customers and or "owning" the transactions in a given market. We believe that
the value that a company creates for users will provide long term revenue
opportunities and high switching costs.
We seek long-term relationships with entrepreneurs who recognize that
it takes more than capital to develop a successful business. We target companies
managed by individuals who recognize that creating a technology business
requires a focus on teamwork and operational excellence, developing
relationships with other technology-based companies, both within and outside of
the company's industry, and managing processes in areas as diverse as brand
development, sales, marketing, management and technology. We generally seek
individuals with management experience in the industry in which their company
will operate. We believe that industry experience is a key differentiating
factor, enabling our affiliate companies to enter industries with the
established reputation and experience to effectively operate and grow through
their extensive network of contacts.
In those instances in which we identify a concept and form and fund a
company to develop the concept, we will recruit entrepreneurial management for
the company that has these characteristics.
Joint Venture Opportunities. In addition to early-stage opportunities,
we are also seeking to create joint ventures with non-technology companies that
wish to migrate components of their business to the Internet.
Information Technology/Consulting. We also expect to create a business
that provides e-business consulting services to our affiliate companies and
third parties. This business will focus on providing strategy, web design and
integration solutions to both online and traditional businesses.
Benefits Of Our Services
Affiliation with us will provide our affiliate companies the following
benefits:
o Hands-on strategic, operational and technology expertise. Our
management team is experienced in assisting technology companies in
the implementation and understanding of areas such as strategic
planning, sales, marketing, partnership strategy, capital planning,
brand development, management, technology implementation,
negotiations and divestiture/acquisition planning. Companies which
they have assisted in addition to our affiliate companies include:
o AdAuction.com
o Agency.com
o AuctionNet.com
o epylon.com
o HealthyPlanet.com
o HomePortfolio.com
o iconjohn.com
o Intervista
o Interworld
o Noosh
By sharing the lessons learned from these experiences, we believe
that we can help companies efficiently implement and improve their
business plans.
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o Speed and flexibility. As entrepreneurs who are experienced in the
capital raising process, our management team recognizes the
importance of rapid yet prudent funding decisions. Our goal is to
make funding decisions and to deliver funds to those companies which
we choose to fund within several weeks of receiving a business plan
and completing our due diligence review of the prospective candidate.
In addition to acting quickly and prudently, we believe in providing
a high degree of flexibility to our affiliate companies. For example,
although we will encourage our affiliate companies to take full
advantage of our resources, we will not require the management teams
of our affiliate companies to move their operations to be near our
offices, as is common in the case of most incubators. Although it may
be easier for us to assist our affiliate companies if they are
located nearby, we believe that we can efficiently communicate our
ideas and knowledge to our affiliate companies located throughout the
country.
o Network of companies and people. In a time where marketing, capital,
technology and partnerships are critical, we believe that people and
relationships remain the most important elements of success for
development stage enterprises. The members of our management team sit
on either the board of directors or board of advisers of public and
private technology companies. As a result of these activities, our
management team has participated in transactions involving alliances
among technology companies and possess an extensive contact list
consisting of individuals who work in the technology industry.
Through this network of relationships and experiences, our management
team can provide superior business assistance to our affiliate
companies. For example, we have established a marketing relationship
with an online and catalog marketer of audio books, tapes and related
products pursuant to which we will provide a variety of consulting
services to that company and pursuant to which that company and other
consumer-oriented affiliate companies will establish Internet links
to each other's Internet websites.
o Business experience. Members of our management team are part of a
generation that has spent its entire professional career using
computers and technology. Collectively, we have spent over thirty
years in the Internet industry. We believe that the Internet and the
digital economy reflect an evolutionary way of life. This vision
helps in identifying business models and early stage companies that
leverage technology to create value for the customer, whether it is a
business or consumer. In addition, members of our board of directors,
our management team and our consultants are seasoned in fundamental
business principles due to their experience at firms such as:
o Bank of America;
o Bankers Trust;
o Booz-Allen and Hamilton;
o Buchanan Ingersoll Professional Corporation;
o CNBC;
o Ernst & Young, LLP;
o Goldman, Sachs & Co.;
o JobDirect.com
o KPMG LLP;
o LaForce & Stevens;
o Lycos;
o Merrill Lynch, Pierce, Fenner & Smith, Inc.;
o Venture Partners;
o Wild Wild Web;
o WhoWhere.com; and
o Ziff Davis & Publishing (ZD Net);
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We believe that this combination of vision and business acumen will
enable us to efficiently develop an understanding of the seemingly chaotic
digital economy and capitalize upon significant opportunities presented by the
Internet.
Our Affiliation Process
We intend to follow a four-step process for selecting and acquiring
interests in affiliate companies. First, we identify and evaluate potential
affiliate companies which meet our fundamental criteria, strategy and product
commercialization potential. Once a target company is identified, we perform due
diligence on the target opportunity and its senior management team. Once we
determine to proceed, we develop a management and operating plan with that team.
After closing, we provide support both at a management and operational advisory
level and from a board of directors level, we offer strategic relationship
development, planning, senior management staffing, capital structure advice and
budgeting.
1. Transaction Sourcing
We believe that the following factors have and will continue to enable
us to identify high-quality potential affiliate companies:
o Industry Relationships. We intend to maintain and further
develop relationships with industry leaders in the high
technology and Internet communities. Our management team has
utilized these working relationships in over a dozen various
ventures in the Internet industry and intends to use these
relationships as a source of new opportunities.
o Executives. Our management team has relationships with
senior executives at successful high technology, private
equity and investment banking companies who we believe will
refer opportunities to us and provide us with their own
perspectives and market intelligence on the Internet
industry.
o Industry Consultants. Our management team has and will
continue to have working relationships with many specialized
industry consultants who we expect to be positioned to refer
opportunities to us.
o Ability to Internally Generate Opportunities. Members of our
management team will identify and explore potential
e-commerce business ideas that have the potential to
complement our business strategy. Promising ideas will be
further developed. As members of our management team develop
these ideas, we will provide necessary capital, management
and operational services and recruit managers to execute the
developed operating strategies.
2. Due Diligence
Once we have identified a target company or opportunity for our
network, we will perform an extensive due diligence review on the target
company.
Throughout the due diligence process, our management team will interact
with the management and/or owners of the potential affiliate company to analyze
its business and the ability of its existing management to partner with our
management team.
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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 Develop Realistic Budgets and Operating Assumptions. We
intend to pursue relationships with affiliate companies
where we can develop a close working relationship with the
management team during the due diligence process. In
conjunction with the management team of the potential
affiliate company, we expect to develop realistic budgets
and operating assumptions and to design and develop an
operating plan based on our experience with Internet
start-up companies in areas such as marketing, technology,
financial, partnership and operations.
o Equity Participation. We intend to take an active role in
structuring equity-based incentives for members of the
management team of affiliate companies. We expect that
senior management of all affiliate companies will own
significant equity in their company. We believe that it is
crucial for all members of the affiliate company's
management to have an equity stake in their company in order
to support a team approach to the project.
4. Development and Ongoing Support
Following our decision to acquire an interest in a target company or
develop an internally generated opportunity, our management team will work
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closely with senior management of the affiliate company in the implementation of
an operating plan. We expect that this mentoring process will be integral to the
success of each of our affiliate companies. This process will consist of the
following components:
o Broaden and Develop Management Teams. We intend to actively
support affiliate companies in the recruitment and
acquisition of additional management and personnel needed to
execute an agreed upon operating plan and to pursue target
opportunities. We have in-house recruitment professionals to
assist affiliate companies in recruitment and retention of
personnel. As the affiliate companies graduate from the
development stage to mature operating businesses, their
management teams must be expanded and solidified. We believe
that we will be able to assist our affiliate companies in
identifying the need for, finding and developing qualified
personnel to manage their companies.
o Focus Operating Plan Objectives. A well-developed operating
plan is crucial to the execution of a promising business
concept and will significantly increase the probability of
success within any start-up organization. Our management
will work closely to assist affiliate companies in
implementing their operating plans and refining and focusing
the detailed components of these plans as the affiliate
companies develop.
o Developing Strategic Relationships. In the Internet
industry, the development of strategic relationships is
crucial to the success of a company's business model. We
will use our management team's experience to strategically
align our affiliate companies with other Internet companies
that will allow them to realize their full growth potential.
For example, we have established a mutual marketing
relationship between our consumer-oriented affiliate
companies and an established online and catalog marketer of
audio book tapes and related products.
Disposition of Interests
Although we intend to acquire and hold equity interests in affiliate
companies on a long-term basis, we will negotiate rights that will enable us to
dispose of all or a portion of our interest in an affiliate company. The
decision to sell our equity interest in an affiliate company will be based on a
number of factors, including whether the affiliate company continues to fit
within our business strategy and complements our network of affiliate companies,
whether our assets represented by the interest in the affiliate company can be
better applied to benefit other affiliate companies or to fund new investments
and whether we need to dispose of an interest in order not to be required to
register as an investment company.
In May 2000, College411.com, Inc., a company of which we owned
approximately 25% of the issued and outstanding common stock calculated on a
fully diluted basis, completed a merger with Student Advantage, Inc. (Nasdaq:
STAD). Pursuant to this transaction, College411 was merged into a wholly-owned
subsidiary of Student Advantage and the College411 stockholders received .0144
shares of Student Advantage common stock for every share of College411 common
stock which they owned on the date of the merger. As a result of this merger, we
received 54,100 shares of Student Advantage's common stock. The fair market
value of these shares of Student Advantage's common stock on the date of the
merger approximated the book value of our investment in College411. Accordingly,
we did not record a material gain or loss as a result of this transaction.
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Our Affiliate Companies
As of March 31, 2000, we owned equity in each of the following
affiliate companies:
<TABLE>
<CAPTION>
Amount of Approximate
Date(s) of Capital Stock Voting
Affiliate Company Location Investment Purchased Ownership
----------------- -------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
ALARMX.COM SAN FRANCISCO, CA March 2000 $1,000,000 69%
ASSETEXCHANGE PORTLAND, OR September 1999 $ 400,000 20%
BRIGHTSTREET.COM(1) CUPERTINO, CA December 1999 $4,000,000 14%
COLLEGE411.COM SAN FRANCISCO, CA June 1999 and $ 250,000 29%
September 1999
INDUSTRIALVORTEX.COM LAGUNA HILLS, CA January 2000 $1,000,000 31%
METACAT.COM PORTLAND, OR June 1999 $ 100,000 100%
SWAPIT.COM(2) BOSTON, MA November 1999 $ 500,000 11%
WEBMODAL(3) WOODSTOCK, IL October 1999 $ 350,000 10%
YESASIA SAN FRANCISCO, CA June 1999 and $1,300,000 13%
February 2000
</TABLE>
----------
(1) We own this interest indirectly through Net Value, Inc., a 67% owned
subsidiary at March 31, 2000. BrightStreet acquired the business and assets
of Net Value, Inc. during December 1999. We originally acquired our interest
in Net Value, Inc. during October 1998. A further description of the
transaction in which we acquired this interest can be found on page 48 under
the caption "Net Value, Inc./BrightStreet.com, Inc."
(2) Does not include a contribution of 1,109,928 shares of common stock of
Swapit.com, Inc. which Thomas Aley, our Executive Vice President, Business
Development and a founder of Swapit.com, has agreed to make to our company.
Subsequent to this transaction, our approximate voting ownership of
Swapit.com will be 30%.
(3) Does not include our purchase on May 9, 2000 of 563,000 shares of Series A
Preferred Stock and warrants to purchase 170,000 shares of common stock of
Webmodal for cash of $4,000,000 and 113,174 shares of our common stock
valued at $877,099. Subsequent to this transaction, our approximate voting
ownership of Webmodel is 39%.
AlarmX.com
AlarmX.com is developing an internet portal to streamline the ordering
process for the security alarm industry. This industry is highly fragmented,
with over 1,000 suppliers, including manufacturers and distributors, in the
United States alone selling to over 16,000 alarm companies. Today, the
purchasing process for an alarm company has embedded inefficiencies due to the
lack of accurate information, uniform pricing, and product knowledge among order
takers, all of which results in high transaction costs. For example, a typical
medium-size alarm company that sells approximately 300-400 new systems per year
will purchase the majority of its products from roughly 50 different suppliers.
Each company has its own ordering process, requires a separate phone call or fax
request sheet, maintains numerous pricing levels, and ships in different
manners.
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AlarmX.com is a vertical business-to-business portal that has been
established to streamline the ordering process of alarm companies. AlarmX.com is
currently developing an Internet application that aggregates the product
offerings and pricing policies of a large majority of alarm suppliers into a
central Internet portal. By enabling electronic exchange with their customers,
suppliers benefit from:
o reduced costs involved with paper-based purchasing, invoicing and
payment;
o reduced collections activities;
o greater exposure to potential customers;
o increased marketing opportunities; and
o shorter supply chain management links.
By allowing buyers access to a broad range of suppliers and by
streamlining the ordering process, AlarmX.com expects to greatly reduce the
costs associated with an alarm company's purchasing process. Additionally,
AlarmX.com enhances the businesses of buyers by:
o allowing single point of electronic purchasing--placing multiple
orders from any location at one Internet website;
o creating a searchable database of products and suppliers;
o automating the ordering, tracking and reordering capabilities;
o enforcing compliance of spending limits and ordering guidelines; and
o creating real-time reports of parts shipped for management analysis.
In addition to developing an e-commerce engine for buyers and
suppliers, AlarmX.com plans to develop a resource library of current and older
equipment technology information. In order to supplement our Internet website
content with value added applications, AlarmX.com plans to post the technical
specifications for various products of manufacturers that use its Internet
website, thereby providing a valued resource for technicians, customer service
representatives, and owners.
AlarmX.com expects to generate revenues from three primary sources:
o supplier transaction fees;
o services in support of customization and advanced functions for
sellers and buyers, and;
o advertising, through banners and product showcasing.
AlarmX.com commenced operations in March 2000 and has not generated any
revenues. AlarmX.com plans to launch its Internet website in August 2000.
Allison Stollmeyer, our Director of Business Development, and Lee C. Hansen, our
President, current serve on AlarmX.com's Board of Directors.
AssetExchange, Inc.
AssetExchange, Inc. has developed a network of financial institutions
to create an efficient and active loan portfolio exchange. AssetExchange
supports this network by providing an Internet-based listing service of
financial assets. Although AssetExchange initially focused on credit card
portfolios, it is presently offering listings in additional asset classes
including automobile loans, mortgages, small business loans and other consumer
loans. AssetExchange's Internet website was launched in September 1999.
Currently, AssetExchange's network consists of over 550 registered members who
combined hold approximately 90% of all U.S. credit card assets including nine of
the ten biggest issuers. The registered members are entities that are generally
in the market to buy and sell portfolios.
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
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institutions purchase and sell these assets for both strategic and tactical
purposes. The volume of these transactions among financial institutions has been
increasing. The banking and financial industry's trend toward specialization,
consolidation and increased risk management have driven the increase in
transaction volume.
The markets for the purchase and sale of these assets are currently
fragmented and inefficient. Many transactions are completed based on personal
contacts made by brokers or investment bankers. Transaction costs are
substantial and matches between buyers and sellers are unlikely to be the best
available matches in the financial markets. Subsequently, small and medium sized
banks are deterred from participating in these markets.
AssetExchange addresses the inefficiencies which are inherent in these
markets by providing a secure and confidential Internet-based listing and e-mail
notification service for financial institutions. AssetExchange's Internet
website supports posting, browsing and searching for assets. E-mail notification
alerts buyers of new listings of loan portfolios. AssetExchange's primary role
is "matchmaking" between sellers and buyers of loan portfolios. Outside vendors
provide valuations of loan portfolios, legal advice and credit analysis.
AssetExchange may later elect to provide these services based on customer
demand. These vendors currently may purchase advertising and links to their own
Internet websites from AssetExchange. AssetExchange's goal is to provide an
efficient conduit for transacting a broad range of financial assets among
financial institutions.
AssetExchange is currently focusing on transactions involving credit
card portfolios. Credit card portfolios generally consist of consumer accounts
associated with a particular financial institution's credit card program. These
portfolios typically include total outstanding balances ranging from less than
$1 million to over $1 billion. In 1998, credit card portfolio transactions
totaled approximately $32 billion in asset value. This represented an
approximate 55% increase over 1997 transactions. AssetExchange is currently
targeting loan portfolios valued at between $1,000,000 and $200,000,000 for
listing on its Internet-based service. AssetExchange believes that this is an
appropriate portfolio value to target because investment bankers and brokers
generally charge expensive fees that make selling portfolios in this valuation
range cost prohibitive to the selling financial institution. AssetExchange
believes that financial institutions will view its Internet-based service as a
viable alternative for selling credit card portfolios in this value range.
AssetExchange believes that the total value of credit card portfolios in this
range is approximately $5 billion. Other classes of loan portfolios, such as
mortgage loans, auto loans and student loans, create an overall accessible loan
portfolio transaction market of approximately $50 billion.
AssetExchange anticipates that its primary customers will include
banks, finance companies, thrifts, community banks, credit unions and other
financial institutions. Brokers and investment bankers may also use
AssetExchange's services to expand their transaction base and reduce their
transaction costs. AssetExchange is unaffiliated with existing market
participants. This practice allows AssetExchange to provide an impartial and
powerful tool for gaining market exposure.
AssetExchange anticipates that its primary source of revenues will be
commissions on completed transactions. Based on discussions with financial
institutions and brokers, in today's market, commissions typically range from 50
to 300 basis points, which is approximately 0.50% to 3% of a transaction's
value, depending on the level of services provided by the finder or broker.
AssetExchange currently charges 15-150 basis points of a transaction's value and
this fee may be divided between the buyer and seller . This pricing structure
may be adjusted to meet the practices of other industries as AssetExchange
expands into other classes of loan portfolios. AssetExchange anticipates that it
will generate additional revenues by providing links to its Internet website and
selling advertising space on its Internet website to vendors of related
services. AssetExchange believes that a possible future revenue stream may be
subscription fees paid by users of its network.
AssetExchange launched its Internet website in August 1999. Lee Hansen,
our President, currently sits on the Board of Directors of AssetExchange, Inc.
As of May 31, 2000, AssetExchange had not generated any revenues, had a working
deficit of $7,687, net losses since inception of $439,363 and had stockholders'
equity of $16,852.
BrightStreet.com, Inc.
BrightStreet enables manufacturers, retailers and other Internet
websites to deliver, track, and analyze promotions targeted to Internet users.
BrightStreet's technology delivers its promotional offers to customers via the
Internet. BrightStreet operates a permission-based system which requires
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consumers to register before they are permitted to receive promotional offers.
BrightStreet's technology allows its customers to track and analyze consumer
behavior by reporting the amount and type of promotional offers that each
consumer views, prints and redeems. BrightStreet licenses its services directly
to manufacturers, retailers, and Internet websites that publish non-product
related information for consumers. BrightStreet also offers a network of
affiliated Internet websites that distributes promotional offers for
manufacturers and retailers.
BrightStreet markets an Internet based service that allows
manufacturers, retailers, and Internet websites that publish non-product related
information for consumers to deliver customized promotions such as coupons and
free samples via their Internet websites. In doing so, these businesses develop
a rich consumer database, built from registration data that consumers provide as
a prerequisite to receiving valuable promotions, such as discounts on
merchandise and free product samples.
In addition to allowing consumers to register and download offers via
its customers' Internet websites, BrightStreet has created the BrightStreet
Network, a promotional network of affiliated Internet websites. The BrightStreet
Network offers customers who want a wider distribution of their promotions the
ability to place the promotions on the Internet websites of companies with whom
BrightStreet has a relationship. BrightStreet licenses a service from a third
party that allows its customers to create promotions. This system then delivers
these promotions to the affiliated network websites which are authorized to
display these promotions and deliver them to consumers. In these situations,
BrightStreet serves as an intermediary between its customers and consumers.
Manufacturers and retailers experience broader distribution of their promotions
and the portals get the Internet website content and revenues which they need,
with a high perceived value to the consumer.
BrightStreet intends to generate revenues from two sources:
o licensing fees from licensing its technology platform and
promotion services, and
o network fees from transactions, sponsorships, and other
marketing programs on affiliate Internet websites.
As of December 31, 1999, BrightStreet had assets of approximately $19.1
million (unaudited), had generated minimal revenues, had net losses for the year
ended December 31, 1999 of $349,209 (unaudited) and had an accumulated deficit
of $349,209 (unaudited).
Net Value, Inc./BrightStreet.com, Inc.
Asset Sale Transaction
On December 3, 1999, Net Value, Inc. sold substantially all of its
assets to BrightStreet.com, Inc. (f/k/a Promotions Acquisition, Inc.), a
Delaware corporation formed by the former management team of Net Value, Inc. for
the purpose of acquiring the assets of Net Value, Inc. and succeeding to its
business. In exchange for substantially all of its assets, Net Value, Inc.
received:
o cash of $2,000,000;
o the assumption of Net Value, Inc. liabilities presently
valued at approximately $1,600,000;
o the release of all of Net Value, Inc.'s obligations under
employment agreements;
o the cancellation of the majority of the issued and
outstanding Net Value, Inc. stock options held by Net Value,
Inc.'s employees; and
o 2,958,819 shares of BrightStreet common stock equal to an
approximate 14% ownership interest in BrightStreet.
Simultaneous with this transaction, BrightStreet completed a
$17,000,000 equity financing of Series A Preferred Stock representing a 63%
interest in its stock, on a fully-diluted basis. The financing was provided by
Cox Enterprises, Inc., McClatchy Company (NYSE:MNI), CNI Ventures (NYSE:ECP) and
Sandler Capital Management.
Following the transaction, Net Value, Inc. loaned us the $2,000,000
proceeds it received in this transaction. We have agreed to use this cash to
satisfy Net Value, Inc.'s existing obligations which were not assumed by
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BrightStreet. Any payments which we make to creditors on behalf of Net Value,
Inc. will reduce the unpaid principal and interest related to this loan.
Alternatively, Net Value, Inc. may issue additional equity to satisfy these
liabilities. We then plan to complete a merger with Net Value, Inc. pursuant to
which we intend to issue .4 shares of our common stock for every share of Net
Value, Inc. common stock tendered to us by the existing Net Value, Inc.
stockholders. We will also issue common stock purchase warrants and stock
options to the holders of Net Value, Inc.'s common stock purchase warrants and
vested stock options at the same exchange ratio. We currently own approximately
63% of the issued and outstanding shares of Net Value, Inc.'s common stock and
100% of the issued and outstanding shares of Net Value, Inc.'s Series A
Preferred Stock. Net Value, Inc.'s Series A Preferred Stock has the following
rights and preferences:
o Liquidation preference of $1.00 per share;
o Convertible at the option of either Net Value, Inc.
or the holder into 12.5 shares of Net Value, Inc.'s
common stock; and
o No dividends or voting rights.
IndustrialVortex.com, Inc.
IndustrialVortex.com is developing an Internet website that will
facilitate the purchase and sale of industrial automation products such as:
o motors;
o valves;
o sensors;
o timers;
o temperature controllers;
o generators;
o compressors;
o drives; and
o push buttons.
As a facilitator of business-to-business e-commerce,
IndustrialVortex.com is designing this website to provide purchasers with
relevant content that will permit them to make informed and cost-effective
purchasing decisions. IndustrialVortex.com's website will allow purchasers to
efficiently access many vendors of these products, to browse their product
offerings and pricing schedules, and to negotiate transactions with these
vendors through one website.
IndustrialVortex.com's Internet website will provide purchasers with a
set of e-commerce transaction tools, including catalog purchases, supplier
bidding, purchaser pooling, auctions and product showcasing. Purchasers will
access the website and have the ability to:
o chat with vendors on-line;
o chat with other purchasers of the products on-line;
o view pricing schedules;
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
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o the sale of reports describing purchasing and selling
patterns of the market, product performance and life cycles
as derived from data obtained based on transactions
conducted through its website.
IndustrialVortex.com believes that the cost of these fees to vendors
will be accompanied by significant reductions in selling costs which they
currently experience including telephone and telecopier charges, preparation and
delivery of mail catalogs, and the costs associated with bidding procedures,
proposals and purchase orders. IndustrialVortex.com launched its Internet
website on March 13, 2000. Allison Stollmeyer, our Director of Business
Development, is a director of IndustrialVortex.com. As of December 31, 1999,
IndustrialVortex.com had not generated any revenues, had assets of $21,631 and
had an accumulated deficit of $48,048.
metacat.com, Inc.
metacat is an online superstore for small catalogs. It offers a
one-stop shopping Internet website that allows consumers to browse and purchase
a wide variety of items. metacat has entered into merchant relationships with 12
multi-catalog and retail companies whose combined product offerings consist of
an aggregate of approximately 11,000 product SKU bar codes. metacat offers a
wide variety of goods at a single, searchable database. metacat believes that by
pairing the penetration and specialization of the catalog industry with the
Internet's unique retailing power, it will provide consumers with a convenient
and useful way to browse or shop over the Internet. metacat launched its
Internet website, which allows consumers to purchase a variety of consumer goods
from catalogs and mail order services that are linked to its Internet website,
in December 1999.
metacat is building an online store by aggregating the content of
thousands of small, print-based mail order catalogs into a database. This
database contains product descriptions and allows consumers to browse, obtain
information regarding the products and purchase the products directly from one
Internet website. metacat intends to form relationships with many different
catalogs and to use the pre-established distribution and inventory expertise of
individual catalogs to market products. Management believes that metacat will
offer small catalogs the high Internet profile that they could not otherwise
afford, serving as a front-end marketing organization for their products.
As a company that brings together a collection of useful information
and the ability to purchase products and services related to the information
presented, metacat serves as an intermediary between catalog retailers and
Internet customers. As the popularity of its Internet website grows, metacat
hopes to capitalize on the economies of scale possible in Internet retailing.
Economies of scale exist when a company experiences decreasing per-unit costs as
its total sales unit volume increases. Internet retailers can generally
experience economies of scale in their marketing, customer service and
technology functions. Marketing costs generally decrease on a per-unit basis as
Internet retailers grow, due to the increasing strength of their brand name via
word-of-mouth, and the decreasing per-unit costs of advertising as individual
advertising purchases increase in size. Customer service costs decrease on a
per-unit basis as staffing requirements can be spread over an expanded customer
base. Finally, since technology costs are generally a one-time investment that
is required to build an Internet website, this investment becomes a smaller
percentage of per unit costs as the company's sales volume increases.
metacat expects to focus on pre-existing distribution channels for the
many product categories too small, specialized, or diffuse to be exploited by
"category killers." A "category killer" is a retailer that attempts to present a
selection of merchandise that is so broad that it covers all consumer needs in a
given product category. For example, Toys "R" Us has often been described as a
"category killer" in the toys and entertainment retailing space. In the Internet
space, "category killer" refers to an Internet website that brings together
substantially all relevant information and product/service providers for a given
category at one, unified Internet website. For example, Amazon.com, Inc.
provides consumers with an Internet website that provides all of the information
and service necessary to purchase books and compact discs. metacat's management
team anticipates that metacat will establish itself as an important shopping
destination on the Internet for specialized and unique products through:
o A User-Friendly Interface: metacat is developing a user-friendly
interface that will include a full-featured shopping cart,
cookie-based tracking of past purchases to facilitate payment
processing and approval of credit card orders while the consumer is
on metacat's Internet website.
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o Customer Service: metacat will focus on being responsive to
customer's needs throughout the ordering process. metacat will
accurately fill its product orders and promptly respond to customers'
questions and complaints regarding their purchases through its
Internet website. metacat plans to invest in customer service
software as well as training programs for its customer service staff.
In this manner, metacat hopes to present a unified, consistently
positive message to its customers regarding service issues. Finally,
customer service will be delivered by hiring sufficient staff to
handle service requirements efficiently and in a courteous manner.
o Sales and Marketing: metacat's goal is to work with Internet websites
which serve as links or portals to many other Internet websites and
other companies that will increase traffic to its Internet website.
metacat will seek to develop advertising relationships with these
entities that will include significant pay-for-performance components
such as revenue sharing agreements.
metacat plans to generate revenues by charging retailers who sell
products on its Internet website a commission calculated based on the gross
retail revenue of transactions completed on its Internet website. In the future,
metacat plans to develop additional revenue streams from selling advertisements
on its Internet website and charging product placement fees. metacat does not
expect to generate revenues from these sources until the third quarter of 2000.
As of December 31, 1999, metacat has not recognized any revenues, had
minimal assets, had net losses of $266,000 for the year ended December 31, 1999,
and had an accumulated deficit of $266,000.
