<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a- 6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12
B2BSTORES.COM INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
stock, par value $0.01 per share
(2) Aggregate number of securities to which transaction applies: 20 million
shares
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined): The per unit price of $1.56,
the average of the bid and ask price of the common stock, par value $0.01
per share, of b2bstores.com Inc. on January 9, 2001, as reported by the
NASDAQ SmallCap Market is estimated solely for the purpose of calculating
the registration fee pursuant to Exchange Act Rules 0-11(a)(4) and
0-11(c)(1).
(4) Proposed maximum aggregate value of transaction: $31,200,000
(5) Total fee paid: $6,240
[_] Fee paid previously with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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[LOGO]
b2bstores.com Inc.
, 2001
PROPOSED MERGER--YOUR VOTE IS VERY IMPORTANT
Dear stockholder:
The intense competition in the Internet industry has resulted in our
inability to effectuate our business plan and has forced us to discontinue our
operations as a business-to-business Internet destination. Our board of
directors has approved a merger agreement that provides for the merger of
b2bstores.com and IVAX Diagnostics, Inc. IVAX Diagnostics develops,
manufactures, and markets test kits and instruments that perform diagnostic
tests for the detection of disease. We believe that the merger is the best
strategic alternative to maximize stockholder value. If the merger is
completed, IVAX Corporation, the parent of IVAX Diagnostics, will receive 20
million shares of our common stock. These shares will represent approximately
70% of our outstanding common stock after the merger. Shares of b2bstores.com
common stock held by our stockholders before the merger will be unaffected and
represent approximately 30% of our outstanding common stock after the merger.
We will hold a special meeting of our stockholders to consider and vote on
the proposed merger and other related matters. We cannot complete the merger
unless our stockholders approve it. Our board of directors recommends that you
vote FOR the proposed merger and related transactions.
Whether or not you plan to attend the special meeting, please take the time
to vote by following the instructions on your proxy card. The special meeting
will take place at 10:00 a.m., on February 26, 2001, at the offices of IVAX
Corporation, 4400 Biscayne Boulevard, Miami, Florida 33137.
Sincerely,
/s/ Mark Voorhis
Mark Voorhis
Interim Chief Executive Officer
THIS PROXY STATEMENT PROVIDES YOU WITH DETAILED INFORMATION ABOUT THE
MERGER. IN ADDITION, YOU MAY OBTAIN INFORMATION ABOUT US FROM DOCUMENTS THAT WE
HAVE FILED WITH THE SEC. WE ENCOURAGE YOU TO READ THIS ENTIRE PROXY STATEMENT
CAREFULLY.
FOR A DISCUSSION OF RISK FACTORS WHICH YOU SHOULD CONSIDER IN EVALUATING
THE MERGER AND THE RELATED MATTERS TO BE VOTED ON AT THE SPECIAL MEETING, SEE
"RISK FACTORS RELATING TO THE MERGER AND RELATED PROPOSALS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, THE COMMON STOCK TO BE ISSUED
IN THE MERGER, THE FAIRNESS OF THE MERGER, OR DETERMINED WHETHER THIS PROXY
STATEMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This proxy statement is dated , 2001, and is first being mailed to
stockholders on or about , 2001.
<PAGE>
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 26, 2001
To the stockholders of b2bstores.com Inc.:
You are cordially invited to attend a special meeting of stockholders of
b2bstores.com Inc., to be held at 10:00 a.m., on February 26, 2001, at the
offices of IVAX Corporation, 4400 Biscayne Boulevard, Miami, Florida 33137 for
the following purposes:
. to consider and vote upon a proposal to approve our proposed merger with IVAX
Diagnostics, Inc., the merger agreement, and the other transactions
contemplated by the merger agreement, as described in the attached proxy
statement;
. to consider and vote upon a proposal to amend our certificate of
incorporation to increase our authorized common stock from 25 million shares
to 50 million shares and change our name to IVAX Diagnostics, Inc.; and
. to transact any other business as may properly be presented at the special
meeting or any adjournments or postponements of the meeting.
WE CANNOT COMPLETE THE MERGER UNLESS HOLDERS OF A MAJORITY OF ALL SHARES OF
OUR OUTSTANDING COMMON STOCK THAT ARE ENTITLED TO VOTE AT THE SPECIAL MEETING
VOTE TO APPROVE ALL OF THESE PROPOSALS. OUR BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR EACH OF THE PROPOSALS.
Holders of record of our common stock at the close of business on January
5, 2001, will be entitled to notice of, and to vote at, the special meeting and
any adjournments or postponements of it. A list of stockholders entitled to
vote at the meeting will be available for inspection during normal business
hours for the ten days before the meeting at our offices and at the time and
place of the meeting.
For more information about the merger and the other proposed transactions,
please review this proxy statement and the merger agreement attached to the
proxy statement.
By Order of the Board of Directors,
/s/ Richard Kandel
Richard Kandel
Chairman of the Board
Long Beach, California
, 2001
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE SIGN AND RETURN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE. YOUR PROXY MUST BE SIGNED AND RETURNED TO BE
COUNTED AND SO THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. GIVING A PROXY
DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING. YOU MAY
REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS EXERCISED AT THE MEETING.
<PAGE>
Page
----
SUMMARY.................................................................. 1
Questions and Answers about the Merger................................. 1
Information Regarding the Merger....................................... 3
The Merger Agreement................................................... 4
Proposals for Consideration............................................ 5
RISK FACTORS RELATING TO THE MERGER AND RELATED PROPOSALS................ 7
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS............... 13
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA......................... 13
Selected Historical Financial Data of b2b.............................. 13
Selected Historical Financial Data of IVAX Diagnostics................. 14
Unaudited Pro Forma Comparative Per Share Data......................... 14
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET..................... 15
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.... 17
LEGAL PROCEEDINGS........................................................ 17
DESCRIPTION OF IVAX DIAGNOSTICS' BUSINESS................................ 18
EXECUTIVE COMPENSATION OF IVAX DIAGNOSTICS............................... 23
Summary Compensation Table............................................. 23
Stock Option Grants in 1999............................................ 23
Stock Option Exercises in 1999 and Year-End Option Values.............. 24
Certain Compensation Arrangements...................................... 24
DESCRIPTION OF IVAX DIAGNOSTICS' 1999 STOCK OPTION PLAN.................. 24
CERTAIN TRANSACTIONS BETWEEN IVAX AND IVAX DIAGNOSTICS................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS OF IVAX DIAGNOSTICS....................................... 25
Overview............................................................... 25
Results of Operations.................................................. 25
Liquidity and Capital Resources........................................ 27
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF IVAX
DIAGNOSTICS............................................................. 29
THE STOCKHOLDER MEETING AND PROXY SOLICITATIONS.......................... 29
THE MERGER............................................................... 32
General................................................................ 32
Background of the Merger............................................... 32
Our Reasons for the Merger............................................. 36
Opinion of Financial Advisor........................................... 37
Recommendations of Our Board of Directors.............................. 43
Effects on Common Stock................................................ 43
Fractional Shares...................................................... 43
Stock Options.......................................................... 43
Material Federal Income Tax Consequences............................... 43
Accounting Treatment................................................... 44
Regulatory Approvals................................................... 45
Appraisal Rights....................................................... 45
Board of Directors and Executive Officers after the Merger............. 45
Direct or Indirect Interests of Directors and Executive Officers in the
Merger................................................................ 45
Costs and Expenses of the Merger....................................... 45
THE MERGER AGREEMENT..................................................... 46
The Merger............................................................. 46
Timing of Closing...................................................... 46
Merger Consideration................................................... 46
Conditions to the Completion of the Merger............................. 46
Termination of the Merger Agreement.................................... 48
Termination Fee........................................................ 49
No Solicitation........................................................ 49
Representations and Warranties......................................... 50
OTHER RELATED AGREEMENTS................................................. 51
Voting Agreement....................................................... 51
Registration Rights Agreement.......................................... 51
Shared Services Agreement.............................................. 52
Use of Name License Agreement.......................................... 52
PROPOSALS................................................................ 52
Approval of the Merger and the Merger Agreement........................ 52
Authorizing Additional Shares of Common Stock and Name Change.......... 52
ACCOUNTANTS.............................................................. 53
LEGAL MATTERS............................................................ 53
FUTURE STOCKHOLDER PROPOSALS............................................. 53
WHERE YOU CAN FIND MORE INFORMATION...................................... 53
ANNEXES
-------
Annex A Merger Agreement............................................... A-1
Annex B Voting Agreement............................................... B-1
Annex C Amendment to Certificate of Incorporation...................... C-1
Annex D Opinion of Houlihan Lokey Howard & Zukin Capital............... D-1
Annex E Prospectus of b2b dated February 18, 2000...................... E-1
Annex F Quarterly Report of b2b on Form 10-QSB for the quarterly
period ended March 31, 2000.................................... F-1
Annex G Quarterly Report of b2b on Form 10-QSB for the quarterly
period ended June 30, 2000..................................... G-1
Annex H Quarterly Report of b2b on Form 10-QSB for the quarterly period
ended September 30, 2000....................................... H-1
Annex I Financial Statements of IVAX Diagnostics....................... I-1
i
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SUMMARY
This summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. To better
understand the merger and related transactions, and for a more detailed
description of the legal terms, you should carefully read this entire proxy
statement and the other available information referred to in "Where You Can Find
More Information" on page 53. We have included page references parenthetically
to direct you to a more complete description of the topics presented in this
summary.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. When and where is the special meeting?
A. The special meeting will take place at 10:00 a.m., on February 26, 2001, at
the offices of IVAX Corporation, 4400 Biscayne Boulevard, Miami, Florida
33137.
Q. What do I need to do now?
A. After carefully considering the enclosed information, please mark, sign,
date, and return your proxy card in the enclosed envelope as soon as
possible. Your shares will then be voted at the special meeting in
accordance with your instructions.
Q. What do I do if I want to change my vote?
A. Just send a later-dated, signed proxy card to our Secretary. Or, you can
attend the special meeting in person and vote as you so choose. You may
revoke your proxy by sending a notice of revocation to our Secretary.
Q. If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A. No. You must instruct your broker how to vote your shares. Otherwise, your
shares will not be voted.
Q. What happens if I don't vote my shares?
A. Your failure to vote at the special meeting will have the same effect as
voting against each of the proposals. Broker non-votes will have the same
effect as a vote against each proposal.
Q. What vote is required to approve the merger and the other proposals?
A. The affirmative vote of a majority of our common stock that is outstanding
and entitled to vote as of the record date is required to approve each
proposal. All of the proposals must be approved in order for us to complete
the merger.
Q. What will happen in the proposed merger?
A. IVAX Diagnostics will merge with and into us, IVAX, the parent of IVAX
Diagnostics, will receive 20 million shares of our common stock, and we will
change our name to IVAX Diagnostics, Inc. Also, our trading symbol will
change to ______.
Q. Why are the companies merging?
A. The intense competition in the Internet industry has resulted in our
inability to effectuate our business plan and has forced us to discontinue
our operations as a business-to-business Internet destination. We believe
that the merger is the best strategic business alternative to maximize
stockholder value.
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Q. What does the board of directors recommend?
A. Our board of directors recommends that you vote FOR each of the proposals.
Q. How will the merger affect my common stock?
A. Each share of our issued and outstanding common stock will remain issued and
outstanding. You will hold the same number of shares of our common stock
after the merger as you held before the merger. However, shares of our
common stock held by our stockholders before the merger will represent only
approximately 30% of our common stock after the merger due to the issuance
of 20 million shares of our common stock to IVAX.
Q. When do you expect the merger to be completed?
A. We are working towards completing the merger as quickly as possible. In
addition to obtaining stockholder approval of the merger, we must also
obtain regulatory approvals. We hope to complete the merger early in the
second quarter of 2001.
Q. Do I have appraisal rights?
A. No. You will not have appraisal rights as a result of the merger or any of
the other proposed transactions.
Q. What will happen if the merger is not approved at the special meeting?
A. As we have discontinued our business operations, we will most likely
liquidate if the merger is not approved. If the merger is not approved and
we do liquidate, we will have to pay all expenses we incurred in connection
with the transaction, a termination fee to IVAX in the amount of $1.0
million, and the expenses of the liquidation. After giving effect to the
payment of such expenses and assuming we would liquidate shortly after the
special meeting, we estimate that you would receive approximately $2.59 for
each share of our common stock you hold at the time of our liquidation.
Q. Who can help answer additional questions that I may have?
Questions can be directed to:
Randall K. Davis
Director
b2bstores.com Inc.
1023 Morales Street
San Antonio, Texas 78207
Telephone: (210) 227-9161
Duane M. Steele
Vice President - Business Development
IVAX Diagnostics, Inc.
2140 North Miami Avenue
Miami, Florida 33137
Telephone: (305) 324-2338
Q. What will our business be after the merger?
A. We will continue the business of IVAX Diagnostics.
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INFORMATION REGARDING THE MERGER
The Merger (see page 32)
IVAX Diagnostics will merge with and into us. Although we will be the
surviving company, we will change our name from "b2bstores.com Inc." to "IVAX
Diagnostics, Inc." We will assume the business and operations of IVAX
Diagnostics. IVAX Diagnostics is a wholly-owned subsidiary of IVAX. As
consideration for the merger, we will issue 20 million shares of our common
stock to IVAX, plus additional shares if we do not meet a minimum cash holdings
requirement described in the merger agreement. Once the merger takes place, all
of IVAX Diagnostics' assets will become our assets, and all of IVAX Diagnostics'
liabilities and obligations will become our liabilities and obligations.
Description of IVAX Diagnostics' Business (see page 18)
IVAX Diagnostics develops, manufactures, and markets diagnostic:
. test kits or assays that are primarily sold to hospitals and clinical
laboratories AND ARE USED TO AID IN THE DETECTION OF DISEASE MARKERS
PRIMARILY IN THE AREAS OF AUTOIMMUNE AND INFECTIOUS DISEASES, WHICH AID
IN THE IDENTIFICATION OF THE CAUSES OF CERTAIN ILLNESS AND DISEASE AND
BETTER ENABLE PHYSICIANS TO SELECT APPROPRIATE PATIENT TREATMENT;
. laboratory instruments that perform diagnostic tests providing fast and
accurate results, while at the same time reducing labor costs; and
. raw materials, such as antigens used in the production of diagnostic
kits and assays.
Recommendations of our Board of Directors (see page 43)
After due consideration, our board of directors:
. determined that the merger and merger agreement, and the related
transactions are advisable and in the best interests of our
stockholders;
. approved the proposed merger and merger agreement; and
. approved the proposed amendment to our certificate of incorporation to
increase the number of authorized shares of our common stock and change
our name to IVAX Diagnostics, Inc.
Voting Agreement (see page 51)
Holders of 2,943,400 shares, or approximately 34%, of our outstanding
common stock have entered into a voting agreement to vote their shares in favor
of the proposals. The voting agreement is attached to this proxy statement. We
encourage you to read it.
Registration Rights Agreement (see page 51)
We have agreed to enter into a registration rights agreement with IVAX upon
completion of the merger. The registration rights agreement requires us to
register the shares of our common stock issued to IVAX in the merger for resale
at any time after the first anniversary of the merger.
Shared Services Agreement (see page 52)
We will enter into a shared services agreement with IVAX after the merger.
Under the shared services agreement, we can obtain administrative and management
service at a reasonable cost for a period of three months after the merger.
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Opinion of Financial Advisor (see page 37)
In deciding to approve the merger, our board of directors considered the
opinion of Houlihan Lokey Howard & Zukin Capital, our financial advisor, to the
effect that, as of the date of its opinion, the merger is fair to our public
stockholders from a financial point of view. The opinion of Houlihan Lokey is
attached to this proxy statement. We encourage you to read this opinion
carefully, as well as the descriptions of the analyses and assumptions on which
the opinion was based.
Board of Directors and Executive Officers After the Merger (see page 45)
Following the merger, all but two of the members of our board of directors
will resign and five new directors designated by IVAX will be appointed to the
board by our two remaining directors. We have terminated, or by the time of the
merger will terminate, all of our employees; thus, our executive officers after
the merger will be the executive officers of IVAX Diagnostics.
Accounting Treatment (see page 45)
We believe that the merger will be treated as a capital transaction
equivalent to the issuance of stock by IVAX Diagnostics for our net monetary
assets (our net monetary assets were approximately $24.8 million as of
September 30, 2000), accompanied by a recapitalization of IVAX Diagnostics.
United States Federal Income Tax Considerations (see page 43)
Our current stockholders will not recognize any gain or loss for federal
income tax purposes as a result of the merger. We will obtain an opinion from
our legal counsel confirming that the merger will be treated as a tax free
reorganization.
Regulatory Matters (see page 45)
The merger cannot be completed until a pre-merger notification and report
form is filed with the Federal Trade Commission in accordance with the Hart-
Scott-Rodino Antitrust Improvements Act and a required waiting period has
expired or been terminated.
THE MERGER AGREEMENT
The merger agreement is attached to this proxy statement. We encourage you
to read the merger agreement because it is the principal document that governs
the merger.
Conditions to the Completion of Merger (see page 46)
In order to complete the merger, a number of conditions must be satisfied
or waived, including the following:
. our stockholders must have approved the merger and all of the related
proposals;
. expiration or early termination of the HSR waiting period;
. we must have at least $22.0 million in cash or cash equivalents at
closing;
. we must have at least $22.0 million in stockholders' equity at closing;
. IVAX Diagnostics must have at least $2.0 million in cash or cash
equivalents at closing; and
. IVAX Diagnostics must have at least $4.4 million in stockholders' equity
at closing.
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Additionally, the merger is subject to other customary conditions, such as
the receipt of appropriate legal opinions and the absence of any material
adverse changes on the business or operations of us or IVAX Diagnostics. If a
condition to the merger has not been satisfied by the time our stockholders
approve the merger, we, IVAX, or IVAX Diagnostics may, depending on the
condition, waive the condition and complete the merger if the law allows the
waiving parties' boards of directors to do so.
Termination of the Merger Agreement (see page 48)
We may agree with IVAX or IVAX Diagnostics to terminate the merger
agreement without completing the merger, even after our stockholders approve the
merger. The merger agreement may also be terminated at any time prior to the
merger for other reasons, including:
. by either party if, by June 30, 2001, the conditions to completing the merger
have not been satisfied or waived;
. by either party if there has been any material breach of any representation,
warranty, or covenants in the merger agreement;
. by IVAX if any person becomes the beneficial owner of five percent or more of
the aggregate voting power of all of our issued and outstanding capital stock
and that person does not enter into a voting agreement with IVAX; or
. by IVAX if our board of directors withdraws or modifies its recommendation of
the merger agreement and the merger to our stockholders or recommends a
competing transaction to our stockholders.
Termination Fee (see page 48)
If the merger agreement is terminated for a reason other than the mutual
agreement of IVAX, IVAX Diagnostics and us, or other than as a result of an
injunction prohibiting us from completing the merger or threat of such an
injunction, then either we or IVAX, depending on the reason for termination,
will be required to pay the other $1.0 million, in cash, as liquidated damages.
If our stockholders do not approve the merger, we will be required to pay IVAX a
$1.0 million cash termination fee.
No Solicitation (see page 49)
We have agreed not to initiate any discussions with another party regarding
a business combination while the merger is pending or to engage in any such
discussions, unless our board of directors is required to do so to fulfill its
fiduciary duties to our stockholders.
PROPOSALS FOR CONSIDERATION
Approval of the Merger and the Merger Agreement (see page 52)
The affirmative vote of a majority of our outstanding common stock is
required to approve the merger and the merger agreement. If this proposal is
not approved by the affirmative vote of the holders of a majority of our
outstanding common stock, then we will be unable to complete the merger.
Authorization of Additional Shares of Common Stock and Name Change (see page 52)
Currently, our certificate of incorporation authorizes 25 million shares of
common stock. Of those shares, we had 8,621,643 shares issued and outstanding
as of January 1, 2001. In order to fulfill our commitments under the merger
agreement and issue IVAX 20 million shares of our common stock, we will need
more authorized shares of common stock. The merger agreement also requires that
we change our name from "b2bstores.com Inc." to "IVAX Diagnostics, Inc." upon
completion of the merger. In order to make the name change effective, we must
amend our
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certificate of incorporation. We are proposing an amendment to our certificate
of incorporation to increase the amount of our authorized common stock from 25
million shares to 50 million shares and provide for the name change in the event
the merger is approved. If this proposal is not approved by the affirmative vote
of the holders of a majority of our outstanding common stock, then we will be
unable to complete the merger. The proposed amendment to our certificate of
incorporation is attached to this proxy statement. We encourage you to read it.
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RISK FACTORS RELATING TO THE MERGER AND RELATED PROPOSALS
In deciding whether to approve the merger, the merger agreement, and the
related proposals, you should consider the following risks related to the merger
and to your investment in us following the merger. You should carefully
consider these risks along with the other information contained in this proxy
statement and in the documents to which we have referred you. Risk factors
relating to our discontinued Internet business have been intentionally omitted.
FACTORS RELATING TO THE MERGER
You will incur immediate and substantial ownership dilution.
As of January 1, 2001, there were 8,621,643 shares of our common stock
issued and outstanding. In the merger, we will issue an additional 20 million
shares of our common stock to IVAX. Those 20 million shares of our common stock
will represent approximately 70% of our issued and outstanding common stock, and
your common stock holdings will be diluted. In addition, if we do not have at
least $22.0 million in cash or cash equivalents on hand at the time of the
merger, then we will be required to deliver additional shares of our common
stock to IVAX, which will dilute your common stock holdings even more.
After the merger, IVAX will be in a position to control our company.
IVAX Diagnostics is a wholly-owned subsidiary of IVAX. After the
completion of the merger, IVAX will own approximately 70% of the issued and
outstanding shares of our common stock. Under our certificate of
incorporation, on issues for which our stockholders are eligible to vote, the
affirmative vote of a majority of shares represented at a meeting in person or
by proxy, and entitled to vote, is required to approve an action. Consequently,
IVAX will be in a position to unilaterally approve actions that require
stockholder approval and to elect directors acceptable to it based on its share
ownership.
We will incur significant charges and expenses as a result of the merger.
We expect to incur approximately $2.6 million of charges and expenses
related to the merger. These expenses will include investment banking expenses,
finders fees, severance payments, legal and accounting fees, printing expenses,
travel costs, and other related charges. We may also incur additional
unanticipated expenses in connection with the merger.
FACTORS RELATING TO IVAX DIAGNOSTICS
IVAX Diagnostics has limited operating revenues and a history of operational
losses.
