<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________.
Commission file number 0-29413
NET VALUE HOLDINGS, INC.
------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
- --------------------------------------------------------------------------------
(State or Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
1085 Mission Street
San Francisco, CA 94103
------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (415) 575-4755
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
There were 17,680,672 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at April 30, 2000, subject to increase for a
contingency described within Footnote 6 to the Notes to the Consolidated
Financial Statements. In addition, there were 5,000 shares of treasury stock as
of such date.
<PAGE>
NET VALUE HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2000 (unaudited)
and December 31, 1999................................................1
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 2000 and March 31, 1999.................2
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2000 and March 31, 1999.................3
Notes to Consolidated Financial Statements...........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........16
Part II. Other Information
Item 1. Legal Proceedings ..................................................17
Item 6. Exhibit and Reports on Form 8-K.....................................17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NET VALUE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
2000 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 45,715,612 $ 3,127,232
Interest receivable.............................................................. 21,603 28,176
Loans receivable................................................................. 212,833 218,808
Capitalized financing fees, net.................................................. - 142,958
Prepaid expenses and other current assets........................................ 202,875 41,911
----------------- -----------------
Total current assets....................................................... 46,152,923 3,559,085
Ownership interests in and advances to Affiliate Companies....................... 11,091,706 7,065,557
Goodwill, net of accumulated amortization of $891,224 and $578,906 in
2000 and 1999 ................................................................. 2,914,980 3,227,298
Furniture and equipment, net..................................................... 113,219 70,082
Other assets..................................................................... 106,450 67,346
----------------- -----------------
$ 60,379,278 $ 13,989,368
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................................ $ 367,579 $ 802,202
Notes and loans payable.......................................................... 12,000 12,000
Convertible promissory notes..................................................... 28,281 1,921,929
Convertible debentures........................................................... -- 3,250,500
Long-term debt due within one year............................................... 63,165 11,732
Net liabilities of discontinued operations....................................... 1,693,807 1,773,591
----------------- -----------------
Total current liabilities.................................................. 2,164,832 7,771,954
----------------- -----------------
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 (0 and 4,824 shares authorized, issued and outstanding at
2000 and 1999), net of costs of issuance. Liquidation preference: $0
and $4,824,000 at 2000 and 1999.................................................. -- 4,448,872
Redeemable convertible preferred stock, Series C
$.001 par value (4,166,667 shares authorized, issued and outstanding at
2000), net of costs of issuance and proceeds allocated to Series C Warrants.
Liquidation preference: $50,000,000 at 2000...................................... 40,883,087 --
Accrued redeemable convertible preferred stock dividend, Series C................... 335,895 --
----------------- ------------------
41,218,982 4,448,872
----------------- ------------------
Stockholders' equity:
Common stock, Net Value, Inc. $.001 par value
(49,000,000 shares authorized at 2000 and 1999; 898,338 and 1,037,338 shares
issued and outstanding at 2000 and 1999, respectively)......................... 899 1,038
Common stock, $.001 par value
(50,000,000 shares authorized at 2000 and 1999; 19,281,807 and 15,522,807
shares issued and outstanding at 2000 and 1999, respectively).................. 19,281 15,523
Additional paid-in capital....................................................... 195,662,668 103,946,136
Deferred compensation............................................................ (52,539,583) (27,342,172)
Accumulated deficit.............................................................. (126,130,306) (74,919,285)
Treasury stock, Net Value, Inc., at cost (5,000 shares at 2000) ................. (17,495) --
----------------- ------------------
Total stockholders' equity................................................. 16,995,464 1,701,240
----------------- ------------------
$ 60,379,278 $ 13,989,368
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
NET VALUE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenue................................................................ $ -- $ --
Operating expenses:
Stock-based compensation...................................... 5,894,187 --
General and administrative.................................... 2,103,478 44,441
-------------- --------------
Total operating expenses............................. 7,997,665 44,441
Interest income........................................................ 211,957 --
Interest expense....................................................... 73,776 1,383,959
-------------- --------------
Loss before equity in losses of Affiliate Companies.. 7,859,484 1,428,400
Equity in losses of Affiliate Companies................................ 298,851 --
-------------- --------------
Net loss from continuing operations.................. 8,158,335 1,428,400
-------------- --------------