Swapit.com
Swapit.com is creating a consumer-driven electronic barter exchange on
the Internet. Swapit.com believes that this service will enable the swap or sale
of consumer goods between individuals. Swapit.com 's goal is to build a service
that attempts to consolidate the fragmented $180 billion (DLJ) secondhand
distribution market. Swapit.com's service will first permit the trading of
music, movies, books and games, and will then diversify into other consumer
products. Swapit.com intends to generate revenues from:
o listing, transaction and referral fees;
o direct sales; and
o advertising revenues
Swapit.com's service will provide an environment that enables a
three-party exchange-based system. Consumers willing to trade will submit their
products to a central repository/warehouse. Once the consumer submits his
products into the warehouse, he can use the service to identify other consumer
goods of like value which he can then withdraw from the warehouse. Swapit.com
believes that using this three-party exchange system will exponentially increase
the chances of a successful trade, thereby generating a higher level of
revenues. Swapit.com launched its Internet website in April 2000.
Thomas Aley, our Executive Vice President, currently serves on
Swapit.com's Board of Directors. As of December 31, 1999, Swapit.com had not
generated any revenue, had assets of $1,392,058 and had an accumulated deficit
of $222,336.
Webmodal, Inc.
Webmodal has developed an Internet application for use by shippers in
purchasing and executing domestic full-truckload intermodal freight shipments.
Domestic intermodal shipping involves the movement of freight over long
distances in the following manner:
o via truck from an origin point to the nearest railroad hub;
o then via railroad for a majority of the trip; and
o via truck from the destination railroad hub to the freight's final
destination.
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Intermodal shipping provides shippers with an opportunity to achieve
significant cost reductions in comparison to shipping freight via highway-only
trucking. However, intermodal shipping is presently characterized by a complex
and inefficient purchasing and execution process.
Webmodal has recently launched an Internet application that improves
the process of evaluating and purchasing intermodal transportation services.
This interface allows shippers to:
o input their specific transportation needs;
o view relevant transportation alternatives which may
satisfy those needs;
o assemble the service components of an intermodal
shipment, including an origin trucking carrier, a
railroad carrier and a destination trucking
carrier; and
o execute an order for transportation services.
Today, shippers generally purchase intermodal transportation through
marketing intermediaries. The marketing intermediaries perform logistical
coordination tasks using labor intensive marketing and customer service
processes involving telephone and facsimile communications with customers and
carriers. In using these traditional intermediaries to purchase transportation
services, shippers do not generally have access to information on prices and
schedules associated with underlying transportation services. As a result,
shippers are typically unable to confirm that optimal service selections are
being made on their behalf. In addition, because shippers using traditional
intermediaries are not typically made aware of the costs associated with the
underlying transportation services, they are unable to readily observe the fee
that is being paid to the intermediary for management of their shipments.
Webmodal's services allows shippers to replace their dependence on
these traditional marketing intermediaries with an on-line solution which
provides complete information regarding carrier rates, schedules and service
performance records. Analogous to an online travel agent, Webmodal eliminates
the need for cumbersome research and negotiation with marketing intermediaries
by collecting all relevant information into a single user-friendly database.
Webmodal also reduces the manpower costs associated with traditional marketing
intermediaries. Webmodal's service replaces the telephone, facsimile and other
labor-intensive processes and communications necessary to initiate and
coordinate intermodal shipments with immediate, automated digital connections
with carriers.
In addition to creating an Internet application that simplifies the
purchase and execution of domestic full-truckload intermodal transportation,
Webmodal is also positioned to expand into related market segments such as the
provision of a similar purchasing interface for:
o over-the-road trucking;
o railroad shipping; and
o international container shipping.
Webmodal also plans to offer related products such as:
o online traffic analysis tools for shipping
customers; and
o multi-carrier shipment coordination product for
marketing to carriers and intermediaries.
By replacing labor-intensive marketing and carrier coordination
functions with a simple Internet application, Webmodal hopes to streamline the
relationship between shippers and carriers and lower the costs associated with
intermodal freight transportation.
As of December 31, 1999, Webmodal had not generated any revenues, had
assets of $1,460,333, net losses of $504,246 for the period from July 28, 1999
(inception) through December 31, 1999 and an accumulated deficit of $504,246.
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YesAsia, Inc.
YesAsia is an e-commerce company catering to individuals of Asian
descent located throughout the world who either lack easy access to a broad
range of media titles when living outside their native country or who simply
enjoy media from other cultures. With over 60,000 product offerings, YesAsia's
revenues and customer base have grown by more than 80% per calendar quarter
since its inception. Management believes that YesAsia is poised to expand its
United States based e-commerce business model into new international markets and
to take advantage of the rapidly growing Asian online presence in the United
States and worldwide. YesAsia was founded in January 1998 and launched its
Internet website, www.YesAsia.com, in May 1998. YesAsia currently has 51
employees working in four offices located in the following cities:
o San Francisco (42);
o Hong Kong (35);
o Taiwan (6); and
o Japan (7).
YesAsia has over 38,000 customers who have purchased products from its
Internet website. Approximately 44% of these customers have returned to
YesAsia's Internet website and made at least one additional purchase. The
average order size for each YesAsia customer is approximately $40. YesAsia
expects to experience continued sales growth as a result of its aggressive
marketing in the United States. YesAsia currently plans to initiate a marketing
campaign that will include:
o Television and radio commercials;
o Print advertisements;
o Public relations and event sponsorships; and
o Internet advertisements.
YesAsia also plans to expand into other Asian markets where it will
apply its concept of "cross-cultural sales." By establishing business
infrastructure across multiple markets across Asia and with Hong Kong as its
strategic hub, YesAsia will extend its geographic reach to various Asian markets
while diversifying its product selection. By providing convenient, inexpensive
access to a broad range of titles "foreign" to a given market, YesAsia taps into
the increasingly global nature of mass media and uses the Internet to fulfill a
need that is not adequately serviced in the traditional bricks and mortar world.
In the United States, YesAsia's Internet website offers access to Cantonese,
Mandarin, Japanese and Korean products. In Hong Kong and Taiwan, it intends to
offer convenient access to European, Japanese and American titles, at
competitive prices which include local rather than international shipping costs.
YesAsia has established accounts with three major record companies and five
movie production companies in Hong Kong. YesAsia purchases all products which it
sells in Hong Kong and Taiwan either directly from these companies or from
authorized distributors of these companies. YesAsia intends to utilize its
presence in multiple nations to increase distribution and purchasing power.
YesAsia currently sells compact discs, digital video discs, electronic video
games, karaoke, videocassettes and related electronics. YesAsia recently
completed a private placement offering pursuant to which it raised approximately
$11.7 million. This placement was provided by Walden International Investment
Group, Morgan Stanley Dean Witter Private Equity and Hong Kong
Telecommunications. YesAsia plans to use the proceeds of this offering to expand
its Asian online business and plans to open offices in China, Singapore and
Korea by December 31, 2000.
Stephen George, a member of our Board of Directors, currently serves on
YesAsia's board of directors. For year ended December 31, 1999, YesAsia had
generated $2,278,429 in revenues (unaudited). YesAsia's losses for the year
ended December 31, 1999 were $572,634 (unaudited). As of December 31, 1999,
YesAsia's accumulated deficit was $716,124 (unaudited).
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.
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Competition for Internet products and services is intense. As the
market for e-commerce products and services grows, we expect that competition
will intensify. Barriers to entry are minimal, and competitors can offer
products and services at a relatively low cost.
In addition, some of our affiliate companies compete to attract and
retain a critical mass of buyers and sellers. Several companies offer
competitive solutions that compete with one or more of our affiliate companies.
We expect that additional companies will offer competing solutions on a
stand-alone or combined basis in the future. Furthermore, our affiliate
companies' competitors may develop Internet products or services that are
superior to, or have greater market acceptance than, the solutions offered by
our affiliate companies. If our affiliate companies are unable to compete
successfully against their competitors, then our affiliate companies may fail.
Many of our affiliate companies' competitors have greater brand
recognition and greater financial, marketing and other resources than our
affiliate companies. This may place our affiliate companies at a disadvantage in
responding to their competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
AlarmX.com expects to face competition for online ordering of security
alarm and low voltage products from various industry manufacturers and
distributors. As the business-to-business marketplace grows, and manufacturers
and distributors look for new channels of business, online ordering will likely
be a natural progression for them. For example, ADI, the security alarm
industry's largest distributor, recently launched online ordering for its
customer base www.adilink.com. Another industry distributor, Supply Dog
(www.supplydog.com), is an inventory shipping company that accepts security
alarm product orders online. Additionally, www.orderzone.com is serving the
electrical supply market and carries some low voltage products. While some niche
market companies may establish e-commerce ordering markets targeted by
AlarmX.com, none have attempted to aggregate all of the security and low voltage
products industries. This is the market in which AlarmX.com plans to
participate. In addition, AlarmX.com will also compete with bricks and mortar
locations, which have traditionally serviced the security and low voltage
products industry.
AssetExchange competes for financial asset transaction business with an
existing highly fragmented marketplace of buyers and sellers working directly or
through a variety of intermediaries to complete transactions. AssetExchange
allows members to transact a variety of types of loan portfolios, with an
initial focus on credit card portfolios. There are competitors supporting
transactions of residential and commercial mortgages, but none offering credit
card portfolios or multiple asset classes. The online asset brokerage business
is new and rapidly evolving and it is likely that other entities will emerge and
attempt to compete in this market. It is feasible for buyers and sellers to make
direct contact to negotiate transactions without using AssetExchange or a
competing service, and buyers and sellers may also continue to use existing
brokers. However, AssetExchange believes that the demonstrated efficiencies such
as improved price and deal discovery, the ability to quickly access and analyze
data and cost savings associated with its service will be attractive even to
sophisticated buyers and sellers. Potential competitors include businesses
currently conducting online mortgage portfolio auctions and existing brokers who
may enter the market for credit card portfolio transactions or otherwise broaden
their offerings.
BrightStreet faces significant competition from many promotion and
advertising companies as well as on-line publishers which compete, directly or
indirectly, for consumer advertising and promotion business from advertisers and
for consumers' time and attention. Competitors include Catalina Marketing
Corporation, Money Mailer, Val-Pak Direct Marketing Systems, Interactive Coupon
Network, Valassis Communications, Inc. and News America Holdings Incorporated,
who to date primarily operate by distribution of coupons in printed form through
mailings, newspaper inserts and other mass media. These competitors and others
may initiate programs and services involving the Internet which would compete
directly with BrightStreet. Additionally, the Internet is a relatively new
format through which retailers and consumers conduct business. As the Internet
evolves and consumers gain greater confidence in the Internet and other means of
electronic commerce, it is likely that competition will increase.
IndustrialVortex.com expects to face competition from many
business-to-business Internet websites that are entering various segments of the
industrial products market. For example, www.industria.com is serving the
process control industry for maintenance and repair products,
www.purchasingcenter.com is serving the industrial market for maintenance and
repair products, and www.grainger.com is also serving the industrial market for
maintenance and repair products While each of the companies that operate these
Internet websites has expertise in each of their substantive industries, none of
these companies has attempted to enter the market for industrial automation
products such as programmable logic controllers, drives, sensors, temperature
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<PAGE>
controllers, generators, motors, valves and measurement devices.
IndustrialVortex.com will also compete with catalogs and bricks and mortar
locations which have traditionally serviced the industrial products industry.
The key differentiation between many of the maintenance and repair products
companies and IndustrialVortex.com is that IndustrialVortex.com is addressing
the complex nature of the sales cycle, products and supply chain that is
inherent in the complex industrial automation products sector. As a result,
IndustrialVortex.com directs its sales efforts towards industrial engineers
instead of purchasing managers, who are generally the targets of the sales
efforts of companies targeting the maintenance and repair products industry
segment.
metacat.com, Inc. competes with a wide variety of online and offline
sources for mail order products. metacat's competition includes thousands of
sources from which consumers can make purchases, including traditional bricks
and mortar stores, print-based mail order catalogs, individual merchants' online
catalogs and online aggregators of products and catalogs. metacat directly
competes with online competitors including catalogcity.com and The Good Catalog
Company. Catalogcity.com has indexed thousands of print catalog titles on their
Internet website. Each catalog offers a limited number of products for direct
sale through the catalogcity.com Internet website, with links to the catalog
merchant's own Internet website (if one exists). Catalogcity targets well-known
retailers such as Sharper Image, Land's End and Hammacher Schlemmer, many of
whom have their own Internet websites that compete directly with catalogcity.
metacat targets smaller merchants. In addition, metacat is not organized by
catalog, permitting consumers to make a more directed search by product.
Finally, metacat intends to offer for direct sale a large selection of the
products offered in the catalogs of its merchants rather than a selected few
products from each merchant. While The Good Catalog Company has product content
that overlaps with metacat's products, the companies' business models are
significantly different. Fundamentally, The Good Catalog Company works with
manufacturers rather than catalog retailers or other specialty merchants. Many
of these manufacturers lack significant direct fulfillment capability and use
The Good Catalog Company to service a retail channel which they cannot service
internally. metacat believes that the significant differences in the product mix
and ease of purchase that its Internet website provides will permit it to
compete effectively with these online merchants.
Swapit.com expects competition in the market for trading and sales over
the Internet to intensify in the future. Though its business concept can be
differentiated from existing person-to-person trading services, barriers to
entry are relatively low, and the necessary hardware and software is
commercially available. Services similar to Swapit.com could therefore appear at
any time. In addition Swapit.com expects that it will compete heavily with
existing person-to-person trading services including eBay, Yahoo!, Auctions,
Amazon.com, Excite, Inc., Auction Universe and a number of other small services.
It will also compete indirectly with business-to-consumer online auction
services such as Onsale, First Auction, Surplus Auction and uBid. It potentially
faces competition from any number of large online communities and services that
have expertise in developing online commerce and in facilitating online trading
and who could rapidly develop and launch services similar to Swapit.com prior to
or after Swapit.com's appearance. Some current and many potential competitors
have longer company operating histories, larger customer bases and greater brand
recognition in other business and Internet markets than Swapit.com. Some of
these competitors also have significantly greater financial, marketing,
technical and other resources.
Webmodal faces competition from at least 50 intermodal marketing
companies such as The Hub Group and Mark VII Transportation, Inc., approximately
five large intermodal-enabled trucking companies such as J.B. Hunt
Transportation Services, Inc. and Schneider National, numerous railroads and
trucking companies and third-party logistics providers, as well as
transportation-related e-commerce ventures such as Arzoon, Freightwise,
Transplace.com, The National Transportation Exchange, Inc., FreightQuote and
Celarix. Many actual and potential competitors possess advantages such as
existing business relationships and substantially greater financial resources.
Some of these companies have introduced on-line capabilities which offer some of
the services offered by Webmodal or which offer services which are similar to
Webmodal's services to customers outside of Webmodal's target intermodal market.
These companies could expand their marketing and operational efforts or existing
online capabilities to develop a system similar to Webmodal's system. However,
Webmodal is not aware of a competitor who has developed or introduced a product
concept for intermodal transportation that includes all of Webmodal's product
capabilities. Webmodal believes it will have operational advantages that will
allow it to compete effectively. For example, Webmodal expects to realize
considerably greater marketing and customer service staff productivity than
traditional transportation and transportation marketing companies. Webmodal
believes an existing transportation intermediary interested in deploying a
similar business model would risk significant profit margin erosion and
disruption of existing selling processes.
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YesAsia competes generally with all retailers of entertainment media
titles that include Asian selections. Most mass market retailers, including
bricks and mortar retailers such as Walmart, HMV and Borders, and online
retailers such as Amazon.com, carry a limited number of Asian titles and
therefore compete only slightly with YesAsia. If a large, well-funded company
launches an Internet website directed at sales of Asian media titles to the
Asian population in the United States, it will compete directly with YesAsia and
could reduce YesAsia's revenues and cause an increase in YesAsia's marketing
expenses in response. However, YesAsia is not aware of any Internet website that
is proposing to materially increase its Asian media offerings or launch an
Asia-specific Internet website. As YesAsia becomes a more prominent player in
the online Asian video and music space, it is likely to experience increased
competition, either from larger entities with broad offerings that include Asian
titles or from other Asia-specific Internet websites. YesAsia believes that it
will have a significant competitive advantage due to its status as the first
such Internet website and its use of local language that captures and enhances
the visitor's experience.
Investment Company Act of 1940
We are primarily engaged in the building of technology companies that
we manage as part of an integrated supportive network of "affiliate companies".
However, due to our ownership of equity securities of our affiliate companies,
we could be considered an "investment company" under the Investment Company Act
of 1940, which regulates mutual funds and other entities which meet the
definition of an "investment company." An "investment company" generally
includes any entity that is engaged primarily in the business of investing,
reinvesting and trading in securities. The rules under the Investment Company
Act provide in part that an entity is presumed not to be an investment company
if 45% or less of the value of its total assets (excluding government securities
and cash) consists of, and 45% or less of its income over the last four quarters
is derived from, securities other than either government securities or
securities issued by entities that it does not primarily control which are not
themselves engaged in the business of investing in securities. As the
regulations governing the relationship between an investment company and the
entities in which it invests are inconsistent with the manner in which we intend
to provide services to our affiliate companies, it is critical to our business
plan that we not be an investment company subject to the Investment Company Act.
Under current federal securities regulations, we will be considered to
primarily control an entity if we own more than 25% of its voting securities and
have more control than any other single owner. Accordingly, at March 31, 2000,
we are considered to control metacat, Swapit.com, Industrialvortex.com,
AlarmX.com and College411.com. Prior to the sale of Net Value, Inc.'s assets to
BrightStreet, the assets and income of our affiliate companies that we do not
primarily control did not exceed the limits described above. As a result of the
sale, the assets and income of our non-primarily controlled affiliate companies
currently exceed those limits. Under current regulations, we have a "safe
harbor" period of one year during which we will not be considered an investment
company, provided that we have a bona fide intent to primarily engage in a
business other than that of investing, reinvesting and trading in securities as
soon as reasonably possible. Our board of directors has adopted a resolution
confirming this intent. We intend to meet this standard by providing substantial
services to our affiliate companies and, to the extent possible, structuring
future affiliate company investments to include at least a 25% voting
percentage, board representation, approval rights over material decisions and
other features that will give us "primary control" for purposes of the
Investment Company Act. In this manner, we will maintain the assets of and
income derived from our non-primarily controlled affiliate companies below 45%
of our total assets and income. However, fluctuations in the value of our
interests in our affiliate companies may make it difficult for us to accomplish
and maintain this goal. Accordingly, in order to satisfy this goal we may from
time to time dispose of interests in some of our non-controlled affiliate
companies.
The regulations under the Investment Company Act provide an exemption
from the definition of an investment company for any entity which the Securities
and Exchange Commission finds is primarily engaged in a business other than
investing in securities. We may apply to the Securities and Exchange Commission
for this exemption. If we are granted this exemption, we may have greater
latitude in structuring investments in affiliate companies and may not be
compelled to dispose of interests in non-controlled affiliate companies in order
to maintain our non-investment company status.
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Employees
As of May 31, 2000, excluding our affiliate companies, we had 25
full-time employees. None of our employees are currently covered by collective
bargaining agreements and we consider our relations with our employees to be
satisfactory.
History
We were formed as a Florida corporation in 1991. We did not have any
operations until our change of domicile into Delaware in October 1998. This
occurred in conjunction with our acquisition of a controlling interest in Net
Value, Inc. during the fourth quarter of 1998.
The operation of Net Value, Inc. was the primary focus of our
activities during the first half of 1999. In recognition, however, of the
evolving growth opportunities within the Internet industry, during the second
half of 1999, we shifted the focus of our business strategy to the development
and management of a network of early stage technology businesses. We commenced
this business by acquiring our equity interests in metacat.com, Inc., YesAsia,
Inc. and College411.com, Inc. in July 1999 when we merged with Strategicus
Partners, Inc. We acquired the remainder of our affiliate companies thereafter
in 1999 and 2000 in separately negotiated independent transactions.
Facilities
In February 2000, we entered into a lease agreement for our executive
offices located at 1085 Mission Street, San Francisco, California. The office
space consists of approximately 5,000 square feet at a monthly rental of
$17,383. The lease agreement terminates on March 31, 2004. In addition, we also
lease an aggregate of approximately 5,000 square feet of office space for
offices located in Philadelphia, Pennsylvania, New York, New York and Waltham,
Massachusetts, at a combined monthly rental of approximately $17,000.
Legal Proceedings
Dispute With a Former Officer and Director.
In October 1999, we terminated our employment agreement with Douglas
Spink, our former Chief Technology Officer and director, for cause due to Mr.
Spink's material breach of this agreement and his breach of his fiduciary duties
to our company. We believe that Mr. Spink engaged in various acts that were not
in our best interests, including various instances of misappropriation or
attempted misappropriation of our assets and various acts of insubordination and
dishonesty in his dealings with our other officers and directors. The various
agreements which we entered into with Mr. Spink stated that if Mr. Spink's
employment was terminated for cause, he forfeits all unvested shares of our
common stock which he held on the date of termination and he would be obligated
to repay all loans which we advanced to him if the termination date was prior to
December 31, 1999 and 50% of the principal balance of these loans and all
accrued interest thereon if the termination date was prior to May 28, 2000.
On January 7, 2000, Mr. Spink filed an action against us in the United
States District Court for the District of Oregon, alleging that our termination
of his employment constituted a breach of his employment agreement and violated
Oregon statutes regarding the payment of wages. The complaint seeks damages in
the amount of $17,000,000 on the breach of contract claim, plus prejudgment
interest from the date of the alleged breach of the employment agreement or, in
the alternative, an order directing us to specifically perform our obligations
under our employment agreement with Mr. Spink. The complaint seeks damages in
the amount of $150,000 on the wage claim, plus penalty wage, prejudgment
interest, costs and disbursements. We intend to vigorously defend this action.
On May 5, 2000, we filed an action against Mr. Spink and Merus
Partners, Inc., an Oregon corporation principally owned by Mr. Spink, in the
United States District Court for the District of Delaware, asserting various
claims, including a claim for injunctive relief requiring Mr. Spink to forfeit
and return 1,610,835 of his unvested shares of our common stock since he was
terminated for cause.
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In related matters, during June 2000, Mr. Spink filed actions in the
Court of Chancery of the State of Delaware in and for New Castle County seeking
to compel us to call an annual meeting of our stockholders and to inspect our
stockholder list. Mr. Spink asserted other claims in these proceedings which
were stayed by the court or withdrawn by Mr. Spink. The court has scheduled a
hearing on these matters for July 28, 2000.
In another matter related to this dispute, on or about June 5, 2000,
Greg Biggs filed a complaint in the Circuit Court in the State of Oregon for the
County of Multnomah against Mr. Spink and Strategicus Partners, Inc. We were
also named as a defendant in this action. In his complaint, Mr. Biggs alleges
that prior to our merger with Strategicus Partners, he entered into an agreement
with Mr. Spink to acquire 40% of the issued capital stock of Strategicus
Partners, which he currently values at $4,000,000. Mr. Biggs also contends that
he was "squeezed out" of the management of Strategicus Partners by Mr. Spink and
was, therefore, denied the opportunity to participate in our merger with
Strategicus Partners in July 1999. Apart from a claim for shares of our capital
stock equal to Mr. Biggs' ownership interest in Strategicus Partners, Mr Biggs
does not recite any facts relating to claims against us. We have not yet filed a
response to this complaint. Since the allegations set forth in Mr. Biggs'
complaint relate to the ownership of Strategicus Partners' capital stock, we
have demanded indemnification from Mr. Spink for all claims asserted by Mr.
Biggs in his complaint, pursuant to the terms and conditions of our merger
agreement with Strategicus Partners and Mr. Spink. In the event Mr. Spink
declines to indemnify us or provide us with legal defense, then we intend to
vigorously defend this action.
Other Matters.
On August 23, 1999, coolsavings.com, Inc. filed an action against Net
Value, Inc. in the United States District Court for the Northern District of
Illinois, Eastern Division. Pursuant to the Asset Purchase Agreement which Net
Value, Inc. entered into with BrightStreet.com, inc. (f/k/a Promotion
Acquisition, Inc.) BrightStreet has agreed to assume all liabilities related to
this lawsuit, including all legal expenses incurred in defending against these
claims. The complaint alleges that Net Value, Inc. infringed upon United States
Letters Patent No. 5,761,648 entitled "Interactive Marketing Network and Process
Using Electronic Certificates" held by coolsavings. The complaint alleges that
Net Value, Inc., through its Internet website and products, has committed acts
of infringement by:
o performing or completing steps of the methods and processes
described and claimed in Patent No. 5,761,648;
o by actively inducing others to practice the methods and
processes described and claimed in Patent No. 5,761,648 by,
among other things, performing or completing steps of such
methods and processes; and
o by offering to sell or selling a system or service for
offering and providing targeted electronic certificates such
as coupons, for use in practicing the methods and processes
described and claimed in Patent No. 5,761,648.
The complaint seeks both a preliminary and permanent injunction
prohibiting Net Value, Inc. from further acts of infringement, as well as
damages. On November 23, 1999, Net Value, Inc. filed its answer to this
complaint as well as a counterclaim against coolsavings.com, Inc. seeking a
declaratory judgment of invalidity and noninfringement of Patent No. 5,761,648.
Neither a discovery schedule nor a trial have been set in this matter.
BrightStreet cannot estimate the amount of damages that it may incur if the
court issues a final judgment concluding that Net Value, Inc. has infringed on
coolsavings' patent. In addition, based on its estimate of the cost of defending
this type of litigation, BrightStreet may decide to settle this case for an
amount that, although substantially less than the damages sought by coolsavings,
may be significant.
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, their ages and positions are set
forth below:
<TABLE>
<CAPTION>
<S> <C> <C>
Andrew P. Panzo 35 Chairman of the Board of Directors and Chief
Executive Officer
Lee C. Hansen 33 President and Director
Stephen M. Cohen 43 Senior Vice President, General Counsel and
Secretary
Thomas Aley 35 Executive Vice President, Business Development
James F. Elwell 32 Vice President-Finance, Controller and
Treasurer/Principal Accounting Officer
Darr Aley 35 Director
Stephen George 32 Director
</TABLE>
The following is a brief summary of the business experience of our
executive officers and directors:
Andrew P. Panzo has served as our Chairman and Chief Executive Officer
since January 1999. From October 1993 to June 1999, Mr. Panzo was a managing
director at American Maple Leaf Financial Corporation, a boutique investment
banking firm located in Philadelphia, Pennsylvania. Mr. Panzo was one of the
original founders of Net Value, Inc. in September 1996. Mr. Panzo currently
serves on the Board of Directors of Net Value, Inc. and the Board of Directors
of metacat.com, Inc. Mr. Panzo received a Masters degree in International
Business and Finance from Temple University.
Lee C. Hansen has served as our President since October 1, 1999 and as
one of our directors since April 2000. Prior to joining our management team, Mr.
Hansen was Senior Vice President of Corporate Strategy and Development at Bank
of America Corporation from May 1997 to September 1999, where he managed
strategic projects and merger and acquisition activities. From July 1993 to
April 1997, Mr. Hansen served as a Vice President in the International Capital
Raising Group and an Associate in the Lease Finance, Private Placement and High
Yield Groups at Banc of America Securities. Mr. Hansen currently serves on the
Board of Directors of AssetExchange, Inc. and AlarmX.com, Inc. Mr. Hansen
received an MBA from the J.L. Kellogg Graduate School at Northwestern University
and a BSBA from Bucknell University.
Stephen M. Cohen has served as our Senior Vice President, General
Counsel and Secretary since April 2000. Since 1980, Mr. Cohen has been engaged
in the practice of law, having most recently been a partner of Buchanan
Ingersoll Professional Corporation from March 1996 to April 2000 and a partner
of Clark Ladner, Fortenbaugh & Young from March 1990 to March 1996. Mr. Cohen's
practice focused on corporate finance and federal securities matters. He
received a B.S. from the School of Commerce and Finance of Villanova University,
a J.D. from Temple University and a L.L.M. in Taxation from Villanova University
School of Law.
Thomas Aley has served as our Executive Vice President for Business
Development since November 22, 1999. Prior to joining our management team, Mr.
Aley was Executive Vice President of Marketing at Wild Wild Web, Inc. from June
1997 through November 1999 where he oversaw business development including
operations, marketing and sales for Wild Wild Web's online and television
divisions. In November 1998, Mr. Aley played an instrumental role in the sale of
Wild Wild Web to GT Interactive Software. From June 1995 to June 1997, Mr. Aley
was Director of Electronic Commerce at Ziff-Davis where he managed the Company's
Net Buyer initiatives and ZDNet service. From January 1994 to June 1995, Mr.
Aley was the Director of Marketing for Eliza Corporation, where he sold speech
recognition technology to cable and television companies in the interactive
television industry. From January 1992 to January 1994, Mr. Aley worked at
Ono-Sendai Corporation. From October 1990 to January 1992, Mr. Aley worked at
Shiva Corporation. Mr. Aley currently serves on the Board of Directors of
Swapit.com, Inc. Mr. Aley received an MBA in High Technology Marketing and
Operations from Northeastern University.
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<PAGE>
James F. Elwell has served as our Vice President-Finance and Controller
since February 2000 and as our Treasurer since June 2000. Prior to joining our
management team, Mr. Elwell was a Senior Manager at Ernst & Young, LLP from
October 1990 through February 2000, where he practiced public accounting and led
engagements over securities offerings, acquisitions, dispositions and financial
audits for clients within the financial services industry. Mr. Elwell received a
BA in Economics from the University of California at Berkeley.