For the three years ended December 31, 1999, 1998, and 1997 and the nine
months ended September 30, 2000, IVAX Diagnostics realized net revenues of $11.1
million, $9.6 million, $9.3 million, and $9.8 million, respectively, and net
losses of approximately $2.5 million, $3.6 million, $4.9 million, and $0.4
million, respectively. During this three year period and nine month period,
IVAX Diagnostics received net cash advances and capital contributions totaling
$10.9 million from IVAX to fund its operations. There is no assurance that upon
completion of the merger, management will be able to reduce such losses or
operate on a profitable basis. Until such time, IVAX Diagnostics will fund
operations from cash on hand and management believes that such cash is adequate
to satisfy all of IVAX Diagnostics' cash requirements and fund losses for the
immediate future. There is, however, no assurance that cash on hand will
satisfy all of our cash requirements and fund losses from operations. If
existing cash is insufficient to finance operations, we may be required to issue
securities or incur indebtedness to finance operations after the merger.
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IVAX Diagnostics has significant accounts receivable which are more than 90 days
old and a significant allowance for bad debt.
As of September 30, 2000 and December 31, 1999, IVAX Diagnostics' accounts
receivable were $6.7 million and $6.6 million, respectively. Accounts
receivable of Delta Biologicals, S.r.l., or Delta, a wholly-owned subsidiary of
IVAX Diagnostics, located in Italy represented 87.4% and 86.4% of these amounts,
respectively. Historically, IVAX Diagnostics' experience has been that account
receivables generated on Delta's sales in Italy take longer to collect than
account receivables generated from sales to United States customers, but most
customers eventually pay the amounts they owe. At September 30, 2000, IVAX
Diagnostics has reserved $2.4 million for bad debts. There is no assurance that
we will collect the outstanding accounts receivable following the merger or that
the reserve for bad debts is adequate. The failure to collect outstanding
receivables could have a material adverse effect on our business, prospects,
operating results, or financial condition after the merger.
IVAX Diagnostics is currently a wholly owned subsidiary of IVAX but will be
required to operate as a stand-alone business entity after the merger.
IVAX Diagnostics receives substantial administrative and managerial
assistance from IVAX and access to IVAX' capital to fund operations. IVAX also
managed IVAX Diagnostics' cash flow and cash requirements. In connection with
the merger, we will enter into a shared services agreement with IVAX; IVAX has
agreed to provide us administrative services at cost plus 15% for a period of
three months under this agreement. Following the termination of this agreement,
we must provide or procure these services without the assistance of IVAX. There
can be no assurance that we will be able to operate at the same cost, fund
working capital and cash requirements, or implement our business strategy
successfully as an independent entity. The effect of these and other changes on
our operations cannot be fully predicted. Any difficulties or delay in managing
this transition to an independent entity may have a material adverse effect on
our business, prospects, operating results, or financial condition after the
merger.
The historical financial information of IVAX Diagnostics, which is attached
to this proxy statement, for periods during which IVAX Diagnostics was a
subsidiary of IVAX, may not reflect what its results of operations, financial
position, or cash flows would have been had it been a separate independent
entity during those periods. For more information about the adjustments made in
preparing IVAX Diagnostics' financial statements, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on page 25 and
the notes to IVAX Diagnostics' consolidated financial statements attached to
this proxy statement.
IVAX Diagnostics is largely dependent on one significant customer.
In April 1999, IVAX Diagnostics and Sigma Diagnostics, Inc. entered into a
three year contract pursuant to which Sigma agreed to purchase a minimum number
of scientific instruments per year from IVAX Diagnostics. During calendar year
1999 and for the nine month period ending September 30, 2000, net revenues
received by IVAX Diagnostics from such sales and sales of replacement parts
represented 28.1% and 46.2%, respectively, of IVAX Diagnostics' total net
revenues for such periods. Twice during the year 2000, Sigma notified IVAX
Diagnostics that Sigma desired to suspend shipments of instruments pending
resolution of hardware and software upgrade issues. The first suspension lasted
for a period of approximately four months. The second suspension began in
October 2000 and ended in January 2001. There can be no assurance that Sigma
will make purchases at the anticipated levels or will do so within anticipated
time frames. The failure by Sigma to do so would have a material adverse effect
on our business, prospects, operating results, and financial condition after the
merger.
IVAX Diagnostics is subject to governmental regulation that increases its costs
and could prevent it from marketing or selling its products.
The products IVAX Diagnostics sells, and that we will sell once the merger
is completed, are subject to extensive regulation by governmental authorities in
the United States and other countries. Such regulation includes the regulation
of the testing, approval, manufacturing, labeling, marketing, and sale of
diagnostic devices. Failure to comply with these governmental regulations can
result in fines, unanticipated compliance expenditures, interruptions of
production, and criminal prosecution. The process of obtaining regulatory
approval is rigorous, time consuming, and costly. There is no assurance that
necessary approvals will be attained on a timely basis, if at all. In
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<PAGE>
addition, product approvals can be withdrawn if we fail to comply with
regulatory standards or if unforeseen problems occur following initial
marketing. Domestic and foreign regulations are subject to change and extensive
changes in regulation may increase our operating expenses. Delays in obtaining,
or the inability to obtain, necessary domestic or foreign regulatory approvals,
failures to comply with applicable regulatory requirements, or extensive changes
in regulation could have a material adverse effect on our business, prospects,
operating results, or financial condition after the merger.
Reimbursement policies of third parties could affect the pricing and demand for
our products.
Our profitability after the merger may be materially adversely affected by
changes in reimbursement policies of governmental and private third party
payors. The products marketed by IVAX Diagnostics, and which will be marketed
by us following the merger, are purchased principally by healthcare providers
that typically bill third party payors such as governmental programs (e.g.,
Medicare and Medicaid), private insurance plans, and managed care plans, for
health care services provided to their patients. Governmental reimbursement
policies are subject to rapid and significant changes in the United States at
both the federal and state levels and in other countries. Private third party
payors are increasingly negotiating the prices charged for medical products and
services. If healthcare providers respond to such pressures by substituting
competitors' products, our business, prospects, operating results, or financial
condition could be materially and adversely affected after the merger. A third
party payor may deny reimbursement if it determines that a device was not used
in accordance with cost-effective treatment methods, was experimental, or for
other reasons. There can be no assurance that after the merger our products
will qualify for reimbursement by governmental programs in accordance with
guidelines established by the Health Care Financing Administration, by state
government payors, or by commercial insurance carriers, or that reimbursement
will be available in other countries.
We will have limited rights to the IVAX name and may be required to change our
name in the future
In connection with the merger, we will enter into a use of name license
agreement with IVAX, whereby IVAX grants to us a non-exclusive, royalty free
license to use the name "IVAX." The license is not terminable by IVAX for a
one-year period. After the first year, IVAX may terminate the license at any
time upon 90 days' written notice. There can be no assurance that IVAX will not
terminate this license agreement. The loss of the use of the name "IVAX" after
the merger may have a material adverse effect on our business, prospects,
operating results, or financial condition.
We may have conflicts of interest with IVAX.
Conflicts of interest may arise between IVAX and us after the merger in a
number of areas relating to past and ongoing matters, including labor, tax,
employee benefits, indemnification, intellectual property matters, employee
retention and recruiting, major business combinations, IVAX' sale or
distribution of all or any portion of its ownership interest in us, the nature,
quality, and pricing of the administrative services IVAX will provide to us, and
business opportunities that may be attractive to both IVAX and us. IVAX may
decide to compete with us in the future, which would create an additional
conflict of interest. Four of IVAX' executive officers or directors will be
members of our board of directors following the merger. For as long as IVAX
controls us, IVAX will be able to require us to agree to amend any agreements we
have with IVAX, even if those amendments are less favorable to us than the
current terms of any such agreement.
Conflicts of interest may also arise with respect to decisions that arise
in the ordinary course of business of IVAX and us, including conflicts arising
out of intercompany agreements and the allocation of management resources. No
procedures have been adopted to resolve any of the conflicts that might arise.
If any conflicts should arise, those conflicts may involve harmful consequences
to our business, prospects, operating results, or financial condition. We
cannot guarantee that any conflicts that may arise will be resolved in a manner
that is favorable to us. Additionally, even if we do resolve those conflicts,
the resolutions may be less favorable to us than it would be if we were dealing
with an unaffiliated party.
Following the merger, many of our new directors, officers, and employees
will have a substantial amount of their personal financial portfolios in IVAX
common stock and options to purchase IVAX common stock. Ownership of IVAX
common stock by our directors, officers, and employees following the merger
could create, or
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<PAGE>
appear to create, potential conflicts of interest when those directors and
officers are faced with decisions that could have different implications for
IVAX and us. Additionally, our financial results will be included in IVAX'
consolidated financial statements for so long as IVAX continues to own at least
50% of our common stock. Our directors who may hold positions with IVAX, and who
may also be holders of IVAX' common stock or who may have options to purchase
IVAX' common stock, may therefore consider not only the short-term and long-term
impact of financial and operating decisions on us, but also the impact of these
decisions on IVAX' consolidated financial results and its stockholders. In some
instances, the impact of these decisions could be disadvantageous to us and
advantageous to IVAX.
Our future success will depend on the development of new markets.
Our success after the merger depends, in large part, on the introduction
and acceptance by hospitals, clinics, and laboratories of our new diagnostic
products and our ability to broaden sales of our existing products to current
and new customers. In order to penetrate this market more effectively after the
merger, we will need to expand our sales and marketing activities by, among
other things, increasing our sales force, expanding our promotional activities,
developing additional third party strategic distributorships, and participating
in trade shows. There is no assurance that these or other activities or
programs will be successful. The failure of such programs could have a material
adverse effect on our business, prospects, operating results, or financial
condition after the merger.
Our business is highly competitive and subject to rapid technological change.
The in vitro diagnostic market in which IVAX Diagnostics sells many of its
products, and in which we will sell after the merger, is highly competitive.
Several companies have developed, or are developing, scientific instruments and
assays that compete or will compete directly with products marketed by IVAX
Diagnostics, which will be marketed by us after the merger. Many existing and
potential competitors have substantially greater financial, marketing, research,
and technological resources, as well as established reputations for success in
developing, manufacturing, selling, and servicing products than us. Competitors
that are more vertically integrated than us may have more flexibility to compete
effectively on price. We expect that existing and new competitors will continue
to introduce products or services that are, directly or indirectly, competitive
with those sold by us after the merger. Such competitors may succeed in
developing products that are more functional or less costly than those sold by
us and may be more successful in marketing such products. These and other
innovations in the rapidly changing medical technology market may negatively
affect the sales of the products marketed by us after the merger. There can be
no assurance that we will be able to compete successfully in this market or that
technology developments by our competitors will not render our products or
technologies obsolete. If we fail to effectively compete and adapt to changing
technology after the merger, it could have a material adverse effect on our
business, prospects, operating results, or financial condition.
Consolidation of our customers or the formation of group purchasing
organizations could result in increased pricing pressure that could adversely
affect our results.
IVAX Diagnostics currently sells, and after the merger we will sell,
products to hospitals, clinics, and laboratories. The health care industry has
undergone significant consolidation resulting in its customers gaining more
purchasing leverage and consequently increasing the pricing pressures on our
business. Additionally, some of our customers have become affiliated with group
purchasing organizations. Group purchasing organizations typically offer
members price discounts on laboratory supplies and equipment if they purchase a
bundled group of one supplier's products, which results in a reduction in the
number of manufacturers selected to supply products to the group purchasing
organization and increases the group purchasing organization's ability to
influence its customers' buying decisions. Further consolidation among these
customers or their continued affiliation with group purchasing organizations
following the merger, may result in significant pricing pressures and
correspondingly reduce the gross margins of our business or may cause such
customers to reduce their purchases of our products thereby adversely affecting
our business, prospects, operating results, or financial condition.
IVAX Diagnostics is dependent on third-party distributors.
Although IVAX Diagnostics has a direct sales force, it has also engaged
third-party distributors to sell its products. There is no assurance that after
the merger such distributors will achieve acceptable levels of sales or that
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<PAGE>
we will be able to replace any distributors on terms advantageous to us, or at
all, if any of our existing arrangements terminate. Further, there is no
assurance that we will be able to expand our distribution network by adding
additional distributors. Following the merger, if third-party distributors cease
to promote our products, or if we are unable to make acceptable arrangements
with distributors in other markets, our business, prospects, results of
operations or financial condition could be materially adversely affected.
Our success depends on key personnel, the loss of whom could disrupt our
business.
IVAX Diagnostics has been dependent on the active participation of its
principal executive officers. The loss of the services of any of these
individuals following the merger could adversely affect our business and future
prospects. In addition, our ability to continue operations after the merger
will be dependent upon our ability to attract and retain additional qualified
management, scientists, engineers and other personnel, including personnel at
our Italian operation. Competition for such talent is intense and there can be
no assurance that we will be able to attract and retain such personnel.
There is no patent in effect on IVAX Diagnostics' primary product and
competitors may develop or otherwise acquire equivalent or superior technology.
The technology associated with the design and manufacture of the Mago(R)
instrument is not protected by patent registrations or license restrictions.
The Mago instrument is IVAX Diagnostics' primary product. There can be no
assurance that following the merger our competitors will not gain access to our
proprietary and confidential technologies, or that they will not independently
develop similar or competing technologies. If others develop competing
instruments, our market position, business, prospects, operating results, or
financial condition could be materially and adversely affected.
Our success depends on a key consultant, the loss of whom could disrupt our
business.
IVAX Diagnostics has a consulting agreement with an individual that
provides software development enhancement and hardware development services
related to the Mago instrument. The loss of the services of this individual
following the merger could adversely affect our business and future prospects.
IVAX Diagnostics' foreign operations are subject to political and economic
instability as well as foreign currency fluctuations and the transition to the
euro.
IVAX Diagnostics has a significant subsidiary, Delta Biologicals S.r.l.
located in Italy. For the year ended December 31, 1999 and the nine month
period ended September 30, 2000, Delta represented 65.6% and 68.3% of the net
revenues of IVAX Diagnostics, respectively. For the year ended December 31,
1999 and the nine months ended September 30, 2000, non-US sales denominated in
Italian lire were approximately 26.1% and 39.4%, respectively, of IVAX
Diagnostics' total sales. Conducting an international business inherently
involves a number of difficulties, risks, and uncertainties such as export and
trade restrictions, inconsistent and changing regulatory requirements, tariffs
and other trade barriers, cultural issues, longer payment cycles, problems in
collecting accounts receivable, political instability, local economic downturns,
seasonal reductions in business activity in Europe during the summer months, and
potentially adverse tax consequences.
IVAX Diagnostics results of operations are subject to fluctuations in the
value of the Italian lira against the U.S. dollar and other currencies. On
January 1, 1999, members of the European Union, including Italy, introduced a
single currency, the euro. During the transition period ending January 1, 2002,
European Monetary Union (EMU) countries will have the option of settling
transactions in local currencies or in the euro. IVAX Diagnostics has not yet
completed its conversion to the euro. The conversion to the euro will result in
increased costs to IVAX Diagnostics related to updating operating systems,
review of the effect of the euro on its contracts and updating catalogues and
sales materials for its products. The adoption of the euro will limit the
ability of an individual EMU country to manage fluctuations in the business
cycles through monetary policy.
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There is no assurance that we will be able to successfully manage the
operations of Delta after the merger. Any of the above factors may materially
and adversely affect our business, prospects, operating results, or financial
condition.
IVAX Diagnostics is subject to a number of regulatory and contractual
restrictions governing its relations with its employees in Italy.
IVAX Diagnostics' employment relations in Italy are governed by numerous
regulatory and contractual requirements, including national collective labor
agreements and individual employer labor agreements. These arrangements address
a number of specific issues affecting IVAX Diagnostics' working conditions
including hiring, work time, wages and benefits, and termination of employment.
IVAX Diagnostics must make significant payments in order to comply with these
requirements. The cost of complying with these requirements after the merger may
materially adversely affect our business, prospects, operating results, or
financial condition.
Research and development expenditures may not result in commercially successful
products.
For the year ended December 31, 1999, IVAX Diagnostics spent $1.2 million
for research and development activities. There is no assurance that these
expenditures will result in the development of new products or product
enhancements, that regulatory approval will be obtained or that any approved
product may be produced in commercial quantities, at reasonable costs, and be
successfully marketed.
If we fail to maintain our competitive, technological position and
reputation with our customers after the merger, such failure would have a
material adverse effect on the business, prospects, operating results, or
financial condition. The market for IVAX Diagnostics' products is characterized
by continual and rapid technological developments that have resulted in, and
will likely continue to result in, substantial improvements in product function
and performance. Our success after the merger will depend, in part, on our
ability to anticipate changes in technology and industry requirements and to
respond to technological developments on a timely basis either internally or
through strategic alliances.
We face the risk of litigation alleging our infringement of intellectual
property rights of others.
Technology-based companies are often very litigious and are often subject
to unforeseen litigation. Consequently, we face the risk of adverse claims and
litigation alleging infringement of intellectual property rights belonging to
others. These claims could result in costly litigation and could divert
management's attention from other matters. Alternatively, these claims could
practically require us to obtain licenses in order to (i) use, manufacture and
sell certain of our products, regardless of the merits of the infringement
claims, (ii) maintain business levels, or (iii) prevent us from being excluded
from participation in certain markets. There is no certainty that any necessary
licenses will be available or that, if available, they can be obtained on
acceptable terms.
Our products could fail to perform according to specification, or prove to be
unreliable, which could damage our customer relationships and industry
reputation, and result in lawsuits and loss of sales.
IVAX Diagnostics' customers require demanding specifications for product
performance and reliability. Because these products are complex and often use
state-of-the-art components, processes and techniques, undetected errors and
design flaws may occur. Product defects result in higher product service,
warranty and replacement costs and may cause serious damage to our customer
relationships and industry reputation, all of which will negatively impact our
sales and business. After the merger, we may be subject to lawsuits if any of
these products fails to operate properly and causes any ailment to be
undiagnosed or misdiagnosed.
The issuance of preferred stock or additional shares of common stock could
adversely affect the rights of holders of common stock.
Our board of directors is authorized to issue up to 5,000,000 shares of
preferred stock without any further action on the part of our stockholders.
Currently, we have no shares of preferred stock outstanding. In the event that
we issue preferred stock in the future that has preference over the common stock
with respect to payment of
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dividends or upon our liquidation, dissolution, or winding up, the rights of
holders of common stock may be adversely affected. In addition, the ability of
our board of directors to issue shares of preferred stock without any further
action on the part of our stockholders may impede a takeover of us and may
prevent a transaction that is favorable to our stockholders.
Our potential acquisitions may reduce our earnings, be difficult for us to
combine into our operations or require us to obtain additional financing.
To grow our business following the merger, we expect to search for and
evaluate acquisitions that will provide new product and market opportunities,
benefit from and maximize our existing assets and add critical mass. Any
acquisitions we make may fail to accomplish our strategic objectives, may not be
successfully combined with our operations, or may not perform as expected. In
addition, based on current acquisition prices in the pharmaceutical industry,
our acquisitions could initially reduce our earnings and add significant
intangible assets and related goodwill amortization charges. Our acquisition
strategy may require us to obtain debt or equity financing, resulting in
increased leverage or increased debt obligations, as compared to equity and the
dilution of your ownership. We may not be able to finance acquisitions on terms
satisfactory to us.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements, which are subject to risks and
uncertainties, in this proxy statement and in the documents incorporated by
reference into this proxy statement. These statements are based on the beliefs
and assumptions of our management and on the information currently available to
it. Forward-looking statements may be preceded by, followed by, or otherwise
include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "projects," or similar expressions or statements that certain
events or conditions "will" or "may" occur.
Except for ongoing obligations to disclose material information as required
by the federal securities laws, we do not have any intention or obligation to
update forward-looking statements after we distribute this proxy statement.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
We are providing the following financial information to assist you in your
analysis of the financial aspects of the merger. This information is only a
summary and you should read it in conjunction with our historical consolidated
financial statements, the historical financial statements of IVAX Diagnostics,
and the other information included elsewhere in this proxy statement or that we
have previously filed with the SEC. See "Where You Can Find More Information"
on page 53. IVAX Diagnostics is not required to make SEC filings.
SELECTED HISTORICAL FINANCIAL DATA OF B2B
The summary financial information set forth below for the calendar year
ended December 31, 1999 has been derived from our audited financial statements,
which statements have been audited by BDO Seidman, LLP, independent certified
public accountants, and appear elsewhere in this proxy statement. The summary
financial information for the nine month period ended September 30, 2000 and for
the period from June 28, 1999 (inception) to September 30, 1999 have been
derived from our unaudited financial statements which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The results of operations for the nine months ended September 30, 2000
are not indicative of the results for the full year. The following data should
only be read in conjunction with our financial statements and the notes thereto
attached to this proxy statement. In the fourth quarter of 2000, we
discontinued our Internet business operations.
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<PAGE>
<TABLE>
<CAPTION>
(In thousands except share and per share data)
PERIOD FROM PERIOD FROM
JUNE 28, 1999 JUNE 28, 1999
NINE MONTHS ENDED INCEPTION TO INCEPTION TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 DECEMBER 31, 1999
-------------------------- --------------------- ------------------
<S> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT OF
OPERATIONS DATA:
Revenue................................... $ 120 $ 2 $ 2
Loss from operations...................... $ (8,668) $ (2,395) $ (2,907)
Net Loss.................................. $ (7,682) $ (2,395) $ (2,930)
Net loss per common share................. $ (0.99) $ (0.62) $ (0.75)
Weighted average number of
common shares outstanding:............. 7,772,008 3,878,311 3,910,780
AS OF SEPTEMBER 30, 2000 AS OF DECEMBER 31, 1999
--------------------------------- --------------------------------
BALANCE SHEET DATA:
Working capital (deficit)................. $ 24,961 $ (880)
Total assets.............................. $ 25,610 $ 816
Total liabilities......................... $ 392 $ 992
Total stockholders' equity (deficit)...... $ 25,218 $ (176)
</TABLE>
SELECTED HISTORICAL FINANCIAL DATA OF IVAX DIAGNOSTICS
The selected financial information set forth below for each of the three
years in the period ended December 31, 1999 have been derived from IVAX
Diagnostics' audited financial statements, which statements have been audited by
Arthur Andersen LLP, independent certified public accountants, and appear
elsewhere in this proxy statement. The selected financial information for the
nine month period ended September 30, 2000 and 1999 have been derived from the
unaudited financial statements of IVAX Diagnostics which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the results of the full year. The following
data should only be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 25 and the
financial statements of IVAX Diagnostics and the notes thereto attached to this
proxy statement.
(In thousands except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT
OF OPERATIONS DATA:
Net revenue......................... $ 9,839 $ 8,341 $11,105 $ 9,565 $ 9,289 $11,480 $12,032
Income (loss) from operations....... $ 945 $(1,188) $(1,441) $(3,502) $(5,248) $(1,017) $ 1,014
Net income (loss)................... $ (414) $(1,866) $(2,466) $(3,582) $(4,862) $(1,034) $ 622
Net income (loss) per common share:.