Discontinued operations:
Loss from discontinued operations............................. - 1,498,593
-------------- --------------
Net loss............................................................... 8,158,335 2,926,993
-------------- --------------
Preferred stock dividends - continuing operations...................... 43,052,686 --
-------------- --------------
Net loss to common shareholders........................................ $ 51,211,021 $ 2,926,993
============== ==============
Basic and diluted net (loss) per common share -
continuing operations............................................. $ (3.01) $ (1.38)
============== ==============
Basic and diluted net (loss) per common share -
discontinued operations........................................... $ -- $ (1.44)
============== ==============
Basic and diluted weighted average common shares outstanding:.......... 16,986,005 1,037,338
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
NET VALUE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................ $ (8,158,335) $ (2,926,993)
Adjustments to reconcile to net cash used in operating activities:
Discontinued operations........................................................... (50,820) 411,741
Depreciation and amortization..................................................... 322,993 921,073
Stock-based compensation.......................................................... 5,894,187 --
Interest paid with stock issuance................................................. 346,110 20,532
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............................................. (434,623) (631,650)
------------- -------------
Net cash used in operating activities................................... (1,975,134) (2,205,297)
Cash flows from investing activities:
Collections on loans................................................................ -- 163,000
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................................... (4,372,836) 163,000
Cash flows from financing activities:
Repayments of notes payable......................................................... (28,281) (240,000)
Long-term debt borrowings........................................................... -- 3,025,000
Long-term debt payments............................................................. (15,869) --
Issuance of common stock............................................................ 831,704 --
Issuance of preferred stock, Series C............................................... 48,274,760 --
Purchase of treasury stock.......................................................... (17,500) --
Payment of preferred stock dividend, Series B....................................... (108,464) --
Payment of financing fees........................................................... -- (460,600)
------------- -------------
Net cash provided by financing activities............................... 48,936,350 2,324,400
Net increase in cash and cash equivalents............................... 42,588,380 282,103
Cash and cash equivalents at beginning of period...................................... 3,127,232 1,466
------------- -------------
Cash and cash equivalents at end of period............................................ $ 45,715,612 $ 283,569
============= =============
Cash paid for interest................................................................ $ 28,744 43,866
Cash paid for taxes................................................................... $ -- --
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
(1) Nature of Operations and Basis of Presentation
Net Value Holdings, Inc. ("Net Value" or the "Company") is actively engaged
in identifying, financing, and providing business development services for
a network of early-stage technology businesses that possess significant
growth potential. Net Value's operating strategy is to acquire a
significant equity interest in development stage technology companies,
which Net Value calls its "Affiliate Companies," and to provide financial,
management, and technical support to accelerate the achievement of the
Affiliate Companies' business goals and objectives. To date, Net Value has
focused on technology businesses with significant Internet features and
applications. As of March 31, 2000, Net Value owned interests in nine
Affiliate Companies. Net Value is based in San Francisco, California with
offices in Philadelphia, Pennsylvania, New York, New York, and Waltham,
Massachusetts.
The accompanying unaudited consolidated financial statements for the three
months ended March 31, 2000 were prepared in accordance with generally
accepted accounting principles for interim financial information. Certain
information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and
regulations of the SEC relating to interim financial statements. These
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly Net Value's financial position,
operations and cash flows for the periods indicated. While the Company
believes that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should
be read in conjunction with the Company's Annual Report on Form 10-K filed
with the SEC on May 11, 2000. Interim operating results are not necessarily
indicative of the results for a full year. Certain prior year amounts in
the consolidated financial statements have been reclassified in accordance
with generally accepted accounting principles to conform with the current
year presentation.
The financial statements of Net Value for the three months ended March 31,
2000 reflect the results of the in-process merger with Net Value, Inc. ("NV
Inc.") At March 31, 2000, Net Value owned approximately 67% 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 approximate
33% minority interest. Net Value plans on acquiring the remaining shares
that it does not own by completing the merger within three to six months
pursuant to which NV Inc. shareholders will be offered .4 Net Value common
shares for every one NV Inc. share tendered. Additionally, we will issue
common stock purchase warrants and stock options to the holders of NV,
Inc.'s common stock purchase warrants and vested stock options at the same
exchange ratio.