Darr Aley has served as a member of our Board of Directors since July
1999. Mr. Aley is also the chief technology officer of Epylon.com, Inc. Prior to
joining our management team, Mr. Aley was Vice President of Corporate
Development at Lycos, Inc. from August 1998 to August 1999, where he was
responsible for developing Internet joint ventures and strategic alliances. From
December 1997 to August 1998, Mr. Aley worked at WhoWhere.com, a search engine
that enables users to locate a person's home and e-mail address. From December
1996 to December 1997, Mr. Aley worked at Zip Two, a venture capital firm. From
December 1994 to December 1996, Mr. Aley worked at Soft Bank, a venture capital
firm. Mr. Aley currently serves on the Board of Directors of College411.com,
Inc. Mr. Aley received a BA from the University of New Hampshire.
Stephen George has served as a member of our Board of Directors since
July 1999. Mr. George is also the chief executive officer of Epylon.com, Inc., a
business to business San Francisco Bay-area e-commerce company. Prior to forming
Epylon.com, Inc., Mr. George was a Vice President in the San Francisco office of
Goldman Sachs & Co., from January 1996 to May 1999 where he provided a broad
range of financial services to emerging technology companies, entrepreneurs,
management teams and venture capitalists with a specialization in the Internet
industry. From April 1992 through January 1996, Mr. George worked as an
investment banker for Merrill Lynch, Pierce, Fenner & Smith, Inc. Mr. George
currently serves on the Board of Directors of YesAsia, Inc. Mr. George received
a BA in Government from Cornell University.
Executive Compensation
The table below sets forth information concerning the compensation we
paid to our chief executive officer and each executive officer who was paid
compensation at an annual rate of greater than $100,000 in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and
Principal Position Salary Bonus Number of Options
------------------ ------ ----- -----------------
<S> <C> <C> <C>
Andrew P. Panzo, $87,500 0 1,020,000
Chairman and Chief Executive Officer
Lee C. Hansen, President $34,615 0 900,000
Thomas Aley, Executive Vice President $23,077 $50,000 0
</TABLE>
From September 4, 1998 through January 6, 1999, Alexis Christodoulou
served as our sole officer and director. During this period, Mr. Christodoulou
did not receive any compensation in exchange for his services.
The following table sets forth information regarding options granted in
1999 to the executive officers named in our Summary Compensation table above.
Amounts represent the hypothetical gains that could be achieved from the
respective options if exercised at the end of the option term. These gains are
based on assumed rates of stock appreciation of 0%, 5% and 10% compounded
annually from the date the respective options were granted to their expiration
date based upon the grant price.
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<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
-----------------
% of Total
Options Potential Realizable Value at
Granted to Market Assumed Annual Rates of Stock
Number of Employees Price Price Appreciation for Option Term
Options in Fiscal Exercise on Date ----------------------------------
Name Granted Year Price of Grant Expiration Date 0% 5% 10%
---- ------- ---- ----- -------- --------------- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew P. Panzo 120,000 5.5% $1.00 $7.13 June 1, 2004 $735,600 $971,987 $1,257,952
Andrew P. Panzo 300,000(1) 13.8% $1.00 $7.13 June 30, 2005 $1,839,000 $2,566,465 $3,489,369
Andrew P. Panzo 300,000(2) 13.8% $1.00 $7.13 June 30, 2006 $1,839,000 $2,709,788 $3,868,306
Andrew P. Panzo 300,000(3) 13.8% $1.00 $7.13 June 30, 2007 $1,839,000 $2,860,277 $4,285,136
Lee C. Hansen 90,000 4.1% $1.00 $4.56 October 1, 2004 $320,625 $434,073 $571,316
Lee C. Hansen 270,000(1) 12.4% $1.00 $4.56 October 31, 2005 $961,875 $1,380,830 $1,912,342
Lee C. Hansen 270,000(2) 12.4% $1.00 $4.56 October 31, 2006 $961,875 $1,463,372 $2,130,576
Lee C. Hansen 270,000(3) 12.4% $1.00 $4.56 October 31, 2007 $961,875 $1,550,040 $2,370,633
</TABLE>
(1) The options included in this grant vest pro rata on a monthly basis
throughout the twelve month period commencing on the date of grant.
(2) The options included in this grant vest pro rata during the 12 month period
commencing on the first anniversary of the date of grant.
(3) The options included in this grant vest pro rata during the 12 month period
commencing on the second anniversary of the date of grant.
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in our Summary
Compensation Table above. The value of unexercised in-the-money options is
calculated based on the closing bid price of our common stock on December 31,
1999 of $11.00.
<TABLE>
<CAPTION>
Fiscal Year End Option Values
-----------------------------
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
------------------ ------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew P. Panzo 300,000 720,000 $3,000,000 $7,200,000
Lee C. Hansen 157,500 742,500 $1,575,000 $7,425,000
</TABLE>
The table below sets forth the information concerning the compensation
which Net Value, Inc. paid to its chief executive officer and each executive
officer who was paid compensation greater than $100,000 in 1999.
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<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term
Annual Compensation Compensation Awards
Name and ------------------- -------------------
Principal Position Salary Bonus Number of Options
------------------ ------ ----- -----------------
<S> <C> <C> <C>
R. Scott Wills $182,185 $50,000 0
President and Chief Executive Officer
Gregory B. Roberts, $166,789 $25,000 0
Chief Technology Officer
Mark Lapolla, $92,847 $10,000 0
Vice President Engineering
Andrew P. Panzo, 0 0 60,000
President
</TABLE>
The following table sets forth information regarding options granted in
1999 to the executive officers named in the Net Value, Inc. Summary Compensation
Table above. Amounts represent the hypothetical gains that could be achieved
from the respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 0%, 5% and 10%
compounded annually from the date the respective options were granted to their
expiration date based upon the grant price.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
----------------- ---------------
% of Total
Options
Granted to Market
Number of Employees Price on
Options in Fiscal Exercise Date of Expiration
Name Granted Year Price Grant Date 0% 5% 10%
---- ------- ---- ----- ----- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew P. Panzo 60,000 100.00% $ 1.00 $2.85 December 4, $111,000 $157,980 $215,352
2004
</TABLE>
The following table sets forth information concerning year end option
values for fiscal 1999 for the executive officers named in the Net Value, Inc.
Summary Compensation Table above. The value of unexercised in-the-money options
is calculated based on the closing bid price of our common stock on December 31,
1999 of $11.00. The fiscal year end option values for Mr. Panzo's options to
purchase 60,000 shares of Net Value, Inc.'s common stock were calculated
assuming that our merger with Net Value, Inc. was consummated as of December 31,
1999 and that Mr. Panzo's stock options were converted into options to purchase
24,000 shares of our common stock at an exercise price of $2.50 per share.
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Year End Option Values
-----------------------------
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
------------------ -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew P. Panzo 60,000 0 $204,000 $ 0
</TABLE>
Employment Agreements
In June 1999, we entered into a three year employment agreement with
Mr. Panzo. In addition to an annual salary of $150,000, Mr. Panzo's employment
agreement provides for bonus compensation at the discretion of our Board of
Directors. Pursuant to the employment agreement, Mr. Panzo is entitled to fringe
benefits including participation in pension, profit sharing and bonus plans, as
applicable, and life insurance, hospitalization, major medical, paid vacation
and expense reimbursement. Mr. Panzo's employment agreement provides he is
entitled to receive options to purchase 1,200,000 shares of our common stock.
Options to purchase 120,000 shares of common stock vested immediately and the
remainder of the options will vest pro rata on a monthly basis over a three year
period. Mr. Panzo may exercise these options for five years following their
vesting date at an exercise price of $1.00 per share. In September 1999, Mr.
Panzo agreed to reduce his option award and surrendered 180,000 options. Mr.
Panzo now holds options to purchase 1,020,000 shares of our common stock.
In September 1999, we entered into a three year employment agreement
with Lee Hansen pursuant to which Mr. Hansen will serve as our President. In
addition to an annual salary of $150,000, Mr. Hansen's employment agreement
provides for bonus compensation at the discretion of the Board of Directors.
Pursuant to his employment agreement, Mr. Hansen is entitled to fringe benefits
including participation in pension, profit sharing and bonus plans, as
applicable, and life insurance, hospitalization, major medical, paid vacation
and expense reimbursement. We have awarded Mr. Hansen options to purchase
900,000 shares of common stock. Options to purchase 90,000 shares of common
stock vested immediately and the remainder of the options will vest pro rata on
a monthly basis over a three year period. As long as he is our employee, Mr.
Hansen may exercise these options at an exercise price of $1.00 per share until
the later of:
o the fifth anniversary of their vesting date; or
o one year after the effective date of a registration
statement registering the resale of the shares of common
stock issuable upon exercise of the options.
If Mr. Hansen's employment is terminated, then the exercise period of
his options may be reduced.
In November 1999, we entered into a one-year employment agreement with
Thomas Aley pursuant to which he will serve as our Executive Vice President. In
addition to an annual salary of $150,000, Tom Aley's employment agreement
provides for bonus compensation at the discretion of the Board of Directors.
Pursuant to his employment agreement, Tom Aley is entitled to fringe benefits
including participation in pension, profit sharing and bonus plans, as
applicable, and life insurance, hospitalization, major medical, paid vacation
and expense reimbursement. In April 2000, we amended Tom Aley's employment
agreement to award him options to purchase 900,000 shares of common stock.
Options to purchase 150,000 shares of common stock vested immediately and the
remainder of the options will vest pro rata on a monthly basis over a three year
period. Tom Aley may exercise these options at an exercise price of $1.00 per
share until the later of:
o the fifth anniversary of their vesting date; or
o one year after the effective date of a registration
statement registering the resale of the shares of common
stock issuable upon exercise of the options.
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<PAGE>
In April 2000, we entered into a three year employment agreement with
Stephen M. Cohen pursuant to which Mr. Cohen will serve as our Senior Vice
President, General Counsel. In addition to an annual salary of $150,000, Mr.
Cohen's employment agreement provides for bonus compensation at the discretion
of the Board of Directors. Pursuant to his employment agreement, Mr. Cohen is
entitled to fringe benefits including participation in pension, profit sharing
and bonus plans, as applicable, and life insurance, hospitalization, major
medical, paid vacation and expense reimbursement. We have awarded Mr. Cohen
options to purchase 300,000 shares of common stock at an exercise price of $6.75
per share. Options to purchase 50,000 shares of our common stock vested
immediately, options to purchase 62,500 shares of our common vest on April 17,
2001, and the remaining options to purchase 187,500 shares of our common stock
vest pro rata on a monthly basis from April 18, 2001 through April 17, 2004,
provided that if after the expiration of the initial term of the employment
agreement we elect not to extend Mr. Cohen's employment for an additional one
year for reasons other than a "for cause" termination as defined in the
employment agreement, then Mr. Cohen shall vest fully in all of his options at
the end of his initial term of employment as if he had remained our employee for
a full term of four years.
Pursuant to his employment agreement, we have agreed to provide Mr.
Cohen with a loan in the principal amount of $100,000 at the beginning of each
of the first two years of the term of his employment agreement. Each of the
loans shall accrue interest at the rate of 8% per annum and shall be due on
April 17, 2004 or such earlier date that Mr. Cohen shall have received aggregate
proceeds of $5,000,000 from the sale of his options or the shares of common
stock underlying his options. However, Mr. Cohen is not required to repay the
loans if by April 17, 2004, the sum of the proceeds which he has received from
the sale of his options or the shares of common stock underlying his options and
the remaining equity in the options as of April 17, 2004 does not equal or
exceed $5,000,000.
In February 2000, we entered into a letter agreement with James F.
Elwell pursuant to which Mr. Elwell will serve as our Vice President-Finance and
Controller. This agreement provides Mr. Elwell with an annual salary of
$120,000. We have awarded Mr. Elwell options to purchase 120,000 shares of our
common stock at an exercise price of $10.032 per share. Options to purchase
30,000 shares of our common stock vest on February 28, 2001, and the remaining
options to purchase 90,000 shares of our common stock vest pro rata on a monthly
basis from March 1, 2001 through February 28, 2004. This agreement may be
terminated at any time by us or Mr. Elwell without advanced notice.
Consulting Agreements
In connection with our merger with Strategicus Partners, we entered
into consulting agreements with each of Darr Aley and Stephen George, current
directors, as well as Barry Uphoff, a former director. Pursuant to the terms of
the consulting agreements, we issued options to purchase an aggregate of
6,255,876 shares of our common stock to Messrs. Uphoff, Darr Aley and George and
agreed to pay each of them a monthly retainer of $500. Messrs. Uphoff, Darr Aley
and George have subsequently agreed to surrender a substantial portion of these
options. In May 2000, we finalized the terms of these options in warrant
agreements which we issued to each of Messrs. Uphoff, Darr Aley and George.
Pursuant to these warrant agreements, we issued to each of Messrs. Uphoff and
Darr Aley warrants to purchase 332,416 shares of our common stock, of which
warrants to purchase 192,275 shares vested immediately and warrants to purchase
140,141 shares remain subject to vesting provisions, and we issued Mr. George
warrants to purchase 382,416 shares of our common stock, of which warrants to
purchase 192,275 shares vested immediately and warrants to purchase 190,141
shares remain subject to vesting provisions. The unvested shares issued pursuant
to each of these warrant agreements will vest monthly on a pro rata basis over a
period of 36 months from the date of the warrant agreements. For a detailed
discussion of the issuance and status of these options, see "TRANSACTIONS WITH
OFFICERS AND DIRECTORS AND OTHER BUSINESS RELATIONSHIPS." In connection with his
resignation from our Board of Directors in May 2000, Mr. Uphoff terminated his
consulting agreement.
Darr Aley's consulting agreement also provides for the forgiveness of a
loan in the principal amount of $267,000 which we have provided to Darr Aley. We
will forgive:
o one-third of the principal amount of this loan, plus accrued
interest thereon, if Darr Aley remains engaged by us on the
first anniversary of the effective date of the merger with
Strategicus Partners;
65
<PAGE>
o one-third of the principal amount of these loans, plus
accrued interest thereon, if Darr Aley remains engaged by us
on the second anniversary of the effective date of the
merger with Strategicus Partners, Inc.; and
o one-third of the principal amount of this loan, plus accrued
interest thereon, if Darr Aley remains engaged by us on the
third anniversary of the effective date of the merger with
Strategicus Partners, Inc.
On October 1, 1999 we entered into a consulting agreement with Paul H.
Stephens, a founder and formerly a principal of the investment banking firm of
Robertson Stephens & Company. Under the consulting agreement, Mr. 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.
Change in Control Arrangements
Each of the aforementioned employment agreements provides the employee
with the following rights upon a change of control:
Andrew Panzo: If Mr. Panzo terminates his employment agreement due to a
change in control, then we must continue to pay him his salary and bonus, based
upon the average annual bonus paid to him prior to termination of his
employment, for the lesser of one year from the date of termination of his
employment agreement or the remaining original three year term of his employment
agreement. In addition, all of Mr. Panzo's unvested stock options shall
immediately vest as of the termination date of his employment agreement due to a
change in control.
Lee Hansen: If Mr. Hansen terminates his employment agreement due to a
change in control, then we must continue to pay him his salary and bonus, based
upon the average annual bonus paid to him prior to termination of his
employment, for the lesser of one year from the date of termination of his
employment agreement or the remaining original three year term of his employment
agreement.
Thomas Aley: If Mr. Aley terminates his employment agreement due to a
change in control, then we must continue to pay him his salary and bonus, based
upon the average annual bonus paid to him prior to termination of his
employment, for the lesser of one year from the date of termination of his
employment agreement or the remaining original term of his employment agreement.
Stephen Cohen: If Mr. Cohen terminates his employment agreement due to
a change in control that occurs after September 21, 2000, then we must continue
to pay him his salary and bonus, based upon the average annual bonus paid to him
prior to termination of his employment, for the lesser of one year from the date
of termination of his employment agreement or the remaining original term of his
employment agreement. In addition, all of Mr. Cohen's unvested stock options
shall immediately vest as of the termination date of his employment agreement.
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<PAGE>
James F. Elwell: If we terminate Mr. Elwell upon a change in control
that occurs on or before February 28, 2001, then his stock options which were
scheduled to vest on February 28, 2001 shall vest at the rate of 2,500 options
per month from February 28, 2000 until Mr. Elwell's termination date.
In each of these employment agreements, a change in control is defined
as the occurrence of any one of the following:
o any "person" as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, other than one
of our subsidiaries or affiliates becomes a "beneficial
owner," as such term is used in Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, of 50% or more of any
class of issued and outstanding capital stock which
ownership interest constitutes 50% or more of all issued and
outstanding voting shares; and
o the majority of the members of our Board of Directors
consists of individuals other than members of our Board of
Directors on the date of the employment agreement, provided
that persons elected to the Board of Directors whose
election or nomination was supported by one-half of the
directors at the date of the employment agreement shall be
considered a member of the Board of Directors as of the date
of the employment agreement.
In addition, as more fully discussed in "Description of Capital
Stock--Registration Rights," upon a change in control, Messrs. Panzo, George,
Darr Aley, Spink and Barry Uphoff, a former director, have certain registration
rights with regard to their shares of our common stock.
Stock Options
Effective as of June 1, 2000, we adopted the "Net Value Holdings, Inc.
2000 Stock Incentive Plan," which covers 5,000,000 shares of our common stock.
Under its terms, employees, officers and directors are currently eligible to
receive non-qualified stock options, restricted stock awards, and, upon approval
of this plan by our stockholders, will be eligible to receive incentive stock
options within the meaning of Section 422 of the Internal Revenue Code. In
addition, advisors and consultants who perform services for us are eligible to
receive non-qualified stock options under this plan. This plan is administered
by our Board of Directors or a committee designated by our Board of Directors.
All stock options granted under this plan are exercisable for a period of up to
10 years from the date of grant. We may not grant incentive stock options
pursuant to the plan at exercise prices which are less than the fair market
value of our common stock on the date of grant. The term of an incentive stock
option granted under the plan to a stockholder owning more than 10% of the
issued and outstanding common stock may not exceed five years and the exercise
price of an incentive stock option granted to such stockholder may not be less
than 110% of the fair market value of our common stock on the date of grant. The
plan contains certain limitations on the maximum number of shares of our common
stock that may be awarded in any calendar year to any one individual for the
purposes of Section 162(m) of the Internal Revenue Code. As of June 1, 2000,
options to purchase 306,000 shares of our common stock were outstanding under
this plan. Each of these stock options has an exercise price of $4.00 per share.
In addition to the stock options covered by this plan, we have also
issued in private transactions, options to purchase 4,940,000 shares of our
common stock. These options were issued prior to the adoption of our stock
option plan by our Board of Directors. From inception through June 30, 2000,
these options were issued at the following exercise prices:
Number of Stock Options Exercise Price
----------------------- --------------
3,000,000 $1.00
260,000 $3.75 - $ 4.88
340,000 $6.25 - $ 6.75
430,000 $7.75 - $ 7.99
100,000 $8.00 - $ 9.00
210,000 $9.13 - $11.03
105,000 $13.00 - $14.00
290,000 $16.38 - $16.88
205,000 $19.25 - $19.64
---------
4,940,000
=========
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<PAGE>
Advisory Board
Members of our Advisory Board provide us and our affiliate companies
with strategic guidance and networking assistance. The following is a brief
summary of the business experience of our Advisory Board members:
Paul Stephens. Paul Stephens was a founder, managing director and chief
investment officer of the former Robertson Stephens & Company and currently
serves as a managing director of RS Investment Management, which was purchased
from the Bank of America on February 28, 1999. Following nine years in
institutional sales (1969-78) with Smith Barney & Company and Robertson, Colman,
Siebel & Weisel, Mr. Stephens joined Sandy Robertson to found Robertson, Colman,
Stephens & Woodman in 1978. The organization changed its name to Robertson
Stephens & Company in 1989. Mr. Stephens led the firm's research and
institutional sales effort in the late 1970's and early 1980's and then
transitioned into its new business corporate finance department where he served
from 1982 to 1985. He then restructured the venture capital group, managing it
until 1990 when he formed The Robertson Stephens Orphan Fund, a limited
partnership focused on investing globally in undiscovered or neglected growth
companies. In June 1993, Mr. Stephens launched The Contrarian Fund, a public
mutual fund. He holds both a Bachelors degree and a Masters degree in Business
Administration from the Haas School of Business at U.C. Berkeley.
Warren Zide. Warren Zide is a movie producer and talent manager at
Zide/Perry Entertainment, a production and management company. In 1997, Mr. Zide
partnered with Craig Perry to form Zide/Perry Films, a division of Zide/Perry
Entertainment. Mr. Zide recently served as a producer on Universal's box office
success American Pie. He has also produced the action film, The Big Hit,
starring Mark Wahlberg and Christina Applegate. Zide/Perry Films' recent
projects include New Line Cinema's Final Destination, a supernatural thriller;
Sony's Providence, a teen romance; and the independent comedy, Return of the
World's Most Rotten Lover. The company also has numerous projects on its
development slate and currently has a two-year, first-look production deal with
Warner Bros. to develop and produce feature films. Mr. Zide serves as a literary
manager for Zide Management, where he has sold more than 80 spec scripts in less
than 60 months. Mr. Zide represents many young, rising screenwriters and
directors, including Ben Ramsey, screenwriter of The Big Hit, Josh Schwartz,
screenwriter of Providence and Stuart Gibbs, screenwriter of Return of the
World's Most Rotten Lover. He has earned many impressive press accolades,
including being selected for Fade-In Magazine's "One of the Top 100 People In
Hollywood You Need to Know," The Hollywood Reporter's "Next Generation's," and
he is the youngest manager to appear on Weekly Variety's "Top 10 Spec
Salesman's" list. Additionally, Mr. Zide is extending his entertainment presence
by launching InZide.com (www.InZide.com), an Internet website which has been
developed as a comprehensive industry resource and reference tool for aspiring
and established screenwriters. Mr. Zide graduated with a B.A. in finance from
Michigan State University.
Michela O'Connor Abrams. Michela O'Connor Abrams is the president of
Imagine Media, Inc.'s Business Division. In this role, Ms. O'Connor Abrams
oversees all operations, including the flagship publication Business 2.0 and all
new brand extensions. Business 2.0 (www.business2.com) is an international
monthly publication with a current circulation rate base of approximately
210,000. Within its first year, Business 2.0 won seven top magazine awards:
three Maggie Awards, a Computer Press Award, two Ozzie Awards, and the Folio:
Editorial Excellence Award. Ms. O'Connor Abrams has over 16 years of experience
in publishing, trade show management, Internet strategies, online branding and
strategic business development. She has held executive positions at IDG,
Ziff-Davis and McGraw-Hill. Most recently, she served as president and CEO of
Computerworld. Prior to IDG, she was chief operating officer of ZD Events, which
produces industry-leading expositions and conferences such as Comdex, Seybold
and Networld +Interop. She also served several years as a publisher and group
vice president at McGraw-Hill. Ms. O'Connor Abrams sits on the board of
directors for Bow Street Software and Auctionnet.com. She holds a Bachelor of
Science degree in Journalism from California Polytechnic University at San Luis
Obispo.
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<PAGE>
Owen Van Natta. Owen Van Natta is a Senior Director, Business
Development at Amazon.com. Mr. Van Natta came to Amazon.com through the
PlanetAll acquisition in August 1998. As Senior Director of Business
Development, Mr. Van Natta manages the team responsible for all external
partnerships and strategic alliances at Amazon.com. At PlanetAll.com, Mr. Van
Natta oversaw all strategic partnerships and customer communications as the Vice
President of Business Development & Marketing. Prior to PlanetAll, Mr. Van Natta
was part of the management team at Zip2 Corporation where he successfully
developed local sales and marketing operations for newspaper companies like
Knight Ridder and The New York Times Company. Zip2 was ultimately sold to Compaq
Computer Corporation's AltaVista Division. Mr. Van Natta has held Director level
positions at high tech industry leaders such as Acer America, SoftBank, and
Ziff-Davis Publishing Company. Mr. Van Natta holds a BA in English and American
Literature from the University of California at Santa Cruz.
Douglas Boake. Douglas Boake is Vice President, Business Development at
Amazon.com. Mr. Boake came to Amazon.com through the Accept.com acquisition in
June 1999. As Vice President of Business Development, Mr. Boake oversees the
overall development of business opportunities. He implements high-level
marketing strategies, develops strategic alliances and expands Amazon.com's
customer relationships. At Accept.com, Mr. Boake directed all business
development efforts. In addition, he spearheaded efforts to form new alliances
and partnerships for the company. Before joining the Accept.com executive team,
Mr. Boake was Senior Vice President of sales at PointCast Inc. where he oversaw
strategic sales and affiliate development, advertising sales, and advertising
marketing for the PointCast Network. He also held the position of Vice
President, International at PointCast, and was President of PointCast Japan,
Inc. Mr. Boake previously worked for Radius Inc. as Vice President and General
Manager of the Pacific Rim region. He was also President of Radius' wholly-owned
Japanese subsidiary, Radius K.K. Prior to joining Radius, Mr. Boake served as
Managing Director, Pacific Rim, for the Claris Corporation and as President and
Representative Director for Claris Japan, Inc., the company's Japanese
subsidiary. Mr. Boake holds a BA in Managerial Science and Political Science
from Rice University.
Tom H. Rosenwald. Tom H. Rosenwald is a Partner at Heidrick &
Struggles. Based in the New York office, Mr. Rosenwald is a founding member of
the Consumer Practice, a Member of the E-Commerce Practice, and is Head of the
Advertising and Communications Practice, a subset of the Consumer Practice. Mr.
Rosenwald brings more than 30 years of experience in sales, marketing and
advertising in health care and consumer packaged goods to Heidrick & Struggles.
Before joining the firm, he spent ten years as Executive Vice President and
General Manager of MED Communications, an advertising agency specializing in
health care. Mr. Rosenwald concentrates on executive level search assignments,
specializing in consumer-packaged goods, advertising, and communications. Recent
clients he has served include American Express, Ammirati Puris Lintas,
Burson-Marsteller, Coca-Cola Company, Compaq Computer Corporation, DMB&B, Fleet
Financial Group, Gateway Inc., Grey Advertising, Hasbro, Omnicom Worldwide,
Resort Condominiums International (RCI), Schering-Plough, Solvay
Pharmaceuticals, TBWA/Chiat Day, The Hockey Company, True North Communications,
Inc., Wells Rich Greene, Wunderman Cato Johnson, and Young & Rubicam. During his
business career, Mr. Rosenwald has served in sales management positions at Wyeth
Laboratories, a division of American Home Products, and held product management
positions in the Post Division of General Foods. During his association with
Young & Rubicam, he was a member of senior account management and General Foods
was among his major clients. He also founded the firm's first health care
advertising division. Mr. Rosenwald received a BA from Dartmouth College and an
MBA from the Amos Tuck School of Business Administration.
Marc Meyer. Marc Meyer is a Professor of Management at Northeastern
University. Professor Meyer teaches and conducts research in the area of new
product development and technological entrepreneurship. A co-founder of several
software companies, Professor Meyer serves as a consultant to large corporations
in the area of new product development. He is also director of the College's
Center for Technology Management, helps run the College's Entrepreneurial Lab
and is a co-director of the HighTech MBA program. His most recent book is The
Power of Product Platforms (Free Press, 1997). Professor Meyer consults to
leading corporations in the development of next generation products, systems and
services. Professor Meyer holds an AB from Harvard University and MSc and PhD
degrees from Massachusetts Institute of Technology.
Paul Thomas Cohen. Paul Thomas Cohen is an independent investment
advisor. Mr. Cohen has spent the past six years working as an investor banker
for, and consultant to, a variety of New York-based media companies, such as
Time Life, Time, Inc., The New York Times, The National Broadcasting Company
(NBC) and Rolling Stone Magazine, as well as a multitude of Internet-based
companies such as Yoyodyne, Tunes.com, E-Exchange and Medcast. Working with
Rolling Stone, Mr. Cohen aided in creating a new media/Internet strategy, in
addition to developing and consulting on CD-Rom projects and commercial on-line
ventures. Prior to his work in new media and the Internet, Mr. Cohen spent four
69
<PAGE>
years acting as Chief Executive Officer of the New York-based brokerage firm
Herzfeld & Stern. Mr. Cohen received an MBA from Columbia University.
Eric Olander. Eric Olander is an Equity Analyst for Tudor Investment
Corporation specializing in small and mid-cap growth stocks. Previously, he was
an Analyst for Putnam's Specialty Growth Equities Group, focusing on emerging
small-cap growth stocks for the New Opportunities, OTC Emerging Growth and
Voyager Funds. He is a Chartered Financial Analyst and is currently completing
his Master of Business Administration at the Harvard Business School.