$ (.03) $ (.13) $ (.17) $ (.25) $ (.33) $ (.07) $ .04
Weighted average number of common
shares outstanding................. 14,600 14,600 14,600 14,600 14,600 14,600 14,600
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF SEPTEMBER ----------------------------------------------------
30, 2000 1999 1998 1997 1996 1995
----------------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 5,262 $ 8,600 $ 8,176 $ 7,438 $10,222 $12,714
Total assets.................. $18,781 $21,662 $22,120 $21,264 $24,562 $30,393
Total liabilities............. $10,522 $12,000 $ 8,668 $ 5,404 $ 2,578 $ 7,966
Total stockholders' equity.... $ 8,258 $ 9,662 $13,452 $15,860 $21,984 $22,427
</TABLE>
UNAUDITED PRO FORMA COMPARATIVE PER SHARE DATA
Neither we nor IVAX Diagnostics has paid any cash dividends on its common
stock. The unaudited pro forma comparative per share data presented should be
read in conjunction with IVAX Diagnostics' historical
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financial statements and the related notes thereto attached to this proxy
statement, b2b's historical financial statements and the related notes thereto
attached to this proxy statement, and the pro forma combined condensed balance
sheet on page 15.
The following table presents selected comparative unaudited per share data:
. for us and IVAX Diagnostics on an historical
basis;
. for the combined company on a pro forma basis assuming the merger had
been effective for the periods indicated in the table; and
. for IVAX Diagnostics on a pro forma equivalent basis.
Book value per share: As of September 30, 2000
Our historical................................... $2.92
IVAX Diagnostics historical...................... $0.57
IVAX Diagnostics pro forma equivalent............ $0.96
Pro forma combined company....................... $1.31
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The following unaudited pro forma combined condensed balance sheet as of
September 30, 2000 gives effect to the merger and our discontinued Internet
business operations. The unaudited pro forma combined condensed balance sheet
is based on the estimates and assumptions described in the notes on page 17.
This information should be read in conjunction with the historical financial
statements and notes thereto of b2b and IVAX Diagnostics attached to this proxy
statement.
The merger has been accounted for as a capital transaction equivalent to
the issuance of stock by IVAX Diagnostics for our net monetary assets,
accompanied by a recapitalization of IVAX Diagnostics.
The pro forma adjustments are described on page 17. The unaudited pro
forma combined condensed balance sheet assumes the merger had occurred as of
September 30, 2000. No pro forma statements of operations have been presented
since our Internet business operations have terminated and will be reflected as
discontinued operations in our future financial statements.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(In thousands)
<TABLE>
<CAPTION>
IVAX PRO FORMA
DIAGNOSTICS b2b ADJUSTMENTS COMBINED
------------ --------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 1,712 $ 16,540 $(2,600) (a) $15,940
288 (b)
Marketable securities........................ - 8,719 8,719
Accounts receivable, net..................... 4,355 - - 4,355
Inventories.................................. 2,291 - - 2,291
Deferred income taxes........................ 667 - - 667
Other current assets......................... 110 94 (94) (c) 110
------- -------- ------- -------
Total current assets................... 9,135 25,353 (2,406) 32,082
------- -------- ------- -------
PROPERTY, PLANT AND EQUIPMENT................. 1,579 212 (212) (c) 1,579
------- -------- ------- -------
OTHER ASSETS:
Goodwill, net................................ 7,200 - - 7,200
Equipment on lease, net...................... 625 - - 625
Deferred income taxes........................ 67 - - 67
Other........................................ 175 45 (45) (c) 175
------- -------- ------- -------
8,067 45 (45) 8,067
------- -------- ------- -------
Total assets........................... $18,781 $ 25,610 $(2,663) $41,728
======= ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................. $ 694 $ 374 $ (374) (c) $ 694
Accrued expenses............................. 2,308 18 (18) (c) 2,308
Income taxes payable......................... 872 - - 872
Net liability of discontinued operations..... - - 41 (c) 41
------- -------- -------- -------
Total current liabilities.............. 3,874 392 (351) 3,915
DUE TO AFFILIATES............................. 6,405 - (6,693) (e) -
288 (b)
OTHER LONG-TERM LIABILITIES................... 244 - - 244
------- -------- -------- -------
Total liabilities...................... 10,523 392 (6,756) 4,159
------- -------- -------- -------
STOCKHOLDERS' EQUITY:
Preferred stock.............................. - - - -
Common stock................................. 146 86 54 (d) 286
Additional paid-in-capital................... 11,312 35,744 (54) (d) 43,083
6,693 (e)
(10,612) (f)
Accumulated deficit.......................... (646) (10,612) (2,600) (a) (3,246)
10,612 (f)
Accumulated other comprehensive loss......... (2,554) - - (2,554)
------- -------- -------- -------
Total stockholders' equity............. 8,258 25,218 4,093 37,569
------- -------- -------- -------
Total liabilities and
stockholders' equity................... $18,781 $ 25,610 $ (2,663) $41,728
======= ======== ======== =======
</TABLE>
The accompanying notes to unaudited pro forma combined condensed
financial statements are an integral part of this Balance Sheet.
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Note 1: The pro forma combined condensed financial information for the periods
presented does not reflect the difference between the fair value of our
common stock and the $1.00 exercise price of outstanding options to
acquire 809,420 shares of our common stock pursuant to the stock option
plan of IVAX Diagnostics that we will assume as part of the merger and
which are exercisable upon completion of the merger. The difference
between the fair value of our common stock and the $1.00 exercise price
for each such option will be recorded as an expense upon completion of
the merger based upon the fair value on that date.
Note 2: The following pro forma adjustments were made:
(a) to record the estimated cost of the merger;
(b) to record a cash investment by IVAX to meet the minimum cash
holding under the merger agreement;
(c) to reflect the operations of b2b as discontinued;
(d) to adjust equity to reflect the issuance of 20,000 shares of our
common stock in the merger;
(e) to reflect the contribution to capital of amounts due to affiliates
of IVAX Diagnostics which will not be repaid; and
(f) to eliminate b2b's historical accumulated deficit.
LEGAL PROCEEDINGS
In the course of pursuing strategic alternatives, we meet with potential
merger candidates. We have received correspondence from a stockholder of a
potential merger candidate, that is also one of our stockholders, alleging that
we acted in bad faith when we terminated negotiations with such potential merger
candidate and that the merger with IVAX Diagnostics is not in the best interest
of our stockholders. Our board of directors and officers deny the allegations.
No legal proceedings have been instituted against us with respect to this
matter. If legal proceedings are commenced, we will vigorously defend all claims
relating to these allegations, but the ultimate outcome of any such legal
proceedings cannot be determined.
17
<PAGE>
DESCRIPTION OF IVAX DIAGNOSTICS' BUSINESS
General. IVAX Diagnostics is a wholly-owned subsidiary of IVAX. IVAX
incorporated IVAX Diagnostics in 1996 to be the parent corporation of the
following three subsidiaries:
. Diamedix Corporation;
. Delta Biologicals, S.r.l.; and
. ImmunoVision, Inc.
Through these subsidiaries, IVAX Diagnostics develops, manufactures, and
markets diagnostic test kits or assays that are used to aid in the detection of
disease markers primarily in the areas of autoimmune and infectious diseases.
These tests, which are designed to aid in the identification of the causes of
illness and disease, assist physicians in selecting appropriate patient
treatment. Most of IVAX Diagnostics' tests are based on Enzyme Linked
ImmunoSorbent Assay (ELISA) technology, a clinical testing methodology used
worldwide. Specific tests are prepared using a 96 well microplate format
whereby specific antigens are typically coated on the wells of a microplate
during the manufacturing process. A test using ELISA technology involves a
series of reagent additions to the microplate causing a reaction that results in
a visible color in the wells. The amount of color is directly proportionate to
the amount of the specific analyte in the patient sample. IVAX Diagnostics'
kits are designed to be performed either manually or in an automated format. In
addition to an extensive line of diagnostic kits, IVAX Diagnostics also designs
and manufactures laboratory instruments that perform the tests and provide fast
and accurate results, while reducing labor costs. This proprietary instrument,
named the Mago system, includes a fully-automated Elisa processor operating with
IVAX Diagnostics' own user-friendly software, allowing customers to perform
tests in an automated mode. IVAX Diagnostics also develops, manufactures, and
markets raw materials, such as antigens used in the production of diagnostic
kits.
Delta, which IVAX acquired in 1991, was established in 1980. From its
facility located in Pomezia Roma, Italy, it develops and manufactures
scientific and laboratory instruments, including its proprietary Mago
instrument, which includes hardware, reagents, and software. The Mago system,
in association with 74 specific assays acquired from Diamedix and third parties,
is sold directly in Italy through Delta's independent sales representatives,
most of whom work exclusively for Delta. Delta also sells in Italy other
diagnostic products manufactured by third parties. Approximately 90% of Delta's
customers in Italy are government owned hospitals and the remaining 10% are
private laboratories. Thus, sales in Italy are heavily concentrated in the
public sector.
Diamedix was established in 1986 after it acquired all of the assets and
retained substantially all of the personnel of Cordis Laboratories, Inc., a
company that had developed, manufactured, and marketed diagnostic equipment
since 1962. IVAX acquired Diamedix in 1987. Diamedix' products are sold in the
United States through Diamedix' sale force. There are currently 36 FDA approved
assays manufactured by Diamedix that are available to be run in conjunction with
the Mago system. These assays are sold under the trade name
immunoSIMPLICITY(R). In 2001, subject to FDA approval, IVAX Diagnostics
anticipates the number of assays offered in the immunoSIMPLICITY kits to
increase to over 45. Diamedix is located in Miami, Florida.
Since 1985, ImmunoVision has been developing, manufacturing, and marketing
autoimmune reagents and research products for use by clinics, hospitals,
research laboratories, and commercial diagnostic manufacturers. These
manufacturers (including Diamedix) use these antigens to produce autoimmune
diagnostic kits. IVAX acquired ImmunoVision in 1995. It is located in
Springdale, Arkansas.
Market. IVAX Diagnostics products are primarily associated with the in
vitro diagnostics market. In vitro diagnostic assays are tests that are used to
detect specific substances, usually either antigens or antibodies, outside the
body. This usually involves using a blood sample or other bodily fluid sample
for testing. The market for in vitro diagnostic products consists of reference
laboratory and hospital laboratory testing, testing in physician offices, and
over the counter testing, in which testing can be performed at home by the
consumer. The world market for in vitro diagnostics was estimated to be $19
billion in 1998 and estimated to grow during the period 1999 to 2004 at a
18
<PAGE>
compound annual growth rate of 5.5%. Clinica World Medical Device and
Diagnostic News (April 12, 1999). It is believed that the top eight in vitro
product manufacturers account for approximately 75% of worldwide revenue.
Clinica World Medical Device and Diagnostic News (April 12, 1999). The primary
manufacturers in the market are Roche, Abbott Diagnostics, Johnson & Johnson,
and Bayer. There are at least 200 smaller companies with annual revenues of $5
to $300 million that make up most of the remaining market. Clinica World Medical
Device and Diagnostic News (April 12, 1999). Of this total $19 billion market,
the immunoassay market in which IVAX Diagnostics operates is estimated to be
$7.2 billion. Clinica World Medical Device and Diagnostic News (April 12, 1999).
IVAX Diagnostics has focused its efforts on what management estimates is a $430
million market for autoimmune and infectious disease immunoassay products. Its
ELISA autoimmune product line consists of 16 test kits that have been FDA
approved. These include test kits for screening antinuclear antibodies and
specific tests to measure antibodies to dsDNA, SSA, SSB, Sm, Sm/RNP, Scl 70,
Jo-1, Rheumatoid Factor, MPO, PR-3, TPO, TG, and others. These products are used
for the diagnosis and monitoring of autoimmune diseases, including Systemic
Lupus Erythematosus (SLE), Rheumatoid Arthritis, Mixed Connective Tissue
Disease, Sjogren's Syndrome, Scleroderma, and Dermatopolymyositis. IVAX
Diagnostics' infectious disease product line includes 20 FDA approved kits,
including Toxoplasma IgG, Toxoplasma IgM, Rubella IgG, Rubella IgM,
Cytomegalovirus (CMV) IgG, CMV IgM, Herpes Simplex Virus (HSV) IgG, HSV IgM,
Measles, Varicella Zoster Virus (VZV), Lyme Disease, H. pylori, Mumps, and six
different Epstein-Barr Virus (EBV) kits.
IVAX Diagnostics believes that the market trend for in vitro diagnostic
products is towards increased laboratory automation that will allow laboratories
to lower their overall costs. IVAX Diagnostics believes that its proprietary
Mago system will enable laboratories to achieve more automation in the
autoimmune and infectious disease test sectors.
IVAX Diagnostics is seeking to differentiate itself from its competitors
through its Mago instrument. While some of its competitors offer proprietary
instruments, other competitors use third parties to manufacture these
instruments for them. IVAX Diagnostics believes that its instrument is
competitive in its markets and offers the features that laboratories most
commonly require. IVAX Diagnostics expects to make continued improvements in the
Mago instrument in order to maintain and improve its position in the
marketplace. IVAX Diagnostics believes that the cost advantage it enjoys from
its own manufacture of the Mago instrument, coupled with its production of
autoimmune reagents at ImmunoVision, positions it to target new geographic and
product markets for growth beyond the $430 million market for autoimmune and
infectious disease immunoassay products. IVAX Diagnostics is currently planning
for the release of its next generation Mago instrument which is expected to be
marketed to clinics and pharmaceutical, and biotechnology research companies for
high throughput screening applications.
IVAX Diagnostics devotes substantial resources for research and
development. These efforts are targeted towards development of additional ELISA
kits that can be used in conjunction with the Mago instrument. While there is
no assurance that it will be successful, IVAX Diagnostics is seeking to expand
the test kits menu it offers in the autoimmune and infectious disease testing
sectors and considering moving into additional diagnostic test sectors such as
HIV, Hepatitis, and allergy detection.
IVAX Diagnostics currently markets its products in the U.S. through its own
sales force to hospitals, reference laboratories, clinical laboratories,
research laboratories, as well as other commercial companies that manufacture
diagnostic products. IVAX Diagnostics also sells some of its products to
pharmaceutical and biotechnology companies. In addition, some of IVAX
Diagnostics' products are sold on a private-label basis to other companies that
resell the products through their own distribution network. IVAX Diagnostics
markets and sells its products in Italy through a network of 16 salespersons and
sales agents, most of whom work on an exclusive basis for Delta. Products are
also sold in other global markets through a number of independent distributors.
Sales personnel are trained to demonstrate Ivax Diagnostics' products, such as
the Mago system, in the laboratory setting. The marketing and technical service
departments located in Miami, Florida, Springdale, Arkansas, and Pomezia Roma,
Italy support their efforts. IVAX Diagnostics participates in a number of
industry trade shows in the United States and Europe.
Competition. IVAX Diagnostics competes on a worldwide basis and there are
numerous competitors in the specific market sectors in which IVAX Diagnostics
offers its products. These competitors range from major pharmaceutical
companies to development stage diagnostic companies. Many of these companies,
such as Abbott and Pharmacia & Upjohn, are much larger and have significantly
greater financial, technical, manufacturing, sales,
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<PAGE>
and marketing resources than IVAX Diagnostics. The diagnostics industry has
experienced considerable consolidation through mergers and acquisitions in the
past several years. At the same time, the competition in test sectors such as
autoimmune is very fragmented as it is comprised of primarily small players with
no single player possessing a dominant market position. IVAX Diagnostics
competes in the marketplace on the basis of the quality of its products, price,
instrument design and efficiency, as well as its relationships with customers.
In addition to Abbott and Pharmacia & Upjohn, IVAX Diagnostics' competitors
include DiaSorin, Hemagen, Sigma Diagnostics, Meridian Diagnostics, Wampole
Laboratories (Carter-Wallace), Hycor Biomedical, and Trinity Biotech.
Personnel. As of December, 2000, IVAX Diagnostics had approximately 97
full time employees, of whom 14 were managerial, 48 were technical and
manufacturing, 12 were administrative, and 23 were sales and marketing.
Intellectual Property. In December 1994, Diamedix entered into an
intellectual property agreement with two inventors pursuant to which it acquired
all rights, title, and interest in the Mago instrument, including all related
software and technical information. Separately, on December 12, 1994, Diamedix
entered into consulting agreements with each of the inventors. Only one of
these consulting agreements currently remains in effect. Under the terms of the
intellectual property agreement, as amended, Diamedix is required to pay the
inventors $1,000 per instrument produced beginning with the fifteenth instrument
produced, until August 31, 2002, unless the remaining consulting agreement
terminates, in which case (i) if such termination occurs before January 25,
2001, then Diamedix' per instrument payment obligation will cease as of January
25, 2001, or (ii) if such termination occurs on or after January 25, 2001, but
before August 31, 2002, then Diamedix' per instrument payment will cease on the
date that such consulting agreement terminates. Alternatively, in lieu of the
per instrument payment, Diamedix may, at its election, make a lump sum payment
to the inventors equal to $3,000 per instrument produced, beginning with the
fifteenth instrument produced and ending with the last instrument produced,
before the date of Diamedix' election, minus all royalty payments previously
made to the inventors pursuant to the intellectual property agreement. In the
event of breach by Diamedix of the intellectual property agreement, the only
recourse available to the inventors is to sue Diamedix for damages. Diamedix
would in any event retain all right, title, and interest in the Mago instrument.
As a condition to the merger, IVAX and IVAX Diagnostics will enter into a
use of name license whereby IVAX will grant us a non-exclusive, royalty free
license to use the name "IVAX." IVAX may not terminate this license for a one-
year period. After the first year, IVAX may terminate this license at any time
upon 90 days' written notice. Upon termination of the agreement, we are
required to take all steps reasonably necessary to change our name as soon as is
practicable.
Governmental Regulation. The testing, manufacturing, and sale of IVAX
Diagnostics' products are subject to regulation by numerous governmental
authorities, principally the Food and Drug Administration, or FDA. To comply
with FDA requirements, IVAX Diagnostics must manufacture its products in
conformance with the FDA's medical device Quality System regulations. Diamedix
is listed as a registered establishment with the FDA and Delta has received ISO
9002 certification validating its quality system. The FDA classifies medical
devices into three classes (Class I, II or III). Class I devices are subject to
general controls, such as good manufacturing practices, and may or may not be
subject to pre-market notification. Premarket notifications must be submitted
to the FDA before products can be commercially distributed. Some Class 1
devices have been deemed exempt from this requirement by the FDA. Class II
devices are subject to the same general controls, pre-market notification and
performance standards. Usually, Class III devices are those that must receive
premarket approval by the FDA to ensure their safety and effectiveness. Most of
IVAX Diagnostics' products are classified as Class I or II devices. Generally,
before a new test kit can be introduced to the market, it is necessary to obtain
FDA clearance in the form of a pre-market 510(k) notification. A 501(k)
notification provides data to show that the new device is substantially
equivalent to other devices in the marketplace. Almost all of the products sold
by IVAX Diagnostics have received 510(k) clearance. In addition, customers
using diagnostic tests for clinical purposes in the united states are also
regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA.
CLIA is intended to ensure the quality and reliability of all medical testing in
laboratories in the United States by requiring that any health care facility in
which testing is performed meets specified standards in the areas of personnel
qualification, administration, participation in proficiency testing, patient
test management, quality control, quality assurance, and inspections.
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<PAGE>
Additionally, IVAX Diagnostics is subject to numerous federal, state, and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control, and disposal of
hazardous or potentially hazardous substances.
Facilities. Diamedix owns approximately 56,000 square feet of buildings at
its facility in Miami, Florida. From this facility, Diamedix conducts research
and development of in vitro diagnostic products, reagent kit manufacturing,
marketing, and corporate management activities. Delta leases approximately
25,000 feet of industrial space in Pomezia Roma, Italy at a current monthly rent
of approximately $15,500, under a lease that expires in 2006. This facility is
where the Mago instrument is manufactured. ImmunoVision leases approximately
5,700 square feet of commercial space in Springdale, Arkansas at a current
monthly rent of $3,500, under a lease that expires in 2002.
Legal Proceedings. IVAX Diagnostics is a party to actions in the ordinary
course of its business.
Executive Officers and Directors. The current executive officers and
directors of IVAX Diagnostics are as follows:
Mr. Giorgio D'Urso, age 65, has served as the President and Chief Executive
Officer of IVAX Diagnostics since 1996 and as a director since 1996. He has
served as President and Chief Executive Officer of Diamedix since 1993,
President and Chief Executive Officer of Delta since 1980, and President and
Chief Executive Officer of ImmunoVision since 1995. He has over 31 years of
diagnostics industry experience. Mr. D'Urso founded Delta Biologicals S.r.l.
(formerly Delta Diagnostics), and was its Managing Director from 1980 to 1998.
From 1976 to 1980, Mr. D'Urso founded and served as the General Manager of
Menarini Diagnostici , Florence, Italy, a division of Menarini S.A.S. Mr.
D'Urso also founded and supervised Menarini Diagnosticos S.A. in Spain. From
1974 to 1976, Mr. D'Urso served as the Marketing Manager of the diagnostic
division of SmithKline & French S.P.A. in Milan, Italy. From 1969 to 1974, Mr.
D'Urso served as the Marketing Manager of Laboratori Travenol S.P.A. in Rome,
Italy.
Mr. Duane M. Steele, age 50, has served as the Vice President - Business
Development of IVAX Diagnostics since 1996. He joined Diamedix in 1995 and has
over 20 years of diagnostics industry experience. He has served as the Chief
Operating Officer of Diamedix since 1998. From 1990 to 1994, he served as
President and Chief Executive Officer of LaserCharge, Inc. in Austin, Texas.
From 1988 to 1989, Mr. Steele was the General Manger of Austin Biological
Laboratories, Inc. From 1972 to 1987, Mr. Steele held a variety of positions
with Kallestad Diagnostics, Inc., including Senior Vice President.
Mr. Mark Deutsch, age 38, has served as Chief Financial Officer and Vice
President - Finance of IVAX Diagnostics since its inception. He has served as
the Vice President - Finance of Diamedix since 1993 and has 7 years of
diagnostics industry experience. From 1988 to 1993, Mr. Deutsch held various
positions including Accounting Manager of IVAX and Controller of certain
subsidiaries of IVAX. From 1985 to 1988, Mr. Deutsch worked for Arthur Andersen
& Co. as a Senior Accountant.