-4-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
(2) 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 March 31, 2000. One Affiliate Company, metacat.com, is
consolidated and therefore is not included in the table below. All of the
Affiliate Companies were privately held companies as of March 31, 2000.
<TABLE>
<CAPTION>
Excess of
carrying value
Carrying value over net assets Percentage of ownership
-------------- --------------- ----------------------
<S> <C> <C> <C>
Equity method:
AlarmX.com $1,000,000 $340,724 69%(1)
IndustrialVortex.com 901,009 596,789 31%
College 411.com 191,563 68,052 29%
AssetExchange 318,947 238,453 20%
Swapit.com 2,376,694 324,253 11%(2)
---------- ----------
$4,788,213 $1,568,271
========== ==========
Cost method:
BrightStreet.com $3,994,406 14%
Webmodal 1,009,087 10%
YesAsia 1,300,000 13%
-----------
6,303,493
-----------
$11,091,706
===========
</TABLE>
(1) AlarmX.com is not consolidated because Net Value anticipates that its
majority ownership is temporary and will be reduced below 50% within
the next 12 months.
(2) SwapIt.com is accounted for under the equity method due to an officer
of Net Value having a 16% ownership interest for which the officer has
assigned the voting rights to Net Value.
The following unaudited summarized financial information for Affiliate
Companies accounted for under the equity method of accounting at March 31,
2000 has been compiled from the unaudited financial information of the
respective companies:
Balance sheets: February 29, 2000
--------------- -----------------
Current assets $1,729,704
Noncurrent asset 525,597
----------
Total assets $2,255,301
==========
Current liabilities $ 601,617
Noncurrent liabilities --
Stockholders' equity 1,653,684
----------
Total liabilities and stockholders' equity $2,255,301
==========
Two Months Ended
Results of operations: February 29, 2000
--------------------- -----------------
Revenues $ --
Net loss $(1,141,078)
-5-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
(3) Borrowing Arrangements
Borrowing arrangements consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- -----------
<S> <C> <C>
8% Convertible debentures $ -- $3,250,500
12% Convertible promissory notes 28,281 1,021,929
10% Convertible promissory note -- 900,000
Installment loan payable, bearing interest at 7.76% 63,165 79,034
Other 12,000 12,000
----------- ----------
$ 103,446 $5,263,463
----------- ----------
Less amount due within one year -- 5,196,161
----------- ----------
Noncurrent portion $ -- $ 67,302
=========== ==========
</TABLE>
8% Convertible Debentures
Net Value repaid in full the 8% Convertible Debentures plus accrued
interest at various dates through March 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.
12% Convertible Promissory Notes
Net Value repaid substantially all of the 12% Convertible Promissory Notes
plus accrued interest at various dates through March 2000 through the
payment of $28,281 and the issuance of 546,780 shares of common stock
pursuant to the original conversion terms of the notes. The terms of
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.
These warrants are exercisable over a three year period from the date of
issuance at a $6 per share exercise price. Accordingly, Net Value issued
273,390 warrants to purchase common stock during the first quarter of 2000
in connection with the conversions.
10% Convertible Promissory Note
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.
-6-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
(4) Preferred Stock
Preferred Stock issued and outstanding is as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
Shares outstanding Amount (1) Shares outstanding Amount (2)
------------------ ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Series B -- -- 4,824 $4,448,872
Series C 4,166,667 40,883,087 -- --
--------- ----------- ------- ----------
4,166,667 $40,883,087 4,824 $4,448,872
========= =========== ======= ==========
</TABLE>
(1) Amount is net of issuance costs and proceeds allocated to the Series C
Warrants.
(2) Amount is net of issuance costs.
Series B Preferred Stock
In February 2000, the holders of Net Value's Redeemable Convertible Series
B Preferred Stock (Series B Shares) converted their Series B Shares into
1,180,180 shares of common stock pursuant to the original terms of the
issuance. The Series B Shares had a liquidation preference of $1,000, a
noncumulative dividend rate of 5%, and were redeemable at $1,250 per share
in the event Net Value failed to achieve certain performance objectives.