Vici Wayne. Vici Wayne is the Managing Director of the New Media
Practice at Christian & Timbers. Ms. Wayne joined Christian & Timbers to focus
nationally on finding top executives to lead the burgeoning number of media
companies including film, video, audio, broadcast, cable and print which are
currently taking their businesses to the Internet. For the five years prior to
joining Christian & Timbers, Ms. Wayne was a principal at Korn/Ferry
International where she established the firm's Multimedia Practice. Ms. Wayne is
an established search consultant with 12 years of recruiting experience,
including managing her own search firm which focused on telecommunications,
electronic entertainment, publishing and technology. Ms. Wayne received a B.S.
degree in Information Systems from the University of San Francisco and studied
in Switzerland and France. She has appeared as a speaker and a panelist at
multimedia and Internet conventions.
70
<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 June 15, 2000, by:
o the holders of more than 5% of our common stock;
o each of our directors;
o our executive officers; and
o all directors and executive officers of our company as a
group.
As of June 15, an aggregate of 17,680,672 shares of our common stock
were issued and outstanding. For purposes of computing the percentages under
this table, it is assumed that all options and warrants to acquire our common
stock which have been issued to the directors, executive officers and the
holders of more than 5% of our common stock and are fully vested or will become
fully vested within 60 days of the date of this Prospectus have been exercised
by these individuals and the appropriate number of shares of our common stock
have been issued to these individuals. The number of shares reflected as
outstanding has also been determined on the basis that 1,616,835 shares of
common stock that were issued to a former officer have effectively been
cancelled as a result of the termination for cause of the former officer. This
matter is currently the subject of a material legal proceeding discussed in this
prospectus on page 58.
<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>
Rozel International Holdings, Ltd. Beneficial 2,819,852 15.9
Whitehill House Owner
Newby Road, Industrial Estate
Hazel Grove, Stockport
Cheshire, United Kingdom
SK7 5DA
Andrew P. Panzo (2) Officer, 638,582 3.5
8 Pennsford Lane Director
Media, PA 19063
Darr Aley (3) Director 344,467 1.9
615 Howard Avenue
Burlingame, CA 94010
Stephen George (4) Director 348,634 1.9
5 Morning Sun Avenue
Mill Valley, CA 94941
Lee C. Hansen (5) Officer, 315,000 1.8
1475 Vallejo Street, #3 Director
San Francisco, CA 94109
Thomas Aley (6) Officer 212,500 1.2
260 Elsinore Street
Concord, MA 01742
Stephen M. Cohen (7) Officer 50,000 *
1811 Fireside Court
Cherry Hill, NJ 08003
James F. Elwell (8) Officer 0 *
1508 Douglas Drive
El Cerrito, CA 94530
All directors and executive 1,909,183 10.0
officers as a group (7 people)
</TABLE>
------------------
71
<PAGE>
* Less than one percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. Unless otherwise noted, we
believe that all persons named in the table have sole voting and
investment power with respect to all shares of our common stock
beneficially owned by them.
(2) Includes 494,119 shares of our common stock issuable upon exercise of
vested options. Does not include 525,881 shares of common stock issuable
pursuant to options not presently exercisable and not exercisable within
60-days of the date of this Report. Also includes 75,200 shares of our
common stock which Mr. Panzo owns with his spouse as joint tenants with
the right of survivorship.
(3) Includes 201,883 shares of our common stock issuable upon exercise of
vested options. Does not include 130,533 shares of our common stock
issuable pursuant to options not presently exercisable and not exercisable
within 60 days of the date of this prospectus.
(4) Includes 206,050 shares of our common stock issuable upon exercise of
vested options. Does not include 176,366 shares of our common stock
issuable pursuant to options not presently exercisable and not exercisable
within 60 days of this date of this prospectus.
(5) Includes 315,000 shares of our common stock issuable upon exercise of
vested options. Does not include 585,000 shares of our common stock
issuable pursuant to options not presently exercisable and not exercisable
within 60 days of the date of this prospectus.
(6) Includes 212,500 shares of our common stock issuable upon exercise of
vested options. Does not include 687,500 shares of our common stock
issuable pursuant to options not presently exercisable and not exercisable
within 60 days of the date of this prospectus.
(7) Includes 50,000 shares of our common stock issuable upon exercise of
vested options. Does not include 250,000 shares of our common stock
issuable pursuant to options not presently exercisable within 60 days of
the date of this prospectus.
(8) Does not include 120,000 shares of our common stock issuable pursuant to
options not presently exercisable and not exercisable within 60 days of
the date of this prospectus.
72
<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 June 15, 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 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. Three of the selling stockholders own shares of our common stock
which they received upon conversion of convertible debentures which we issued to
them in June 1999. The remaining selling stockholders own shares of our Series C
Preferred Stock and common stock purchase warrants. In addition, these selling
stockholders are entitled to receive dividends on their shares of Series C
Preferred Stock at the rate of 8% per annum. These dividends are paid on a
quarterly basis in additional shares of Series C Preferred Stock. This
prospectus covers 358,904 shares of our common stock with respect to these
dividends. This amount will cover all shares of common stock which we will issue
upon conversion of shares of Series C Preferred Stock which we will be required
to issue in payment of dividends through March 31, 2001. We have allocated these
shares to the holders of the Series C Preferred Stock based on the dividends
which they will receive if they hold the shares of Series C Preferred Stock
which they currently own through March 31, 2001. The number of shares of our
common stock which we are required to issue in connection with these dividends
could be significantly less than this amount depending on whether the selling
stockholders elect to exercise their conversion rights prior to March 31, 2001.
The number of shares of common stock listed in this table was
calculated assuming:
o that the holders of our Series C Preferred Stock will
convert their shares of our Series C Preferred Stock into
4,166,667 shares of our common stock;
o that the holders of our Series C Preferred Stock will
exercise all 416,667 issued and outstanding warrants;
o that the holders of our Series C Preferred Stock will not
elect to exercise their conversion rights prior to March 31,
2001; and
o that the holders of our Series C Preferred Stock will
convert their shares of our Series C Preferred Stock which
they receive as payment of dividends through March 31, 2001
into 358,904 shares of our common stock.
Each holder of our shares of Series C Preferred Stock may only convert
its shares of Series C 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.
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 C Preferred Stock.
These shares may be offered from time to time by the selling
stockholders named below. However, the selling stockholders are under no
obligation to sell all or any portion of these shares of our common stock. In
addition, the selling stockholders are not obligated to sell such shares of our
common stock immediately under this prospectus. Since the selling stockholders
may sell all or part of the shares of common stock offered in this prospectus,
we cannot estimate the number of shares of our common stock that will be held by
the selling stockholders upon termination of this offering.
None of the selling stockholders is an officer or director of our
company. None of the selling stockholders has had any material relationship with
our company, our affiliate companies or our predecessors within the last three
years.
<TABLE>
<CAPTION>
Number of Shares Percentage Number of Shares Percentage
of Common Stock Before of Common Stock After
Name Before Offering Offering (1) After Offering Offering
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brown Simpson Partners I, Ltd. (2)
Carnegie Hall Tower
152 West 57th Street, 40th Fl.
New York, NY 10019 1,188,448 6.5 200,000 *
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage Number of Shares Percentage
of Common Stock Before of Common Stock After
Name Before Offering Offering (1) After Offering Offering
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Catalyst Partners, L.P.
350 Park Avenue, 11th Floor
New York, NY 10022 98,844 * 0 *
TGT Capital Partners, LP
375 Park Avenue, Suite 1404
New York, NY 10152 197,690 1.1 0 *
Narragansett I, LP
375 Park Avenue, 14th Floor
New York, NY 10152 98,844 * 0 *
Emergent Capital Investment
Management, LLC
551 Madison Ave., 10th Floor
New York, NY 10022 197,690 1.1 0 *
Gavleborgs Lansforsakingar
Box 206, 80101 Gavle
SWEDEN 98,844 * 0 *
N. Herrick Irrevocable
Securities Trust, Howard
Herrick, Trustee
20 Community Place, 2nd Fl.
Morristown, NJ 07960 197,690 1.1 0 *
Scout Capital Partners, LP
153 East 53rd Street, 55th Fl.
New York, NY 10022 29,653 * 0 *
Asset Management Holding Co.
591 Stewart Ave., Suite 550
Garden City, NY 11530 19,769 * 0 *
Edward O. Thorp
c/o Amroc Investments
535 Madison Ave., 15th Floor
New York, NY 10022 34,596 * 0 *
Jeffrey Thorp
c/o Amroc Investments
535 Madison Ave., 15th Floor
New York, NY 10022 14,827 * 0 *
Halifax Fund, L.P.
195 Maplewood Avenue
Maplewood, NJ 07040 197,690 1.1 0 *
Fisher Partners
Fondkommission, AB
Kundggaten 37
11156 Stockholm, SWEDEN 98,844 * 0 *
ACIE/NET VALUE, LLC
65 East 55th St., 18th Floor
New York, NY 10022 148,267 * 0 *
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage Number of Shares Percentage
of Common Stock Before of Common Stock After
Name Before Offering Offering (1) After Offering Offering
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montrose Investments Ltd.
300 Crescent Ct., Suite 700
Dallas TX 75201 691,913 3.6 0 *
Anegada Fund, Ltd.
P.O. Box 896
Harbour Center, 2nd Fl.
George Town, Grand Cayman
Cayman Islands, BWI 32,153 * 2,500 *
Tonga Partners, LP
600 California Street
San Francisco, CA 94108 500,884 2.8 431,691 1.8
Aspen International ltd.
Charlotte House
Charlotte Street
Nassau, BAHAMAS 101,415 * 0 *
Gilston Corporation Ltd.
Charlotte House
Charlotte Street
Nassau, BAHAMAS 98,844 * 0 *
The Raptor Global Portfolio, Ltd.
40 Rowes Wharf, 2nd Fl.
Boston, MA 02110 492,049 2.7 0 *
The Altar Rock Fund, L.P.
40 Rowes Wharp, 2nd Fl.
Boston, MA 02110 2,174 * 0 *
Martin H. Garvey
72 Wootton Road
Essex Fells, NJ 07042 29,425 * 18,750 *
Eric Hauser
425 East 58th Street, Apt. 7A
New York, NY 10022 29,425 * 18,750 *
Michael Lauer
Seven Dwight Lane
Greenwich, CT 06831 295,402 1.7 210,000 *
Lancer Partners, L.P.
475 Steamboat Road
Greenwich, CT 06830 148,267 * 0 *
Lancer Offshore, Inc.
Kaya Flamboyan 9, Curacao
Netherland Antilles 439,282 2.4 199,682 *
Bridgewater Partners, L.P.
880 Third Avenue
New York, NY 10022 141,217 * 42,373 *
CSL Associates
880 Third Avenue
New York, NY 10022 141,217 * 42,373 *
Gladstone Equity Funds, Inc.
880 Third Avenue
New York, NY 10022 45,884 * 21,173 *
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage Number of Shares Percentage
of Common Stock Before of Common Stock After
Name Before Offering Offering (1) After Offering Offering
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ogden Properties, Inc.
31 Piper Drive
Searington, NY 11507 98,844 * 0 *
Schottenfeld Associates, L.P.
880 Third Avenue, 16th Floor
New York, NY 10022 148,267 * 0 *
Nicholas Stiassni & Suzanne
Stiassni Co., Trustees of the
Stiassni Family Trust
3400 Palos Verdes Drive West
Rancho Palos Verdes, CA 90275 29,653 * 0 *
BNY Capital Markets, Inc.
445 Park Avenue
New York, NY 10022 41,515 * 0 *
Amro International, SA
Westminster Securities
Attn: Thomas Badian,
Attorney-in-Fact
100 Park Avenue, 28th Floor
New York, NY 10017 212,222 1.2 0 *
Austost Anstalt Schaan
Landstrasse 163
9494 Furstentums
Vaduz Liechtenstein 212,222 1.2 0 *
Balmore Funds, SA
Trident Chambers
P.O. Box 146
Roadtown Tartola
British Virgin Island 212,222 1.2 0 *
--------- ---- -
TOTAL 6,766,196 1,187,292
========= =========
</TABLE>
----------
* Less than one percent.
(1) Calculated in accordance with Rule 13d-3(d)(i) of the Securities Exchange
Act of 1934. Reflects all dividends which the holders of the Series C
Preferred Stock have earned and will earn within 60 days of the date of this
prospectus.
(2) Although this fund may own shares of our Series C Preferred Stock which are
convertible into greater than five percent of our issued and outstanding
common stock as of June 30, 2000, the Certificate of Designation of Powers,
Preferences and Rights of the Series C Preferred Stock prohibits any of the
holders of the Series C Preferred Stock from converting shares of our Series
C Preferred Stock to the extent that such conversion would cause the
aggregate number of shares of our common stock beneficially owned by such
holder and its affiliates to exceed 4.99% of the outstanding shares of our
common stock following such conversion.
76
<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.
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
77
<PAGE>
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 C 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 C 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 the Series A Preferred Stock
of Net Value, Inc. This represented 100% of the issued and outstanding shares of
Series A Preferred Stock of Net Value, Inc. In October 1998, we also completed a
share exchange transaction with Rozel International Holdings, Ltd. in which we
issued 1,145,594 shares of our common stock valued at $4,628,200 and 1,145,594
shares of our Series A Preferred Stock valued at $91,648 in exchange for
4,582,377 shares of common stock of Net Value, Inc. Rozel International
Holdings, Ltd. is a beneficial owner of approximately 15.9% of our common stock.
78
<PAGE>
Recapitalization of Securities Issued in Strategicus Merger.
We completed our merger with Strategicus Partners on July 30, 1999.
Subject to vesting provisions described in the merger agreement, we issued the
following shares of our capital stock to the stockholders of Strategicus
Partners:
<TABLE>
<CAPTION>
Vested Shares Unvested Shares of Vested Shares of Unvested Shares of
of Common Common Stock Series A Preferred Series A Preferred
Stock Stock Stock
<S> <C> <C> <C> <C>
Douglas Spink 239,847 1,641,310 73,678 504,187
Barry Uphoff 120,394 1,760,763 36,983 540,882
Darr Aley 120,394 1,760,763 36,983 540,882
Stephen George 120,394 1,760,763 36,983 540,882
---------- ----------- -------- ----------
TOTAL 601,029 6,923,599 184,627 2,126,833
TOTAL VALUE $3,638,084 $21,458,719 $142,163 $1,637,661
</TABLE>
Following the completion of the merger, Messrs. Spink, Uphoff, Aley and George
joined our Board of Directors. Subsequently, Mr. Spink resigned from our Board
of Directors during the first quarter of 2000 and Mr. Uphoff resigned from our
Board of Directors in May 2000.
The unvested shares of our capital stock listed above were intended to
vest ratably on a monthly basis over periods ranging from 24 months to 48 months
based on the individual stockholder's continued employment or engagement as a
consultant with Net Value Holdings.
Following our merger with Strategicus, the securities issued in the
merger were recapitalized in several stages as follows:
1. In August 1999, we issued 2,898,788 shares of our common stock in
exchange for all 4,831,312 issued and outstanding shares of our
Series A Preferred Stock. Of this amount, Messrs. Spink, Uphoff,
Aley and George received a total of 1,386,876 shares of our common
stock valued at $6,012,738 in exchange for the cancellation of all
of their 2,311,460 shares of our Series A Preferred Stock.
2. On August 31, 1999, each of Messrs. Uphoff, Darr Aley and George
agreed to immediately cancel all of their 6,255,876 unvested shares
of our common stock valued at $37,927,669 (consisting of 5,282,289
unvested shares of our common stock pursuant to our merger with
Strategicus Partners, and 973,587 unvested shares of our common
stock in the Series A Preferred Stock Exchange described above) in
exchange for options to purchase a total of 6,255,876 shares of our
common stock valued at $11,889,024. Each of these options has an
exercise price of $1.00 per share and will be subject to the same
vesting provisions that applied to the unvested shares of common
stock as described in our merger agreement with Strategicus
Partners.
3. During September 1999, each of Messrs. Uphoff, Aley, George and
Panzo agreed to surrender options to purchase 180,000 shares of our
common stock valued at $646,884. On September 13, 1999, Mr. Spink
agreed to cancel 180,000 of his unvested shares of common stock
valued at $1,148,727.
4. During January 2000, each of Messrs. Uphoff, Aley and George agreed
to surrender options to purchase 1,217,876 shares of our common
stock valued at $4,376,803.
5. During May 2000, each of Messrs. Uphoff and Aley agreed to surrender
options to purchase 355,000 shares of our common stock. During May
2000, Mr. George agreed to surrender options to purchase 305,000
shares of our common stock. Their remaining options were
recharacterized as common stock purchase warrants.
Recapitalized as set forth above, the securities which we issued
pursuant to our merger with Strategicus Partners were issued and outstanding as
of May 31, 2000, as follows:
Warrants
Vested Shares of to Purchase Shares
Common Stock of Common Stock
Douglas Spink 431,041 0
Barry Uphoff 142,584 332,416
Darr Aley 142,584 332,416
Stephen George 142,584 382,416
------- ---------
TOTAL 858,793 1,047,248
======= =========
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The table set forth above does not reflect 1,616,835 unvested shares of
our common stock which we believe are subject to surrender by Mr. Spink
following his termination "for cause."
Loans Made in Connection With Our Merger With Strategicus Partners, Inc.
In May 1999, Strategicus Partners made a loan to Mr. Spink in the
principal amount of $310,000. This amount was extended to Mr. Spink to provide
funds for expenses which he incurred in connection with the start-up of
metacat.com, Inc. This transaction was structured as a loan to induce Mr. Spink
to remain our employee for at least one year. The loan accrues interest at a
simple rate of 9% per annum. The repayment of the principal amount of this loan
plus all accrued interest was originally due on July 12, 1999 but was
subsequently extended to July 30, 1999. Upon the completion of our merger with
Strategicus Partners, we entered into an employment agreement with Mr. Spink in
which we agreed not to take any actions to demand repayment or to collect this
loan during the term of the employment agreement so long as we do not terminate
Mr. Spink's employment for "cause," death or disability (as such terms are
defined in the employment agreement) and we agreed to forgive the principal
amount plus all accrued interest related to this loan if Mr. Spink remained an
employee of our company on the first anniversary of his employment. On January
21, 2000, we sent Mr. Spink written notice terminating his employment agreement
for "cause", effective October 19, 1999. Accordingly, we intend to take legal
action to obtain repayment of the principal amount of this loan plus all accrued
interest thereon. In addition, in July 1999, Strategicus made an advance to Mr.
Spink in the principal amount of approximately $185,000. We intend to take legal
action to obtain repayment of this advance.
In June 1999, we extended a loan to Mr. Darr Aley in the principal
amount of $267,000. This amount was extended to Mr. Aley as an inducement for
him to leave his prior employment. This transaction was structured as a loan to
induce Mr. Aley to remain our consultant for the duration of his engagement. The
repayment of the principal amount of this loan plus all accrued interest was
originally due on July 12, 1999 but was subsequently extended to July 30, 1999.
Upon the completion of our merger with Strategicus Partners, we entered into a
consulting agreement with Mr. Aley in which we agreed not to take any actions to
demand repayment or to collect this loan during the term of the consulting
agreement. We also agreed to forgive Mr. Aley 's obligation to repay a portion
of this loan if he remains engaged as a consultant to our corporation on each of
the first three anniversaries of the date of his consulting agreement.
Personal Investments of Members of Our Management Team in Our Affiliate
Companies
Members of our management team have made personal investments in some
of our affiliate companies. As of May 31, 2000, members of our management team
either own or have in the past owned the following equity interests in our
affiliate companies:
<TABLE>
<CAPTION>
Affiliate company Equity Interest
----------------- ---------------
<S> <C> <C>
Andrew P. Panzo YesAsia 12,000 shares of common stock
Barry Uphoff (former director) YesAsia 12,000 shares of common stock
Darr Aley YesAsia 12,000 shares of common stock
Darr Aley College 411 50,000 stock options
Stephen George YesAsia 12,000 shares of common stock
Stephen George College 411 37,500 stock options
Thomas Aley Swapit.com 30,072 shares of common stock
Lee Hansen YesAsia 3,430 shares of Series B Preferred Stock
Douglas Spink (former director) YesAsia 12,000 shares of common stock
Douglas Spink (former director) WebModal 400 shares of common stock
</TABLE>
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San Francisco Office Space
We shared office space in San Francisco, California with a corporation
owned by Mr. George, at no expense from October 1999 until March 2000.
Contribution of Shares of Swapit.com, Inc. Common Stock From Thomas Aley
In November 1999, we purchased a 10% equity ownership interest in
Swapit.com, Inc. for $500,000. Thomas Aley, our Executive Vice President,
Business Development, was a founder of this company and owned 1,140,000 shares
of its common stock as of the date we completed our purchase of this equity
ownership interest. In connection with this transaction, Mr. Aley has agreed to
contribute 1,109,928 of these shares of Swapit.com's common stock to our
company. Upon the completion of this transaction, we will own approximately 30%
of Swapit.com's issued and outstanding common stock.
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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 March 2000, we sold 4,166,667 shares of our Series C Preferred Stock
to a group of institutional investors and their affiliates led by Tudor
Investment Corporation, Brown Simpson Asset Management and BNY Capital Markets,
Inc. for an aggregate purchase price of $50 million.
Each share of our Series C Preferred Stock is convertible into one
share of our common stock. This conversion ratio is subject to adjustment under
certain circumstances to protect the holders of the Series C Preferred Stock
against future dilutive transactions. The holders of our Series C Preferred
Stock may convert their shares of Series C Preferred Stock into shares of our
common stock at any time. Our Series C Preferred Stock shall automatically be
converted into shares of common stock upon:
o the affirmative vote of holders of 80% of the outstanding shares of
Series C Preferred Stock;
o the closing of a public offering of our common stock pursuant to
which the offering price is at least $30 per share; and
o upon our election, provided that our registration statement
registering the resale of the shares of common stock issuable upon
conversion of the Series C Preferred Stock has been declared
effective by the Securities and Exchange Commission and remains
effective and the closing market price of the our common stock has
been equal to at least $18 per share for a period of at least 20
consecutive business days.
Our Series C Preferred Stock accrues a dividend of 8% per annum which
is required to be paid on a quarterly basis in kind in the form of additional
shares of Series C Preferred Stock. This dividend rate shall increase by 1% on
October 3, 2000 and by an additional 1% on the 90th day of each 90-day period
thereafter if our
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application to list our shares of common stock on the NASDAQ SmallCap Market or
another national exchange has not been approved prior to such dates.
We are obligated to redeem the issued and outstanding shares of our
Series C Preferred Stock within 60 days of receiving written notice from holders
of at least 80% of the issued and outstanding shares of our Series C Preferred
Stock upon:
o any voluntary or involuntary bankruptcy, receivership, assignment for
the benefit of creditors, liquidation or acceleration of any third
party obligations;
o any payment default continuing for at least 120 days where the
aggregate amount in default is greater than $750,000; and
o our use of the proceeds of the offering in a manner which is not
permitted by the Series C Preferred Stock Purchase Agreement.
Any such redemption shall be at a price per share equal to the greater of (i)
the liquidation value of our Series C Preferred Stock of $12.00 per share plus
all accrued and unpaid dividends, or (ii) the fair market value per share of the
our common stock on the redemption date.
In connection with the issuance of our Series C Preferred Stock, we
issued warrants to purchase an aggregate of 416,667 shares of our common stock
to the purchasers of our Series C Preferred Stock. The warrants are exercisable
until March 2, 2003 at an exercise price of $26.58 per share of our common stock
(subject to adjustment in certain circumstances), provided that if while this
registration statement is effective, the closing market price of our common
stock is at least $39.87 per share for at least 30 consecutive days, then we may
terminate the warrants upon 30 days prior written notice.
Until the earlier of March 3, 2001 or the date on which we close a
public offering of our common stock at an offering price of at least $30 per
share and pursuant to which we receive gross proceeds of at least $20,000,000,
each holder of our Series C Preferred Stock has the right to purchase that
number of shares of our capital stock sold in a private placement offering which
we complete for financing purposes equal to its pro rata ownership interest in
our company, calculated on a fully diluted, as converted basis. This right does
not apply to any shares of capital stock issued pursuant to any stock option,
incentive, or benefit plan or in connection with any merger, acquisition or
other strategic purpose which is not primarily to raise equity capital.
Registration Rights
Founders Equity Group, Inc., Founders Mezzanine Investors III, LLC,
George and Nancy Moorehead Charitable Trust, and Donald and Shelley Moorehead
Charitable Trust, 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.
Upon a change of control Messrs. Panzo, Spink, Uphoff, Darr 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. The merger
agreement with Strategicus Partners and Douglas Spink which grants these
registration rights, defines a change of control as the occurrence of any one of
the following:
o any "person" as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, other than one
of our subsidiaries or affiliates becomes a "beneficial
owner," as such term is used in Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, of 50% or more of any
class of issued and outstanding capital stock which
ownership interest constitutes 50% or more of all issued and
outstanding voting shares;
o the majority of the members of our Board of Directors
consists of individuals other than members of our Board of
Directors on July 30, 1999, provided that persons elected to
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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.
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 2,981,986 common
stock purchase warrants, as follows:
<TABLE>
<CAPTION>
Holder Date of Issuance # of Shares Exercise Price Expiration Date
Per Share
<S> <C> <C> <C> <C>
Founders Equity March 1999 90,000 $2.50 February 2002
Group, Inc.
Founders Equity March 1999 90,000 $5.00 February 2002
Group, Inc.
Various Investors Various Dates 1,143,968 $6.00 3 years from Grant
Date
Private Capital October 1999 110,007 $5.00 October 2002
Source, Ltd.
Series B Preferred October 1999 21,024 $4.49625 August 2000
Stockholders
Series B Preferred October 1999 21,024 $4.905 August 2000
Stockholders
Series B Preferred October 1999 21,024 $5.31375 August 2000
Stockholders
Series B Preferred October 1999 21,024 $5.7225 August 2000
Stockholders
Series C Preferred March 2000 416,667 $26.58 March 2003
Stockholders
Barry Uphoff May 2000 332,416 $ 1.00 May 2005
Darr Aley May 2000 332,416 $ 1.00 May 2005
Stephen George May 2000 382,416 $ 1.00 May 2005
</TABLE>
The exercise price for each of these warrants is subject to
proportionate adjustment in the event of:
o a recapitalization, reorganization, reclassification, merger
of our company or the sale of substantially all of our
assets;
o a subdivision or combination of shares of our common stock;
and
o a stock dividend.
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In addition, the warrants held by the former holders of Series B
Preferred Stock are subject to proportionate adjustment in the event of any of
the following transactions, other than transactions which are not considered
Subsequent Financings, as that term is defined in Section 3.13 of the Series B
Convertible Preferred Stock Agreement dated as of September 17, 1999, a copy of
which is included at Exhibit 10.19 hereto:
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 of the warrants held by the former holders of our Series B
Preferred Stock:
o any issuance of our securities other than for cash, as
consideration for a merger, consolidation or sale of assets,
in connection with any strategic partnership or joint
venture or in exchange for assets, stock or joint venture
interests;
o our grant of any securities pursuant to an employee benefit
plan, stock option plan, restricted stock plan or stock
purchase plan for the benefit of our employees or directors;
o any transactions regarding the sale or exchange of our
securities at a price per share greater than the price of
the Series B Preferred Stock;
o any securities issued upon 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 while this registration statement is effective, the closing market
price of our common stock is at least $39.87 per share for at least 30
consecutive days, then we may terminate the warrants held by our Series C
Preferred Stockholders upon 30 days prior written notice.
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.
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 a breach of the director's duty of loyalty to our
corporation or its stockholders;
o acts or omissions by the director not in good faith or which
involve intentional misconduct or a knowing violation of
law;
o a willful or negligent declaration of an unlawful dividend,
stock purchase or redemption; or
o 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.
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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 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.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock, including our
common stock issued upon exercise of outstanding options and warrants and
conversion of outstanding shares of preferred stock, in the public market could
adversely affect market prices prevailing from time to time and could impair our
ability to raise capital through the sale of equity securities.
As of June 15, 2000, there were 17,680,673 shares of our common stock
issued and outstanding. Approximately 11.8 million of the shares are subject to
restrictions upon resale as "restricted shares" as defined in Rule 144 under the
Securities Act of 1933. Approximately 5.8 million of the shares are free
trading. In addition, the shares of common stock which are issuable upon
conversion of 4,166,667 shares of our Series C Convertible Preferred Stock, upon
conversion of 358,904 shares of our Series C Convertible Preferred Stock which
will be issued as dividends on our Series C Preferred Stock through March 31,
2001, and upon exercise of 416,667 common stock purchase warrants which are held
by the holders of our Series C Convertible Preferred Stock will all become
eligible for resale pursuant to this prospectus.
The public resale of our "restricted shares" is governed by Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who owns shares that were purchased from us (or any
affiliate) at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three-month period, a number of
shares that does not exceed 1% of the then outstanding shares of our common
stock. If our common stock is subsequently included for trading in an automated
inter-dealer quotation system or listed on a national securities exchange, then
the volume limitation will become 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.