Mr. Neil Flanzraich, age 56, has been a director of IVAX Diagnostics since
September 15, 1998. He has served as Vice Chairman and President of IVAX since
May 1998 and as a director of IVAX since 1997. He was a stockholder and served
as Chairman of the Life Sciences Legal Practices Group of Heller Ehrman White &
McAuliffe from 1995 to May 1998. From 1981 to 1994, he served in various
capacities at Syntex Corporation (pharmaceuticals), most recently as its Senior
Vice President, General Counsel and a member of the Corporate Executive
Committee. From 1994 to 1995, after Syntex Corporation was acquired by Roche
Holding Ltd., he served as Senior Vice President and General Counsel of Syntex
(U.S.A.) Inc., a Roche subsidiary. He is Chairman of the Board of Directors of
North American Vaccine, Inc. (vaccine research and development), and is a
director of Whitman Education Group, Inc. (proprietary education).
Mr. Thomas E. Beier, age 54, has been a director of IVAX Diagnostics since
September 18, 1997. He has served as Senior Vice President - Finance and Chief
Financial Officer of IVAX since October 1997. From December 1996 to October
1997, he served as Vice President - Finance for IVAX. Prior to joining IVAX, he
served as Executive Vice President and Chief Financial Officer of
Intercontinental Bank from 1989 until August 1996.
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It is anticipated that Messrs. D'Urso, Steele and Deutsch will continue to
be executives of the resulting company after the Merger and that IVAX will
designate Messrs. D'Urso and Flanzraich to be nominated for election as members
of the board of directors of the resulting company. Additionally, IVAX has
indicated that it will also designate Dr. Phillip Frost, Dr. Jane Hsiao and Dr.
John Harley to serve on the Board. Information regarding Dr. Frost, Dr. Hsiao
and Dr. Harley is provided below:
Dr. Phillip Frost, age 63, has served as the Chairman of the Board of
Directors and Chief Executive Officer of IVAX since 1987. He served as President
of IVAX from July 1991 until January 1995. He was the Chairman of the Department
of Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami Beach,
Florida from 1972 to 1990. Dr. Frost was Chairman of the Board of Directors of
Key Pharmaceuticals, Inc. from 1972 to 1986. He is Chairman of the Board of
directors of whitman education group, inc. (proprietary education), Vice
Chairman of the Board of Directors of North American Vaccine, Inc. (vaccine
research and development), Vice Chairman of the Board of Directors of
Continucare Corporation (integrated health care), and a director of Northrop
Grumman Corp. (aerospace). He is Vice Chairman of the Board of Trustees of the
University of Miami and a member of the Board of Governors of the American Stock
Exchange.
Dr. Jane Hsiao, age 52, has served as IVAX' Vice Chairman-Technical Affairs
since February 1995, as IVAX' Chief Technical Officer since July 1996, and as
Chairman, Chief Executive Officer and President of DVM Pharmaceuticals, Inc.,
IVAX' veterinary products subsidiary, since March 1998. From 1992 until February
1995, she served as IVAX' Chief Regulatory Officer and Assistant to the
Chairman, and as Vice President-Quality Assurance and Compliance of Baker Norton
Pharmaceuticals, Inc., IVAX' principal proprietary pharmaceutical subsidiary.
From 1987 to 1992, Dr. Hsiao was Vice President-Quality Assurance, Quality
Control and Regulatory Affairs of Baker Norton Pharmaceuticals, Inc.
Dr. John Harley, age 51, has held various prestigious positions at the
University of Oklahoma Health Sciences Center since 1982. In the Department of
Medicine, his positions include Chief of Rheumatology, Allergy and Immunology
Section and Vice Chair for Research, George Lynn Cross Research Professor (1999
to present), James R. McEldowney Chair in Immunology and Professor of Medicine
(1992 to present), Associate Professor (1986 to 1992), and Assistant Professor
(1982 to 1986). Since 1996 Dr. Harley has been an Adjunct Professor in the
Department of Pathology. In the Department of Microbiology, Dr. Harley has
served as Adjunct Professor (1992 to present), Adjunct Associate Professor (1988
to 1992), and Adjunct Assistant Professor (1983 to 1988). Since 1982 Dr. Harley
has also been associated with the Oklahoma Medical Research Foundation's
Arthritis and Immunology Program as Program Head (1999 to present), Member (1998
to present), Associate Member (1989 to present), Affiliated Associate Member
(1986 to 1989), Affiliated Assistant Member (1982 to 1986). Dr. Harley has also
served as a Staff Physician (1982, 1984 to 1987 and 1992 to present), and a
Clinical Investigator (1987 to 1992), Immunology Section, Medical Service at the
Veterans Administration Medical Center, Oklahoma City, Oklahoma. In 1981 and
1982, Dr. Harley was a Postdoctoral Fellow in Rheumatology with the Arthritis
Branch of the National Institute of Arthritis, Diabetes and Digestive and Kidney
Diseases, National Institutes of Health, Bethesda, Maryland. He was also a
Clinical Associate at the Laboratory of Immunoregulation, National Institute of
Allergy and Infectious Diseases, National Institutes of Health, Bethesda,
Maryland from 1979 to 1982.
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EXECUTIVE COMPENSATION OF IVAX DIAGNOSTICS
The following summary compensation table sets forth information concerning
compensation for services rendered to IVAX Diagnostics in all capacities awarded
to, earned by or paid to Mr. D'Urso, the President and Chief Executive Officer
and Mr. Steele, the Vice President - Business Development. No other person
employed by IVAX Diagnostics earned in excess of $100,000 during the year ended
December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------ ------------------------------------------------------------------
Awards Payouts
------------------------------------------------------------------
Name and
Principal Other Annual Restricted Stock Securities Underlying LTIP All Other
Position Year Salary($) Bonus($) Compensation($) Awards ($) Options/(#) Payouts ($) Compensation $
--------- ---- --------- -------- --------------- ---------------- --------------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Giorgio D'Urso 1999 348,987 17,426 -- -- 438,000(a) -- 118,375
President and 1998 351,636 -- -- -- -- -- --
CEO 1997 343,204 -- -- -- 90,000(b) -- 8,467
Duane M. 1999 122,237 6,250 -- -- 87,600(a) -- --
Steele Vice 1998 101,769 -- -- -- -- -- --
President 1997 89,314 -- -- -- -- -- --
(a) IVAX Diagnostic options
(b) IVAX options
</TABLE>
The following table sets forth certain summary information concerning
individual grants of stock options by IVAX Diagnostics during the year ended
December 31, 1999 to the executive officers named in the "Summary Compensation
Table."
STOCK OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rate of
Number of Stock Price
Securities Appreciation for
Underlying % of Total Option Term ($)
Options/ Options Granted Exercise -------------------------
Name Granted # to Employees (%) Price ($/sh) Expiration Date 5% 10%
------------------- --------------- ---------------- ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Giorgio D'Urso 438,000 56.4 1.00 June 28, 2006 178,310 415,538
Duane M. Steele 87,600 11.4 1.00 June 28, 2006 35,662 83,107
</TABLE>
The following table sets forth certain summary information concerning
the exercise of IVAX options during 1999 and exercised and unexercised options
to purchase shares of IVAX' and IVAX Diagnostics' common stock as of December
31, 1999 held by the executive officers named in the "Summary Compensation
Table.
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<PAGE>
STOCK OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Shares Options at Year-End (#) Money Options at Year-End ($)
Acquired on Value --------------------------- ------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Giorgio D'Urso
IVAX Options 15,000 87,325 66,251 48,750 802,525 590,528
IVAX Diagnostics Options - - - 438,000 - -
Duane M. Steele - - 18,751 1,250 227,138 15,142
IVAX Options - - - 87,600 - -
IVAX Diagnostics Options
</TABLE>
CERTAIN COMPENSATION ARRANGEMENTS
In October 1998, IVAX Diagnostics entered into a five-year employment
agreement with Mr. D'Urso, President and Chief Executive Officer, at a base
annual salary of $348,519, with discretionary annual adjustments. Mr. D'Urso's
employment may be terminated with or without cause at any time upon written
notice. For a termination without cause, IVAX Diagnostics must pay Mr. D'Urso
his then current annual base salary in installments for the remainder of the
employment term. While employed by IVAX Diagnostics and for a two-year period
thereafter, Mr. D'Urso cannot employ or contract with any current employee or
former employee of IVAX Diagnostics, except former employees who have not been
employed by IVAX Diagnostics for more than one year.
DESCRIPTION OF IVAX DIAGNOSTICS' 1999 STOCK OPTION PLAN
General. IVAX Diagnostics adopted the IVAX Diagnostics 1999 Stock Option
Plan in June 1999. The plan expires in June 2009, unless sooner terminated.
1,460,000 shares of IVAX Diagnostics' common stock has been reserved for
issuance under the plan and, of that amount, options to purchase 809,420 shares
of IVAX Diagnostics' common stock have been granted. IVAX Diagnostics agreed in
the merger agreement not to grant any additional options under the plan.
Effect of the merger on the IVAX Diagnostics' 1999 Stock Option Plan. At
the effective time of the merger, automatically and without any action on the
part of an option holder, we will assume each outstanding option granted under
the plan and each outstanding option granted under the plan will become an
option:
. to purchase shares of our common stock in an amount equal to the product of
the number of shares of IVAX Diagnostics' common stock issuable upon the
exercise of the option under the plan, multiplied by the exchange ratio;
. at an exercise price per share equal to the quotient of the per share
exercise price of the option under the plan, divided by the exchange ratio;
and
. otherwise upon the same terms and conditions as the outstanding option under
the plan.
However, if Internal Revenue Service Code Section 421 applies to any option
under the Plan because of the qualifications under Internal Revenue Service Code
Sections 422 or 423, then the exercise price, the number of shares purchasable
pursuant to the option under the plan and the terms and conditions of exercise
of the option under the plan will comply with Internal Revenue Service Code
Section 424(a).
Under the terms of the merger agreement, we have agreed to take all
corporate actions necessary to reserve for issuance a sufficient number of
shares of our common stock for delivery upon exercise of options under the plan
which are assumed by us. Upon the assumption of the plan and the options under
the plan, we may make amendments to the plan and the options under the plan as
we determine are required to reflect the completion of the merger.
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<PAGE>
CERTAIN TRANSACTIONS BETWEEN IVAX AND IVAX DIAGNOSTICS
Following the merger, we will enter into a registration rights agreement, a
shared services agreement, and a license for use of name agreement with IVAX.
For a description of such agreements, see "Other Related Agreements -
Registration Rights Agreement" on page 51, "Other Related Agreements - Shared
Services Agreement" on page 52, and "Other Related Agreements - Use of Name
License" on page 52.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS OF IVAX DIAGNOSTICS
The following discussion and analysis of IVAX Diagnostics' financial
condition and results of operations should be read in conjunction with IVAX
Diagnostics' selected historical financial data and consolidated financial
statements, including the notes thereto and other information appearing
elsewhere in the proxy statement. A discussion and analysis of our financial
condition and results of operations has been intentionally omitted due to the
discontinuation of our Internet business. If you would like to review the
discussion and analysis of our financial condition and results of operations
prior to the discontinuation of our Internet business, see Annexes E, F, G,
and H.
OVERVIEW
IVAX Diagnostics was during the periods discussed a wholly-owned
subsidiary of IVAX. For the years ended December 31, 1999, 1998, and 1997, IVAX
Diagnostics generated net losses and required net cash advances from IVAX to
fund its operations.
RESULTS OF OPERATIONS
IVAX Diagnostics' operations are conducted through subsidiaries involved
primarily in the development, manufacture and marketing of diagnostic test kits,
reagents and instruments for use in hospital and reference laboratories and
doctors' offices. IVAX Diagnostics generated net losses of $1.9 million, $2.5
million, $3.6 million, and $4.9 million, and required net cash advances from its
parent company, IVAX, to fund its operations for the nine months ended September
30, 1999 and the years ended December 31, 1999, 1998, and 1997, respectively.
For the nine months ended September 30, 2000, IVAX Diagnostics generated a net
loss of $0.4 million and generated positive net cash from operations. During
1998, IVAX Diagnostics also received a capital contribution from IVAX, to fund
its operations. IVAX Diagnostics' future success is largely dependent upon its
ability to develop, obtain approval for, efficiently manufacture, and market
commercially viable products.
Nine Months Ended September 30, 2000 Compared To The Nine Months Ended
September 30, 1999
Net Revenue and Gross Profit. Net revenue for the nine months ended
September 30, 2000 totaled $9.8 million, an increase of $1.5 million, or 18%,
from the $8.3 million reported in the prior year comparable period. This
increase was comprised of an increase of $1.2 million in net revenue from
Italian operations as well as an increase of $0.3 million in net revenue from
domestic operations. Net revenue from Italian operations totaled $6.7 million
for the nine months ended September 30, 2000, compared to $5.5 million in the
nine months ended September 30, 1999. The $1.2 million increase was primarily
attributable to increased sales volume of instrumentation, partially offset by
the effect of foreign exchange differences. Domestic operations generated net
revenue of $3.1 million for the nine months ended September 30, 2000, compared
to $2.8 million for the nine months ended September 30, 1999. The $0.3 million,
or 10.7%, increase was primarily due to volume increases in instrumentation
revenue. Gross profit for the nine months ended September 30, 2000 increased
$1.1 million, or 24.4%, to $5.6 million (57.1% of net revenue) from $4.5 million
(54.2% of net revenue) for the nine months ended September 30, 1999. The
increase in the gross profit percentage was primarily attributable to an
increase in sales of products with relatively higher gross margins.
Operating Expenses. Selling expenses were $1.9 million (19.4% of net
revenue) for the nine months ended September 30, 2000 compared to $2.3 million
(27.7% of net revenue) for the nine months ended September 30, 1999. The
decrease was primarily due to the effect of foreign exchange rate differences as
well as reductions in payroll and travel costs. General and administrative
expenses totaled $1.5 million (15.3% of net revenue) in the nine
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months ended September 30, 2000, a decrease of $0.8 million, or 34.8%, from $2.3
million (27.7% of net revenue) in the nine months ended September 30, 1999. The
decrease was primarily the result of a partial reimbursement of legal fees
received from a settlement of patent litigation in 2000, as well as a reduction
of legal fees incurred in 1999 associated with patent litigation and accounts
receivable collections. Research and development expenses totaled $1.0 million
(10.2% of net revenue) in the nine months ended September 30, 2000 compared to
$0.9 million (10.8% of net revenue) in the nine months ended September 30, 1999,
an increase of $0.1 million, or 11.1%. The increase in research and development
expenses in 2000 was primarily due to increased instrumentation research. The
future level of research and development expenditures will depend on, among
other things, the outcome of ongoing testing of products under development,
delays or changes in government required testing and approval procedures,
technological and competitive developments, strategic marketing decisions and
liquidity. Goodwill amortization was relatively unchanged, amounting to $0.2
million in each period.
Other Income (Expense). Interest income decreased $0.2 million to $0.1
million in the nine months ended September 30, 2000 compared to $0.3 million in
the nine months ended September 30, 1999. The decrease is due to 1999 interest
received as a result of accounts receivable collection efforts in Italy.
Interest expense-related party amounted to $0.4 million in the nine months ended
September 30, 2000 and $0.3 million in the nine months ended September 30, 1999,
an increase of $0.1 million. The related party interest was incurred on
intercompany advances from IVAX. The increase was a result of increased
interest bearing advances at higher interest rates.
Year Ended December 31, 1999 Compared To The Year Ended December 31, 1998
Net Revenue and Gross Profit. Net revenue for the year ended December 31,
1999 totaled $11.1 million, an increase of $1.5 million, or 15.6%, over the $9.6
million reported in the prior year. This increase was comprised of an increase
of $1.6 million in net revenue from Italian operations, offset by a decrease of
$0.1 million in net revenue from domestic operations. Net revenue from Italian
operations totaled $7.3 million for the year ended December 31, 1999, compared
to $5.7 million in 1998. The $1.6 million, or 28.1%, increase was attributable
to increased instrumentation sales volume. Domestic operations generated net
revenue of $3.8 million for the year ended December 31, 1999, compared to $3.9
million for 1998. The $0.1 million, or 2.6%, decrease was primarily due to
sales reductions in non-strategic product lines partially offset by increases in
antigen revenue. Gross profit for the year ended December 31, 1999 increased
$1.0 million, or 20.4%, to $5.9 million (53.2% of net revenue) from $4.9 million
(51% of net revenue) for the year ended December 31, 1998. The increase in the
gross profit percentage was primarily attributable to an increase in sales of
products with relatively higher gross margins.
Operating Expenses. Selling expenses increased $0.3 million, or 11%, to
$3.0 million in 1999 (27% of net revenue) from $2.7 million (28.1% of net
revenue) in 1998. The increase was primarily due to an increase in payroll and
related personnel costs as well as an increase in travel costs. General and
administrative expenses totaled $2.9 million (26.1% of net revenue) in 1999, a
decrease of $0.9 million, or 23.7%, from $3.8 million (39.6% of net revenue) in
1998. The decrease was primarily attributable to lower legal expenses incurred
in connection with litigation relating to patent rights held by IVAX
Diagnostics. Research and development expenses totaled $1.2 million (10.8% of
net revenue) in 1999 compared to $1.7 million (17.7% of net revenue) in 1998, a
decrease of $0.5 million, or 29.4%. The decrease in research and development
expenses in 1999 was primarily due to the increased 1998 development and testing
activity of IVAX Diagnostics' immunoSIMPLICITY reagent product line. Goodwill
amortization was relatively unchanged, amounting to $0.3 million in 1999 and
1998.
Other Income (Expense). Interest income amounted to $0.3 million in 1999
and 1998. Interest expense-related party amounted to $0.5 million in 1999 and
$0.4 million in 1998, an increase of $0.1 million, or 25%. The related party
interest was incurred on intercompany advances from IVAX. The increase was a
result of increased interest bearing advances at higher interest rates.
Year Ended December 31, 1998 Compared To The Year Ended December 31, 1997
Net Revenue and Gross Profit. Net revenue for the year ended December 31,
1998 totaled $9.6 million, an increase of $0.3 million, or 3.2%, from the $9.3
million reported in the prior year. This increase was comprised of an increase
of $1.2 million in net revenue from Italian operations partially offset by a
decrease of $0.9 million in net revenue from domestic operations. Net revenue
from Italian operations totaled $5.7 million for the year ended December 31,
1998, compared to $4.5 million for 1997. The $1.2 million, or 26.7%, increase
was primarily
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attributable to instrumentation sales volume increases. Domestic operations
generated net revenue of $3.9 million in 1998 compared to $4.8 million for 1997.
The $0.9 million, or 18.8%, decrease was primarily due to decreased sales of
older reagent product lines, as the transition was made from products which
could not be run on automated instrumentation to the current immunoSIMPLICITY
line. Gross profit for the year ended December 31, 1998 increased $0.4 million,
or 8.9%, from the prior year. Gross profit was $4.9 million (51% of net revenue)
for the year ended December 31, 1998, compared to $4.5 million (48.4% of net
revenue) for the year ended December 31, 1997. The increase in the gross profit
percentage was primarily due to increased higher margin Italian sales partially
offset by decreased sales of relatively lower gross margin domestic sales.
Operating Expenses. Selling expenses totaled $2.7 million (28.1% of net
revenue) in 1998, compared to $3.0 million (32.3% of net revenue) in 1997. The
decrease of $0.3 million, or 10%, was primarily attributable to the reduction of
payroll and related costs and promotional expenditures associated with the
development of the immunoSIMPLICITY product line. General and administrative
expenses totaled $3.8 million (39.6% of net revenue) in 1998, compared to $5.0
million (53.8 % of net revenue) in 1997, a decrease of $1.2 million, or 24%.
The decrease was primarily attributable to a reduction in legal fees associated
with patent litigation and accounts receivable collections as well as for a
litigation settlement paid in 1997. Research and development expenses in 1998
increased $0.2 million, or 13.3%, to a total of $1.7 million (17.7% of net
revenue) from $1.5 million (16.1% of net revenue) in 1997. The increase was due
to the development activity of the Company's immunoSIMPLICITY product line.
Goodwill amortization was unchanged, amounting to $0.3 million in 1998 and 1997.
Other Income (Expense). Interest income increased $0.2 million in 1998 to
$0.3 million compared to $0.1 million in 1997. Interest received as part of
successful accounts receivable collection efforts in Italy primarily accounted
for the increase. Interest expense-related party increased $0.3 million to $0.4
million in 1998 from $0.1 million in 1997, primarily due to increased interest
bearing advances from IVAX Diagnostics' parent, IVAX.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At September 30, 2000, and December 31, 1999 and 1998,
working capital totaled $5.3 million, $8.6 million, and $8.2 million,
respectively. Cash and cash equivalents amounted to $1.7 million, $4.2 million,
and $2.2 million at September 30, 2000, and December 31, 1999, and 1998,
respectively. Net cash provided by operations during the nine months ended
September 30, 2000 was $0.8 million compared to net cash used in operations
during the nine months ended September 30, 1999 of $0.2 million. Net cash used
by operations during the year ended December 31, 1999 was $0.4 million compared
to $2.5 million and $3.3 million in 1998 and 1997, respectively. The increase
in cash provided by operating activities during the nine months ended September
30, 2000 compared to the nine months ended September 30, 1999 was primarily due
to reduced losses and a relative decrease in cash utilized to acquire inventory
and pay accounts payable and accrued expenses, partially offset by increases in
accounts and income tax receivable. The decrease in cash used by operating
activities during 1999 compared to 1998 was primarily due to reduced losses and
collection of accounts and income tax receivables, partially offset by an
increase in cash used relative to 1998 to acquire inventory and pay accounts
payable and accrued expenses. The decrease in cash used by operating activities
during 1998 compared to 1997 was due to reduced losses and a decrease in cash
utilized to pay accounts payable and accrued expenses, partially offset by
increases in accounts and income tax receivable. Net cash of $0.4 million was
used for investing activities in both the nine months ended September 30, 2000
and September 30, 1999. Net cash of $.6 million was used for investing
activities during 1999 compared to $0.7 million and $0.5 million in 1998 and
1997, respectively. Cash used by investing activities for the nine months ended
September 30, 2000 and September 30, 1999, and in the years ended December 31,
1999, 1998, and 1997 was primarily attributable to the acquisition of equipment
on lease and capital expenditures. Net cash of $1.8 million was used in
financing activities in the nine months ended September 30, 2000 compared to
$3.7 million that was provided during the nine months ended September 30, 1999.
The decrease was due to the net repayment of intercompany advances from IVAX
Diagnostics' parent company, IVAX. Net cash of $4.6 million was provided by
financing activities in 1999 compared to $3.1 million in 1998 and $5.0 million
in 1997. The increase in 1999 compared to 1998 was primarily due to increased
advances from IVAX. The decrease in 1998 compared to 1997 reflects a decrease
in advances partially offset by a capital contribution from IVAX.