In connection with the Series B issuance in 1999, Net Value issued warrants
to purchase 295,040 shares of common stock (Series B Warrants). These
warrants are exercisable at prices equivalent to a range between 110% to
140% of the conversion price of the Series B Shares. 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.
-7-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
(4) Preferred Stock (continued)
Series C Preferred Stock (continued)
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.
Preferred Stock Dividends
The components of 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 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.
-8-
<PAGE>
NET VALUE HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
(5) Stock-based Compensation
The components of deferred compensation for continuing operations are as
follows:
<TABLE>
<CAPTION>
Consultants and
Employees Advisory Board Total
--------- -------------- -----
<S> <C> <C> <C>
Balance at beginning of year $ 7,137,600 $20,180,172 $27,317,772
Additions to deferred compensation 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>
(6) Contingencies
NV, Inc. is a defendant in a legal proceeding alleging patent infringement.
NV, Inc. filed its answer to this action November 23, 1999 seeking a
declaratory judgment of invalidity and noninfringement of the patent. In
connection with its purchase of substantially all of the assets of NV,
Inc., BrightStreet.com has agreed to assume all liabilities related to this
lawsuit, including all legal expenses incurred in defending against these
claims. Accordingly, Net Value does not believe that the resolution of this
action will have a material adverse effect on its or NV, Inc.'s financial
position.
Net Value is also a defendant in a legal proceeding brought by a former
officer and director of Net Value alleging breach of his employment
agreement. 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 1,610,835 shares of Net
Value common stock to which the former officer and director claims he is
entitled. 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.
-9-
<PAGE>
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our affiliate companies, that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those in our other Securities and Exchange
Commission filings, including our Registration Statement on Form S-1 declared
effective on February 15, 2000 by the SEC (File No. 333-88629) and our Annual
Report on Form 10-K filed on May 11, 2000. The following discussion should be
read in conjunction with our Consolidated Financial Statements and related Notes
thereto included elsewhere in this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We were originally formed as a Florida corporation in 1991. We did not
have any operations until our change of domicile into Delaware in October 1998.
This occurred in conjunction with our acquisition of a controlling interest in
Net Value, Inc. which commenced in October 1998. Net Value, Inc. was engaged in
the development and distribution of online promotional campaigns.
We obtained control of Net Value, Inc. when we acquired 66% of its
outstanding common stock through share exchange transactions with 20 of its
largest stockholders. Since as a result of these transactions the former Net
Value, Inc. stockholders obtained a majority ownership interest of our company,
the transaction was accounted for as a recapitalization. Under a
recapitalization, the historical financial statements presented are those of the
company acquired, not those of the legal acquiror. Accordingly, the financial
information included in our financial statements prior to October 1998 is that
of Net Value, Inc.
We plan to complete a merger with Net Value, Inc. within three to six
months pursuant to which we intend to offer .4 shares of our common stock for
every share of Net Value, Inc. common stock tendered to us by the existing Net
Value, Inc. stockholders. This is being done in order to acquire the remaining
minority interest in Net Value, Inc. Additionally, we will issue common stock
purchase warrants and stock options to the holders of Net Value, Inc.'s common
stock purchase warrants and vested stock options at the same exchange ratio.
Since we already own a majority of Net Value, Inc.'s capital stock, we can
assure that the merger will be completed. Accordingly, our consolidated
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. Since 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 approximate 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 campaign operations of Net Value, Inc. In December 1999, we sold the
business and assets of Net Value, Inc. to BrightStreet.com, Inc., a new company
formed by members of Net Value, Inc.'s then senior management team
-10-
<PAGE>
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 technology companies, all
of which currently generate net losses, we have experienced, and expect to
continue to experience, significant volatility in our quarterly financial
results. We do not know if we will report net income in any period, and we
expect that we will report net losses in many quarters for the foreseeable
future. While our affiliate companies have consistently reported losses, we may
have net income in certain periods and may experience significant volatility
from period to period due to non-recurring transactions and other events
incidental to our ownership interests in and advances to affiliate companies.
These transactions include dispositions of, and changes to, our affiliate
company ownership interests, and impairment charges.