Based upon the respective dates of issuance, approximately 8.3 million
of our "restricted shares" are presently eligible for resale under Rule 144. The
remainder of our "restricted shares" will all become eligible for resale under
Rule 144 at various times throughout 2000.
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Of our "restricted shares," the holders of approximately 6.6 million
shares have agreed, by contract or other arrangement, not to sell or transfer
their shares of common stock except according to the schedule identified below.
Of our free trading shares, the holders of approximately 1.1 million shares have
agreed, by contract or other arrangements, not to sell or transfer their shares
of common stock except according to the schedule identified below.
Approximate
Number of Shares
Subject to Restriction Restrictions In
(in millions) Effect Through
---------------------- --------------
.8 August 15, 2000
.1 September 30, 2000
4.4 December 15, 2000
.1 January 31, 2001
2.3 The earlier of August 31, 2001,
or on the one year anniversary
of the effective date of our merger
with Net Value, Inc.
If the closing price of our common stock is at least $12.00 per share
for each of the ten trading days prior to September 30, 2000, then approximately
.5 million of the shares which are scheduled to be released on the earlier of
August 31, 2001 or the one year anniversary of the effective date of our merger
with Net Value, Inc will be released from these transfer restrictions on
September 30, 2000. If the closing price of our common stock is at least $12.00
per share for each of the ten trading days prior to January 31, 2001, then
approximately .5 million of the shares which are scheduled to be released on the
earlier of August 31, 2001 or the one year anniversary of the effective date of
our merger with Net Value, Inc. will be released from these transfer
restrictions on January 31, 2001. These transfer restrictions do not apply to
transfers to the stockholder's immediate family members or trusts for estate
planning purposes, or to transfers or sales made with our prior written consent
or the prior written consent of a placement agent whom we designate.
In addition to the outstanding shares of our common stock described
above, as of the date of this prospectus, we have 5,246,000 shares of common
stock reserved for issuance upon the exercise of outstanding options and
2,981,986 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.
As we discussed under the Risk Factors section of this prospectus,
future sales of restricted common stock under Rule 144 or otherwise, or of the
shares that are covered by this prospectus, may create downward pressure on the
trading price of our common stock. This pressure could, in turn, negatively
effect the market price of our 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 could have on the
market price of our common stock prevailing from-to-time.
EXPERTS
LJ Soldinger Associates completed the audit of our consolidated
financial statements for the years ended December 31, 1997 and 1998. In February
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2000, we dismissed LJ Soldinger Associates as our independent accounting firm
and we engaged KPMG LLP as our independent accounting firm. KPMG LLP completed
the audit of our consolidated financial statements for the year ended December
31, 1999. LJ Soldinger Associates has confirmed that they did not have any
disputes or disagreements with our management regarding accounting principles or
practices, financial disclosure or auditing scope of procedures.
For periods in which we were inactive prior to our acquisition of a
controlling interest in Net Value, Inc., Barry L. Friedman, P.C. completed
audits of our financial statements and was subsequently dismissed when we
engaged LJ Soldinger Associates in 1998. Barry L. Friedman, P.C. confirmed that
they did not have any disputes or disagreements with management regarding
accounting principles or practices, financial disclosure or auditing scope or
procedures.
The consolidated financial statements of Net Value Holdings, Inc. as of
December 31, 1999 and for the year ended December 31, 1999 have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Net Value Holdings, Inc. as of
December 31, 1998 and for each of the years in the two-year period ended
December 31, 1998 have been included herein and in the registration statement in
reliance upon the report of LJ Soldinger Associates, independent certified
public accountants, given on the authority of said firm as experts in accounting
and auditing.
The following reports have been included herein and in the registration
statement in reliance upon the report of Morgenstern & Associates, independent
certified public accountants, given on the authority of that firm as experts in
accounting and auditing:
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 financial statements of Webmodal, Inc. as of December 31, 1999 and
for the period from July 28, 1999 (inception) through December 31, 1999 have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
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
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Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain additional information
regarding the operation of the Public Reference Section by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at the address http://www.sec.gov.
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<TABLE>
<CAPTION>
Net Value Holdings, Inc.
Index to Financial Statements
Page
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY: Reference
<S> <C>
Independent Auditors' Report KPMG F1
Independent Auditors' Report L J Soldinger Associates F2
Consolidated Balance Sheets as of December 31, 1998 and 1999 and March 31, 2000 (unaudited) F3
Consolidated Statements of Operations for the three years ended December 31, 1999 and the three months ended
March 31, 1999 and 2000 (unaudited) F4
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1999 and the
three months ended March 31, 2000 (unaudited) F5
Consolidated Statements of Cash Flows for the three years ended December 31, 1999 and the three months ended
March 31, 1999 and 2000 (unaudited) F6
Notes to Consolidated Financial Statements F7
FINANCIAL STATEMENTS OF AFFILIATE COMPANIES:
Asset Exchange.com, Inc.
Independent Auditor's Report F30
Balance Sheet as of September 30, 1999 F31
Statement of Operations for the period March 12, 1999 (date of inception)through September 30, 1999 (unaudited) F32
Statement of Stockholders' Equity for the period March 12, 1999 (date of inception) through September 30, 1999 (unaudited) F33
Statement of Cash Flows for the period March 12, 1999 (date of inception) to September 30, 1999 (unaudited) F34
Notes to Financial Statements F35
College 411.com, Inc.
Independent Auditors' Report F39
Balance Sheet as of September 30, 1999 F40
Statement of Operations for the period April 13, 1999 (date of inception) through September 30, 1999 (unaudited) F41
Statement of Stockholders' Equity for the period April 13, 1999 (date of inception) through September 30, 1999 (unaudited) F42
Statement of Cash Flows for the period April 13, 1999 (date of inception) to September 30, 1999 (unaudited) F43
Notes to Financial Statements F44
Swapit.com, Inc.
Independent Auditors' Report F49
Balance Sheet as of November 30, 1999 F50
Notes to Financial Statements F51
IndustrialVortex.com, Inc.
Independent Auditors' Report F55
Balance Sheet as of December 31, 1999 F56
Statement of Operations for the period May 20, 1999 (date of inception) through December 31, 1999 F57
Statement of Stockholders' Deficit for the period May 20, 1999 (date of inception) through December 31, 1999 F58
Statement of Cash Flows for the period May 20, 1999 (date of inception) through December 31, 1999 F59
Notes to Financial Statements F60
Strategicus Partners, Inc.
Consolidated Balance Sheet as of June 30, 1999 (unaudited) F64
Consolidated Statements of Operations for the six months ended June 30, 1999 (uaudited) F65
Consolidated Statements of Stockholders' Equity for the six months ended June30, 1999 (unaudited) F66
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 (unaudited) F67
Notes to Consolidated Financial Statements F68
Webmodal, Inc.
Independent Auditors' Report F72
Balance Sheet as of December 31, 1999 and March 31, 2000 (unaudited) F73
Statement of Operations for the period July 28, 1999 from (date of inception) through December 31, 1999
and the three months ended March 31, 2000 (unaudited) F74
Statement of Stockholders' Equity for the period from July 28, 1999 (date of inception) through December 31, 1999
and the three months ended March 31, 2000 (unaudited) F75
Statement of Cash Flows for the period from July 28, 1999 (date of inception) through December 31, 1999 F76
Notes to Financial Statements F77
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Basis of Presentation F86
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2000 F87
Pro Forma Condensed Consolidated Statements of Operations for the three months ended March 31, 2000 F88
Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1999 F89
</TABLE>
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Net Value Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Net Value
Holdings, Inc. and subsidiaries (the Company) as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Net Value Holdings,
Inc. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
March 31, 2000
- F1 -
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Net Value Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Net Value
Holdings, Inc. as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Net Value Holdings,
Inc. as of December 31, 1998, and the results of its operations, stockholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's negative
working capital position, substantial losses incurred since inception, and
dependence on outside financing raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
April 30, 1999
- F2 -
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31, March 31,
Assets 1998 1999 2000
---------------------------- -------------
(Unaudited)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,466 $ 3,127,232 $ 45,715,612
Interest receivable -- 28,176 21,603
Loans receivable 200,000 218,808 212,833
Capitalized financing fees, net 170,182 142,958 --
Prepaid expenses and other current assets -- 41,911 202,875
----------- ------------ -------------
Total current assets 371,648 3,559,085 46,152,923
Ownership interests in and advances to Affiliate Companies -- 7,065,557 11,091,706
Goodwill, net of accumulated amortization of $0, $578,906
and $891,224 in 1998, 1999 and 2000 -- 3,227,298 2,914,980
Furniture and equipment, net -- 70,082 113,219
Other assets -- 67,346 106,450
----------- ------------ -------------
$ 371,648 $ 13,989,368 $ 60,379,278
=========== ============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 148,421 $ 802,202 $ 367,579
Notes and loans payable 1,140,000 12,000 12,000
Convertible promissory notes -- 1,921,929 28,281
Convertible debentures 1,402,500 3,250,500 --
Long-term debt due within one year -- 11,732 63,165
Net liabilities of discontinued operations 6,430,891 1,773,591 1,693,807
----------- ------------ -------------
Total current liabilities 9,121,812 7,771,954 2,164,832
----------- ------------ -------------
Noncurrent liabilities:
Long-term debt, less amounts due within one year -- 67,302 --
----------- ------------ -------------
Total noncurrent liabilities -- 67,302 --
----------- ------------ -------------
Redeemable convertible preferred stock, Series B,
$.001 par value (4,824 shares authorized, issued and outstanding at
1999), net of costs of issuance. Liquidation
preference: $4,824,000 at 1999 -- 4,448,872 --
Redeemable convertible preferred stock, Series C,
$.001 par value (4,166,667 shares authorized, issued and outstanding at
March 31, 2000), net of costs of issuance and proceeds
allocated to Series C warrants. Liquidation
preference: $50,000,000 at 2000 -- -- 40,883,087
Preferred stock dividend, Series C -- -- 335,895
----------- ------------ -------------
-- 4,448,872 41,218,982
Stockholders' equity:
Convertible preferred stock, Series A , $.001
par value (2,519,852 shares authorized, issued and outstanding at 1998),
net of costs of issuance 2,520 -- --
Common stock, Net Value Inc. $.001 par value (49,000,000 shares authorized at
1998, 1999 and 2000; 1,037,338 shares issued and outstanding at 1998 and 1999;
898,338 shares issued and outstanding at 2000) 1,038 1,038 899
Common stock, $.001 par value (50,000,000 shares authorized at 1998, 1999, 2000;
6,969,852, 15,522,807 and 19,281,193 shares issued and outstanding at 1998
1999 and 2000, respectively) 6,970 15,523 19,281
Additional paid-in capital 39,005,768 103,946,136 195,662,668
Deferred compensation (3,283,532) (27,342,172) (52,539,583)
Accumulated deficit (44,482,928) (74,919,285) (126,130,306)
Treasury stock, Net Value Inc., at cost (5,000 shares at 2000) -- -- (17,495)
----------- ------------ -------------
Total stockholders' equity (deficit) (8,750,164) 1,701,240 16,995,464
----------- ------------ -------------
$ 371,648 $ 13,989,368 $ 60,379,278
=========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
- F3 -
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31 Three months ended March 31
--------------------------------------- ---------------------------
1997 1998 1999 1999 2000
---------- --------- ---------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ -- $ --
Operating expenses:
Stock-based compensation -- -- 7,320,695 -- 5,894,187
General and administrative -- 140,484 3,719,497 44,441 2,103,478
----------- ----------- ----------- ---------- -----------
Total operating expenses -- 140,484 11,040,192 44,441 7,997,665
Interest income -- -- 60,526 -- 211,957
Interest expense -- 1,441,399 12,380,157 1,383,959 73,776
Financing fees -- 48,436 523,601 -- --
----------- ----------- ----------- ---------- -----------
Loss before equity in losses of Affiliate Companies -- 1,630,319 23,883,424 1,428,400 7,859,484
Equity in losses of Affiliate Companies -- -- 79,559 -- 298,851
----------- ----------- ----------- ---------- -----------
Net loss from continuing operations -- 1,630,319 23,962,983 1,428,400 8,158,335
----------- ----------- ----------- ---------- -----------
Discontinued operations:
Loss from discontinued operations 11,235,237 11,106,826 6,370,776 1,498,593 --
Gain on disposal of discontinued operations -- -- 6,502,663 -- --
----------- ----------- ----------- ---------- -----------
Net loss 11,235,237 12,737,145 23,831,096 2,926,993 8,158,335
----------- ----------- ----------- ---------- -----------
Preferred stock dividends
Continuing operations -- -- 6,605,261 -- 43,052,686
Discontinued operations 1,181,250 15,250,500 -- -- --
----------- ----------- ----------- ---------- -----------
Net loss to common shareholders $12,416,487 $27,987,645 $30,436,357 $2,926,993 $51,211,021
=========== =========== =========== ========== ===========
Basic and diluted net (loss) per common share -
continuing operations $ -- $ (0.35) $ (2.90) $ (1.38) $ (3.01)
Basic and diluted net earnings (loss) per common =========== =========== =========== ========== ===========
share - discontinued operations $ (6.88) $ (5.59) $ 0.01 $ (1.44) $ --
=========== =========== =========== ========== ===========
Basic and diluted weighted average common shares outstanding: 1,804,700 4,711,351 10,557,953 1,037,338 16,986,005
=========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- F4 -
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred stock
---------------------------------------------------------------
Net Value, Inc. Net Value Holdings, Inc.
------------------------------ -----------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 1,567,607 $ 1,568
Issuance of preferred stock 22,500 23 -- --
Preferred stock dividend -- -- -- --
Issuance of common stock, net -- -- -- --
Earned common stock for consulting services -- -- -- --
Common stock issued as consideration for notes and loans payable -- -- -- --
Common stock and warrants issued in connection with short-term
bridge financing, net -- -- -- --
Compensatory common stock options issued -- -- -- --
Amortization of deferred compensation -discontinued
operations -- -- -- --
Effects of common stock exchanged -- -- 452,245 452
Net loss -- -- -- --
--------- --------- --------- ---------
Balances at December 31, 1997 22,500 23 2,019,852 2,020
Issuance of preferred stock 276,200 276 -- --
Preferred stock conversion (258,700) (259) 500,000 500
Preferred stock repurchase (40,000) (40) -- --
Preferred stock dividend -- -- -- --
Issuance of warrants -- -- -- --
Issuance of common stock, net -- -- -- --
Common stock issued as consideration for satisfaction of preferred
stock purchase commitment -- -- -- --
Common stock issued as consideration for interest payable -- -- -- --
Issuance of common stock for consulting services -- -- -- --
Acquisition of assets of Holdings -- -- -- --
Compensatory common stock options issued -- -- -- --
Amortization of deferred compensation -discontinued
operations -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
Balances at December 31, 1998 -- -- 2,519,852 2,520
Issuance of warrants -- -- -- --
Issuance of common stock, net -- -- -- --
Common stock issued in connection with conversion of convertible
debentures and interest -- -- -- --
Common stock issued in connection with conversion of notes payable
and interest -- -- -- --
Common and preferred stock issued in connection with
Strategicus merger -- -- 184,627 185
Common stock issued for consulting services -- -- -- --
Contributed capital -- -- -- --
Beneficial conversion features on convertible notes and debentures -- -- -- --
Series A preferred stock conversion -- -- (2,704,479) (2,705)
Preferred stock dividend -- -- -- --
Compensatory common stock and common stock options
issued, net of cancellations -- -- -- --
Amortization of deferred stock based compensation -continuing
operations -- -- -- --
Amortization of deferred stock based compensation -discontinued
operations -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balances at December 31, 1999 -- -- -- --
Issuance of warrants -- -- -- --
Issuance of common stock, net -- -- -- --
Common stock issued in connection with conversion of convertible
debentures and interest -- -- -- --
Common stock issued in connection with conversion of notes payable
and interest -- -- -- --
Common stock issued for consulting services -- -- -- --
Contributed capital -- -- -- --
Beneficial conversion features on convertible notes and debentures -- -- -- --
Beneficial conversion features on preferred stock -- -- -- --
Series B preferred stock conversion -- -- -- --
Preferred stock dividends -- -- -- --
Treasury stock -- -- -- --
Cancellation of shares -- -- -- --
Compensatory common stock and common stock options
issued, net of cancellations -- -- -- --
Amortization of deferred stock based compensation -continuing
operations -- -- -- --
Amortization of deferred stock based compensation -discontinued
operations -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
Balances at March 31, 2000 (unaudited) -- $ -- -- $ --
========= ========= ========= =========
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Common stock
------------------------------------------------------------
Net Value, Inc. Net Value Holdings, Inc.
------------------------ -----------------------------
Shares Amount Shares Amount
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 1,567,607 $ 1,568
Issuance of preferred stock -- -- -- --
Preferred stock dividend -- -- -- --
Issuance of common stock, net 73,750 74 -- --
Earned common stock for consulting services 43,750 44 -- --
Common stock issued as consideration for notes and loans payable 885,770 886 -- --
Common stock and warrants issued in connection with short-term
bridge financing, net 100,625 101 -- --
Compensatory common stock options issued -- -- -- --
Amortization of deferred compensation -discontinued
operations -- -- -- --
Effects of common stock exchanged (452,245) (452) 452,245 452
Net loss -- -- -- --
--------- --------- --------- ---------
Balances at December 31, 1997 651,650 652 2,019,852 2,020
Issuance of preferred stock -- -- -- --
Preferred stock conversion 250,000 250 1,000,000 1,000
Preferred stock repurchase -- -- -- --
Preferred stock dividend -- -- -- --
Issuance of warrants -- -- -- --
Issuance of common stock, net 7,500 8 2,950,000 2,950
Common stock issued as consideration for satisfaction of preferred
stock purchase commitment 37,500 38 -- --
Common stock issued as consideration for interest payable 688 1 -- --
Issuance of common stock for consulting services 90,000 90 -- --
Acquisition of assets of Holdings -- -- 1,000,000 1,000
Compensatory common stock options issued -- -- -- --
Amortization of deferred compensation -discontinued
operations -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
Balances at December 31, 1998 1,037,338 1,038 6,969,852 6,970
Issuance of warrants -- -- -- --
Issuance of common stock, net -- -- 80,388 80
Common stock issued in connection with conversion of convertible
debentures and interest -- -- 2,076,589 2,077
Common stock issued in connection with conversion of notes payable
and interest -- -- 1,732,066 1,732
Common and preferred stock issued in connection with
Strategicus merger -- -- 601,029 601
Common stock issued for consulting services -- -- 676,374 676
Contributed capital -- -- -- --
Beneficial conversion features on convertible notes and debentures -- -- -- --
Series A preferred stock conversion -- -- 1,622,687 1,623
Preferred stock dividend -- -- -- --
Compensatory common stock and common stock options
issued, net of cancellations -- -- 1,763,822 1,764
Amortization of deferred stock based compensation -continuing
operations -- -- -- --
Amortization of deferred stock based compensation -discontinued
operations -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balances at December 31, 1999 1,037,338 1,038 15,522,807 15,523
Issuance of warrants -- -- -- --
Issuance of common stock, net -- -- 214,573 215
Common stock issued in connection with conversion of convertible
debentures and interest -- -- 1,391,853 1,392
Common stock issued in connection with conversion of notes payable
and interest -- -- 946,780 947
Common stock issued for consulting services -- -- 25,000 25
Contributed capital -- -- -- --
Beneficial conversion features on convertible notes and debentures -- -- -- --
Beneficial conversion features on preferred stock -- -- -- --
Series B preferred stock conversion -- -- 1,180,180 1,180
Preferred stock dividends -- -- -- --
Treasury stock (5,000) (5) -- --
Cancellation of shares (134,000) (134) -- --
Compensatory common stock and common stock options
issued, net of cancellations -- -- -- --
Amortization of deferred stock based compensation -continuing
operations -- -- -- --
Amortization of deferred stock based compensation -discontinued
operations -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
Balances at March 31, 2000 (unaudited) 898,338 $ 899 19,281,193 $ 19,281
========= ========= ========== =========
</TABLE>
<PAGE>
RESTUBBED TABLE CONTINUED
<TABLE>
<CAPTION>
Additional Deferred
paid-in Accumulated Treasury stock-based
capital deficit Stock compensation
----------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 3,770,568 $(4,078,796) $ -- $ --
Issuance of preferred stock 224,978 -- -- --
Preferred stock dividend 1,181,250 (1,181,250) -- --
Issuance of common stock, net 551,760 -- -- --
Earned common stock for consulting services 612,453 -- -- --
Common stock issued as consideration for notes and loans payable 3,878,415 -- -- --
Common stock and warrants issued in connection with short-term
bridge financing, net 2,410,541 -- -- --
Compensatory common stock options issued 1,932,150 -- -- (1,932,150)
Amortization of deferred compensation -discontinued
operations -- -- -- 1,434,400
Effects of common stock exchanged (452) -- -- --
Net loss -- (1,235,237) -- --
------------ -------------- -------- -------------
--
Balances at December 31, 1997 14,561,663 (6,495,283) -- (497,750)
Issuance of preferred stock 2,761,724 -- --
Preferred stock conversion (1,491) -- -- --
Preferred stock repurchase (399,960) -- -- --
Preferred stock dividend 15,250,500 (5,250,500) -- --
Issuance of warrants 49,200 -- -- --
Issuance of common stock, net 2,151,473 -- -- --
Common stock issued as consideration for satisfaction of preferred
stock purchase commitment (38) -- -- --
Common stock issued as consideration for interest payable 13,749 -- -- --
Issuance of common stock for consulting services 251,910 -- -- --
Acquisition of assets of Holdings (1,000) -- -- --
Compensatory common stock options issued 4,368,039 -- -- (4,368,039)
Amortization of deferred compensation -discontinued
operations -- -- -- 1,582,257
Net loss -- (2,737,145) -- --
------------ -------------- -------- -------------
--
Balances at December 31, 1998 39,005,768 (4,482,928) -- (3,283,532)
Issuance of warrants 454,000 -- -- --
Issuance of common stock, net 356,536 -- -- --
Common stock issued in connection with conversion of convertible
debentures and interest 4,774,444 -- -- --
Common stock issued in connection with conversion of notes payable
and interest 3,462,402 -- -- --
Common and preferred stock issued in connection with
Strategicus merger 3,637,298 -- -- --
Common stock issued for consulting services 2,965,698 -- -- --
Contributed capital 659,087 -- -- --
Beneficial conversion features on convertible notes and debentures 11,165,145 -- -- --
Series A preferred stock conversion 1,082 -- -- --
Preferred stock dividend 6,605,261 (6,605,261) -- --
Compensatory common stock and common stock options
issued, net of cancellations 30,859,415 -- -- (30,861,179)
Amortization of deferred stock based compensation -continuing
operations -- -- -- 5,031,371
Amortization of deferred stock based compensation -discontinued
operations -- -- -- 1,771,168
Net loss -- (23,831,096) -- --
------------ -------------- -------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balances at December 31, 1999 103,946,136 (74,919,285) -- (27,342,172)
Issuance of warrants 7,391,673 -- -- --
Issuance of common stock, net 831,489 -- -- --
Common stock issued in connection with conversion of convertible
debentures and interest 3,450,061 -- -- --
Common stock issued in connection with conversion of notes payable
and interest 2,009,577 -- -- --
Common stock issued for consulting services 713,914 -- -- --
Contributed capital -- -- -- --
Beneficial conversion features on convertible notes and debentures -- -- -- --
Beneficial conversion features on preferred stock 42,608,327 (42,608,327) -- --
Series B preferred stock conversion 4,304,734 -- -- --
Preferred stock dividends -- (444,359) -- --
Treasury stock -- -- (17,495) --
Cancellation of shares 134 -- -- --
Compensatory common stock and common stock options
issued, net of cancellations 30,406,623 -- -- (30,406,623)
Amortization of deferred stock based compensation -continuing
operations -- -- -- 5,184,812
Amortization of deferred stock based compensation -discontinued
operations -- -- -- 24,400
Net loss -- (8,158,335) -- --
------------ -------------- --------- -------------
Balances at March 31, 2000 (unaudited) $195,662,668 $(126,130,306) $(17,495) $(52,539,583)
============ ============== ========= =============
</TABLE>
- F5 -
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------
1997 1998 1999
----- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(11,235,237) $(12,737,145) $(23,831,096)
Adjustments to reconcile to net cash used in operating activities:
Discontinued operations -- -- --
Depreciation and amortization 1,445,956 3,602,776 2,061,609
Stock-based compensation 1,434,400 1,582,257 9,091,863
Beneficial conversion features on convertible notes and debentures -- 1,400,000 11,165,145
Gain on sale of assets - discontinued operations -- -- (6,502,663)
Interest paid with stock issuance 1,129,301 13,750 395,348
Equity in losses of Affiliate Companies -- -- 79,559
Changes in assets and liabilities
Interest receivable -- -- (28,176)
Prepaid expenses and other current assets (416,302) 774,197 (41,911)
Other assets -- (21,107) (67,346)
Accounts payable and accrued expenses 1,286,616 15,708 653,781
------------ ----------- ------------
Net cash used in operating activities (6,355,266) (5,369,564) (7,023,887)
Cash flows from investing activities:
Disbursements of loans -- (200,000) (1,164,000)
Collections on loans -- -- 767,000
Proceeds from sale of assets - discontinued operations -- -- 2,000,000
Acquisition of ownership interests in Affiliate Companies -- -- (2,500,000)
Advances to Affiliate Companies -- -- (50,000)
Purchases of furniture and equipment (544,618) (57,478) (74,977)
------------ ----------- ------------
Net cash (used in) provided by investing activities (544,618) (257,478) (1,021,977)
Cash flows from financing activities:
Proceeds from notes payable 5,329,250 3,418,000 12,000
Repayments of notes payable (1,501,000) (1,495,000) (240,000)
Long-term debt borrowings -- 1,402,500 6,455,000
Long-term debt payments -- (34,173) (35,675)
Issuance of common stock 3,112,474 529,430 1,032,910
Issuance of preferred stock 225,000 2,762,000 4,448,872
Repurchase of preferred stock -- (400,000) --
Purchase of treasury stock -- -- --
Payment of preferred stock dividend, Series B -- -- --
Payment of financing fees (140,919) (80,000) (501,477)
Registration costs (124,921) (474,249) --
------------ ------------ ------------
Net cash provided by financing activities 6,899,884 5,628,508 11,171,630
Net increase in cash and cash equivalents -- 1,466 3,125,766
Cash and cash equivalents at beginning of period -- -- 1,466
------------ ----------- ------------
$
Cash and cash equivalents at end of period -- $ 1,466 $ 3,127,232
============ ============ ============
Cash paid for interest $ 3,200 $ 93,537 $ 76,974
============ ============ =============
Cash paid for taxes $ -- $ -- $ --
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NET VALUE HOLDINGS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended March 31
-------------------------------------
1999 2000
---- ----
(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss $(2,926,993) $(8,158,335)
Adjustments to reconcile to net cash used in operating activities:
Discontinued operations 411,741 (50,820)
Depreciation and amortization 921,073 322,993
Stock-based compensation -- 5,894,187
Beneficial conversion features on convertible notes and debentures -- --
Gain on sale of assets - discontinued operations -- --
Interest paid with stock issuance 20,532 346,110
Equity in losses of Affiliate Companies -- 298,851
Changes in assets and liabilities
Interest receivable -- 6,573
Prepaid expenses and other current assets -- (160,964)
Other assets -- (39,106)
Accounts payable and accrued expenses (631,650) (434,623)
----------- ----------
Net cash used in operating activities (2,205,297) (1,975,134)
Cash flows from investing activities:
Disbursements of loans -- --
Collections on loans 163,000 --
Proceeds from sale of assets - discontinued operations -- --
Acquisition of ownership interests in Affiliate Companies -- (2,300,000)
Advances to Affiliate Companies -- (2,025,000)
Purchases of furniture and equipment -- (47,836)
----------- ----------
Net cash used in investing activities 163,000 (4,372,836)
Cash flows from financing activities:
Proceeds from notes payable -- --
Repayments of notes payable (240,000) (28,281)
Long-term debt borrowings 3,025,000 --
Long-term debt payments -- (15,869)
Issuance of common stock -- 831,704
Issuance of preferred stock -- 48,274,760
Repurchase of preferred stock -- --
Purchase of treasury stock -- (17,500)
Payment of preferred stock dividend, Series B -- (108,464)
Payment of financing fees (460,600) --
Registration costs -- --
----------- ----------
Net cash provided by financing activities 2,324,400 48,936,350
Net increase in cash and cash equivalents 282,103 42,588,380
Cash and cash equivalents at beginning of year 1,466 3,127,232
----------- -----------
Cash and cash equivalents at end of year $ 283,569 $45,715,612
=========== ===========
Cash paid for interest $ 43,866 $ 28,744
=========== ===========
Cash paid for taxes $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- F6 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(1) Nature of Operations and Basis of Presentation
Net Value Holdings, Inc. (Net Value or the Company) is actively engaged
in identifying, financing, and providing business development services
for a network of early-stage technology businesses that possess
significant growth potential. Net Value's operating strategy is to
acquire a significant equity interest in development stage technology
companies, which Net Value calls its "Affiliate Companies", and to
provide financial, management, and technical support to accelerate the
achievement of the Affiliate Companies' business goals and objectives. To
date, Net Value has focused on technology businesses with significant
Internet features and applications. As of December 31, 1999, Net Value
owned interests in seven Affiliate companies. Net Value is based in San
Francisco with offices in New York, Boston and Philadelphia.