Dividends. IVAX Diagnostics paid no cash dividends during 1999, 1998, or
1997.
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Capital Expenditures. IVAX Diagnostics' product research and development
expenditures are expected to be approximately $1.3 million during 2000, although
actual expenditures will depend on, among other things, the outcome of clinical
testing or products under development, delays or changes in government required
testing and approval procedures, technological and competitive developments,
strategic marketing decisions and liquidity. In addition, IVAX Diagnostics
expects to spend approximately $0.3 million in fiscal 2000 to improve and expand
its facilities.
Capital Resources. IVAX Diagnostics' principal source of short term
liquidity are existing cash, and capital contributions and cash advances from
its parent company, which IVAX Diagnostics believes will be sufficient to meet
its operating needs and anticipated capital expenditures over the short term.
For the long term, IVAX Diagnostics intends to utilize principally internally
generated funds, which are anticipated to be derived primarily from the sale of
existing diagnostic and instrumentation products and diagnostic and
instrumentation products currently under development. There can be no assurance
that IVAX Diagnostics will successfully complete products under development,
that IVAX Diagnostics will be able to obtain regulatory approval for any such
product, or that any approved product will be produced in commercial quantities
and at reasonable costs, and be successfully marketed. IVAX Diagnostics may
consider issuing debt or equity securities in the future to fund potential
acquisitions and growth.
A requirement of the merger agreement is that we have $22 million in cash
or cash equivalents. Accordingly, if the merger is completed, we anticipate
that we will have sufficient liquidity available to fund operations for the
foreseeable future.
Currency Fluctuations. For the nine months ended September 30, 2000 and
1999, and the years ended December 31, 1999, 1998 and 1997, IVAX Diagnostics'
net revenue attributable to operations principally generated in currencies other
than the United States dollar approximated 26.1%, 39.4%, 39.4%, 45.5%, and
48.9%, respectively. Fluctuations in the value of foreign currencies relative
to the United States dollar affect the reported results of operations for IVAX
Diagnostics. If the United States dollar weakens relative to the foreign
currency, the earnings generated in the foreign currency will, in effect,
increase when converted into United States dollars and vice versa. At
September 30, 2000, December 31, 1999 and 1998, no IVAX Diagnostics subsidiaries
were domiciled in highly inflationary environments. As a result of exchange
rate differences, net revenue denominated in foreign currencies decreased by $.4
million in the nine months ended September 30, 2000 compared to September 30,
1999, $0.1 million in 1999 compared to 1998, and by $0.1 million in 1998
compared to 1997.
Income Taxes. IVAX Diagnostics' effective tax rate was 166.1% AND (50.5%)
for the nine month periods ended September 30, 2000 and 1999 and (53.7%), 4.8%,
and 7.4% for the years 1999, 1998, and 1997, respectively. IVAX Diagnostics
recognized tax provisions of $1.0 million and $0.6 million for the nine month
period ended September 30, 2000 and 1999 and $0.9 million for the year 1999,
100% of which relates to foreign operations. IVAX Diagnostics recognized tax
benefits of $0.2 million and $0.4 million in 1998 and 1997, respectively. The
effective tax rates differed from the statutory tax rates primarily due to the
nonrecognition of the benefits of domestic losses of $1.4 million, $2.8 million,
and $3.8 million in 1999, 1998, and 1997, respectively, and $1.6 million and
$2.2 million for the nine months ended September 30, 2000 and 1999.
IVAX Diagnostics' future effective tax rate will depend on the mix between
foreign and domestic taxable income or losses, and the statutory tax rates of
the related tax jurisdictions. The mix between IVAX Diagnostics' foreign and
domestic taxable income may be significantly affected by the jurisdiction in
which new products are developed and manufactured.
IVAX Diagnostics has established a full valuation allowance of
approximately $3.4 million, $2.6 million on its net domestic deferred tax assets
which are primarily comprised of net operating losses of approximately $2.6
million and $2.4 million at December 31, 1999 and 1998. These domestic net
losses are available for use by IVAX. Management believes that these benefits
will be utilized by IVAX prior to the time that sufficient domestic net income
is generated by IVAX Diagnostics. If not utilized by IVAX, realization by IVAX
Diagnostics of the net deferred tax assets is dependent upon generating
sufficient future domestic and foreign taxable income. Although realization is
not assured, management believes it is more likely than not that the net
deferred tax assets will be realized. Management's estimates of future taxable
income are subject to revision due to, among other things, regulatory and
competitive factors affecting the industries in the markets in which IVAX
Diagnostics operates.
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Risk of Product Liability Claims. Developing, manufacturing and marketing
diagnostic test kits, reagents and instruments subject IVAX Diagnostics to the
risk of product liability claims. IVAX Diagnostics believes that it maintains
an adequate amount of product liability insurance under IVAX' insurance plans,
but there can be no assurance that its insurance will cover all existing and
future claims or that IVAX Diagnostics will be able to maintain existing
coverage or obtain additional coverage at reasonable rates. There can be no
assurance that claims arising under any pending or future product liability
cases, whether or not covered by insurance, will not have a material adverse
effect on IVAX Diagnostics' business, results of operations or financial
condition. IVAX Diagnostics' current products liability insurance is a "claims
made" policy. IVAX Diagnostics expects to continue its current coverage through
IVAX or procure similar coverage on its own.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK OF IVAX DIAGNOSTICS
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of IVAX Diagnostics.
IVAX Diagnostics, in the normal course of doing business, is exposed to the
risks associated with foreign currency exchange rates and changes in interest
rates. IVAX Diagnostics is exposed to exchange rate risk when its Italian
subsidiary enters into transactions denominated in currencies other than its
functional currency. Currently, IVAX Diagnostics does not have external debt
obligations. IVAX Diagnostics believes that its exposure to market risk
relating to interest rate risk is not material. IVAX Diagnostics does not
believe it is subject to any material risk associated with commodity prices. A
discussion of our quantitative and qualitative disclosures about market risks of
our discontinued Internet business has been intentionally omitted.
THE STOCKHOLDER MEETING AND PROXY SOLICITATIONS
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Time, place and date.............................. 10:00 a.m. at the offices of IVAX Corporation, 4400 Biscayne
Boulevard, Miami, Florida 33137 on February 26, 2001.
Purpose........................................... To consider and vote upon:
. a proposal to approve the merger agreement and the merger;
. a proposal to increase our authorized common stock and
change our name; and
. any other business that may be properly presented at the
meeting.
We know of no other matters to be brought before the meeting.
Quorum............................................ Presence, in person or by proxy, of stockholders holding a
majority of the outstanding shares of common stock entitled
to vote at the meeting.
Record date....................................... The close of business on January 5, 2001.
Recommendation of the board of directors.......... Our board of directors believes that the merger agreement
and the merger, the increase in authorized common stock, and
the name change are each advisable and in our best interests
and in the best interests of our stockholders. Accordingly,
our board recommends that you vote FOR approval of the
merger agreement and the merger, the increase in authorized
common stock, and the name change.
</TABLE>
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Shares held in street name......................... If you hold your shares of our common stock in the name of a
bank, broker or other nominee, you should follow the
instructions provided by your bank, broker or nominee when
voting your shares or when granting or revoking a proxy.
Under the rules of the NASDAQ SmallCap Market, brokers who
hold shares in street name for customers have the authority
to vote on certain "routine" proposals when they have not
received instructions from beneficial owners. Under these
rules, such brokers are precluded from exercising their
voting discretion with respect to proposals for nonroutine
matters such as the merger agreement and the merger. Thus,
absent specific instructions from you, your broker is not
empowered to vote your shares with respect to the approval
and adoption of the merger agreement and the merger, the
increase in authorized common stock, and the name change.
Such a broker non-vote will have the same effect as a vote
against each proposal.
Votes required..................................... Each proposal requires the affirmative vote of the holders
of a majority of the outstanding shares of our common stock.
Abstentions will have the same effect as votes against the
merger agreement and the merger and the amendment to our
certificate of incorporation.
The failure of a stockholder to vote in person or by proxy
will also have the effect of a vote against each proposal.
Shares outstanding................................. As of January 1, 2001, we had 8,621,643 shares of common
stock outstanding and entitled to vote.
Preemptive rights.................................. None of our shares of common stock are entitled to
preemptive rights.
Voting procedures and proxies...................... A proxy card will be sent to each of our stockholders as of
the record date. If you received a proxy card, you may
grant a proxy vote on the proposals to approve the merger
and merger agreement, the increase in authorized common
stock, and the name change, by marking your proxy card
appropriately, executing it in the space provided, and
returning it to us. If you hold your common stock in the
name of a bank, broker or other nominee, you should follow
the instructions provided by your bank, broker or nominee
when voting your shares.
If you have timely submitted a properly executed proxy card,
clearly indicated your votes, and have not revoked your
proxy, your shares will be voted as indicated. If you have
timely submitted a properly executed proxy card and have not
clearly indicated your vote, your shares will be voted FOR
each proposal.
If any other matters are properly presented at the meeting
for consideration, the persons named in the proxy card will
have the discretion to vote on these matters in accordance
with their best judgment. Proxies voted against any
proposal will not be voted in favor of any adjournment of
the meeting for
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the purpose of soliciting additional proxies.
Voting by holder of common stock................... Each share of common stock is entitled to one vote at the
meeting. You may vote by marking, signing, dating and
returning the enclosed proxy card in the postage-paid
envelope. Each proxy that is received in time for the
meeting, and not revoked, will be voted in accordance with
the instructions contained in that proxy.
Revocation......................................... You may revoke your proxy card at any time prior to its
exercise by:
. giving written notice of such revocation to our corporate
secretary;
. appearing and voting in person at the meeting; or
. properly completing and executing a later dated proxy and
delivering it to our corporate secretary at or before the
meeting.
Your presence without voting at the meeting will not
automatically revoke your proxy, and any revocation during
the meeting will not affect votes previously taken.
Validity........................................... The inspectors of election will determine all questions as
to the validity, form, eligibility (including time of
receipt) and acceptance of proxy cards. Their determination
will be final and binding. Our board of directors has the
right to waive any irregularities or conditions as to the
manner of voting. We may accept your proxy by any form of
communication permitted by Delaware law as long as we are
reasonably assured that the communication is authorized by
you.
Solicitation of proxies............................ The accompanying proxy is being solicited on behalf of our
board of directors. We are responsible for the expenses of
preparing, printing, and mailing the proxy and the materials
used in the solicitation. We have retained American Stock
Transfer to aid in the solicitation of proxies for a fee of
approximately $500 and the reimbursement of its
out-of-pocket expenses. Proxies may also be solicited by
personal interview, telephone and telegram by our directors
and officers, who will not receive additional compensation
for performing that service. Arrangements may also be made
with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation materials to
the beneficial owners of common stock, and we will reimburse
them for reasonable expenses they incur related to the
forwarding of solicitation materials.
Accountants........................................ BDO Seidman, LLP serves as our independent public
accountants. Representatives of BDO Seidman, LLP plan to
attend the special meeting and will be available to answer
appropriate questions. The representatives will also have
an opportunity to make a statement at the meeting if they so
desire, although it is not expected that any statement will
be made.
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THE MERGER
This section of the proxy statement describes the proposed merger. While
we believe that the description covers the material terms of the merger, it may
not contain all of the information that is important to you. This discussion of
the merger and the principal terms of the merger agreement is qualified in its
entirety by reference to the merger agreement, a copy of which is attached to
this proxy statement and is incorporated into this proxy statement by reference.
In addition, we incorporate important business and financial information about
us into this proxy statement by reference. You may obtain the information
incorporated by reference into this proxy statement without charge by following
the instructions in the section entitled "Where You Can Find More Information"
on page 53.
GENERAL
We are furnishing this proxy statement to you in connection with the
solicitation of proxies by our board of directors for use at the special
meeting. At the special meeting, you will be asked, among other things, to
approve the merger and the merger agreement.
The merger agreement provides that IVAX Diagnostics will merge with and
into us, after which we will change our name from b2bstores.com Inc. to IVAX
Diagnostics, Inc. After the merger, we will no longer engage in the businesses
we had before the merger. After the merger, our only business will be the
business of IVAX Diagnostics before the merger.
IVAX Diagnostics is currently a wholly-owned subsidiary of IVAX.
As of the effective time of the merger, all of the issued and outstanding
shares of common stock of IVAX Diagnostics, will be automatically converted, in
the aggregate, into the right to receive 20 million shares of our common stock.
Because IVAX is the sole stockholder of IVAX Diagnostics, IVAX will be the sole
recipient of those rights. We have attached a copy of the merger agreement to
this proxy statement.
BACKGROUND OF THE MERGER
By April 2000, roughly two months after the completion of our initial
public offering, or IPO, substantial changes had occurred in the marketplace
which forced our board of directors to re-evaluate our business plan and model.
Under our IPO prospectus, our business plan focused on marketing our
website as a business-to-business e-commerce site and attaining a high level of
name recognition through various marketing expenditures. Members of our board
of directors recognized, however, that this focus was proving to be unsuccessful
in the changing marketplace, as several Internet companies with similar business
plans began to face operating difficulties and many began going out of business.
As these failures increased, capital sources began to generally require a more
expedient profitability timetable from Internet companies than previously
required.
On May 1, 2000, our board of directors met to discuss the effect of the
changing marketplace on our business plan and to try to determine whether our
business direction should change. Our board of directors considered proposals
to shift our business focus from the electronic business supply storefront and
concentrate on other possible revenue sources. Additionally, our board of
directors considered proposals to eliminate a large portion of our work force,
thereby reducing our operating expenses or "burn rate."
At a meeting of our board of directors on May 11, 2000, Company One made a
presentation proposing a potential merger between our company and Company One or
an affiliate of Company One. After the presentation, our board of directors
resolved to invite Company One to submit a formal proposal concerning the
proposition. At that same meeting, our board of directors also resolved to
begin interviewing investment banking firms that could be retained to assist us
in pursuing other strategic alternatives and maximizing stockholder value.
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On May 16, our board of directors again met to try to find a new direction
for our business. Our board of directors was divided over which direction our
business should take and the divisiveness resulted in the resignation of four
of our nine directors on May 17, 2000. Subsequently, on May 25, 2000, a sixth
director was added to our board of directors and an Investment Bank Committee of
the board was formed to identify strategic business alternatives.
At a meeting on June 2, 2000, our board of directors approved resolutions
to hire Akin, Gump, Strauss, Hauer & Feld, L.L.P. as our merger and acquisition
legal counsel and Houlihan, Lokey as our financial advisor. Houlihan, Lokey's
services included:
. reviewing our financial condition, operations, competitive environment,
prospects, and related matters including assessing our valuation;
. assessing the adequacy and fairness of offers received, including reviewing
the structure of a transaction and the valuation of any non-cash
consideration offered;
. assisting in the negotiations and closing of a transaction on our behalf;
. providing our board of directors with a fairness opinion;
. preparing an offering memorandum;
. soliciting, coordinating, and evaluating indications of interest in us by
potential strategic partners; and
. providing other financial advisory and investment banking services reasonably
necessary to accomplish the above.
During this time, our board of directors proceeded to reduce our operating
losses by reducing our workforce and terminating operational contracts,
licenses, and agreements. On August 16, 2000, our board of directors approved a
plan to eliminate a majority of our workforce. We continued negotiating a
possible business combination with an affiliate of Company One until August 26,
2000, when our board of directors determined that continuing the negotiations
was not in the best interest of our stockholders.
During their retention as our financial advisors, Houlihan, Lokey conducted
extensive marketing efforts and contacted or held discussions with over 41
parties, including both strategic partners and financial buyers. Detailed
information was presented to our board of directors from interested parties,
including business plans, financial projections, valuation indications, and
proposed transaction structures. Our board of directors and Houlihan, Lokey
reviewed information received from interested parties, and conducted follow-up
due diligence calls with certain interested parties to obtain additional
information. This follow-up information was then assessed and analyzed by our
board of directors and Houlihan, Lokey. The results and conclusions of this
process were reported in a presentation to our board of directors by Houlihan,
Lokey. After reviewing its alternatives, our board of directors concluded that
IVAX Diagnostics represented the best alternative for maximizing stockholder
value. Some of the criteria considered by our board of directors was a
comparison of cash flows, operating history and a presence in a solid industry.
On September 7, 2000, an initial meeting at the headquarters of IVAX in
Miami, Florida was held to attend a management presentation and discuss IVAX
Diagnostics' business plan. In attendance at this initial meeting were Randall
K. Davis, one of our board members and special chairman to our Investment Bank
Committee, Dr. Phillip Frost, Chairman of IVAX, senior management of IVAX and
Diamedix, representatives of Houlihan, Lokey, and financial advisors to IVAX.
At this meeting, IVAX proposed a merger between b2b and IVAX Diagnostics in
which IVAX would receive 20 million shares of our common stock. IVAX further
proposed all intercompany obligations of IVAX Diagnostics to IVAX would be
assumed in the merger and all available cash of IVAX Diagnostics would be
distributed to IVAX prior to completing the proposed merger. Our board of
directors and Houlihan Lokey responded to this offer by informing IVAX that it
was not possible to assess the offer without completing a due diligence
investigation of IVAX Diagnostics. At a board of directors meeting held on
September
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21, 2000, our board of directors authorized continued negotiations of a proposed
merger with IVAX Diagnostics. Following the authorization and direction by our
board of directors, Houlihan, Lokey immediately began to perform further due
diligence on IVAX and IVAX Diagnostics. In addition, our board approved the
retention of a consultant. The consultant analyzed the product offerings and
strategic plan of IVAX Diagnostics and provided our board with an assessment and
visited IVAX Diagnostics' facilities in Miami, Florida and Pomezia Roma, Italy.
On October 5, 2000, a subsequent meeting was held in Miami to conduct additional
due diligence, and was attended by Dr. Frost, senior management of Diamedix, and
representatives of Houlihan, Lokey. Our representatives met with various IVAX
and Diagnostics personnel on several occasions to discuss and negotiate points
concerning the merger. During these negotiations, it was agreed that IVAX
Diagnostics would merge with and into us and IVAX would receive 20 million
shares of our common stock; however, IVAX agreed to eliminate all intercompany
indebtedness and assure that IVAX Diagnostics would have at least $2.0 million
in cash at the time the merger is completed.
In October 2000, a one-day due diligence meeting at the headquarters of
IVAX Diagnostics in Miami, Florida, which was attended by representatives of
Houlihan, Lokey, our consultant, Giorgio D'Urso, President and CEO of IVAX
Diagnostics, Diamedix, and Delta and Duane M. Steele, Chief Operating Officer of
Diamedix, yielded several observations, which were communicated to our board of
directors.
First, it was determined that IVAX Diagnostics has a cost-competitive
product line which serves as a strong foundation to support both a high growth
and high margin business model. It was noted that as a direct manufacturer of
both reagents and the Mago instrument, IVAX Diagnostics is positioned to earn
higher profit margins than its competitors.
In addition, it was observed that IVAX Diagnostics' recent growth is at the
top of its comparables, and its projected profitability is strong relative to
the industry. This indicates that IVAX Diagnostics may trade at attractive
multiples. Specifically, IVAX Diagnostics compares well in this regard to
certain competitors, which include publicly traded companies such as Bio-Rad
Laboratories, Inc., which is highly leveraged and facing the task of integrating
its acquisition of Pasteur Sanofi Diagnostics, Hemagen Diagnostics Inc., which
has experienced revenue declines due to a loss in market share, and Carter-
Wallace, Inc., which may be seen as focused in less aggressive industries. As a
result, given IVAX Diagnostics' recent and projected revenue growth, its niche
focus, and solid customer base, IVAX Diagnostics should trade well compared to
its competitors.
Moreover, according to its management, IVAX Diagnostics is attempting to
target a series of immunoassay testing niches believed to be under-served by
current vendors. By selecting smaller test niches, IVAX Diagnostics hopes to
avoid major sales competition against the billion-dollar in vitro diagnostics
manufacturers, such as Abbott Laboratories, Bayer Diagnostics, and Diagnostic
Products Corporation.
Furthermore, based upon the initial success of the Mago instrument, IVAX
Diagnostics has entered into a distribution agreement with Sigma Diagnostics, a
division of publicly-traded Sigma-Aldrich Corporation, a multi-billion dollar
corporation, which provides for Sigma to purchase a specified number of
instruments during a certain time period. IVAX Diagnostics' management believes
that its experience with Sigma can be considered as favorable validation of the
market acceptance for IVAX Diagnostics' products.
In October 2000, a due diligence visit was conducted in Springdale,
Arkansas. Representatives from Houlihan, Lokey met with Kevin Clark, Chief
Operation Officer of ImmunoVision, to discuss company operations, ImmunoVision's
relationship with Diamedix and Delta, and future projections. Several
observations were made from this meeting, and were communicated to our board of
directors.
First, ImmunoVision runs a unique, relatively high-margin business.
Essentially, it is a dominant supplier in a very focused niche of the diagnostic
test kit market. ImmunoVision supplies Diamedix and most of its competitors in
this niche market with the antigens needed for its autoimmune assays. While
ImmunoVision does not hold any patents on its technologies, the market is
difficult for potential competitors to penetrate due to the limited size of the
market and the fact that ImmunoVision has strong relationships with many of the
key participants.
Also, ImmunoVision provides Diamedix a significant cost advantage in the
selected tests within the autoimmune market. The autoimmune antigens supplied
to Diamedix are produced at a low cost relative to the retail
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price paid by Diamedix' competitors. Some of ImmunoVision's customers have
attempted to manufacture these antigens on their own, but have returned to
ImmunoVision because they cannot create the same quality of product in a cost-
efficient manner. Therefore, this enviable strategic relationship ensures
Diamedix a quality source of supply at a cost potentially less than its
competitors. The savings created through the strategic relationship with
ImmunoVision translates into a significant cost savings on those respective
individual autoimmune test kits at the Diamedix level.
The due diligence meeting yielded additional insights from Houlihan, Lokey,
which were discussed with our board of directors, and which suggested that
ImmunoVision is a strong company that is well positioned in its niche market.
Among other things, the company benefits from:
. a strong labor pool in northwest Arkansas through a strong relationship with
the University of Arkansas;
. relationships with key academicians within the diagnostics testing field in
order to keep abreast of developing technologies;
. a unique market niche with limited competition; and
. strong company management and experience.
Representatives from Houlihan, Lokey and our consultant discussed with our
board of directors the conclusion that ImmunoVision is a key component in the
vertically integrated business model created by IVAX Diagnostics. The
competitive advantages from having an internal source of antigen production are
numerous and position ImmunoVision to compete effectively on price, quality, and
service.