On a continuous basis, but no less frequently than at the end of each
reporting period, we evaluate:
o the carrying value of our ownership interest in and
advances to each of our affiliate companies for possible
impairment based on achievement of business plan objectives
and milestones;
o the value of each ownership interest in the affiliate
company relative to carrying value; and
o the financial condition and prospects of the affiliate
company; and 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 expense relating to the
amortization of deferred compensation and issuance of stock for services. 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 date of the grant 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
-11-
<PAGE>
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.
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. 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 net results of operations in the Consolidated Statements of
Operations.
Equity Method. Affiliate companies whose results we do not consolidate,
but over whom we exercise significant influence, are generally accounted for
under the equity method of accounting. Whether or not we exercise significant
influence with respect to an affiliate company depends on an evaluation of
several factors including, among others, representation on the affiliate
company's board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the affiliate company, including voting
rights associated with our holdings in common 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
----------------
Partner 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.
-12-
<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
----------------
Partner 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 market value of the unvested awards.
Of the total additions to deferred compensation for consultants and
advisory board members of $17,198,948, $12,772,336 resulted from
adjusting unvested awards to their then fair market value, and
-13-
<PAGE>
$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:
Three Months Ended
------------------
March 31, 2000 March 31, 1999
------------- --------------
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
========== ==========
Professional fees consist primarily of legal and accounting fees
associated with our filing of our Registration Statement on Form S-1 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 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.
-14-
<PAGE>
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 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.
-15-
<PAGE>
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. If, by December 31, 2000, we have
not filed a registration statement to register the resale of the shares of
common stock issuable upon conversion of the Series C Preferred Stock, then,
upon receiving 60 days notice from holders of 80% of the Series C Preferred
Stock, we are required to redeem the Series C Preferred Stock in three annual
installments beginning on or before the date stated in the written notice.
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 273,390 warrants to
purchase common stock.
During the first quarter of 2000, we advanced approximately $2 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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to changes in interest
rates and the resulting impact on our invested cash. We place our cash with high
credit quality financial institutions and invest that cash in short term fixed
income investments with remaining maturities of less than 90 days. We are averse
to principal loss and ensure the safety and
-16-
<PAGE>
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as reported in Part I, Item 3 - "Legal Proceedings" of our
Annual Report on Form 10-K for the year ended December 31, 1999, there have been
no material developments to any of the matters that require reporting under this
Item.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is included herein:
27.1 Financial Data Schedule.
(b) The Company filed the following Current Reports on Form 8-K during the
three month period ended March 31, 2000:
(i) Current Report on Form 8-K, dated February 22, 2000.
The Company filed the foregoing Current Report on
Form 8-K reporting, under Item 5, the dismissal of LJ
Soldinger Associates, the principal accountant
previously engaged to audit the Company's financial
statements, and the appointment of KPMG LLP as the
principal accountant to audit the Company's financial
statements.
(ii) Current Report on Form 8-K, dated March 3, 2000.
The Company filed the foregoing Current Report on
Form 8-K reporting, under Item 5, the sale of
4,166,667 shares of its newly-created Series C
Convertible Participating Preferred Stock for an
aggregate purchase price of $50,000,000.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET VALUE HOLDINGS, INC.
Date: May 15, 2000 /s/ Andrew P. Panzo
---------------------
Andrew P. Panzo
Chief Executive Officer and Chairman
of the Board of Directors
Date: May 15, 2000 /s/ Jay Elwell
----------------
Jay Elwell
Vice President - Finance and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 45,715,612
<SECURITIES> 0
<RECEIVABLES> 234,436
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,152,923
<PP&E> 117,919
<DEPRECIATION> (4,700)
<TOTAL-ASSETS> 60,379,278
<CURRENT-LIABILITIES> 2,164,832
<BONDS> 0
0
40,883,087
<COMMON> 20,180
<OTHER-SE> 16,975,284
<TOTAL-LIABILITY-AND-EQUITY> 60,379,278
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,997,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,776
<INCOME-PRETAX> (8,158,335)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,158,335)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,158,335)
<EPS-BASIC> (3.01)
<EPS-DILUTED> (3.01)
</TABLE>