Net Value was formed in December 1991 and had no operations until October
1998, when Net Value acquired a majority interest in an Internet software
developer named Net Value, Inc. (NV Inc.). This merger was accounted for
as a recapitalization of Net Value because NV Inc. shareholders acquired
a majority ownership in Net Value. Under a recapitialization, the
historical financial statements presented are those of the company
acquired, not those of the legal acquiror. Accordingly, the financial
information included in these financial statements prior to the merger in
October 1998 is that of NV Inc.
The 1999 financial statements of Net Value reflect the results of the
in-process merger with NV Inc. At December 31, 1999, Net Value owned 66%
of the outstanding common stock of NV Inc. Because it is unlikely that
the minority shareholders will make additional capital contributions to
erase subsequent NV Inc. losses, no amount has been ascribed to the 34%
minority interest. Net Value plans on acquiring the remaining shares that
it does not own by completing the merger in 2000 pursuant to which NV
Inc. shareholders will receive .4 Net Value common shares for every one
NV Inc. share tendered. Additionally, we will issue common stock purchase
warrants and stock options to the holders of NV, Inc.'s common stock
purchase warrants and vested stock options at the same exchange ratio.
As further described in Note 15, in November 1999, the Board of Directors
approved a formal plan to sell substantially all the assets of NV Inc,
and to discontinue the operations of NV Inc's Internet software
development operations. Accordingly, the operating results of the
discontinued Internet software operations of NV Inc. have been segregated
from continuing operations and reported as a separate line item on the
statements of operations. The assets and liabilities of NV Inc's software
development operations have been recorded as net liabilities of
discontinued operations in the accompanying balance sheets.
Net Value has a limited operating history under its current business
model and was in the development stage prior to the commencement of its
principal business operations in 1999. Net Value's prospects are subject
to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products
and services. In addition, all of our current Affiliate Companies are
early stage companies that have limited operating histories and have
generated very limited, if any, revenues or earnings from operations
since inception. Since Net Value's inception, the Company has generated
operating funds primarily through the sale of equity and debt securities.
Future capital requirements depend on many factors including Net Value's
ability to execute its business plan. Failure by Net Value to raise
additional funding when or if needed could have a material adverse effect
on its business, results of operations and financial condition.
- F7 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in
money market funds. Net Value considers all highly liquid
instruments with a remaining maturity of 90 days or less at the
time of purchase to be cash equivalents.
Financial instruments that potentially subject Net Value to
concentrations of credit risk consist principally of cash deposits
at financial institutions. To mitigate this risk, Net Value places
its cash deposits only with high credit quality institutions.
(b) Principles of Consolidation and Ownership Interests in and
advances to Affiliate Companies
The consolidated financial statements of Net Value include its
wholly-owned subsidiary, metacat.com, and its majority owned
subsidiary, NV Inc. The various interests that Net Value acquires
in its Affiliate Companies are accounted for under three broad
methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on Net
Value's voting interest in the Affiliate Company.
o Consolidation - Affiliate Companies in which Net Value
directly or indirectly owns more than 50% of the outstanding
voting securities are accounted for under the consolidation
method of accounting. Under this method, an Affiliate
Company's results of operations are reflected within Net
Value's Consolidated Statements of Operations. All
significant intercompany accounts and transactions have been
eliminated.
o Equity Method - Affiliate Companies whose results are not
consolidated, but over whom Net Value exercises significant
influence, are accounted for under the equity method of
accounting. Whether or not Net Value exercises significant
influence with respect to the Affiliate Company depends on
an evaluation of several factors including, among others,
representation on the Affiliate Company's Board of Directors
and Net Value's ownership level, which is generally a 20% to
50% interest in the voting securities of the Affiliate
Company, including voting rights associated with Net Value's
holdings in common, preferred and other convertible
instruments in the Affiliate Company. Under the equity
method of accounting, Net Value's proportionate share of
each affiliate's net income or loss and amortization of Net
Value's excess investment cost over its equity in each
affiliate's net assets is included in "Equity in losses of
Affiliate Companies" in the Consolidated Statements of
Operations. Amortization of the excess investment is
recorded on a straight-line basis over 3 years.
o Cost Method - All other investments for which Net Value does
not have the ability to exercise significant influence and
for which there is not a readily determinable market value,
are accounted for under the cost method of accounting. Under
this method, Net Value's share of each affiliate's net
income or loss is not included in the Consolidated
Statements of Operations. Cost basis represents Net Value's
original acquisition cost less any impairment charges in
such companies.
- F8 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies (continued)
(b) Principles of Consolidation and Ownership Interests in and
advances to Affiliate Companies (continued)
o Advances to Affiliate Companies - In addition to the
Company's investments in voting and non-voting equity and
debt securities, it also periodically makes advances to its
Affiliate Companies in the form of short term loans which
are evidenced by demand notes. These are accounted for in
accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan.
o Evaluations of Interests in Affiliate Companies - Net Value
continually evaluates the carrying value of its ownership
interests in and advances to each of its Affiliate Companies
for possible impairment based on achievement of business
plan objectives and milestones, the value of each ownership
interest in the Affiliate Company relative to carrying
value, the financial condition and prospects of the
Affiliate Company, and other relevant factors. The business
plan objectives and milestones considered by Net Value
include, among others, those related to financial
performance such as achievement of planned financial results
or completion of capital raising activities, and those that
are not primarily financial in nature such as the launching
of an Internet web site or the hiring of key employees. The
fair value of Net Value's ownership interests in and
advances to privately held Affiliate Companies is generally
determined based on the value at which independent third
parties have or have committed to invest in its Affiliate
Companies. If impairment is determined, the carrying value
is adjusted to fair value.
(c) Capitalized Financing Fees
The Company capitalizes the direct costs incurred with the
issuance of long term debt as capitalized financing fees. Net
Value amortizes these fees using an effective interest method over
the life of the related debt. Upon conversion of the related debt
into Net Value's common shares, the related unamortized balance of
capitalized financing fees is eliminated against additional
paid-in capital.
(d) Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the assets acquired less liabilities assumed of the
acquired businesses. Net Value amortizes goodwill on a
straight-line basis over three-years. As more fully described in
Note 6, goodwill at December 31, 1999 of $3,227,298, net of
accumulated amortization of $578,906, was attributable to Net
Value's acquisition of Strategicus Partners, Inc.
(e) Furniture and Equipment
Furniture and equipment are carried at cost, less accumulated
depreciation computed on a straight-line basis over the estimated
useful lives of the respective assets. Depreciation is computed
using a four-year life for computer equipment and a five-year life
for furniture and office equipment.
- F9 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies (continued)
(f) Gain or Loss on Issuances of Stock By Affiliate Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time an
Affiliate Company accounted for under the consolidation or equity
method of accounting issues its common stock at a price per share
different from Net Value's per share carrying amount for that
Affiliate Company, then Net Value's share of the Affiliate
Company's net equity changes. If at that time, the Affiliate
Company is not a newly-formed, non-operating entity, nor a
research and development, start-up or development stage company,
nor is there question as to the company's ability to continue in
existence, then Net Value records the change in its share of the
Affiliate Company's net equity as a gain or loss in its
Consolidated Statements of Operations.
(g) Income Taxes
Net Value uses the liability method of accounting for income
taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the expected future tax
consequences of existing differences between financial reporting
and tax reporting basis of assets and liabilities, as well as for
operating losses and tax credit carryforwards, using enacted tax
laws and rates. Deferred tax expense represents the net change in
the deferred tax asset or liability balance during the year. This
amount, together with income taxes currently payable or refundable
for the current year, represents the total income tax for the
year.
(h) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (FAS
123) and Emerging Issues Task Force Issue No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services". As
permitted under FAS 123, Net Value has continued to follow
Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees (APB 25) in accounting for its stock-based compensation.
Under APB 25, no accounting recognition is given to stock options
issued to employees that are granted with exercise prices at fair
market value. Stock options issued to non-employees are recorded
at fair value at the date of grant and are subsequently remeasured
as counterparty performance is complete, which typically
corresponds to the vesting period.
- F10 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies (continued)
(i) Loss Per Share
Basic net loss per common share and diluted net loss per common
share are presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share (FAS 128), for
all periods presented. In accordance with FAS 128, basic and
diluted net loss per common share have been computed using the
weighted-average number of shares of common stock outstanding
during the period. Shares associated with stock options,
convertible debt, stock warrants, and convertible preferred stock
are not included because their inclusion would be antidilutive
(i.e., reduce the net loss per share). The total numbers of such
shares excluded from diluted net loss per common share are
11,713,653, 3,837,506, 9,276,476, 2,213,161, and 0 for the three
months ended March 31, 2000 and 1999, and the years ended December
31, 1999, 1998, and 1997, respectively. Such securities, had they
been dilutive, would have been included in the computations of
diluted loss per share using the treasury stock method.
(j) Statements of Stockholders' Deficit
The 1998 recapitalization of Net Value described in Note 1
resulted in Net Value's equity accounts being restated whereby
every four NV Inc. shares are reflected as one Net Value common
share and one Net Value preferred share. This restatement had the
effect of changing the allocation of capital between par value and
additional paid in capital. There was no effect on aggregate
stockholders deficit as a result of this allocation.
(k) Segment Information
Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" establishes
standards for the way public companies report operating segments
in annual financial statements and interim reporting to
shareholders. Net Value has determined that it has one operating
and reportable segment: incubating development stage Internet
companies as described in Note 1. The chief operating decision
maker evaluates performance and makes decisions based on financial
data consistent with the presentation in the accompanying
financial statements.
(l) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the accompanying notes.
These estimates are based on information available as of the date
of the consolidated financial statements; therefore, actual
results could differ from those estimates. Certain amounts
recorded to reflect our share of losses of Affiliate Companies
accounted for under the equity method are based on unaudited
results of operations of those affiliate companies and may require
adjustments in the future when audits of these entities are made
final.
(m) Recent Accounting Pronouncements
Net Value does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on its
results of operations, financial position or cash flows.
- F11 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(2) Summary of Significant Accounting Policies (continued)
(n) Reclassifications
Certain prior year amounts in the consolidated financial
statements have been reclassified in accordance with generally
accepted accounting principles to conform to the current year
presentation. The impact of these changes did not affect net loss.
(3) Interim Financial Information (Unaudited)
The accompanying consolidated balance sheet as of March 31, 2000, the
consolidated statements of operations and cash flows for the three months
ended March 31, 1999 and 2000 and the consolidated statement of changes
in stockholders' equity for the three months ended March 31, 2000 are
unaudited. The data disclosed in these notes to the consolidated
financial statements for these periods is also unaudited. In the opinion
of management, these financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary to present fairly
the financial position of the interim period. Interim operating results
are not necessarily indicative of results for a full year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations relating to the interim financial statements.
(4) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Net Value's ownership interests in and advances
to Affiliate Companies accounted for under the equity method and cost
method of accounting at December 31, 1999. All of the Affiliate Companies
were privately held companies as of December 31, 1999 and March 31, 2000.
Net Value had no interests in or advances to Affiliate Companies at
December 31, 1998.
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
(unaudited)
---------------------------------------- -----------------------------------------
Excess of Excess of
Carrying carrying value Carrying carrying value
value over net assets value over net assets
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Equity method:
AlarmX.com $ -- $ -- $ 1,000,000 $ 340,724
IndustrialVortex.com -- -- 901,009 596,789
College 411.com 221,950 123,440 191,563 68,052
AssetExchange 366,192 285,698 318,947 238,453
Swapit.com 473,922 421,481 2,376,694 324,253
---------- -------- ---------- ----------
$1,062,064 $830,619 $4,788,213 $1,568,271
========== ======== ========== ==========
Cost method:
BrightStreet.com $3,994,406 $ 3,994,406
Webmodal 1,009,087 1,009,087
YesAsia 1,000,000 1,300,000
---------- -----------
6,003,493 6,303,493
---------- -----------
$7,065,557 $11,091,706
========== ===========
</TABLE>
- F12 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(4) Ownership Interests in and Advances to Affiliate Companies (continued)
The following summarized financial information for Affiliate Companies
accounted for under the equity method of accounting at December 31, 1999
and February 29, 2000 has been compiled from the financial statements of
the respective companies:
<TABLE>
<CAPTION>
Balance sheets: February 29, 2000
December 31, 1999 (unaudited)
----------------- -----------------
<S> <C> <C>
Current assets $ 1,629,349 $ 1,729,704
Noncurrent assets 190,554 525,597
------------ ------------
Total assets 1,819,903 2,255,301
============ ============
Current liabilities 249,860 601,617
Noncurrent liabilities -- --
Stockholders' equity 1,570,043 1,653,684
------------ ------------
Total liabilities and stockholders' equity $ 1,819,903 $ 2,255,301
============ ============
Two Months Ended
Year Ended February 29, 2000
Results of operations: December 31, 1999 (unaudited)
----------------- -----------------
Revenues $ 823 $ --
Net loss $ (653,538) $ (1,141,078)
</TABLE>
(5) Furniture and Equipment
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
December 31, 2000
1999 (unaudited)
------------ ------------
<S> <C> <C>
Computer equipment $ 56,491 $ 100,613
Furniture and office equipment 18,486 22,201
------------ ------------
74,977 122,814
Less accumulated depreciation (4,895) (9,595)
------------ ------------
$ 70,082 $ 113,219
============ ============
</TABLE>
(6) Acquisitions
On June 21, 1999, Net Value entered into a merger agreement pursuant to
which it acquired Strategicus Partners Inc. (Strategicus) in exchange for
$1,555,000 in cash and 601,029 shares of common stock and 184,627 shares
of Series A convertible preferred stock collectively valued at
$3,638,084. In connection with this transaction, NetValue also entered
into consulting agreements with the three principal stockholders and an
employment agreement with a principal officer of Strategicus (Note 14).
- F13 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(6) Acquisitions (continued)
Strategicus was developing Internet operations through a wholly owned
subsidiary and was in the process of investing in two other Internet
companies which Net Value desired to acquire. Net Value accounted for
this acquisition as a purchase. The total purchase price was $5,364,423,
of which $1,100,000, $458,030, and $3,806,204 was allocated to ownership
interests in Affiliate Companies, various assets, and goodwill,
respectively. The goodwill represents the excess of the purchase price
over the fair value of the assets acquired less the liabilities assumed.
The results of the acquired company are included in Net Value's
operations as of the completion of the merger on July 30, 1999. Net Value
evaluates the carrying value of this goodwill based on achievement of
business plan objectives and milestones, the financial condition and
prospects of the acquired operations, and other relevant factors. If
impairment exists, the carrying amount of the goodwill will be reduced by
the estimated shortfall of discounted cash flows. Amortization of
goodwill totaled $578,906 for the year ended December 31, 1999 and is
included in General and administrative expense in the Consolidated
Statements of Operations.
The following unaudited pro forma financial information presents the
combined results of operations as if Net Value had owned Strategicus
since the beginning of its operations in 1999, after giving effect to the
amortization of goodwill. The unaudited pro forma financial information
is provided for informational purposes only and should not be construed
to be indicative of Net Value's consolidated results of operations had
the acquisitions been consummated on the dates assumed and do not project
Net Value's results of operations for any future period:
Year ended
December 31,
1999
------------
Revenue $ --
Pro forma net loss to common shareholders 30,671,504
=============
Pro forma net loss per common share $ 2.91
=============
- F14 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(7) Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the financial statement carrying amounts of assets
and liabilities and the amounts used for income tax purposes. The tax
effects of temporary differences that give rise to significant portions
of Net Value's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Temporary differences:
Accruals and reserves $ -- 355,000
Amortization of financing fees 16,000 --
Deferred compensation and warrants -- 2,194,000
Temporary differences discontinued operations:
Vesting of nonqualified stock options 82,000 --
Accrued salaries and compensation 37,000 --
Amortization of discounts 132,000 --
Common stock and warrants issued 29,000 --
Depreciation (20,000) --
----------- ----------
Total temporary differences 258,000 2,549,000
Carryforwards and credits:
Federal and state deferred tax benefits arising from net
operating loss carryforwards 66,000 6,004,000
Federal and state deferred tax benefits arising from net
operating loss carryforwards of discontinued operations 6,692,000 --
Research and development credits from discontinued operations 278,000 --
----------- ----------
7,294,000 8,553,000
Less valuation allowance (7,294,000) (8,553,000)
----------- ----------
$ -- $ --
=========== ==========
</TABLE>
- F15 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(7) Income Taxes (continued)
The following table presents the principal reasons for the differences
between the amount computed by applying the U.S. federal statutory tax
rate of 35% to the net loss from continuing operations and the actual
provision for income taxes for the years ended December 31, 1997, 1998,
and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $ -- (571,000) (8,387,044)
State and local income tax expense (benefit) -- (82,000) 2,375
Nondeductible goodwill amortization -- -- 202,617
Other non-deductible expense -- 560,000 83,715
Loss from operations not benefited -- 93,000 8,100,712
------------ ------------ ------------
Total tax expense $ -- $ -- 2,375
============ ============ ============
</TABLE>
Prior to September 18, 1996, Net Value was a limited liability company,
and accordingly, losses were passed through to its members. For the year
ended December 31, 1999, Net Value had losses from continuing operations
which resulted in net operating loss carryforwards for federal and state
income tax purposes amounting to approximately $15,976,000 and
$7,940,000, respectively. The federal net operating loss carryforwards
expire beginning 2018 through 2019. The state net operating loss
carryforwards expire beginning in 2004. However, these carryforwards may
be significantly limited due to changes in the ownership of Net Value as
a result of future equity offerings.
As of December 31, 1998, NV, Inc. had net operating loss carryforwards of
$16,730,000, of which a portion was utilized during 1999. As of December
31, 1998, Net Value, Inc. had generated research and development credits
of approximately $328,000. As of December 31, 1999, due to Federal tax
law, NV, Inc. no longer has net operating loss carryforwards and credits
available to utilize as a result of the company selling substantially all
of its assets in 1999.
Recognition of the benefits of the net deferred tax assets and
liabilities will require that Net Value generate future taxable income.
It is more likely than not that Net Value will not generate sufficient
taxable income during the 15-year carryforward period. Therefore, Net
Value has established valuation allowances for deferred tax assets (net
of liabilities) of $8,553,000 as of December 31, 1999. The net change in
the total valuation allowance for the year ended December 31, 1997, 1998
and 1999 was an increase of $3,511,000, $3,016,000, and $1,259,000,
respectively.
- F16 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(8) Borrowing Arrangements
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------ --------
2000
1998 1999 (unaudited)
------ -------- ------------
<S> <C> <C> <C> <C>
8% Convertible debentures $ 1,402,500 $3,250,500 $ --
12% Convertible promissory notes -- 1,021,929 28,281
Convertible promissory note, bearing interest at 10% -- 900,000 --
Installment loan payable, bearing interest at 7.76% -- 79,034 63,165
Promissory note, bearing interest at 10% 900,000 -- --
Loan payable to related party, bearing interest at 0% 200,000 -- --
Loan payable, bearing interest at 10% 40,000 -- --
Other -- 12,000 12,000
---------- ---------- ----------
2,542,500 5,263,463 103,446
Less amount due within one year 2,542,500 5,196,161 103,446
---------- ---------- ----------
Noncurrent portion $ -- $ 67,302 $ --
========== ========== ==========
</TABLE>
(a) 8% Convertible Debentures
Net Value issued 8% Convertible Debentures (Debentures) in the
aggregate amount of $7,857,000 in a private placement offering.
These debentures were issued in two separate tranches with the
first tranche totaling $1,642,500 and the second tranche totaling
$6,215,000. The first and second tranches of debentures together
with accrued interest thereon were convertible into Net Value's
common stock at any time by the holders at a conversion price of
$2.00 and $2.50 per share, respectively. The Debentures mature at
the earlier of (i) the date on which the holder elects to convert
into shares of common stock; (ii) the date upon which Net Value
elects to cause a mandatory conversion; or (iii) two years from
the date of the issuance of the Debentures.
Net Value recorded $1,400,000 and $6,457,500 as additional paid in
capital in 1998 and 1999, respectively, for the discount deemed
related to imputed interest for the preferential conversion
features on the Debentures. In accordance with the Emerging Issues
Task Force Issue No. 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" (EITF 98-5), these discounts were limited to
the principal amount of the Debentures and were charged
immediately to interest expense as the holders had the right to
convert upon issuance. Net Value issued 2,076,589 shares of common
stock during fiscal 1999 in connection with conversion requests
from holders of outstanding Debenture principal and accrued
interest. Net Value repaid in full the 8% Convertible Debentures
plus accrued interest at various dates during the quarter ended
March 31, 2000 through the payment of $15,869 and the issuance of
1,391,853 shares of common stock pursuant to the original
conversion terms of the debentures.
- F17 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(8) Borrowing Arrangements (continued)
(b) 12% Convertible Promissory Notes
On January 7, 1999, Net Value issued $4,270,125 Convertible
Promissory Notes (Convertible Notes) with interest payable at 12%
per annum in exchange for the outstanding promissory notes plus
accrued interest of NV Inc. The noteholders are entitled at any
time to convert the outstanding principal plus accrued interest
thereon into Net Value's common stock at a conversion rate of
$2.00 per share. The Convertible Notes mature at the earlier of
(i) the date on which either the holder or Net Value exercise
their respective conversion rights under the Convertible Notes; or
(ii) the one-year anniversary of the closing of the pending merger
between Net Value and NV Inc. (see Note 1). Additionally, the
terms of conversion obligate Net Value to issue a warrant to
purchase one-half of one share of Net Value's common stock for
each share purchased through conversion. These warrants are
exercisable over a three year period from the date of issuance at
a $6 per share exercise price.
The Company recorded $4,270,125 as additional paid in capital in
fiscal 1999 for the discount deemed related to imputed interest
for the preferential conversion features on the Convertible Notes.
In accordance with EITF 98-5, these discounts were limited to the
principal amount of the Convertible Notes and were charged
immediately to interest expense as the holders had the right to
convert upon issuance. Net Value issued 1,732,066 and 546,780
shares of common stock during fiscal 1999 and the quarter ended
March 31, 2000, respectively, in connection with conversion
requests from holders of outstanding Convertible Notes principal
and accrued interest. The terms of the conversion obligated Net
Value to issue warrants to purchase one-half of one share of Net
Value common stock for each share issued upon conversion.
Accordingly, Net Value issued 866,033 and 273,390 warrants to
purchase common stock during fiscal 1999 and the quarter ended
March 31, 2000, respectively, in connection with the conversions.
(c) Promissory Note
In September 1998, Net Value issued a $900,000 promissory note
with interest payable at 10% per annum. On the scheduled maturity
date of March 1, 1999, Net Value issued the Convertible Note
described below as payment in full on the $900,000 promissory
note.
(d) Convertible Promissory Note
On March 1, 1999, in exchange for the outstanding promissory note,
Net Value issued a $900,000 convertible promissory note
(Convertible Note) with interest payable quarterly in cash or in
shares of Net Value's common stock at the election of the lender.
The Convertible Note, as amended, is convertible at any time by
the noteholder into Net Value's common stock at a conversion rate
of $2.25 per share. Net Value also issued to the lender
immediately exercisable warrants to purchase 180,000 shares of Net
Value's common stock in connection with the Convertible Note
issuance. The warrants have exercise prices ranging from $2.50 to
$5.00 per share and expire on February 28, 2002.
The Company recorded $446,000 as additional paid in capital for
the discount deemed related to imputed interest for the
preferential conversion feature on the Convertible Note and
recorded
- F18 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(8) Borrowing Arrangements (continued)
(d) Convertible Promissory Note (continued)
$454,000 as additional paid in capital for the discount deemed
related to the detachable warrants as determined by an independent
valuation. In accordance with EITF 98-5, these discounts were
limited to the principal amount of the Convertible Note and were
charged immediately to interest expense as the holder had the
right to convert upon issuance and the warrants were immediately
exercisable.
During the quarter ended March 31, 2000, Net Value repaid in full
the 10% Convertible Promissory Note plus accrued interest through
the issuance of 400,000 shares of common stock pursuant to the
original conversion terms of the note.
(9) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------------------- -----------------
2000
1998 1999 (unaudited)
------------------- ------------------- -----------------
<S> <C> <C> <C>
Accounting fees $ -- $ 272,806 $ 115,000
Legal fees 20,000 200,000 225,000
Other accounts payable 87,022 14,225 27,579
Accrued interest 41,399 301,077 --
Accrued salaries and benefits -- 14,094 --
---------- ------------ ------------
$ 148,421 $ 802,202 $ 367,579
========== ============ ============
</TABLE>
(10) Commitments and Contingencies
Net Value leases office space for its principal executive offices in San
Francisco, California at a rate of $17,383 per month. In addition, the
Company also leases office space in Philadelphia, Pennsylvania, New York,
New York, and Waltham, Massachusetts at a combined monthly rental of
approximately $17,000.
Net Value and subsidiaries are defendants in various legal proceedings
including an action alleging patent infringement and an action brought by
a former officer and director of Net Value alleging breach of an
employment contract. Net Value filed its answer to the patent
infringement action on November 23, 1999 seeking a declaratory judgment
of invalidity and noninfringement of the patent. Promotions Acquisitions
has agreed to assume all liabilities related to this lawsuit, including
all legal expenses incurred in defending against these claims, as part of
their purchase of substantially all of the assets of NV Inc. (Note 16).
Accordingly, Net Value does not believe that the resolution of this
action will have a material adverse effect on its financial position.
With respect its former officer and director, Net Value intends to
vigorously defend itself against all claims made and to assert
counterclaims and make additional claims against this individual. The
litigation will center around the number of shares of Net Value common
stock to which the former officer and director is entitled, if any.
Because of the preliminary nature of this matter and as the parties have
not commenced discovery, it is not possible at this time to quantify the
number of shares, if any, that the former employee will be entitled.
- F19 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(11) Stockholders' Equity
The Company's has two classes of authorized stock: common stock and
preferred stock.
(a) Common Stock
Net Value is authorized to issue 50,000,000 shares of common
stock, par value $.001 per share. The holders of common stock are
entitled to one vote per share and are entitled to dividends as
declared. Dividends may be restricted by the inability to
liquidate ownership interests in Affiliate Companies to fund cash
dividends and are subject to the preferential rights of the
holders of Net Value's preferred stock. We have never declared
dividends nor do we intend to for the foreseeable future. Certain
shareholders have registration rights and piggy-back rights that
require Net Value to register the underlying shares with the
Securities and Exchange Commission.
Common stock is reserved for issuances as follows:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
------------------- -------------------
<S> <C> <C>
Conversion of convertible debentures and notes 2,370,960 --
Conversion of preferred stock, series B 1,180,180 --
Conversion of preferred stock, series C -- 4,166,667
Preferred stock dividend, series C, payable in kind -- 27,991
Completion of in-process merger with NV Inc. (see Note 1) 1,659,740 1,659,740
Exercise of outstanding warrants 1,448,088 1,934,738
Exercise of outstanding options 4,277,248 5,612,248
----------- ----------
10,936,216 13,401,384
=========== ==========
</TABLE>
(b) Preferred Stock
Net Value is authorized to issue 10,000,000 shares of undesignated
preferred stock, par value $.001 per share. Net Value may
establish one or more classes or series of preferred stock having
such number of shares and relative voting rights, designation,
dividend rates, liquidation rights and preferences as may be fixed
by them without further shareholder approval. The holders of
preferred stock may be entitled to preferences over common
stockholders with respect to dividends, liquidation, or
dissolution in such amounts as established by Net Value's board of
directors.
- F20 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(11) Stockholders' Equity (continued)
(b) Preferred Stock (continued)
Preferred stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
March 31, 2000
December 31, 1998 December 31, 1999 (unaudited)
---------------------------- ---------------------------- ------------------------------
Shares Shares Shares
outstanding Amount (1) outstanding Amount (1) outstanding Amount (2)
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Series A 2,519,852 $ 2,520 $ -- -- -- $ --
Series B -- -- 4,824 4,448,872 -- --
Series C -- -- -- -- 4,166,667 40,883,087
--------- -------- --------- --------- --------- -----------
2,519,852 $ 2,520 4,$24 4,448,872 4,166,667 40,883,087
========= ======== ========= ========= ========= ===========
</TABLE>
(1) Amount is net of issuance costs.
(2) Amount is net of issuance costs and proceeds allocated to
Series C Warrants.