Further due diligence meetings were conducted over two days on October 25
and 26, 2000 at the headquarters of Delta in Pomezia Roma, Italy. These
meetings were attended by Houlihan, Lokey, our consultant, Mr. D'Urso and
members of Delta's management team.
On November 9, 2000, Randall Davis met with Messrs. D'Urso, Steele, and
Deutsch in Miami, Florida to discuss IVAX Diagnostics' business and tour the
Diamedix facility. Mr. D'Urso discussed the general business strategy of IVAX
Diagnostics and the mechanisms used in its Mago sales. Outside legal counsel
for our company discussed various outstanding issues with the IVAX Diagnostics
representatives, including the lack of a patent on the Mago system, the status
of its contract with Sigma, and the status of any FDA investigations.
On November 10, 2000, our board of directors held a meeting in Miami,
Florida. Representatives from Houlihan, Lokey made a formal presentation to our
board which covered an overview of the process to date, an overview of IVAX
Diagnostics, the industry, a due diligence summary and the valuation and
fairness analysis. Overall, our board of directors, Houlihan, Lokey and our
consultant concurred that meetings with the executive teams in Miami, Florida,
Springdale, Arkansas, and Pomezia Roma, Italy were thorough. Answers to
questions were provided openly and without much difficulty or delay. The
business objectives presented by executives of IVAX Diagnostics, Delta and
ImmunoVision appeared to be consistent with their respective companies' actual
market experience during the past two years. Thus, the observation communicated
to our board was that IVAX Diagnostics provided full disclosures about its
experience in marketing test kit assays and the automated Mago instrument in the
United States and Italy.
Our board of directors was also apprised of the competitive landscape which
suggested that many of IVAX Diagnostics' competitors are purchasing either
instruments or reagents manufactured by third parties. IVAX Diagnostics, on the
other hand, has a significant cost advantage in the diagnostic marketplace
because it manufactures its own reagents at Diamedix, and its own automated
immunoassay instrument at Delta. This vertical integration results in a
potential strategic advantage in both costs and processes, especially in its
respective market niche.
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In addition, Houlihan, Lokey discussed the results of the due diligence
efforts at the Delta facility. Several observations were made. First, Delta
manufactures the Mago instrument, which is subsequently resold to others such as
Sigma and internally to Diamedix. Moreover, Diamedix is aggressively pursuing a
purchasing plan known as "reagent rental," whereby the customer will pay
Diamedix a pre-agreed price for each test performed on the instrument. This
rental price will incorporate the cost of the reagent and the cost of the Mago
instrument. By owning Delta, IVAX Diagnostics is positioned to take advantage
of the cost advantage created from its self manufacture of instruments and
reagents.
During our investigation of Delta, it was also noted that Delta appears to
have a robust product line which can evolve and successfully incorporate new
testing technology as it becomes available in the marketplace. Consequently,
IVAX Diagnostics may be less exposed to technological obsolescence. In theory,
it can provide an ever-increasing menu of tests to its installed base of
automated immunoassay instruments. This approach has the potential for creating
a significant strategic advantage as a "razor" and "razor blade" business model.
Also, the Mago system provides a potential competitive advantage offering
the end-user an "open system" which enables other producers' test kits to be run
on it. The result is a proactive marketing and surveillance tool to assess the
frequency of new tests as opposed to the "closed systems" currently offered by
competitors such as Abbott, which restricts the capabilities of the instrument
to only test kits offered by the instrument manufacturer.
By mid-November of 2000, we had effectively reduced our workforce to six
active employees and reduced our operating expenses to a level that produced
operational revenues due to our interest income from our cash and cash
equivalents.
On November 20, 2000, our board of directors held a telephonic meeting.
During that meeting, representatives of Houlihan, Lokey provided an overview to
our board of the proposed strategic combination with IVAX Diagnostics, reviewed
several provisions of the definitive agreement and discussed the valuation
analysis prepared by Houlihan, Lokey. Houlihan, Lokey then delivered to our
board of directors its oral opinion, subsequently confirmed in writing in an
opinion dated as of November 21, 2000. For a discussion of Houlihan, Lokey's
opinion, see "Opinion of Financial Advisor" on page 37. Our board of directors
then reviewed its reasons for the business combination and, based upon the
information presented, unanimously approved the merger, the merger agreement and
the completion of the transactions related to the merger agreement as advisable
and in the best interests of our stockholders. The merger agreement was signed
on the morning of November 21, 2000. A joint press release announcing the
merger was issued in the afternoon of November 21, 2000.
On December 1, 2000, our board of directors authorized the complete shut-
down of our website and the further reduction of our workforce to preserve our
cash.
OUR REASONS FOR THE MERGER
Our board of directors considered various factors in unanimously approving
the merger, including those described below.
Industry Leadership Position. We believe that it is the goal of IVAX
Diagnostics to become a vertically integrated, market-driven entity that is able
to secure a leading market position in the specific market segments of the in
vitro diagnostics market that include autoimmune immunoassays, TORCH assays,
Epstein-Barr Virus assays, H. pylori, and Lyme assays.
International Growth Platform. The platform that IVAX Diagnostics offers
is international. IVAX Diagnostics develops, manufactures and markets
proprietary diagnostic reagents, instrumentation and software on a direct basis
in the United States and Italy through Diamedix, Delta, and Immunovision. This
established operating platform provides us with an immediate business operation,
which will provide an opportunity to significantly enhance stockholder value.
Complementary Acquisition and Growth Strategies. Our scope of resources
will be greatly expanded as a consequence of the merger. As a result of the
addition of our assets to the current business of IVAX Diagnostics,
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the combined company's acquisition and development currency will be
significantly enhanced in the form of both cash and stock.
Experienced Management. IVAX Diagnostics' management team is highly
experienced and well regarded. Our board of directors believes that the
strength and experience of the combined company's management team will benefit
from the substantially larger pool of resources available to the combined
company and that the combined company management team can effectively and
efficiently lead the combined company to maximize stockholder value.
Complementary Assets. Our assets consist primarily of cash and our status
as a public company. The merger will significantly expand our operations by
providing an international operating company, consisting of three operating
divisions coupled with a market proven, vertically integrated product and a
strong management team that will make efforts to implement an aggressive growth
strategy.
Stronger Pro Forma Financial Profile. After the merger, we will have a
significantly improved balance sheet and income statement than our current
company profile. Our board believes that this will result in an improved
ability to increase stockholder value through internal growth and strategic
acquisitions.
Opinion of Financial Advisor. Our board of directors also considered the
presentation and opinion of Houlihan, Lokey as described below, which provided
that, subject to and based upon the various considerations set forth in the
opinion, the merger is fair to our public stockholders from a financial point of
view.
Based on these and other factors that board members deemed relevant, our
board unanimously approved the merger agreement and the merger. Our board of
directors believes that the merger agreement and the merger are advisable and in
the best interest of our stockholders and recommends that our stockholders
approve the merger agreement and the merger.
The above discussion of the information and factors considered and given
weight by our board of directors is not intended to be exhaustive. However, the
discussion is believed to include all material factors considered by our board
of directors. In reaching the decision to approve and recommend approval to our
stockholders of the merger, our board of directors did not assign any relative
or specific weights to the factors considered. In addition, individual
directors may have given differing weights to different factors.
Our board of directors realizes that there are significant risks associated
with the merger. These risks include, among others, the risk that IVAX
Diagnostics will not be profitable and the risk that some of the potential
benefits set forth above may never be realized or that there may be significant
costs associated with realizing those benefits. These factors are discussed
more fully in this proxy statement under "Risk Factors" on page 7. On balance,
our board of directors believes that the positive factors should outweigh any
negative factors, although we can give no assurance in this regard.
OPINION OF FINANCIAL ADVISOR
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the valuation
methodologies utilized by Houlihan, Lokey in preparing their fairness opinion.
This summary is not a complete statement of the analyses and procedures applied,
the judgments made or the conclusion reached by Houlihan, Lokey or a complete
description of its presentation. Houlihan, Lokey believes, and has advised our
board of directors, that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create an incomplete view of the
process underlying its analyses and opinions.
We retained Houlihan, Lokey to act as our investment banker and to render
an opinion as to the fairness, from a financial point of view, of the merger to
our public stockholders. At the November 10, 2000 meeting of our board of
directors, Houlihan, Lokey presented the analysis described below and delivered
its opinion that, as of that
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date and based on the matters described in their opinion, the merger is fair to
our public stockholders from a financial point of view.
THE COMPLETE TEXT OF HOULIHAN, LOKEY'S OPINION IS ATTACHED TO THIS PROXY
STATEMENT. THIS SUMMARY OF THEIR OPINION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THEIR COMPLETE OPINION. WE URGE YOU TO READ THE COMPLETE OPINION IN
ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS
CONSIDERED AND THE ASSUMPTIONS MADE BY HOULIHAN, LOKEY.
Houlihan, Lokey's opinion to our board of directors addresses only the
fairness from a financial point of view of the consideration to be received by
our stockholders who will hold approximately 30% of our common stock after the
merger on a fully diluted basis, and does not constitute a recommendation to you
as to how you should vote at the special meeting.
In connection with the preparation of its opinion, Houlihan, Lokey made the
reviews, analyses and inquiries as they deemed necessary and appropriate under
the circumstances. Among other things, Houlihan, Lokey:
. reviewed our audited financial statements contained in our prospectus from
June 28, 1999 (inception) to December 31, 1999, and our unaudited financial
statements for the quarter ended September 30, 2000, which we have identified
as being the most current financial statements available;
. reviewed IVAX Diagnostics' audited financial statements for the last two
fiscal years ended December 31, 1999, and unaudited financial statements for
the quarter ended September 30, 2000, which we have identified as being the
most current financial statements available;
. reviewed the merger agreement;
. met with our senior management to discuss our operations, financial
condition, future prospects, and projected operations and performance;
. visited certain of our facilities and business offices;
. met with certain members of the senior management of IVAX Diagnostics to
discuss the operations, financial condition, future prospects, and projected
operations and performance of IVAX Diagnostics;
. visited certain facilities and business offices of IVAX Diagnostics;
. reviewed forecasts and projections prepared by IVAX Diagnostics' management
with respect to IVAX Diagnostics for the projected fiscal years December 31,
2000 through December 21, 2004;
. reviewed the historical market prices and trading volume for our publicly
traded securities;
. reviewed many other publicly available financial data for companies that
Houlihan, Lokey deemed comparable to IVAX Diagnostics, and publicly available
prices and premiums paid in other transactions that we considered similar to
the merger; and
. conducted such other studies, analyses, and inquiries as Houlihan, Lokey
deemed appropriate.
In assessing the financial fairness of the merger consideration to our public
stockholders, Houlihan, Lokey:
. independently valued the common equity of IVAX Diagnostics using widely
accepted valuation methodologies;
. analyzed the reasonableness of the consideration being offered in the merger;
and
. reviewed the valuation implications of the merger to our stockholders.
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Valuation of IVAX Diagnostics
The various approaches utilized by Houlihan, Lokey were the market multiple
approach, the comparable transactions approach, and the discounted cash flow
approach.
The market multiple approach is a method of determining the fair market
value of a company. The approach is one of determining operating levels, which
are considered to be representative of the future performance of the subject
company, and capitalizing these figures by an appropriate risk-adjusted rate.
The capitalization rate is an expression of what investors believe to be a fair
and reasonable rate of return for the particular security, given the inherent
risk of ownership. It also incorporates expectations of growth and rests on the
implicit assumption that some level of earnings will be generated by the
enterprise into perpetuity. The most common means of obtaining capitalization
rates is to examine publicly traded companies with similar risk and growth
profiles compared with the subject company and to use the public company
capitalization rates as a basis for choosing capitalization rates for the
subject company. Capitalization rates obtained in this manner are generally
expressed as ratios of the various operating levels, and are referred to as
market multiples.
The comparable transaction approach analyzes companies that have recently
been sold in the public marketplace. In this approach, the total price paid for
the subject company is related to earnings and cash flow figures which yield
implied transaction multiples. The acquired company is then compared with the
subject company on the basis of risk and expected return, and its transaction
multiples are used as a basis for selecting appropriate multiples for the
subject company.
The discounted cash flow approach is another method of determining the
value of an operating enterprise. This approach entails determining the
appropriate cash flows to discount, based upon projected income statements and
balance sheets for the enterprise. An appropriate discount rate for the
enterprise projections is selected based upon an analysis of alternative
investments, including public company discounts rates. The terminal value,
which is the value of the enterprise at the end of the projected period, is
determined by using a market multiple approach. The summation of the discounted
value of the projected periods and the discounted value of the terminal value
determines the subject company's enterprise value. To determine the fair market
value of the subject company's common equity, adjustments must be made for
interest bearing debt net of cash and any preferred equity.
Market Multiple Approach. Using publicly available information, Houlihan,
Lokey compared selected financial data of IVAX Diagnostics with similar data of
various companies engaged in businesses considered by Houlihan, Lokey to be
comparable to that of IVAX Diagnostics. The companies Houlihan, Lokey
considered comparable were Abbott Laboratories, Bio-Rad Labs, Carter-Wallace,
Inc., Diagnostics Products Corporation, Diametrics Medical, Inc., Hemagen
Diagnostics, Hycor Biomedical, Meridian Diagnostics, Inc., Sigma-Aldrich, and
Ventana Medical Systems, Inc. Houlihan, Lokey reviewed certain diagnostics test
kits companies other than the companies mentioned above, but determined that
these other companies were not comparable to IVAX Diagnostics due to differences
in the type of business, end-markets served and operating characteristics. For
each of the comparable companies, Houlihan, Lokey calculated, reviewed and
analyzed numerous financial and operating performance ratios, as well as
numerous market capitalization ratios, such as the enterprise value, or EV,
(aggregate equity plus total interest-bearing debt less cash) to the latest
twelve months (based on the most recent quarterly information publicly available
as of November 10, 2000) revenues and latest twelve months earnings before
interest, taxes, depreciation and amortization, or EBITDA, and earnings before
interest and taxes, or EBIT.
Three of the ten comparable companies were unprofitable on an EBIT and
EBITDA basis. As a result, these three companies were excluded from
consideration in evaluating earnings multiples. Analyst estimates of year
forward revenue, EBITDA or EBIT results were used to calculate forward multiples
for six of the ten comparable companies for the 2001 projected fiscal year and
estimates were available for three of the ten companies for the 2002 projected
fiscal year.
The review of the comparable companies indicated the following:
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<TABLE>
<CAPTION>
--------------------------Latest Twelve Months-----------------------
EV/Revenues EV/EBITDA (1) EV/EBIT (1)
---------------------------------------------------------------------
<S> <C> <C> <C>
Low 0.84 x 6.2 x 9.8 x
High 10.39 x 23.3 x 65.4 x
Median 2.51 x 11.2 x 15.7 x
Mean 3.61 x 13.1 x 22.9 x
</TABLE>
(1) Three companies' results were excluded from the range for reasons described
above, including Diametrics Medical, Hemagen Diagnostics, and Ventana Medical
Systems.
<TABLE>
<CAPTION>
--------------------------Next Fiscal Year---------------------------
EV/Revenues EV/EBITDA EV/EBIT
---------------------------------------------------------------------
<S> <C> <C> <C>
Low 2.12 x 5.7 x 7.9 x
High 5.53 x 22.0 x 35.9 x
Median 4.36 x 11.1 x 13.4 x
Mean 3.88 x 12.3 x 16.5 x
Next Fiscal Year +1
EV/Revenues
-------------------
Low 2.12 x
High 5.53 x
Median 4.36 x
Mean 3.88 x
</TABLE>
All multiples were based on closing stock prices on November 8, 2000. Applying
these multiples to the representative levels of revenue and earnings for IVAX
Diagnostics indicates an enterprise value between $35.4 and $135.9 million with
a median value of $68.7 million.
Comparable Transaction Approach. Houlihan, Lokey reviewed certain recent
mergers and acquisition transactions reported in SEC filings, public company
disclosures, press releases, industry and popular press reports, and databases
that involved companies comparable to IVAX Diagnostics. Houlihan, Lokey
reviewed nine transactions that had occurred in the diagnostics test kits
industry since July 1999 and had sufficient financial information available for
analysis.
Houlihan, Lokey compared EVs (in the selected transactions as multiples
sales), EBIT, and EBITDA for the transactions. Information regarding five
transactions yielded meaningful enterprise value to revenue multiples; only two
transactions provided significant enterprise value to EBITDA multiples; only one
transaction indicated a valuable enterprise value to EBIT multiple. The
summary of the transaction multiples analyses is as follows:
<TABLE>
<CAPTION>
--------------------------Latest Twelve Months-----------------------
EV/Revenues EV/EBITDA EV/EBIT
----------------------- --------------------- -------------------
<S> <C> <C> <C>
Low 1.60x 7.0x 12.6x
High 3.88x 7.7x 12.6x
Median 1.80x 7.4x 12.6x
Mean 2.29x 7.4x 12.6x
</TABLE>
Given the lack of publicly available information on most of the transactions
Houlihan, Lokey reviewed, Houlihan, Lokey did not rely on the above analysis as
an indication of IVAX Diagnostics' value.
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Discounted Cash Flow Approach. Using the discounted cash flow approach,
Houlihan, Lokey estimated the present value of the future cash flows that IVAX
Diagnostics could be expected to produce over a four-year period in fiscal years
2000 through 2004 under the various assumptions and in accordance with
management forecasts and estimates as to future performance assuming that IVAX
Diagnostics continued to operate on a stand-alone basis and without giving
effect to the merger.
The discounted cash flow was calculated assuming discount rates ranging
from 20% to 30%, which reflects the assumed risk of the projected cash flows,
and was comprised of the sum of the present values of:
. the projected free cash flows for the years 2000 through 2004; and
. the anticipated future 2003 exit value based upon a range of multiples of
6.0x to 8.0x of its future 2004 EBITDA.
This analysis produced value indications ranging from $78.1 million and $104.1
million.
Fairness of consideration
To determine the fairness of the merger to our public stockholders from a
financial point of view, Houlihan, Lokey compared the value implied by IVAX
Diagnostics' offer to our publicly traded stock price at that time.
Houlihan, Lokey concluded that the combined value of us and IVAX
Diagnostics, giving consideration to the valuation indications of IVAX
Diagnostics, the pro forma cash balance of the combined entity and the estimated
transaction costs, was between $80.7 million and $144.0 million. On a fully
diluted basis, this indicates a value of $2.74 per share to $4.88 per share.
The low end of these value indications represent a 96.3% premium to the closing
price of our common stock 60-days prior to the date of the opinion, a 50.5%
premium to the price 30-days prior to the opinion, and an 88% premium to the
closing price on the day prior to the opinion.
Assessment of our strategic alternatives to the merger
In evaluating the fairness of the merger, from a financial point of view,
Houlihan, Lokey considered the expected value to us of completing the merger and
certain other alternatives to the merger. With regard to each alternative,
Houlihan, Lokey's analysis qualitatively considered the valuation implications
to us, the probability of successfully completing the alternative, and the cost
and time to implement. In assessing strategic alternatives available, Houlihan,
Lokey also considered the majority stockholders' agreement to tender their
shares.
For purposes of this analysis Houlihan, Lokey considered the following
strategic alternatives:
. status quo;
. sale of us to another buyer; and
. our liquidation.
Houlihan, Lokey noted that of the strategic alternatives considered, the merger
appears to provide the greatest potential value to us.
For purposes of its opinion, Houlihan, Lokey relied upon and assumed the
accuracy, completeness and fairness of the financial statements and other
information provided to it by us and IVAX Diagnostics or otherwise made
available to Houlihan, Lokey and did not assume responsibility for the
independent verification of that information. Houlihan, Lokey relied upon the
assurances of the financial management of IVAX Diagnostics that:
. the information provided to Houlihan, Lokey by them was prepared on a
reasonable basis;
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. the financial planning data and other business outlook information reflects
their best currently available estimates;
. they were not aware of any information or facts that would make the
information provided to Houlihan, Lokey incomplete or misleading; and
. there were no material changes in IVAX Diagnostics' financial condition,
results of operations, business or prospects since the date of the last
financial statements or information made available to Houlihan, Lokey.
Houlihan, Lokey drew no specific conclusion from its comparable company,
comparable transaction, discounted cash flow and market trading analyses, but
subjectively factored its observations from these analyses into its qualitative
assessment of the relevant facts and circumstances. Houlihan, Lokey analyzed
IVAX Diagnostics as a going concern. Houlihan, Lokey's analyses indicated that
the consideration to be received by our public stockholders in connection with
the merger is fair from a financial point of view.
Houlihan, Lokey expressed no opinion as to the price at which shares of
IVAX Diagnostics common stock would have traded or at which these shares may
trade at any future time. The opinion is based on information available to
Houlihan, Lokey and the facts and circumstances as they existed and were subject
to evaluation on the date of the opinion. Events occurring after that date
could materially affect the assumptions used in preparing the opinion.
Houlihan, Lokey's opinion is based on the business, economic, market and other
conditions as they existed as of November 10, 2000 and on the projected
financial information provided to Houlihan, Lokey as of such date. Except as
set forth above, Houlihan, Lokey did not make any independent appraisal of the
specific properties or assets of IVAX Diagnostics.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan, Lokey in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan, Lokey made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan,
Lokey believes that its analyses and summary set forth herein must be considered
as a whole. In its analysis, Houlihan, Lokey made numerous assumptions with
respect to IVAX Diagnostics' industry performance, general business, economic,
and market and financial conditions, many of which are beyond IVAX Diagnostics'
control. The estimates contained in such analyses are not necessarily indicative
of actual values or predictive of future results or values, which may be more or
less favorable than suggested by such analyses. However, there were no specific
factors reviewed by Houlihan, Lokey that did not support its opinion.
Additionally, analyses relating to the value of businesses or securities are not
appraisals. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty.
Houlihan, Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. As part of its investment banking business,
Houlihan, Lokey is continually engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, leveraged buyouts,
private placements of debt and equity, corporate reorganizations, employee stock
ownership plans, corporate and other purposes. We selected Houlihan, Lokey
because of its investment banking experience and expertise in performing
valuation and fairness analysis. Houlihan, Lokey does not beneficially own nor
has it ever beneficially owned any interest in us.
Fees and Expenses. We retained Houlihan, Lokey as of June 1, 2000 to act
as our investment banker as well as to analyze the fairness of the merger
consideration to our public stockholders from a financial point of view. We have
agreed to pay Houlihan, Lokey a fee of $150,000 for its fairness opinion and
additional investment banking fees aggregating $725,000 in connection with the
merger, plus reasonable out-of-pocket expenses incurred in connection with the
merger. We have also agreed to indemnify Houlihan, Lokey and its directors,
officers, agents and employees against certain liabilities and expenses in
connection with the rendering of its services.
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RECOMMENDATIONS OF OUR BOARD OF DIRECTORS
Our board of directors recommends that you vote FOR each of the following
proposals:
. approving the merger and merger agreement; and
. approving an amendment to our articles of incorporation to increase the
number of authorized shares of our common stock and change our name to IVAX
Diagnostics.
EFFECTS ON COMMON STOCK
Our Common Stock. Each share of our common stock that is issued and
outstanding at the effective time of the merger will remain issued and
outstanding after the merger. However, because additional shares of our common
stock will be issued as a result of the merger and related transactions, your
equity interest in us will be substantially diluted from 100% of our issued and
outstanding common stock prior to the merger to 30% of our issued and
outstanding common stock immediately after the merger.
IVAX Diagnostics' Common Stock. Each share of IVAX Diagnostics' common
stock that is issued and outstanding at the effective time of the merger will be
automatically converted into our common stock in accordance with an exchange
ratio, or formula. The exchange ratio is a fraction, the numerator of which is
the number of shares of our common stock that IVAX will receive under the merger
agreement. This number will consist of the 20 million shares of common stock
that IVAX is entitled to receive plus any additional shares that IVAX will
receive if we fall short of our minimum cash holding requirements. That total
number of shares will then be divided by the number of shares of IVAX
Diagnostics' common stock that are issued and outstanding at the effective time
of the merger. The result will be the number of shares of our common stock into
which each share of IVAX Diagnostics' common stock may be converted. Once the
shares of IVAX Diagnostics' common stock are converted into shares of our common
stock, the shares of IVAX Diagnostics' common stock will no longer be deemed to
be issued and outstanding and will be automatically cancelled. IVAX will
surrender its certificates of IVAX Diagnostics' common stock to us, and will be
entitled to receive the appropriate number of shares of our common stock as
determined by the exchange ratio described above.
FRACTIONAL SHARES
We will not issue any fractional shares as a result of the merger. We will
not pay any compensation as a result of fractional shares. Instead, fractional
shares will be rounded down to the nearest whole number.
STOCK OPTIONS
At the effective time of the merger, and subject to any restrictions
imposed by applicable laws, we will automatically assume commitments of IVAX
Diagnostics with respect to warrants, stock options, convertible or exchangeable
securities, pre-emptive rights, phantom stock, stock appreciation rights, and
similar rights. In addition, we will assume each plan providing for the
issuance or grant of IVAX Diagnostics common stock, and will amend such plans to
reflect the occurrence of the merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Tax Opinions. Our obligation to complete the merger is conditioned upon
the receipt of a tax opinion from our counsel Akin, Gump, Strauss, Hauer & Feld,
L.L.P. No ruling from the IRS with respect to the merger has been, or will be,
sought. The tax opinion will not prevent the IRS from adopting a contrary
position. The tax opinion will assume the absence of changes in existing facts
and relies on customary assumptions, representations, and covenants, including
those continued in certificates of officers of us, IVAX and others.
Tax Implications to Stockholders. The tax opinion will state that, except
as limited by the matters discussed below under "Assumption and Limitations" and
assuming the merger is completed in the manner contemplated in this proxy
statement and in accordance with the merger agreement:
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. because your shares will remain unchanged as a result of the merger, you will
not recognize any gain or loss on your common stock for federal income tax
purposes as a result of the merger;
. the aggregate tax basis of your common stock will not change as a result of
the merger; and
. the holding period of your common stock will not change as a result of the
merger.
Tax Implications to Us and IVAX. The merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code. Neither we nor IVAX will recognize any gain or loss
for federal income tax purposes as a result of the merger.
Assumptions and Limitation. The above discussion assumes, and the tax
opinion will assume, that you hold your shares as capital assets. The above
discussion does not address, and the tax opinion will not address, all aspects
of federal income taxation that may be important to you in light of your
particular circumstances. Additionally, the above discussion is, and tax
opinion will be, based on laws, regulations, rulings, and decisions in effect on
the date of this proxy statement, all of which are subject to change, possibly
with retroactive effect, and to differing interpretations. Further, the
discussion does not, and the tax opinion will not, address all aspects of
federal taxation that may be applicable to holders covered by special rules,
such as:
. holders who are not United States persons;
. financial institutions;
. tax-exempt organizations;
. insurance companies;
. dealers or brokers in securities;
. holders who held their stock as part of a hedge, appreciated financial
position, straddle, or conversion transaction; or
. holders who acquired their shares upon the exercise of employee stock options
or otherwise as compensation.
THE DISCUSSION ABOVE ADDRESSES, AND THE TAX OPINION WILL ADDRESS, THE
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO HOLDERS NOT COVERED BY
SPECIAL RULES, BUT DOES NOT AND WILL NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.
THIS DISCUSSION DOES NOT, AND THE TAX OPINION WILL NOT, ADDRESS THE FOLLOWING:
. THE TAX CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT ON, INDIVIDUAL
CIRCUMSTANCES;
. ANY NON-INCOME TAX OR ANY FOREIGN, STATE, OR LOCAL TAX CONSEQUENCES OF THE
MERGER; OR
. THE TAX CONSEQUENCES OF ANY TRANSACTION OTHER THAN THE MERGER.
WE STRONGLY URGE YOU TO CONSULT WITH YOUR TAX ADVISOR TO DETERMINE THE
PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL, OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES OF THE MERGER TO YOU.
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ACCOUNTING TREATMENT
We believe that this merger will be treated as a capital transaction
equivalent to the issuance of stock by IVAX Diagnostics for our net monetary
assets (our net monetary assets were approximately $24,867,000 as of September
30, 2000), accompanied by a recapitalization of IVAX Diagnostics.
REGULATORY APPROVALS
Pursuant to the HSR Act, the merger cannot be completed until after we have
given certain information and materials to the Federal Trade Commission and a
required waiting period has expired or been terminated. We and IVAX expect to
submit pre-merger notification and report forms on or about January 19, 2001.
The FTC has the authority to challenge the merger on antitrust grounds by
seeking a Federal court order enjoining the merger pending an administrative
hearing.
APPRAISAL RIGHTS
Holders of our common stock will not have appraisal rights under Section
262 of the Delaware General Corporation Law.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS AFTER THE MERGER
Board of Directors. After the merger, our board of directors will consist
of seven directors. Five members of the board will be designated by IVAX, and
two will be designated by us. Our two board members will be Jay Raubvogel and
Randall Davis, who currently serve on our board of directors. On or prior to
the effective date of the merger, all of the members of our current board,
except Jay Raubvogel and Randall Davis, will deliver their resignations to us.
The remaining directors will then fill the vacancies created by the resignations
with the five designees of IVAX at and as of the effective time of the merger.
Executive Officers. On or prior to the effective date of the merger, all
of our current officers will be terminated. It is anticipated that all of the
officers of IVAX Diagnostics will remain with the combined company.
Upon completion of the merger, we expect the following individuals to serve
as executive officers in the capacities set forth below:
<TABLE>
<CAPTION>
CURRENT COMPANY
NAME AGE POSITION AFFILIATION
------------------- ----------- ---------------------------------------------------------- -------------------------
<S> <C> <C> <C>
Giorgio D'Urso 65 President and CEO IVAX Diagnostics
Duane M. Steele 50 Vice President - Business Development IVAX Diagnostics
Mark Deutsch 38 Chief Financial Officer and Vice President -Finance IVAX Diagnostics
</TABLE>
DIRECT OR INDIRECT INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
Upon execution of the merger agreement, we paid a director, Mr. Davis,
$100,000 in cash, and we granted options to acquire 50,000 shares of our common
stock at an exercise price of $1.81 for a period of five years to two of our
directors, Messrs. Walke and Raubvogel. In addition, we have agreed to settle
the employment agreements upon termination of the employment of our executives
upon completion of the merger, Richard Kandel and Mark Voorhis, for $400,00 and
$161,000, respectively.
COSTS AND EXPENSES OF THE MERGER
We estimate that merger-related fees and expenses, consisting of fees and
expenses of our investment bankers, consultants, attorney, and accountants,
financial printing and related charges, severance costs, and travel expense,
will total approximately $2.2 million, assuming the merger is completed. In
addition, we will pay finders fees of $200,000 to Harter Financial, Inc. and
$200,000 to GBI Capital Partners upon completion of the merger.
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THE MERGER AGREEMENT
This section describes various material provisions of the merger agreement.
Because the description of the merger agreement contained in this proxy
statement is a summary, it does not contain all the information that may be
important to you. You should read carefully the entire agreement and plan of
merger attached to this proxy statement before you decide how to vote.
THE MERGER
The merger agreement provides that IVAX Diagnostics will merge with and
into us, and, as a result, we will automatically acquire all of IVAX
Diagnostics' assets and assume all of IVAX Diagnostics' liabilities and
obligations. After the merger, we will change our name from b2bstores.com Inc.
to IVAX Diagnostics, Inc. and we will no longer engage in the businesses we had
before the merger; rather, after the merger, our only businesses will be the
businesses of IVAX Diagnostics before the merger.
TIMING OF CLOSING
The closing of the merger will occur as promptly as practicable after the
conditions set forth in the merger agreement have all been satisfied or waived.
Articles of merger will be filed with the Secretary of State of Florida and a
certificate of merger will be filed with the Secretary of State of Delaware at
the time of the closing, after which the merger will be effective.
MERGER CONSIDERATION
As consideration for the merger, we will issue to IVAX 20 million shares of
our common stock. Further, if we do not have a minimum of $22.0 million in cash
or cash equivalents and a minimum of $22.0 million in stockholders' equity as of
the effective time of the merger after giving effect to the payment of all of
our transaction expenses, the accruals made for the termination of our existing
business, and any associated payments, then IVAX may, at its sole option,
terminate the merger agreement or (assuming all other conditions are satisfied
or waived) complete the merger. In such an instance, if IVAX chooses to waive
the condition and complete the merger, we would then be required to issue to
IVAX one additional share of our common stock for each dollar by which $22.0
million exceeds our actual cash and cash equivalents at the time of closing.
To illustrate, if, at the effective time of the merger, our cash and cash
equivalents are only $21.6 million, then we would be $400,000 short of meeting
the cash holding requirements. If IVAX were to agree to waive that condition
and complete the merger, then IVAX would receive from us an additional 400,000
shares of our common stock. Therefore, we would be required to give IVAX a
total of 20,400,000 shares of our common stock, which would consist of the 20
million shares that IVAX is entitled to receive under the merger agreement and
the additional 400,000 shares.
CONDITIONS TO THE COMPLETION OF THE MERGER
The merger is contingent upon the fulfillment of several conditions. If
we, IVAX or IVAX Diagnostics fail to fulfill any of our respective conditions by
June 30, 2001, then the other party may, in its sole discretion, terminate the
merger agreement or waive the condition and proceed with the merger.
Mutual Closing Conditions. Each party's obligation to complete the merger
is subject to the satisfaction or waiver of each of the following conditions:
. we must call a special meeting of stockholders, at which our stockholders
must consider, vote upon and approve each of the merger and merger agreement,
the increase in common stock, and the name change;
. all applicable HSR Act waiting periods must have expired or been terminated;
and
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. there must be no litigation or other governmental action which either
prohibits or seeks to prohibit the merger.
Additional Closing Conditions for Our Benefit. Our obligation to complete
the merger is subject to the following additional conditions:
. the representations and warranties of IVAX and IVAX Diagnostics as set forth
in the merger agreement must be accurate in all material respects as of the
closing;
. IVAX and IVAX Diagnostics must have performed in all material respects all of
their obligations set forth in the merger agreement;
. IVAX and IVAX Diagnostics must have delivered officer's certificates to us
and our counsel;
. IVAX and IVAX Diagnostics must have obtained all material required consents
in connection with the merger;
. we must have received an opinion of counsel to IVAX and IVAX Diagnostics
reasonably acceptable to us and our counsel;
. we must have received an opinion of our counsel that the merger will
constitute a transaction described in Section 368(a) of the Internal Revenue
Code;
. IVAX Diagnostics must have, at the time of closing, after the payment of all
its expenses related to the merger, at least $2.0 million in cash and cash
equivalents and at least $4.4 million in stockholders' equity;
. the fairness opinion that we received from Houlihan, Lokey must be reaffirmed
at closing, and must not have been amended, modified or altered without the
prior approval of our board of directors;
. all intercompany indebtedness between IVAX and its affiliates, on one hand,
and IVAX Diagnostics, on the other hand, must have been eliminated;
. we must have entered into a use of name license agreement with IVAX;
. we must have received a general release from IVAX; and
. no event may have occurred, and no condition may exist, which has had a
material adverse effect on IVAX Diagnostics or any of its subsidiaries.
Additional Closing Conditions for IVAX' Benefit. The obligations of IVAX
and IVAX Diagnostics to complete the merger is subject to the following
additional conditions:
. our representations and warranties as set forth in the merger agreement must
be accurate in all material respects as of the closing;
. we must have performed in all material respects all of our obligations set
forth in the merger agreement;
. we must have delivered officer's certificates to IVAX and their counsel;
. we must have obtained all material required consents in connection with the
merger;
. IVAX must have received an opinion from our counsel reasonably acceptable to
them and their counsel;
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. IVAX must have received an opinion from their counsel that the merger will
constitute a transaction described in Section 368(a) of the Internal Revenue
Code;
. we must have at the time of closing at least $22.0 million in cash and cash
equivalents and at least $22.0 million in stockholders' equity after the
payment of all of our expenses related to the merger, and after giving effect
to all accruals made for the termination of our existing business and for the
payment of all obligations associated with the termination of our existing
business;
. all of our directors, officers and employees must have resigned or been
terminated, except Messrs. Raubvogel and Davis, who will remain as our
directors;
. we and IVAX must have received a written waiver from GHB Capital Partners and
any other firm that performed investment banking services for us waiving all
future and ongoing rights that they may have related to us, including GHB's
right to appoint a representative to our board of directors; and
. no event may have occurred, and no condition may exist, which has had a
material adverse effect on us.
TERMINATION OF THE MERGER AGREEMENT
We, IVAX and IVAX Diagnostics may mutually agree to terminate the merger
agreement without completing the merger, even if our stockholders have already
approved the merger. In addition, we may terminate the merger agreement:
. at any time after June 30, 2001 if, by that date, any of the mutual closing
conditions or closing conditions for our benefit have not been satisfied or
waived;
. if there has been any material breach, which cannot be cured by June 30,
2001, of any representation, warranty or covenant made by IVAX or IVAX
Diagnostics in the merger agreement; or
. if our board of directors, after consultation with outside legal counsel,
determines that failure to terminate the merger agreement would be
inconsistent with its fiduciary duties to our stockholders and, in good
faith, withdraws or modifies its recommendation of the approval of the merger
agreement and the merger in a manner adverse to IVAX or IVAX Diagnostics.
IVAX may terminate the merger agreement:
. at any time after June 30, 2001, if, by that date, any of the mutual closing
conditions or closing conditions for their benefit have not been satisfied or
waived;
. if there has been any material breach, which cannot be cured by June 30,
2001, of any representation, warranty or covenant made by us in the merger
agreement;
. if any person (together with that person's affiliates), after the date
hereof, becomes the beneficial owner of five percent or more of the aggregate
voting power of all of our issued and outstanding capital stock, and that
person has not, within two business days after the acquisition, delivered to
IVAX a voting agreement, in which that person has agreed to vote all shares
of our capital stock that the person, along with its affiliates, beneficially
owns, in favor of the merger and all of the related proposals; or
. if our board of directors withdraws, modifies or changes its recommendation
of the merger agreement and the merger in a manner adverse to IVAX or IVAX
Diagnostics, or our board recommends to our stockholders a competing
transaction.
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TERMINATION FEE
We must pay to IVAX a termination fee of $1.0 million in cash as liquidated
damages if the merger agreement is terminated for any of the following reasons:
. at any time after June 30, 2001, if, by that date, any of the mutual closing
conditions or closing conditions for the benefit of IVAX and IVAX Diagnostics
have not been satisfied or waived;
. if there has been any material breach, which cannot be cured by June 30,
2001, of any representation, warranty or covenant made by us in the merger
agreement;
. if any person (together with that person's affiliates), after the date
hereof, becomes the beneficial owner of five percent or more of the aggregate
voting power of all of our issued and outstanding capital stock, and that
person has not, within two business days after the acquisition, delivered to
IVAX a voting agreement, in which that person has agreed to vote all shares
of our capital stock that the person, along with its affiliates, beneficially
owns, in favor of the merger and all of the related proposals;
. if our board of directors withdraws, modifies or changes its recommendation
of the merger agreement and the merger in a manner adverse to IVAX or IVAX
Diagnostics, or our board recommends to our stockholders a competing
transaction; or
. if our board of directors, after consultation with outside legal counsel,
determines that failure to terminate the merger agreement would be
inconsistent with its fiduciary duties to its stockholders and, in good
faith, withdraws or modifies its recommendation of the approval of the merger
agreement and the merger in a manner adverse to IVAX or IVAX Diagnostics.
IVAX must pay to us a termination fee of $1.0 million in cash as liquidated
damages if the merger agreement is terminated for any of the following reasons:
. at any time after June 30, 2001 if, by that date, any of the mutual closing
conditions or closing conditions for our benefit have not been satisfied or
waived; or
. if there has been any material breach, which cannot be cured by June 30,
2001, of any representation, warranty or covenant made by IVAX or IVAX
Diagnostics in the merger agreement.
NO SOLICITATION
We have agreed that we will not solicit, initiate or encourage any
negotiations or discussions related to a competing transaction. A competing
transaction is any of the following involving us (other than the merger):
. merger, consolidation, business combination or similar transaction;
. sale, lease, transfer or other disposition of 15% or more of our assets; or
. tender offer or exchange offer for 15% or more of our outstanding voting
securities.
We have also agreed that we will promptly notify IVAX if any significant
discussions or negotiations relating to any competing transaction takes place.
However, IVAX may not interfere with or take any action adverse to any competing
transaction.
In addition, unless required by law, we have agreed that we will not share
any information related to our business and properties that is not typically
shared, and we may not allow any person access to our properties, corporate
books, or records. However, our board may provide information to or enter into
negotiations with any person in connection with an unsolicited proposal by that
person if:
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. our board of directors, after consulting our outside legal counsel,
determines, in good faith, that its duties to our stockholders require it to
do so; and
. prior to providing information to, or entering into discussions or
negotiations with, such person, we obtain a signed confidentiality agreement
on terms no less favorable to us than the terms contained in our
confidentiality agreement with IVAX.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties by us as to
ourselves, and by IVAX and IVAX Diagnostics as to IVAX Diagnostics and its
subsidiaries (and in certain instances, IVAX), concerning, among other things:
. organization, standing and authority;
. corporate authorization to enter into the merger and related transactions;
. enforceability of the merger agreement and plan of merger;
. capitalization and validity of common stock;
. significant subsidiaries;
. the absence of violations of organizational documents;
. the absence of additional required consents;
. the absence of undisclosed liabilities;
. compliance with court orders and laws;
. accuracy of financial statements and reports filed with the SEC;
. the absence of undisclosed litigation;
. the absence of certain changes or events;
. the consent of governmental authorities;
. tax matters;
. employee benefits and labor matters;
. the absence of violations or liabilities under environmental laws;
. rights to use intellectual property;
. good title to real property;
. insurance matters;
. absence of brokers and finders; and
. the inapplicability of Sections 203 and 262 of the Delaware General
Corporation Law to the merger.
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OTHER RELATED AGREEMENTS
VOTING AGREEMENT
We, IVAX, IVAX Diagnostics, and holders of at least 2,943,400 shares of our
common stock (all of whom are material holders of our stock) have entered into a
voting agreement. Under this voting agreement, these stockholders agree to
attend the special meeting and any adjournment or postponement of the meeting,
and to vote their shares:
. in favor of the merger and the approval and adoption of the terms under the
merger agreement, and any other actions required to effectuate the merger;
. against any action or agreement that is reasonably likely to result in a
material breach of any covenant, representation, warranty, or other
obligation of ours under the voting agreement or the merger agreement; and
. against any competing transaction.
In addition, each supporting stockholder, by signing the voting agreement:
. revoked any proxy previously granted to any other party with regard to its
shares of our common stock; and
. appointed IVAX as its proxy to vote all of its shares of our common stock at
the special meeting or any adjournment.
The appointment of IVAX as proxy is irrevocable under the voting agreement until
the earlier of the effective date of the merger, or June 20, 2001.
Nothing in the voting agreement will restrict, limit or prohibit any
supporting stockholders, or any individuals representing supporting stockholders
or our board of directors, from exercising (in their capacities as directors or
officers), their fiduciary duties to us. Furthermore, nothing in the voting
agreement will require any individuals, in their capacity as our officers, to
take any action opposed to, or to fail to take any action in accordance with,
instructions or directions of our board of directors to be undertaken in the
exercise of their fiduciary duties.
REGISTRATION RIGHTS AGREEMENT
Upon completion of the merger, we will enter into a registration rights
agreement with IVAX that requires us to file a registration statement on Form
S-3 (at any time after one year, and before the earlier of five years following
the completion of the merger or such time at which all the shares of our common
stock owned by IVAX can be sold in any three-month period without registration)
to register not less than $1.0 million of our common stock owned by IVAX.
Additionally, IVAX may "piggyback" on registrations initiated by us or other
holders exercising similar demand registration rights. We may delay the filing
of any registration statement for 120 days if we determine in good faith that to
effect such registration statement would be detrimental to us or our
stockholders. We have agreed to pay all fees and expenses in connection with
such registrations, except for any underwriting discounts and commissions. If
we file a registration statement in connection with an underwritten offering,
IVAX has agreed to sign a customary underwriting agreement in connection with
such registrations and its rights to register shares is subject to a proration
provision if the underwriters determine that the success of the offering will be
jeopardized from too many shares being included in the offering. Shares to be
sold by us on any registered offering will be included prior to the inclusion of
any other shares of our common stock held by IVAX. The registration rights
agreement also contains customary mutual indemnification and market stand-off
provisions. IVAX can assign or transfer its rights under the agreement.
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SHARED SERVICES AGREEMENT
In connection with the merger, we will enter into a shared services
agreement with IVAX pursuant to which IVAX will continue to provide
administrative and management services previously provided by IVAX to IVAX
Diagnostics prior to the merger at IVAX' cost plus 15% for a period of three
months. These services include payroll, including printing paychecks and making
associated tax filings; treasury, including cash management services such as
disbursements, receipts, banking and investing; insurance, including procuring
and administering policies; human resources, including administering employee
benefits and plans; financial reporting, including public reports, income taxes;
and, information systems, including network and website hosting, phone and data
systems, software licenses and information systems support.