Series A Preferred Stock
The Company's Series A Preferred Stock (Series A Shares) was
convertible up to one share of Net Value's common stock upon Net
Value's achievement of specified performance objectives. In fiscal
1999, pursuant to a private offering, Net Value issued 1,622,687
shares of common stock in exchange for all issued and outstanding
Series A Shares based on a negotiated exchange ratio of .6 share
of common stock for every one Series A Share. Net Value recorded a
preferred stock dividend of $5,955,261 representing the excess of
the fair value of the common stock issued over the fair value of
the Series A Shares redeemed. Accordingly, at December 31, 1999
there were no longer any issued and outstanding Series A Shares.
Series B Preferred Stock
In September 1999, Net Value issued 4,824 shares of Series B
Preferred Stock (Series B Shares) for aggregate proceeds of
$4,824,000. These Series B Shares were subsequently converted into
1,180,180 shares of common stock in February 2000 pursuant to the
original terms of the issuance. The Series B Shares had a
liquidation preference of $1,000, bore a noncumulative dividend
rate of 5%, and were redeemable at $1,250 per share in the event
Net Value failed to achieve certain performance objectives.
- F21 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(11) Stockholders' Equity (continued)
(b) Preferred Stock (continued)
Series B Preferred Stock (continued)
In connection with the issuance of the Series B Shares, Net Value
issued warrants to purchase 295,040 shares of common stock (Series
B Warrants). These warrants are exercisable at prices equivalent
to a range between 110% to 140% of the conversion price of the
Series B Shares. Net Value allocated $650,000 to the cost of the
Series B Warrants based on an independent valuation, which was
recorded as a preferred stock dividend and offsetting increase to
additional paid in capital. During the quarter ended March 31,
2000, the warrant holders exercised 162,780 Series B Warrants with
cash proceeds to Net Value of $831,704.
Series C Preferred Stock
In March 2000, the Company sold 4,166,667 shares of its Redeemable
Convertible Series C Preferred Stock (Series C Shares) at $12 per
share for net proceeds of $48,274,760 after payment of issuing
costs of $1,305,240 and 35,000 Series C Shares valued at $420,000.
The Series C Shares are convertible into one share of the
Company's common stock at any time at the election of the
shareholder, bear a cumulative dividend of 8% per annum payable in
kind on a quarterly basis and have a liquidation preference of $12
per share. If Net Value has not filed a registration statement to
register the resale of the shares of common stock issuable upon
conversion of the Series C Shares by December 31, 2000, then upon
receiving 60 days notice from 80% holders of the Series C Shares,
Net Value is required to redeem the Series C Shares in three
annual installments beginning on or before the date stated in the
written notice at a price per share equal to the greater of: (i)
the liquidation preference of $12 per share, or (ii) the per share
fair market value of Net Value's common stock on the redemption
date, as defined. The dividend rate shall increase by 1% in
October 2000 if the Company's listing application for a nationally
recognized securities exchange has not been approved and by an
additional 1% on the 90th day of each 90-day period thereafter on
which a listing application for a nationally recognized securities
exchange has not been approved. The dividend rate shall also
increase by an additional 1% in December 2000 if the Company's
registration statement to register the resale of the Series C
Shares has not been approved and by an additional 1% on the last
day of each calendar quarter thereafter on which the registration
statement has not been approved.
Net Value issued warrants to purchase an aggregate of 416,667
shares of common stock (Series C Warrants) in connection with the
issuance of the Series C Shares. The Series C Warrants are
exercisable until March 2, 2003 at an exercise price of $26.58 per
share of common stock. Net Value also agreed to issue warrants to
purchase 62,500 shares of the Company's common stock on July 1,
2000 and on the thirtieth day of each subsequent 30 day period
thereafter, provided that the Company's registration statement for
resale of the Series C Shares has not been declared effective by
the SEC. Net Value allocated $7,391,673 of the net proceeds
received from this offering to the cost of the Series C Warrants
as determined by a Black-Scholes option-pricing model.
- F22 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(11) Stockholders' Equity (continued)
(b) Preferred Stock (continued)
Preferred Stock Dividends
The components of the preferred stock dividends are as follows:
<TABLE>
<CAPTION>
For the three
months ended
For the year ended March 31, 2000
December 31, 1999 (unaudited)
-------------------- -------------------
<S> <C> <C>
Series B Preferred Stock dividend $ -- $ 108,464
Series C Preferred Stock dividend -- 335,895
Non-cash charge: beneficial conversion feature on Series
A Shares 5,955,261 --
Non-cash charge: beneficial conversion feature on Series
B Shares 650,000 --
Non-cash charge: beneficial conversion feature on Series
C Shares -- 42,608,327
------------- -------------
$ 6,605,261 $ 43,052,686
============= =============
</TABLE>
Net Value paid the Series B Preferred Stock dividend in cash as
the holders converted their Series B Shares into shares of Net
Value's common stock. The Series C Preferred Stock dividend is
payable in additional Series C Shares on a quarterly basis.
At the time of issuance of the Series C Shares, the then fair
market value of Net Value's common stock was higher than the
Series C Shares sales price of $12 per share. As the Series C
Shares are convertible into shares of Net Value's common stock,
this differential in price constitutes a beneficial conversion
feature as defined in the Emerging Issues Task Force Issue No.
98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios"
(EITF 98-5). Accordingly, Net Value recorded $42,608,327 as
additional paid in capital for the discount deemed related to a
preferential dividend for the beneficial conversion feature. In
accordance with EITF 98-5, this discount was limited to the
proceeds allocated to the Series C Shares and was recognized
immediately as a preferred stock dividend as the Series C Shares
are immediately convertible.
During the year ended December 31, 1999, Net Value recorded
beneficial conversion features of $5,955,261 and $650,000
representing the excess of the fair value of the common stock
issued over the fair value of the Series A Shares redeemed and the
fair value of the Series B Warrants, respectively.
- F23 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(12) Stock Options and Warrants
(a) Stock Options
Under the stock option plan that Net Value expects to be adopted
by the Board of Directors, options to purchase shares of Net Value
common stock may be granted to officers, directors, employees,
consultants and independent contractors. Options granted under
this plan will expire no more than ten years following the date of
vesting, will have limited transferability, and will be subject to
various vesting provisions. The Board of Directors or a committee
thereof will determine the exercise price of options granted under
this plan. The Board anticipates having the ability to amend,
suspend or terminate this plan at any time, subject to
restrictions imposed by applicable law.
As part of the in-process merger with NV Inc. discussed in note 1,
Net Value plans on converting the outstanding options under the
existing NV Inc. stock option plan into options to purchase Net
Value common stock using a conversion ratio of .4 Net Value
options for every 1 NV Inc option. On an as converted basis, NV
Inc. had 558,500 options outstanding at December 31, 1999 and
March 31, 2000 with exercise prices ranging from $.25 to $7.00.
Metacat.com, Net Value's wholly owned consolidated subsidiary,
maintains a separate stock option plan for which 27,025 options to
purchase metacat.com Series A preferred stock were outstanding at
December 31, 1999. Affiliate Companies maintain their own stock
plans.
The following summarizes Net Value's stock option activity and
related information during the year ended December 31, 1999 and
the quarter ended March 31, 2000:
<TABLE>
<CAPTION>
Weighted
Range of exercise average
Shares prices exercise price
----------------- -------------------- ---------------
<S> <C> <C> <C>
Outstanding at December 31, 1998 -- -- --
Granted 8,650,876 $ 1.00 - 10.13 $ 1.14
Cancelled (4,373,628) $ 1.00 $ 1.00
----------
Outstanding at December 31, 1999 4,277,248 $ 1.00 - 10.13 $ 1.28
Granted 1,335,000 $ 7.75 - 19.64 $ 11.98
-----------
Outstanding at March 31, 2000 (unaudited) 5,612,248 $ 1.00 - 19.64 $ 3.83
===========
Options contractually exercisable at
December 31, 1999 886,384
Options contractually exercisable at
March 31, 2000 (unaudited) 1,162,955
</TABLE>
- F24 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(12) Stock Options and Warrants (continued)
(a) Stock Options (continued)
Exercise prices for stock options outstanding as of December 31,
1999 and March 31, 2000 and the weighted average remaining
contractual life are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Weighted
average
remaining Number Weighted Average
Exercise prices Shares Outstanding contractual life exercisable Exercise Price
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
$1.00 2,782,248 9.41 years 886,384 $ 1.00
$3.75 - $10.13 1,495,000 9.74 years -- $ 5.12
--------- --------
$1.00 - $10.13 4,277,248 9.53 years 886,384
========= ========
March 31, 2000 (unaudited)
$1.00 3,982,248 5.23 years 1,150,869 $ 1.00
$1.01 - $ 4.00 210,000 9.57 years -- $ 3.75
$4.01 - $ 8.00 430,000 9.81 years 1,112 $ 7.72
$8.01 - $10.00 335,000 9.79 years 3,195 $ 8.37
$10.01 - $12.00 160,000 9.81 years 2,223 $ 11.42
$12.01 - $17.00 290,000 9.84 years -- $ 16.38
$17.01 - $19.64 205,000 9.84 years 5,556 $ 19.63
--------- ---------
$1.00 - $19.64 5,612,248 6.82 years 1,162,955
========= =========
</TABLE>
As discussed in Note 2, Net Value has elected to follow APB 25 in
accounting for its employee and director stock-based awards. Under
APB 25, Net Value does not recognize compensation expense with
respect to such awards if the exercise price equals or exceeds the
fair value of the underlying security on the date of grant and
other terms are fixed. The fair values of these awards for the
purpose of the alternative fair value disclosures required by FAS
123 were estimated as of the date of the grant using a Black
Scholes option-pricing model. For purposes of Net Value's pro
forma disclosures, the fair value of options granted during the
year ended December 31, 1999, was determined using a Black Scholes
option pricing model with a volatility of 87%, a risk-free
interest rate of approximately 6.3%, an expected life of 5 years,
and a dividend yield of zero.
- F25 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(12) Stock Options and Warrants (continued)
(a) Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. Net Value's pro forma information follows:
Year ended: December 31, 1999
-----------------
Net loss to common shareholders:
As reported $30,436,357
Pro forma $32,149,155
Basic and diluted net loss per common share:
As reported $ 2.90
Pro forma $ 3.05
Future pro forma results may be materially different from actual
amounts reported. The weighted average fair value of employee
options granted during 1999 was $5.17. Net Value issued no options
in 1998 or 1997.
(b) Deferred Stock Based Compensation
Net Value records deferred compensation when it makes restricted
stock awards or compensatory stock option grants to employees,
members of the Board of Directors, consultants or advisory board
members. In the case of stock option grants to employees and Board
of Directors, the amount of deferred compensation initially
recorded is the difference between the exercise price and fair
market value of the common stock on the date of grant. In the case
of options granted to consultants or advisory board members, the
amount of deferred compensation recorded is the fair value of the
stock options on the grant date as determined using a
Black-Scholes option pricing model. Net Value records deferred
compensation as a reduction to shareholders' equity and an
offsetting increase to additional paid-in capital. Net Value then
amortizes deferred compensation into stock based compensation over
the performance period, which typically coincides with the vesting
period of the stock based award of 3 to 4 years.
- F26 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(12) Stock Options and Warrants (continued)
(b) Deferred Stock Based Compensation (continued)
The components of deferred compensation from continuing operations
are as follows:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
-------------- ----------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ -- $ -- $ --
Deferred compensation recorded during 1999 10,916,048 21,433,095 32,349,143
Amortization to stock-based compensation in 1999 (3,778,448) (1,252,923) (5,031,371)
-------------- ----------------- ---------------
Balance at December 31, 1999 7,137,600 20,180,172 27,317,772
Additions to deferred compensation in 2000 13,207,675 17,198,947 30,406,622
Amortization to stock-based compensation in 2000 (2,530,355) (2,654,457) (5,184,812)
-------------- ----------------- ---------------
Balance at March 31, 2000 (unaudited) $ 17,814,920 $ 34,724,662 $ 52,539,582
============== ================= ===============
</TABLE>
(c) Warrants
The Company had outstanding the following warrants to purchase its
securities:
<TABLE>
<CAPTION>
March 31, 2000
December 31, 1999 (unaudited)
----------------------- -------------------------------------- -------------------------------------
Number of Exercise price Number of Exercise price
Description of series warrants issued per share warrants issued per share
----------------------- ---------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Common Stock 1,448,088 $2.50 - $6.00 1,934,738 $2.50 - $26.58
========= ============= ========= ==============
</TABLE>
As described further in Notes 8 and 12, these warrants were issued
in connection with Net Value's borrowing arrangements and Series B
and Series C Preferred Stock issuances. Net Value recorded
interest expense on warrants issued in connection with borrowing
arrangements equal to the warrants then fair value as determined
by independent valuations. Net Value recorded a preferred stock
dividend on warrants issued in connection with the Series B
Preferred Stock issuance equal to the warrants then fair value as
determined by independent valuations. Net Value allocated a
portion of the net proceeds received from the Series C Preferred
Stock issuance to the cost of the Series C Warrants as determined
using a Black-Scholes option-pricing model.
As part of the in-process merger with NV Inc. discussed in Note 1,
Net Value plans on converting the outstanding NV Inc. warrants
into warrants to purchase Net Value common stock using a
conversion ratio of .4 Net Value warrants for every 1 NV Inc.
warrant. On an as converted basis, NV Inc. had 585,089 warrants
outstanding at December 31, 1999 with exercise prices ranging from
$6.00 to $8.64.
- F27 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(13) Fair Value of Financial Instruments
As of December 31, 1999 and 1998, the respective carrying values of Net
Value's financial instruments approximated their fair values. These
financial instruments include cash and cash equivalents, loans
receivable, accounts payable, accrued expenses, notes and loans payable,
convertible promissory notes, and convertible debentures.
Carrying values for cash and cash equivalents, loans receivable, accounts
payable, accrued expenses, and notes and loans payable were estimated to
approximate fair values for these financial instruments as they are short
term in nature and are generally receivable or payable on demand. The
fair value of Net Value's convertible promissory notes and convertible
debentures were estimated assuming full conversion into common shares and
using the closing the price of Net Value common stock on December 31,
1999. The resulting fair value computes to $26,080,560, which exceeds the
carrying value of the convertible promissory notes and debentures of
$5,172,429.
(14) Related Party Transactions
Net Value provides strategic and operational support to its Affiliate
Companies in the normal course of its business. These services are
generally provided by Net Value's employees, members of its Advisory
Board and Board of Directors and outside consultants. Net Value pays the
costs related to employees. Members of Net Value's Advisory Board and
Board of Directors are generally compensated with stock options in Net
Value which are accounted for in accordance with FAS 123 and EITF 96-18.
The costs of outside consultants are generally paid directly by the
Affiliate Company.
In June 1999, Net Value entered into a consulting agreement with and
loaned $267,000 to an officer of a company that Net Value acquired (see
Note 6). The loan is forgiven in 33% increments on the first, second and
third year anniversary dates of the consulting agreement. For accounting
purposes, Net Value amortizes the loan to consulting expense evenly over
the three year loan period and recorded $51,917 during the year ended
December 31, 1999 in connection with such loan amortization. The
unamortized loan balance at December 31, 1999 was $215,083.
In October 1999, Net Value entered into a consulting agreement with an
Advisory Board member. Under the terms of the consulting agreement, an
affiliated company of the Advisory Board member was granted and exercised
the right to purchase 676,374 shares of Net Value common stock at a
discount to its then fair market value. Net Value recorded consulting
expense of $2,289,324 equal to the discount of the exercise price to the
closing stock price on the date of grant.
In October 1999, a former officer and director of Net Value agreed to
sell his shares of an affiliate company to Net Value at a price which was
less than the then deemed fair value of the stock. Accordingly, Net Value
recorded contributed capital of $659,087 for the difference.
In December 1998, Net Value made a non-interest bearing, unsecured loan
of $200,000 to a stockholder which was subsequently repaid during March
and April of 1999.
- F28 -
<PAGE>
Net Value Holdings, Inc.
Notes to Consolidated Financial Statements
(Information at March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
(15) Discontinued Operations
In November 1999, Net Value made the strategic decision to exit the
online software development operations of NV Inc. and on December 3, 1999
completed a sale of substantially all of the assets of the discontinued
operations to Promotions Acquisitions, Inc. (Promotions), a corporation
formed by the former management team of NV Inc. in connection with a $17
million investment in Promotions by outside investors. Net Value received
$2 million in cash and 2,958,819 shares of Promotions' common stock in
exchange for substantially all of NV Inc.'s assets and assumption by
Promotions of approximately $1.6 million of liabilities. The value
ascribed to the Promotions common stock was based on the value of the
shares issued to outside investors. Furthermore, the majority of stock
options held by former NV Inc. employees were cancelled resulting in a
reduction of $1,487,964 to deferred stock-based compensation. Net Value
recognized a gain on the sale of the assets of the discontinued
operations of $6,502,663 representing the excess of the fair value of the
Promotions stock and cash received over the carrying value of the assets
sold and liabilities assumed. The loss from operations during between the
decision to exit the online software development operations and the sale
of these operations was not material. At December 31, 1999, the remaining
liabilities of the discontinued software development operations that were
not assumed by Promotions consist of payables to several vendors and
professional service providers used throughout fiscal 1999 and are
included in net liabilities of discontinued operations on the
consolidated balance sheet.
- F29 -
<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
Voorhees, NJ
December 6, 1999
- F30 -
<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)
STOCKHOLDERS' 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
- F31 -
<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>
- F32 -
<PAGE>
Asset Exchange, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
From March 12, 1999 (Inception) to 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) - - - - - -
------- ---- --------- ----- -------- ---------
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) $ (48,529)
--------- ---------
Balance at September 30, 1999 $ (48,529) $ 152,471
========= =========
</TABLE>
- F33 -
<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>
- F34 -
<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.
- F35 -
<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.
- F36 -
<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
- F37 -
<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.
- F38 -
<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
Voorhees, NJ
November 30, 1999
- F39 -
<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)
STOCKHOLDERS' 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.
- F40 -
<PAGE>
College411.com, Inc.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(UNAUDITED)
From April 13, 1999 (Inception) to September 30, 1999
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
REVENUES $ 300
-----------
OPERATING EXPENSES
Bank charges 65
Consulting 69,572
Depreciation 1,969
Dues and subscriptions 25
Insurance 517
Miscellaneous 585
Office 860
Payroll 5,350
Payroll processing fees 1,500
Professional fees 15,486
Software 311
Travel and entertainment 1,170
Telephone 2,907
-----------
Total operating expenses 100,317
-----------
NET LOSS TO COMMON STOCKHOLDERS $ (100,017)
===========
Basic and diluted net loss per common share $ (0.0100)
===========
Basic and diluted weighted average number of common shares outstanding 10,049,806
===========
</TABLE>
- F41 -
<PAGE>
College411.Com, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
From April 13, 1999 (Inception) to 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>
- F42 -
<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>
- F43 -
<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.
- F44 -
<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.
- F45 -
<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.
- F46 -
<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>
- F47 -
<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.
- F48 -
<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
Voorhees, NJ
December 7, 1999
- F49 -
<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)
STOCKHOLDERS' 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
- F50 -
<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.
- F51 -
<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.
- F52 -
<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.
- F53 -
<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.
- F54 -
<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 statements 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of 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
Voorhees, NJ
January 31, 2000
- F55 -
<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
- F56 -
<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
- F57 -
<PAGE>
Industrialvortex.com, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' DEFICIT
From May 20, 1999 (Inception) to 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
- F58 -
<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
- F59 -
<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.
- F60 -
<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.
- F61 -
<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.
- F62 -
<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.
- F63 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 1999
ASSETS
<TABLE>
<CAPTION>
June 30,
1999
---------
(unaudited)
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 143,842
Interest receivable 2,522
Loan receivable - officer 310,000
Prepaid rent 1,200
---------
Total current assets 457,564
PROPERTY AND EQUIPMENT, NET 10,852
OWNERSHIP INTERESTS AND ADVANCES IN INVESTMENTS 270,000
DEPOSITS 624
---------
TOTAL ASSETS $ 739,040
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 53,368
Accrued expenses 3,070
Note payable 630,000
Loans payable - officer 12,000
---------
Total current liabilities 698,438
---------
COMMITMENTS AND CONTINGENCIES (NOTE B)
STOCKHOLDERS' EQUITY
Preferred stock, $0.00 par value; 0 shares issued and outstanding;
250,000 shares authorized --
Common stock, $0.00 par value; 240,000 shares issued and outstanding;
1,000,000 shares authorized --
Additional paid - in capital 280,000
Deficit accumulated during the development stage (239,398)
---------
Total stockholders' equity 40,602
---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 739,040
=========
</TABLE>
- F64 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
August 19, 1998
Six Months Ended (Inception) Through
June 30, 1999 June 30, 1999
---------------- -------------------
(unaudited) (unaudited)
<S> <C> <C>
REVENUES $ -- $ --
--------- ---------
OPERATING EXPENSES
Advertising 4,063 4,180
Bad debt expense 100,000 100,000
Bank charges and interest 439 454
Consulting fees 81,184 83,184
Contributions 200 200
Depreciation 677 677
Dues and subscriptions 630 880
Employee benefits 507 507
Marketing -- 750
Office expense 3,380 3,487
Professional fees 5,211 5,211
Recruiting fees 65 65
Rent 4,671 4,671
Salaries 21,889 21,889
Tax on salaries 1,137 1,137
Telephone 2,889 3,901
Travel 10,547 10,547
Utilities 180 180
--------- ---------
Total operating expenses 237,669 241,920
--------- ---------
NET LOSS FROM OPERATONS (237,669) (241,920)
OTHER INCOME
Interest income 2,522 2,522
--------- ---------
NET LOSS $(235,147) $(239,398)
========= =========
</TABLE>
- F65 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Preferred Stock Common Stock Paid-In Development
Shares Amount Shares Amount Capital Stage Total
--------- --------- ---------- ------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 19, 1998 -- $ -- -- $ -- $ -- $ -- $ --
Net loss for period August 19, 1998
(Inception) to December 31, 1998 -- -- -- -- -- (4,251) (4,251)
------- -------- ---------- ------- --------- --------- ---------
Balance at December 31, 1998 (unaudited) -- -- -- -- -- (4,251) (4,251)
Common stock issued -- -- 240,000 -- 280,000 -- 280,000
Net loss for period -- -- -- -- -- (235,147) (235,147)
------- -------- ---------- ------- --------- --------- ---------
Balance at June 30, 1999 (unaudited) -- $ -- 240,000 $ -- $ 280,000 $(239,398) $ 40,602
======= ======== ========== ======= ========= ========= =========
</TABLE>
- F66 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
August 19, 1998
Six Months Ended (Inception) Through
June 30, 1999 June 30, 1999
---------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(235,147) $(239,398)
Adjustments to reconcile net loss to net cash used
in operating activities:
Bad debt on stock subscription 100,000 100,000
Depreciation 677 677
Changes in assets and liabilities:
Interest receivable (2,522) (2,522)
Prepaid expenses (1,200) (1,200)
Deposits (624) (624)
Accounts payable 51,368 53,368
Accrued expenses 3,070 3,070
--------- ---------
Net cash used by operating activities (84,378) (86,629)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of computer equipment and furniture (11,530) (11,530)
Equity investments (270,000) (270,000)
--------- ---------
Net cash used by investing activities (281,530) (281,530)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from officers loans 405,985 409,966
Repayment of officers loans (707,965) (707,965)
Proceeds from loans payable 715,000 715,000
Repayment of loans payable (85,000) (85,000)
Net proceeds from issuance of common stock 180,000 180,000
--------- ---------
Net cash provided by financing activities 508,020 512,001
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 142,112 143,842
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,730 --
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 143,842 $ 143,842
========= =========
CASH PAID FOR INTEREST $ 99 $ 99
========= =========
CASH PAID FOR TAXES $ -- $ --
========= =========
</TABLE>
- F67 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Six Months Ended June 30, 1999
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
THE COMPANY
Strategicus Partners, Inc., an Oregon corporation, was incorporated on
August 19, 1998. Strategicus Partners, Inc. is a development stage
enterprise that operates as an Internet holding company which owns equity
interests in and provides strategic management services to development
stage Internet companies.
Generation Y Brands, Inc., a wholly-owned subsidiary of Strategicus
Partners, Inc., is an Oregon corporation, which was incorporated on August
19, 1998. Generation Y Brands, Inc. is a development stage company, which
intends to operate as an online superstore for small catalogs. It intends
to offer a one-stop shopping site for browsing and buying by aggregating
the content of thousands of smaller, print-based mail order catalogs into
a commerce-enabled database.
On March 19, 1999 the Articles of Incorporation of Generation Y Brands,
Inc. ("Generation"), a wholly owned subsidiary, were amended to reflect a
corporate name change. As of this date the legal corporate name changed to
Metacat.com, Inc. ("Metacat").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Strategicus
Partners, Inc. and its wholly owned subsidiary, Generation Y Brands, Inc..
All material intercompany transactions have been eliminated.
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. Accounts are insured by the Federal Deposit Insurance
Corporation up to a maximum of $100,000. At June 30, 1999 the Company had
an uninsured cash balance of $43,842.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
loan receivables, accounts payable and borrowings, are carried at cost,
which approximates fair value.
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.
- F68 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Six Months Ended June 30, 1999
(Continued)
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 10 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.
USE OF ESTIMATES
The preparation of consolidated 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 consolidated financial statements and the reported amounts of
consolidated revenues and consolidated expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues when earned or when services performed,
provided no significant obligations remain, and collectibility is
probable.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," during 1998. SFAS 130
establishes standards for reporting comprehensive income and its
components in consolidated 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.
CONCENTRATIONS
Concentrations not disclosed elsewhere in the consolidated financial
statements are as follows:
Metacat.com, Inc., formerly Generation Y Brands, Inc., ("Subsidiary")
plans to generate revenue from several sources which utilize the same
medium. Lack of product (website) development or customer interest could
have a materially adverse effect on the Company.
- F69 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Six Months Ended June 30, 1999
(Continued)
B. CONTINGENCY - GOING CONCERN
Since August 19, 1998 (Inception), the Company has been in the development
stage and the principal activities have consisted of raising capital.
The accompanying consolidated 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 June 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
subsidiary's product and achieving satisfactory levels of profitable
operations. The consolidated 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.
C. RELATED PARTY PAYABLES AND RECEIVABLES
In May 1999, the Company loaned $310,000 to one of its officers. The note
accrues interest at 9% per annum and is due on July 31, 1999.
In May 1999, the Company borrowed $12,000 from a corporate officer. The
loan was non-interest bearing and payable on demand.
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Computer hardware and software 10,202
Furniture and fixtures 1,327
--------
11,529
Less Accumulated Depreciation (677)
---------
10,852
Depreciation expense for the six months ended June 30, 1999 was $677.
E. OWNERSHIP INTERESTS AND ADVANCES IN INVESTMENTS
The following summarizes the Company's ownership interests and advances in
investments which are accounted for under the cost method of accounting.
Ownership interests are classified according to applicable accounting
methods at June 30, 1999. Cost basis represents Company's original
acquisition cost less any impairment charges in such companies.
June 30, 1999
COST METHOD
AsiaCD.com, Inc. $250,000
College411.com, Inc. 20,000
--------
$270,000
========
- F70 -
<PAGE>
Strategicus Partners, Inc. and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Six Months Ended June 30, 1999
(Continued)
F. NOTE PAYABLE
In June 1999, the Company borrowed $630,000 from Net Value Holdings, Inc.
which the Company used for the following:
<TABLE>
<S> <C>
Acquired ownership interest in AsiaCD.com, Inc. and College411.com, Inc. $270,000
Advanced funds to wholly-owned subsidiary, Metacat.com, Inc., formerly
Generation Y Brands, Inc., for operating expenditures 50,000
Loaned funds to officer in exchange for a promissory note 310,000
---------
$630,000
========
</TABLE>
The terms of the note calls for a maturity date of July 31, 1999 and
accrues interest at a rate of 10% per annum.
G. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorizes the issuance of
1,000,000 shares of Common Stock, no par value per share, of which zero
shares were outstanding as of June 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's Articles of Incorporation authorizes the issuance of 250,000
shares of Preferred Stock, no par value per share, of which 240,000 shares
were outstanding as of June 30, 1999. Holders of each share of Preferred
Stock are entitled to vote on all matters at stockholder's meetings.
Effective June 17, 1999 the Company entered into a "Subscription
Agreement" with four individuals. Each agreement allows the holder the
opportunity to purchase 60,000 shares of the Company's Series A Common
Stock ("Stock") for the consideration of $70,000. The total shares of
Stock purchased per the "Subscription Agreement" totaled 240,000 and the
total amount of consideration received by the Company totaled $280,000.
H. STOCK OPTION PLAN
During June 1999, Metacat.com, Inc. adopted a Stock Option Plan which
provides for the granting of stock options to employees, officers and
directors of Metacat.com, Inc. 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.
I. SUBSEQUENT EVENTS
On July 30, 1999 Strategicus Partners, Inc. ("Strategicus") merged with
NetValue Holdings, Inc. ("Holdings") whereby Holdings acquired all of the
common stock of Strategicus in exchange for 7,524,628 shares of Holdings
common stock and 2,311,460 shares of Holdings Convertible Preferred Stock.
The principals of Strategicus are to receive 30% of the consideration, for
the merger, immediately, with the remainder of the consideration to be
vested over a 24 month period. The remaining shareholders are to receive
15% of the consideration for the merger immediately, with the remainder
of the consideration to be vested over a 30 month period.
J. 1998 INFORMATION
Strategicus incorporated in August 1998 and had less that $5,000 of
assets, liabilities, expenses and revenues as of December 31, 1998.
Consequently, presentation of audited financial statements of Strategicus
at December 31, 1998 was deemed to be immaterial and of no benefit to
investors. The Company has included the unaudited financial statements of
Strategicus as June 30, 1999 and for the six months then ended and the
period August 19, 1998 (inception) through June 30, 1999 which covers the
entire history of the company.
- F71 -
<PAGE>
Independent Auditors' Report
The Board of Directors
Webmodal, Inc.:
We have audited the accompanying balance sheet of Webmodal, Inc., (a
development-stage enterprise) as of December 31, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the period
from July 28, 1999 (inception) through December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Webmodal, Inc. (a
development-stage enterprise) as of December 31, 1999, and the results of its
operations and its cash flows for the period from July 28, 1999 (inception)
through December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
June 20, 2000
- F72 -
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Balance Sheets
December 31, 1999 and March 31, 2000
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1999 2000
(Unaudited)
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,437,909 $ 1,551,450
Prepaid expenses and other current assets 6,169 13,139
----------- -----------
Total current assets 1,444,078 1,564,589
Property and equipment, net of accumulated depreciation 16,255 111,873
Website development costs -- 568,220
----------- -----------
Total assets $ 1,460,333 $ 2,244,682
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 44,841 $ 420,114
Accrued expenses 143,649 252,135
----------- -----------
Total current liabilities 188,490 672,249
----------- -----------
Note payable 245,588 245,588
Accrued interest 8,186 13,097
----------- -----------
Total liabilities 442,264 930,934
----------- -----------
Redeemable preferred stock, $1.00 par value; 3,000,000 shares
authorized; none issued and outstanding -- --
Stockholders' equity:
Common stock, $.0001 par value; 10,000,000 shares
authorized; 1,174,900 and 1,264,000 issued and outstanding 117 126
Additional paid-in capital 2,427,407 3,172,132
Deferred compensation (905,209) (826,249)
Deficit accumulated during development stage (504,246) (1,032,261)
----------- -----------
Total stockholders' equity 1,018,069 1,313,748
----------- -----------
Total liabilities and stockholders' equity $ 1,460,333 $ 2,244,682
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-F73-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Statements of Operations
Period from July 28, 1999 (inception) through December 31, 1999, three
months ended March 31, 2000, and period from July 28, 1999 (inception) through
March 31, 2000
<TABLE>
<CAPTION>
Period from Period from
July 28, 1999 July 28, 1999
(inception) Three months (inception)
through ended through
December 31, March 31, March 31,
1999 2000 2000
(Unaudited) (Unaudited)
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ -- $ -- $ --
---------- ---------- ------------
Operating expenses:
Administration 338,589 500,521 839,110
Website development costs 162,182 41,587 203,769
Depreciation 1,208 2,342 3,550
---------- ---------- ------------
Total operating expenses 501,979 544,450 1,046,429
---------- ---------- ------------
Other income (expense):
Interest income 5,919 21,346 27,265
Interest expense (8,186) (4,911) (13,097)
---------- ---------- ------------
Net loss $ (504,246) $ (528,015) $ (1,032,261)
========== ========== ============
</TABLE>
See accompanying notes to financial statements.
-F74-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Statements of Stockholders' Equity
Period from July 28, 1999 (inception) through December 31, 1999
and three months ended March 31, 2000
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock Additional during the Total
------------------- paid-in development Deferred stockholders'
Shares Amount capital stage compensation equity
------ ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 28, 1999
(date of inception) -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock for cash
in formation of the Company 1,000,000 100 29,312 -- -- 29,412
Issuance of common stock for cash 174,900 17 1,445,443 -- -- 1,445,460
Deferred compensation related
to options -- -- 947,554 -- (947,554) --
Compensation expense related
to options -- -- -- -- 42,345 42,345
Consulting expense related to options -- -- 5,098 -- -- 5,098
Net loss -- -- -- (504,246) (504,246)
--------- ----- ----------- ------------ ---------- -----------
Balance at December 31, 1999 1,174,900 117 2,427,407 (504,246) (905,209) 1,018,069
--------- ----- ----------- ------------ ---------- -----------
Issuance of common stock in exchange
for services (unaudited) 13,200 1 109,090 -- -- 109,091
Issuance of common stock for cash
(unaudited) 75,900 8 627,249 -- -- 627,257
Compensation expense related
to options (unaudited) -- -- -- -- 78,960 78,960
Consulting expense related to
options (unaudited) -- -- 8,386 -- -- 8,386
Net loss (unaudited) -- -- -- (528,015) -- (528,015)
--------- ----- ----------- ------------ ---------- -----------
Balance at March 31, 2000 (unaudited) 1,264,000 $ 126 $ 3,172,132 $ (1,032,261) $ (826,249) $ 1,313,748
========= ===== =========== ============ ========== ===========
</TABLE>
See accompanying notes to financial statements.
-F75-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Statements of Cash Flows
Period from July 28, 1999 (inception) through December 31, 1999, three
months ended March 31, 2000 and period from July 28, 1999 (inception) through
December 31, 1999
<TABLE>
<CAPTION>
Period from Period from
July 28, 1999 July 28, 1999
(inception) Three months (inception)
through ended through
December 31, 1999 March 31, 2000 March 31, 2000
(Unaudited) (Unaudited)
----------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (504,246) $ (528,015) $(1,032,261)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation 1,208 2,342 3,550
Common stock/options issued in lieu of cash
payment for professional services 5,098 117,477 122,575
Compensation expense related to options 42,345 78,960 121,305
Changes in assets and liabilities:
Prepaid assets and other current assets (6,169) (6,970) (13,139)
Accounts payable 44,841 375,273 420,114
Accrued expenses 143,649 108,486 252,135
Accrued interest 8,186 4,911 13,097
----------- ----------- -----------
Net cash provided by (used in)
operating activities (265,088) 152,464 (112,624)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (17,463) (97,960) (115,423)
Website development costs capitalized -- (568,220) (568,220)
----------- ----------- -----------
Net cash used in investing activities (17,463) (666,180) (683,643)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of note payable 245,588 -- 245,588
Proceeds from issuance of common stock 1,474,872 627,257 2,102,129
----------- ----------- -----------
Net cash provided by financing activites 1,720,460 627,257 2,347,717
----------- ----------- -----------
Net increase in cash 1,437,909 113,541 1,551,450
Cash at beginning of period -- 1,437,909 --
----------- ----------- -----------
Cash at end of period $ 1,437,909 $ 1,551,450 $ 1,551,450
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ -- $ --
Cash paid for taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-F76-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
(1) Nature of the Business
Webmodal, Inc. (Webmodal or the Company) was incorporated on July 28, 1999.
Upon completion of its website applications on June 1, 2000, Webmodal is an
Internet-based transportation company that gives shippers the ability to
identify, evaluate, and purchase intermodal transportation services online.
Webmodal uses a fast, data-driven, online interface designed to
dramatically improve upon traditional intermodal marketing processes.
Webmodal's Point-Click-Ship(SM) product gives shippers the ability to input
their specific transportation needs, view a comprehensive list of relevant
intermodal transportation alternatives, and execute orders for
transportation services entirely online at the Company's website
www.webmodal.com.
Since inception, the Company has devoted substantially all of its efforts
to business planning, product development, acquiring operating assets,
raising capital, marketing, and business development activities.
Accordingly, the Company is in the development stage, as defined by the
Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and
Reporting by Development Stage Enterprises.
The Company has incurred losses since inception and expects to incur a loss
in 2000. Should the Company be unable to generate revenue and realize cash
flows from operations in the near term, the Company may require additional
equity or debt financing to meet working capital needs and to fund
operating losses. Although management believes the Company could obtain
such financing, there can be no assurances that such financing will be
available in the future at terms acceptable to the Company.
The Company is subject to risks and uncertainties common to growing
technology-based companies, including technological change, growth and
commercial acceptances of the Internet, dependence on principal products
and third party technology, new product development and performance, new
product introductions and other activities of competitors, and its limited
operating history.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the time of purchase to be cash
and cash equivalents. Cash equivalents at December 31, 1999 are
invested in money market accounts.
(b) Impairment of Long-lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the
Company records impairment of losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
(c) Property and Equipment
Property and equipment are carried at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets, which range from three to five years.
-F77-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
(d) Computer Software and Website Development
The Company has adopted the provisions of Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use and Emerging Issues Task Force No. 00-2, Accounting
for Web Site Development Costs. Accordingly, certain costs in the
planning development stage of internal-use computer software,
including website development, are expensed as incurred. During the
period from July 28, 1999 (inception) through December 31, 1999,
software development planning costs related to website development of
$162,182 were incurred and expensed.
(e) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(f) Stock-Based Compensation
The Company applies the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and provide pro forma net income and pro forma net income per share
disclosures as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
(3) Interim Financial Information
The interim financial statements of the Company as of and for the three
months ended March 31, 2000, included herein, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations relating to
interim financial statements.
-F78-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and cash flows as of and for the three months ended
March 31, 2000. The accompanying unaudited interim financial statements are
not necessarily indicative of full-year results.
(4) Property and Equipment
Property and equipment consists of the following:
December 31,
1999
------------
Property and equipment:
Office equipment and furniture $ 4,995
Computer equipment 12,468
--------
17,463
Less: accumulated depreciation (1,208)
--------
Property and equipment, net $ 16,255
========
(5) Income Taxes
The provision for income taxes differs from the amounts which would result
by applying the applicable Federal income tax rate to loss before provision
for income taxes for the period from July 28, 1999 (inception) to December
31, 1999 as follows:
<TABLE>
<CAPTION>
Period from
July 28, 1999
(inception)
through
December 31,
1999
-------------
<S> <C>
Expected income tax benefit at the statutory rate $ (171,444)
State tax benefit, net of Federal taxes (21,342)
Nondeductible expenses 20,833
Increase in valuation allowance 171,953
----------
$ --
==========
</TABLE>
-F79-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
The tax effect of temporary differences giving rise to significant portions
of the deferred tax assets and liabilities at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
December 31,
1999
------------------
<S> <C>
Deferred tax assets:
Capitalized start-up and organizational costs $ 156,456
Net operating loss carryforward 16,290
---------
Gross deferred tax assets 172,746
Less valuation allowance (171,953)
---------
Net deferred tax assets 793
---------
Deferred tax liabilities - depreciation (793)
---------
Net deferred income taxes $ --
=========
</TABLE>
The Company has a net operating loss carryforward of approximately $41,970
as of December 31, 1999, which can potentially be carried forward twenty
years and will expire in 2019.
The Company has recorded a full valuation allowance against its net
deferred tax assets since management believes that, after considering all
the available objective evidence, it is more likely than not that these
assets will not be realized.
(6) Note Payable
On August 2, 1999, the Company issued a note payable in the amount of
$245,588. The note is due on August 2, 2009. The unpaid principal balance
of the note bears interest at an annual rate of 8%, payable annually on
August 2 of each year commencing August 2, 2002.
(7) Capital Stock
Stock Split
On September 16, 1999, the Company affected a 100 to 1 stock split on
its then-outstanding shares of common stock. All share information
included in these financial statements has been retroactively adjusted
to reflect the revised authorized capital stock and stock split.
Authorization of Stock
In September 1999, the Company amended and restated its certificate of
incorporation thereby authorizing 100,000 shares of $.0001 par value
common stock.
-F80-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
Equity Investments
On July 30, 1999, the Company entered into a shareholders agreement
with an investor. Under the terms of the agreement, the investor has
the right to purchase 180,000 additional shares of the Company's
common stock for total consideration of $1,245,588 which may partly be
paid by the surrender of the note payable discussed in Note (6) above.
The right to purchase these additional shares expired September 30,
1999.
On October 11, 1999, the Company entered into a stock purchase
agreement with an investor. Under the terms of the stock purchase
agreement, the Company issued 12,100 shares of common stock for total
consideration of $100,000.
On December 8, 1999 and December 17, 1999, the Company entered into
stock purchase agreements with investors. Under the terms of the
agreements, the Company issued 62,000 shares of common stock for total
consideration of $512,399 and 100,800 shares of common stock for total
consideration of $833,061, respectively.
(8) Stock Options
The Company has a Long-Term Stock Incentive Plan (the "Plan") for the
issuance of options to eligible employees, directors and consultants. The
Plan permits the Company to issue options on terms that the Company
determines appropriate, subject to a maximum life of 10 years. Such terms
include the exercise price, number of shares, vesting arrangements and
other terms. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Plan. Had compensation cost for the
Company's option plan been determined consistent with SFAS No. 123, the net
loss for the period from July 28, 1999 (inception) through December 31,
1999 would have been increased to the pro forma amount indicated below:
Net income (loss):
As reported $ (504,246)
Pro forma (504,551)
==========
For purposes of calculating the compensation cost consistent with SFAS No.
123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999: dividend yield of 0%,
nominal volatility, average risk free interest rate of 6.0%, and expected
lives of four years.
-F81-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
The following is a summary of activity under the Plan:
Weighted-
Options average
outstanding price
----------- ---------
Outstanding at July 28, 1999 -- $ --
Granted 129,900 0.28
Exercised -- --
Canceled -- --
------- ------
Outstanding at December 31, 1999 129,900 0.28
Granted (unaudited) 38,800 8.26
Exercised (unaudited) -- --
Canceled (unaudited) -- --
------- ------
Outstanding at March 31, 2000 (unaudited) 168,700 $ 2.12
======= ======
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------ ------------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Range of exercise prices of shares life price of shares price
------------------------ -------------- --------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$0.28 129,900 9.86 $0.28 2,825 $0.28
============== =============== ============= ============== ==============
</TABLE>
(9) Deferred Compensation
On November 1, 1999 and December 15, 1999, the Company granted employees
90,400 and 28,200 options, respectively. The aggregate amount of the
estimated fair value of the underlying stock in excess of the strike price
of the options on the dates of grant of $947,554 is being expensed over the
option vesting period, which is monthly vesting over three years.
On November 1, 1999, the Company granted a consultant 11,300 options in
consideration for consulting services over a three-year period. The
consulting expense will be adjusted to the current estimated fair value of
the options.
(10) Subsequent Events
Effective January 1, 2000, the Company implemented a 401(k) savings plan
(the "Savings Plan"). Qualified employees may participate in the Savings
Plan by contributing up to 15% of their gross wages or $10,500 (subject to
change by statutory regulations). The Company may elect to make matching
contributions at the discretion of the Board of Directors of the Company.
-F82-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
On January 12, 2000 and January 21, 2000, the Company entered into several
stock purchase agreements with investors. Under the terms of the
agreements, the Company issued 36,200 shares of common stock for total
consideration of $299,175 and 39,700 shares of common stock for total
consideration of $328,082, respectively.
On January 15, 2000, the Company entered into a technology development and
consulting services agreement with a third party. Under the terms of the
agreement, the first $400,000 of consulting services will be paid by
issuing Company common stock at a share price of $8.26. Consulting services
in excess of $400,000 will be paid 1/3 cash and 2/3 deferred cash or 100%
cash, at the election of the Company. This agreement may be terminated by
either party upon 14 days written notice.
On March 3, 2000, the Company entered into a lease agreement for office
space in Southlake, Texas. This agreement is a two-year lease with monthly
base rent of $4,900 plus a pro rata share of operating expenses of
approximately $1,050 per month.
On May 1, 2000, the Company entered into a domestic intermodal
transportation contract with a railway. The terms of the agreement require
$2.5 million of annual transportation services to be purchased from the
railway during the initial annual period. If the Company fails to achieve
this revenue requirement, the Company is liable for 25% of any shortfall.
In addition, in connection with this agreement, the Company established a
$250,000 letter of credit on behalf of the railway.
On May 8, 2000, the Company affected a 100 to 1 stock split on its
then-outstanding shares of common stock. All share information included in
these financial statements has been retroactively adjusted to reflect the
stock split.
On May 9, 2000, the Company amended and restated its certificate of
incorporation thereby authorizing 10,000,000 shares of $.0001 par value
common stock and 3,000,000 shares of $1.00 par value preferred stock, of
which 563,000 were designated as Series A preferred stock. Upon
liquidation, each holder of Series A preferred stock shall be entitled to
receive an amount equal to the original issue price of the Series A
preferred stock plus all accrued and unpaid dividends.
The Company shall pay preferential dividends to the holders of Series A
preferred stock, when and if declared, at an annual rate of 8% of the
original purchase. The dividends may be paid, at the discretion of the
Company, in cash or common stock at a price per share equal to the
conversion price of the Series A preferred stock on the payment date of the
dividend. Holders of the Series A preferred stock shall be entitled to
cumulative dividends prior and in preference to the payment of any dividend
or other distribution on the common stock. If after dividends in the full
preferential amount for the Series A preferred stock have been paid or
declared and set apart, then any additional dividends and distributions
declared, shall be declared among the holders of the then outstanding
common stock and Series A preferred stock pro rata according to the number
of shares of common stock held, where holders of shares of Series A
preferred stock will be deemed to hold the greatest whole number of shares
of common stock then issuable upon conversion in full of such shares of
Series A preferred stock.
-F83-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
In the event of liquidation, the holders of the Series A preferred stock
shall be entitled to be paid, prior and in preference to any payment or
distribution on any common stock, an amount per share equal to the original
issue price of the Series A preferred stock, plus all accrued but unpaid
dividends. If any funds remain after payment or distribution to the holders
of the Series A preferred stock, the remaining funds shall be distributed
among the holders of the then outstanding common stock and the Series A
preferred stock pro rata according to the number of shares of common stock
held, holders of shares of Series A preferred stock will be deemed to hold
the greatest whole number of shares of common stock then issuable upon
conversion in full of such shares of Series A preferred stock.
Each holder of shares of Series A preferred stock shall be entitled to the
number of votes equal to the number of whole shares of common stock into
which such shares of Series A preferred stock could be converted.
Series A preferred stock may be converted at any time, at the election of
the holder, into the number of shares of common stock which results from
dividing the original issue price by the conversion price. The initial
conversion price is equal to the original issue price. The conversion price
shall be subject to adjustments upon (i) the issuance of additional shares
of common stock as a dividend or other distribution on outstanding common
stock, (ii) a subdivision of the outstanding shares of common stock into a
greater number of shares of common stock, (iii) a combination of the
outstanding shares of common stock into a smaller number of shares of
common stock, (iv) the company pays a dividend or makes another
distribution to the holders of the common stock payable in securities of
the Company other than shares of common stock, (v) the Series A preferred
stock is changed into the same or a different number of shares of any class
or classes of stock, whether by recapitalization, reclassification or
otherwise and (vi) the issuance or sale of additional shares of common
stock for a price that is less than the conversion price for the Series A
preferred stock in effect immediately prior to such issue or sale.
Each share of Series A preferred stock shall automatically be converted
into fully paid and nonassessable shares of common stock, immediately prior
to the closing of the Company's first underwritten public offering in which
the aggregate gross proceeds received equals or exceeds $20 million at an
offering price per share of common stock of not less than four times the
original conversion price per share.
If a qualifying initial public offering (IPO) has not occurred as of the
fourth anniversary of the original issue date, each holder of outstanding
shares of Series A preferred stock may request redemption of all of the
outstanding shares of Series A preferred stock. The redemption price per
share of Series A preferred stock shall be equal to the original issue
price plus all accrued but unpaid dividends.
-F84-
<PAGE>
WEBMODAL, INC.
(a development-stage enterprise)
Notes to Financial Statements
December 31, 1999 and March 31, 2000 (unaudited)
On May 9, 2000, the Company issued 563,000 shares of Series A preferred
stock to a third party, pursuant to the terms of a Series A Convertible
Preferred Stock Purchase Agreement, and a warrant to purchase 170,000
shares of the Company's common stock. The aggregate purchase price for the
stock and the warrant was $4,877,099, comprised of $4,000,000 in cash and
113,174 shares of the third party's common stock valued at $877,099. The
warrants are convertible into common stock at an exercise price of $8.88.
The warrant exercise period is May 9, 2000 through May 9, 2005 or upon the
earlier of the third party's redemption of all shares of the Company's
Series A preferred stock, the last business day prior to a qualified IPO,
merger or consolidation of the Company and another entity following which
the shareholders of the Company control less than 50% of the voting
securities of the resulting entity or a sale of all or substantially all of
the Company's assets. In connection with the consummation of the purchase
agreement, the Company also entered into a Stockholders' Agreement and an
Investors Rights Agreement, dated as of May 9, 2000. The Stockholders'
Agreement and the Investors Rights Agreement, taken in the aggregate,
provide for, among other things, restrictions on the transferability of
securities, co-sale, preemptive and registration rights. These agreements
terminate upon a qualified public offering of the Company's common stock.
-F85-
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
BASIS OF PRESENTATION
On May 9, 2000, Net Value Holdings, Inc. acquired an additional equity interest
in Webmodal for total consideration of $4,877,099 consisting of $4,000,000 cash
and 133,174 shares of our common stock valued at $877,099. This acquisition
increased our approximate voting ownership from 10% to 39% and necessitated a
change from the cost method to the equity method of accounting for our
investment in Webmodal.
The following unaudited pro forma consolidated balance sheet at March 31, 2000
presents our acquisition of additional equity interests in Webmodal as if it had
occurred on March 31, 2000. The unaudited pro forma consolidated statement of
operations for the year ended December 31, 1999 and the three months ended March
31, 2000 presents our acquisition of additional equity interests in Webmodal as
if it had occurred on January 1, 1999 and excludes the historical effect of
discontinued operations. The detailed assumptions used to prepare the unaudited
pro forma condensed consolidated financial information are contained herein. The
unaudited pro forma condensed consolidated financial information reflects the
use of the purchase method of accounting for the acquisition, which for purposes
of this presentation encompasses the purchase of our equity interest in a
business that will be accounted for by the equity method.
The unaudited pro forma condensed consolidated financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations which would have actually been
reported had the transactions been consummated at the dates mentioned above or
which may be reported in the future. This unaudited pro forma condensed
consolidated financial information is based upon the respective historical
financial statements of Net Value Holdings, Inc. and Webmodal and should be read
in conjunction with those statements and the related notes.
-F86-
<PAGE>
NET VALUE HOLDINGS, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2000
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Assets Historical Adjustments Balance
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 45,715,612 $(4,000,000)(a) $ 41,715,612
Interest receivable 21,603 -- 21,603
Loans receivable 212,833 -- 212,833
Prepaid expenses and other current assets 202,875 -- 202,875
------------- ----------- ------------
Total current assets 46,152,923 (4,000,000) 42,152,923
Ownership interests in and advances to Affiliate Companies 11,091,706 4,775,937 (a) 15,867,643
Goodwill, net 2,914,980 -- 2,914,980
Furniture and equipment, net 113,219 -- 113,219
Other assets 106,450 -- 106,450
------------- ----------- ------------
$ 60,379,278 $ 775,937 $ 61,155,215
============= =========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 367,579 $ -- $ 367,579
Notes and loans payable 12,000 -- 12,000
Convertible promissory notes 28,281 -- 28,281
Long-term debt due within one year 63,165 -- 63,165
Net liabilities of discontinued operations 1,693,807 -- 1,693,807
------------- ----------- ------------
Total current liabilities 2,164,832 -- 2,164,832
------------- ----------- ------------
Redeemable convertible preferred stock, Series C 40,883,087 -- 40,883,087
Accrued preferred stock dividend, Series C 335,895 -- 335,895
------------- ----------- ------------
41,218,982 -- 41,218,982
------------- ----------- ------------
Stockholders' equity:
Common stock, Net Value Inc. 899 -- 899
Common stock, Net Value Holdings 19,281 113 (a) 19,394
Additional paid-in capital 195,662,668 876,986 (a) 196,539,654
Deferred compensation (52,539,583) -- (52,539,583)
Accumulated deficit (126,130,306) (101,162)(a) (126,231,468)
Treasury stock, Net Value Inc. (17,495) -- (17,495)
------------- ----------- ------------
Total stockholders' equity 16,995,464 775,937 17,771,401
------------- ----------- ------------
$ 60,379,278 $ 775,937 $ 61,155,215
============= =========== ============
</TABLE>
Pro Forma Adjustment Legend
(a) Amount represents the total consideration paid to acquire our additional
equity interest in Webmodal and the effect of changing from the cost method
to the equity method of accounting for our investment in Webmodal:
<TABLE>
<CAPTION>
<S> <C>
Consideration paid:
Cash $ 4,000,000
Common stock (113,174 shares) 113
Additional paid-in capital 876,986
Effect of changing from the cost to equity method of accounting:
Accumulated deficit (101,162)
-----------
$ 4,775,937
===========
</TABLE>
The 113,174 shares of our common stock were valued using our closing stock
market price on the date of acquisition of $7.75 per share. The effect of
changing from the cost method to the equity method of accounting for our
investment includes a retroactive adjustment to our accounts based on a
step by step acquisition of our investment.
-F87-
<PAGE>
NET VALUE HOLDINGS, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Three months ended March 31, 2000
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustments Balance
------------ ----------- ------------
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
Operating expenses:
Stock-based compensation 5,894,187 -- 5,894,187
General and administrative 2,103,478 -- 2,103,478
------------ --------- ------------
Total operating expenses 7,997,665 -- 7,997,665
Interest income 211,957 -- 211,957
Interest expense 73,776 -- 73,776
------------ --------- ------------
Loss before equity in losses of Affiliate Companies 7,859,484 -- 7,859,484
Equity in losses of Affiliate Companies 298,851 501,004 (a) 799,855
------------ --------- ------------
Net loss from continuing operations 8,158,335 501,004 8,659,339
------------ --------- ------------
Preferred stock dividends 43,052,686 -- 43,052,686
------------ --------- ------------
Net loss to common shareholders from continuing operations $ 51,211,021 $ 501,004 $ 51,712,025
============ ========= ============
Loss per common share from continuing operations $ (3.01) $ (3.02)
============ ============
Shares used in per share calculation 16,986,005 113,174 (b) 17,099,179
============ ========= ============
</TABLE>
Pro Forma Adjustment Legend
(a) Amount represents adjustment to Equity in losses of Affiliate Companies as
follows:
Our proportionate share of Webmodal's net loss $ 203,814
Amortization of the excess investment cost over our
equity in Webmodal's net assets 297,190
---------
$ 501,004
=========
(b) Amount represents the number of shares outstanding as if the additional
issuance of 113,174 shares of our common stock to acquire our equity
interest in Webmodal occured as of January 1, 1999.
-F88-
<PAGE>
NET VALUE HOLDINGS, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustments Balance
------------ ----------- ------------
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
Operating expenses:
Stock-based compensation 7,320,695 -- 7,320,695
General and administrative 3,719,497 -- 3,719,497
------------ ---------- ------------
Total operating expenses 11,040,192 -- 11,040,192
Interest income 60,526 -- 60,526
Interest expense 12,380,157 -- 12,380,157
Financing fees 523,601 -- 523,601
------------ ---------- ------------
Loss before equity in losses of Affiliate Companies 23,883,424 -- 23,883,424
Equity in losses of Affiliate Companies 79,559 1,383,400 (a) 1,462,959
------------ ---------- ------------
Net loss from continuing operations 23,962,983 1,383,400 25,346,383
------------ ---------- ------------
Preferred stock dividends 6,605,261 -- 6,605,261
------------ ---------- ------------
Net loss to common shareholders from continuing operations $ 30,568,244 $1,383,400 $ 31,951,644
============ ========== ============
Loss per common share from continuing operations $ (2.90) $ (2.99)
============ ============
Shares used in per share calculation 10,557,953 113,174 (b) 10,671,127
============ ========== ============
</TABLE>
Pro Forma Adjustment Legend
(a) Amount represents adjustment to Equity in losses of Affiliate Companies as
follows:
Our proportionate share of Webmodal's net loss $ 194,639
Amortization of the excess investment cost over our
equity in Webmodal's net assets 1,188,761
-----------
$ 1,383,400
===========
(b) Amount represents the number of shares outstanding as if the additional
issuance of 113,174 shares of our common stock to acquire our equity
interest in Webmodal occured as of January 1, 1999.
-F89-
<PAGE>
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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.
-------------------
================================================================================
<PAGE>
================================================================================
NET VALUE HOLDINGS, INC.
5,578,904 SHARES OF COMMON STOCK
-------------
PROSPECTUS
-------------
June 30, 2000
================================================================================