USE OF NAME LICENSE AGREEMENT
We will enter into a use of name license with IVAX that grants us a non-
exclusive, royalty free license to use the name "IVAX." The license is not
terminable by IVAX for a one-year period. After the first year, IVAX may
terminate the license upon 90 days' written notice. Upon early termination of
the agreement, we must take all steps reasonably necessary to conduct a
stockholders' meeting to approve a name change our name as soon as is
practicable. If IVAX abandons its use of the name, IVAX must transfer all
rights to the name to us.
PROPOSALS
APPROVAL OF THE MERGER AND THE MERGER AGREEMENT
This proxy statement and the merger agreement attached to this proxy
statement describe the proposed merger. The affirmative vote of a majority of
our outstanding common stock is required to approve the merger and the merger
agreement.
Our board of directors has unanimously recommended that you vote FOR the
proposal to approve the merger and merger agreement.
AUTHORIZING ADDITIONAL SHARES OF COMMON STOCK AND NAME CHANGE
When we complete the merger, we will issue to IVAX at least 20 million
shares of our common stock. In addition, because IVAX Diagnostics is merging
into us, we will assume commitments of IVAX Diagnostics with regard to options,
warrants, convertible securities, pre-emptive rights, stock appreciation rights,
or other similar rights, which will require us to issue common stock to holders
of these rights under certain circumstances.
Currently, we have 25 million shares of common stock authorized. Of those
25 million shares, 8,621,643 were issued and outstanding as of January 1, 2001.
As a result, we do not currently have enough authorized shares of common stock
to satisfy our commitments under the merger agreement and we will need to amend
our certificate of incorporation in order to authorize more shares of common
stock. This proxy statement includes a proposal to increase the authorized
shares of our common stock from 25 million shares to 50 million shares.
The merger agreement requires that we change our name to "IVAX Diagnostics,
Inc." The name "IVAX Diagnostics, Inc." will more accurately describe our
business after the merger since, as a result of the merger, we will assume the
business of IVAX Diagnostics, and will operate only that business afterwards.
The NASDAQ SmallCap Market has informed us that if and when our supplemental
listing application is approved, our common stock will be traded under the
symbol "___."
A copy of the proposed certificate of amendment to our certificate of
incorporation, which incorporates these changes, is attached to this proxy
statement as Annex C.
The affirmative vote of a majority of our outstanding common stock is
required to approve this proposal.
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Our board of directors has unanimously recommended that you vote FOR the
proposed name change. If this proposal is not approved by the affirmative vote
of a majority of our outstanding common stock, then we will be unable to
complete the merger.
ACCOUNTANTS
The financial statements of b2b incorporated by reference in the proxy
statement for the year ended December 31, 1999 have been incorporated in
reliance on the report of BDO Seidman, LLP, independent public accountants,
given on the authority of BDO Seidman, LLP as experts in auditing and
accounting.
The audited consolidated balance sheets as December 31, 1998 and 1999 and
the related audited consolidated statements of operations, stockholder's equity
and cash flows for each of the three years in the period ended December 31, 1999
of IVAX Diagnostics, Inc. included in this proxy statement have been audited by
Arthur Andersen, LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
LEGAL MATTERS
Certain legal matters in connection with the merger will be passed upon, on
our behalf, by Akin, Gump, Strauss, Hauer & Feld, L.L.P.
FUTURE STOCKHOLDER PROPOSALS
Whether or not the merger is completed as expected, we expect to hold an
annual stockholders' meeting on or about June 29, 2001. In order to be included
in the proxy material for our annual meeting, eligible proposals of stockholders
intended to be presented at the annual meeting must be received at our offices
no later than March 1, 2001. SEC rules set forth standards as to what
stockholder proposals are required to be included. However, if the date of the
annual meeting is scheduled to be held prior to May 30, 2001 or later than July
29, 2001, the proposals are required to be received by us within a reasonable
time before our solicitation is made if the proposals are to be included in the
proxy materials for the meeting. Stockholder proposals may be mailed to:
Randall K. Davis
Director
b2bstores.com, Inc.
1023 Morales
San Antonio, Texas 78207
Telephone: (210) 227-9161
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
materials we file at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" certain information into
this proxy statement, which means that we can disclose important information to
you by referring you to another document filed with the SEC. The information
incorporated by reference is deemed to be part of this proxy statement, except
for any information superseded by information in, or incorporated by reference
in, this proxy statement. This proxy statement incorporates by reference the
following documents that we have previously filed with the SEC:
. description of common stock contained in our Amended Registration Statement
for Small Business Issuers on Form SB-2/A filed with the SEC on January 26,
2000;
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<PAGE>
. Prospectus dated February 18, 2000;
. Quarterly Report on Form 10-QSB for the quarterly period ended March 31,
2000;
. Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2000;
. Quarterly Report on Form 10-QSB for the quarterly period ended September 30,
2000;
. Current Report on Form 8-K filed with the SEC on November 30, 2000; and
. Current Report on Form 8-K filed with the SEC on December 5, 2000.
The documents incorporated by reference in this proxy statement contain
important information about us. Most of the documents incorporated by reference
are attached to this proxy statement. We are also incorporating by reference
additional documents that we may file with the SEC between the date of this
proxy statement and the date of our special meeting.
You can obtain any of the documents incorporated by reference in this proxy
statement by contacting us directly or by contacting the SEC. Documents
incorporated by reference are available from us upon your written or oral
request without charge, excluding all exhibits, unless we have specifically
incorporated by reference an exhibit in this proxy statement. We will deliver
any requested documents by first class mail or other equally prompt means within
one business day of our receipt of your request.
If you would like to request any of the documents incorporated by reference
in this proxy statement, you may direct your request to:
Randall K. Davis
Director
b2bstores.com, Inc.
1023 Morales
San Antonio, Texas 78207
Telephone: (210) 227-9161
You should rely only on the information contained or incorporated by
reference in this proxy statement. We have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement. This proxy statement is dated , 2001. You should not
assume that the information contained in the proxy statement is accurate as of
any date other than such date, and neither the mailing of this proxy statement
to stockholders nor the issuance of our common stock in the merger will create
any implication to the contrary.
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ANNEX A
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MERGER AGREEMENT
This Merger Agreement is made and entered into as of the 21st day of
November 2000, by and among IVAX CORPORATION, a Florida corporation ("IVAX"),
IVAX DIAGNOSTICS, INC., a Florida corporation and wholly-owned subsidiary of
IVAX ("DIAGNOSTICS"), and B2BSTORES.COM, INC., a Delaware corporation ("B2B").
RECITALS:
1. The Board of Directors of each of IVAX, Diagnostics, and B2B
(individually, a "Party" and collectively, the "Parties") believes it is in such
Party's and such Party's stockholders best interest that B2B acquire Diagnostics
through the statutory merger of Diagnostics with and into B2B (the "Merger")
and, in furtherance thereof, have approved the Merger.
2. Pursuant to the Merger, all of the issued and outstanding shares of
common stock, par value $.01 per share, of Diagnostics ("Diagnostics Common
Stock") will be converted into the right to receive 20,000,000 shares of common
stock, par value $.01 per share, of B2B ("B2B Common Stock").
3. The Parties desire to make certain representations and warranties and
other agreements in connection with the Merger.
4. For federal income tax purposes, the Parties intend to adopt a plan of
reorganization within the meaning of, and to cause the Merger to qualify as a
reorganization under, Section 368(a) of the Code (as defined herein).
AGREEMENT:
In consideration of the premises and the respective mutual agreements,
covenants, representations and warranties herein contained, the Parties agree as
follows:
ARTICLE 1.
Definitions
The following terms when utilized in this Agreement shall have the meanings
indicated:
"Accredited Investor" has the meaning set forth in Regulation D promulgated
under the Securities Act.
"Action" means any action, appeal, petition, plea, charge, complaint,
claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry,
investigation or similar event, occurrence, or proceeding.
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"Affiliate" with respect to any specified Person, means a Person that,
directly or indirectly, through one or more intermediaries, Controls or is
Controlled by, or is under common Control with, such specified person.
"Affiliated Group" means any affiliated group under Code Section 1504(a) or
any similar group defined under provisions of applicable Law.
"Agency" means any federal, state, municipal, county, parish, local,
foreign or other agency, judicial, governmental, quasi-governmental, or
regulatory authority, bureau, branch, department, division, commission, multi-
national organization, instrumentality or similar recognized organization or
body exercising similar powers and authority.
"Agreement" means this Merger Agreement together with all exhibits, the B2B
Disclosure Memorandum and the Diagnostics Disclosure Memorandum contemplated
hereby.
"Amendment" means the amendment to the Certificate of Incorporation of B2B
to (i) change the name of B2B to IVAX Diagnostics, Inc. and (ii) increase the
amount authorized B2B Common Stock from 25,000,000 shares to 50,000,000 shares,
a copy of which is attached hereto as Exhibit A.
---------
"B2B" has the meaning set forth in the preamble of this Agreement.
"B2B Affiliate Stockholders" means each of Richard Kandel, Kandel and Son
Profit Sharing Plan, Enviro-Clean of America, Inc., Mint Corporation, Steven
Etra, Randall Davis, SRK Associates, L.L.C., DotCom Fund L.L.C. and ZERO.NET,
Inc.
"B2B Contracts" means all Contracts to which B2B or any of its Subsidiaries
is a party and are required to be filed with the Commission pursuant to Item 601
of Regulation S-K promulgated under the Exchange Act.
"B2B Common Stock" has the meaning set forth in the second recital of this
Agreement.
"B2B Disclosure Memorandum" means the disclosure memorandum delivered by
B2B to IVAX setting forth the disclosure schedules of B2B and its Subsidiaries
contemplated by this Agreement.
"B2B Effective Date Balance Sheet" means the estimated balance sheet of B2B
as of the Effective Date, prepared in accordance with GAAP applied on a
consistent basis.
"B2B Employment Contracts" has the meaning set forth in Section 3.24.
------------
"B2B Financial Statements" has the meaning set forth in Section 3.8.
-----------
"B2B Preferred Stock" means the preferred stock, par value $.01 per share,
of B2B.
"B2B SEC Filing" has the meaning set forth in Section 3.7.
-----------
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"Basis" means any past or current fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence.
"Basket Limitation" is defined in Section 6.3(d).
--------------
"Beneficial Owner" means, with respect to any security, any Person who
shall be deemed to be the "beneficial owner" of such security within the meaning
of Rule 13d-3 promulgated by the Commission under the Exchange Act.
"Best Efforts" means the efforts, time, and costs that a prudent Person
desirous of achieving a result would use, expend, or incur in similar
circumstances to ensure that such result is achieved as expeditiously as
possible; provided, however, that no such use, expenditure, or incurrence will
be required if it would have a Material Adverse Effect on such Person calculated
immediately prior to the Effective Time.
"Breach" means any breach, inaccuracy, failure to perform, failure to
comply, conflict with, default, violation, acceleration, termination,
cancellation, modification, or required notification.
"Claim Notice" is defined in Section 6.5.
-----------
"Closing" has the meaning set forth in Section 2.1.
-----------
"Code" means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.
"Commission" means the Securities and Exchange Commission.
"Commitment" means (a) options, warrants, convertible securities,
exchangeable securities, subscription rights, conversion rights, exchange
rights, or other Contracts that could require a Person to issue any of its
securities or equity interests or to sell any securities or equity interests it
owns in another Person; (b) any other securities or equity interests convertible
into, exchangeable or exercisable for, or representing the right to subscribe
for any securities or equity interests of a Person or owned by a Person; (c)
statutory pre-emptive rights or pre-emptive rights granted under a Person's
organizational documents; and (d) stock appreciation rights, phantom stock,
profit participation, or other similar rights with respect to a Person.
"Competing Transaction" has the meaning set forth in Section 5.8.
-----------
"Consent" means any consent, approval, notification, waiver, or other
similar action.
"Contract" means any Enforceable contract, agreement, arrangement,
commitment, letter of intent, memorandum of understanding, heads of agreement,
promise, obligation, right, instrument, document, or other similar
understanding, whether written or oral.
"Control" and its derivatives means, as used with respect to any Person,
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies
A-3
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of such Person, whether through the ownership of voting securities, equity
interests, by Contract or otherwise.
"Controlled Group of Corporations" has the meaning set forth in Code
Section 1563.
"Court" means any federal, state, municipal, county, parish, local, foreign
or other court or judicial entity.
"Damages" means all damages (including incidental and consequential
damages), losses (including any diminution in value), Liabilities, payments,
amounts paid in settlement, obligations, fines, penalties, costs, expenses
(including reasonable fees and expenses of outside attorneys, accountants and
other professional advisors and of expert witnesses and other costs (including
the allocable portion of the Indemnitee's internal costs) of investigation,
preparation and litigation in connection with any Action or Threatened Action)
of any kind or nature whatsoever; provided, however, insurance recoveries and
Taxes will be taken into account in determining Damages for purposes of this
Agreement.
"Deferred Intercompany Transactions" has the meaning set forth in Treas.
Reg. Section 1.1502-13.
"Delaware GCL" means the General Corporation Law of the State of Delaware,
as amended.
"Delta" means Delta Biologicals S.r.l, a Subsidiary of Diagnostics.
"Diagnostics" has the meaning set forth in the preamble to this Agreement.
"Diagnostics Contracts" means all material Contracts to which Diagnostics
or any of its Subsidiaries is a party which would be required to be filed with
the Commission pursuant to Item 601 of Regulation S-K promulgated under the
Exchange Act if Diagnostics was a reporting company under the Exchange Act.
"Diagnostics Common Stock" has the meaning set forth in the second recital
of this Agreement.
"Diagnostics Disclosure Memorandum" means the disclosure memorandum
delivered by IVAX and Diagnostics to B2B setting forth to disclose schedules
contemplated by this Agreement.
"Diagnostics Effective Date Balance Sheet" means the estimated balance
sheet of Diagnostics as of the Effective Date prepared in accordance with GAAP
applied on a consistent basis.
"Diagnostics Employment Contracts" has the meaning set forth in Section
-------
4.19.
----
"Diagnostics Financial Statements" has the meaning set forth in Section
-------
4.6.
A-4
<PAGE>
"Diagnostics Equity" means the number of shares of Diagnostics Common Stock
issued and outstanding as of the Effective Time.
"Effective Date" has the meaning set forth in Section 2.1.
-----------
"Effective Time" has the meaning set forth in Section 2.1.
-----------
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(1).
"Encumbrance" means any Order, Security Interest, Contract, easement,
covenant, community property interest, equitable interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
"Enforceable" a Contract is "Enforceable" if it is the legal, valid, and
binding obligation of the applicable Person enforceable against such Person in
accordance with its terms, except as such enforceability may be subject to the
effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws
relating to or affecting the rights of creditors, and general principles of
equity.
"Environmental Law" means any Law relating to pollution or protection of
the environment (including ambient air, surface water, groundwater, land surface
or subsurface strata), including any Law relating to emissions, discharges,
Releases of chemicals, pollutants, contaminants, or industrial, toxic or
hazardous substances or wastes into the environment, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of chemicals, pollutants, contaminants, or industrial,
toxic or hazardous substances or wastes, as well as all authorizations, codes,
decrees, demands or demand letters, injunctions, judgments, Licenses, notices or
notice letters, Orders, plans or regulations issued, entered, promulgated or
approved thereunder.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means each business or entity which is a member of a
"controlled group of corporations," under "common control" or an "affiliated
service group" with any Person within the meaning of Sections 414(b), (c) or (m)
of the Code, or required to be aggregated with any Person under Section 414(o)
of the Code, or is under "common control" with any Person, within the meaning of
Section 4001(a)(14) of ERISA.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Excess Loss Account" is defined in Treas. Reg. Section 1.1502-19.
"Exchange Ratio" means the quotient of (a) 20,000,000 (plus any additional
shares of B2B Common Stock issuable pursuant to Section 6.3(c)(ii)) divided by
------------------
(b) the Diagnostics Equity.
"Fiduciary" has the meaning set forth in ERISA Section 3(21).
"Florida BCA" means the Business Corporation Act of the State of Florida,
as amended.
"Foreign Corrupt Practices Act" means the Foreign Corrupt Practices Act of
1977, as amended, and the rules and regulations promulgated thereunder.
"GAAP" has the meaning set forth in Section 3.8.
-----------
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Indemnified Party" is defined in Section 6.4(a).
--------------
"Indemnifying Party" is defined in Section 6.4(a).
--------------
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations relating thereto, (b) all trademarks, service marks, trade dress,
logos, domain names, trade names, and corporate names, and all goodwill
associated therewith, together with all translations, adaptations, derivations,
and combinations, applications, registrations, and renewals relating thereto,
(c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals relating thereto, (d) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (e) all computer software (including data and related
documentation), (f) all other proprietary rights, and (g) all copies and
tangible embodiments of the foregoing (in whatever form or medium).
"IRS" means the United States Internal Revenue Service.
"IVAX" has the meaning set forth in the preamble of this Agreement.
"IVAX Filing Affiliated Group" is defined in Section 10.1.
------------
"Knowledge" means, with respect to any representation or warranty or other
statement in this Agreement qualified by reference to the knowledge or to the
best knowledge of any party,
A-6
<PAGE>
the actual knowledge, without independent investigation, of those persons listed
on Exhibit B, with respect to B2B, and listed on Exhibit C, with respect to IVAX
--------- ---------
and/or Diagnostics.
"Law" means any federal, state, municipal, county, parish, local, foreign
or other governmental law (statutory, common or otherwise), rule, regulation,
ordinance, statute or directive.
"Liability" means any liability or obligation (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any Liability for Taxes.
"License" means any license, sublicense, franchise, approval, certificate,
permit, planning, permission or other authorization.
"Material Adverse Change (or Effect)" means a change (or effect) in the
condition (financial or otherwise), properties, assets, Liabilities, rights,
operations, business, or prospects which change (or effect), individually or in
the aggregate, could reasonably be expected to be materially adverse to such
condition, properties, assets, Liabilities, rights, operations, business, or
prospects.
"Merger" has the meaning set forth in the first recital of this Agreement.
"Merger Consideration" has the meaning set forth in Section 2.1.
-----------
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Order" means any order, judgment, ruling, injunction, notice, decree,
writ, mandate, or similar determination or finding of any Court, Agency,
arbitrator or mediator.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity,
quality and frequency) of the relevant Person and its Subsidiaries in the
industry in which the relevant Person and its Subsidiaries does business.
"Parties" or "Party" have the meaning set forth in the first recital of
this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any natural person, corporation, unincorporated
organization, partnership, association, joint-stock company, entity, joint
venture, trust, government, Court or Agency.
"Plan of Merger" has the meaning set forth in Section 2.1.
-----------
"Pre-Merger Consolidated Tax Returns" is defined in Section 10.1.
------------
"Prohibited Transactions" has the meaning set forth in ERISA Sections 406
and 407 and Code Section 4975.
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<PAGE>
"Proxy Statement" means the proxy statement of B2B soliciting the proxies
of the B2B stockholders to approve (i) this Agreement, (ii) the Merger, (iii)
the issuance of the Merger Consideration, (iv) the Amendment, and (v) such other
matters as the Parties may deem appropriate.
"Receivables" means all the receivables of a Person, including all
Contracts in transit, manufacturing warranty receivables, notes receivable,
accounts receivable, trade account receivables and insurance proceeds
receivable.
"Release" means any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other release into the soil, land surface or
subsurface strata, water (including ocean, stream, pond, reservoir, drainage,
basins, wetlands, ground and drinking), sediments, ambient air (including
indoor), noise, plant life, animal life and all other environmental media or
natural resource.
"Reportable Event" has the meaning set forth in ERISA Section 4043.
"Security Interest" means any mortgage, pledge, lien, charge, encumbrance
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable, (c) purchase money
liens and liens securing rental payments under capital lease arrangements, and
(d) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Special Meeting" has the definition set forth in Section 5.7.
-----------
"Subsidiary" (whether or not capitalized) means any corporation fifty
percent (50%) or more of whose outstanding voting securities, or any other
Person fifty percent (50%) or more of whose equity interests, are, directly or
indirectly, owned by a Person.
"Surviving Corporation" has the meaning set forth in Section 2.1.
-----------
"Tax" means any federal, state, local or foreign income, gross receipts,
License, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 59A),
customs, ad valorem, duties capital stock, franchise, profits withholding,
social security, unemployment, disability, real property, personal property,
sales, use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes required to be filed with any
Agency, including any schedule or attachment thereto, and including any
amendment thereof.
"Third Party Claim" is defined in Section 6.4(a).
--------------
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"Threatened" means a demand or statement has been made (orally or in
writing) or a notice has been given (orally or in writing), or any other event
has occurred or any other circumstances exist that would lead a prudent Person
to conclude that a cause of Action, event or other matter is likely to be
asserted, commenced, taken, or otherwise.
"Threatened Release" means any event that has occurred or other
circumstances that exist that could lead a prudent Person to conclude that any
Release, whether intentional or unintentional, is likely to occur now or in the
future.
"Transaction Expenses" means any and all direct or indirect expenses or
other payables incurred, accrued or payable by a Party in connection with the
Merger or the transactions contemplated hereby.
"Treas. Reg." means the proposed, temporary and final regulations
promulgated under the Code.
"Voting Agreement" has the meaning set forth in Section 2.12.
------------
ARTICLE 2.
The Merger
2.1 Merger; Plan of Merger. Subject to the terms and conditions of the
----------------------
Agreement, Diagnostics will be merged with and into B2B in accordance with the
Delaware GCL and the Florida BCA. At the Effective Time, the separate corporate
existence of Diagnostics will cease and B2B will be the surviving corporation
(the "Surviving Corporation"). Subject to the terms and conditions of this
Agreement, a Plan of Merger (the "Plan of Merger"), in the form of Exhibit D, is
---------
being executed and delivered concurrently herewith by and among B2B and
Diagnostics. The Plan of Merger provides, among other things, for the terms of
the Merger, the mode of carrying the same into effect, the manner of converting
the issued and outstanding shares of Diagnostics Common Stock into the right to
receive Twenty Million (20,000,000) shares of B2B Common Stock, plus any
additional shares of B2B Common Stock issuable pursuant to Section 6.3(c)(ii)
------------------
(the "Merger Consideration") based on the Exchange Ratio. Subject to the terms
and conditions of this Agreement, the Merger shall be consummated as promptly as
practicable after the conditions in Articles 7 and 8 are satisfied or waived by
----------------
the filing of a Certificate of Merger with the Secretary of State of the State
of Delaware in accordance with the Delaware GCL and the filing of Articles of
Merger with the Secretary of State of the State of Florida in accordance with
the Florida BCA (the date of the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware and the Articles of Merger with the
Secretary of State of the State of Florida being hereinafter referred to as the
"Effective Date" and the time of such filing being hereinafter referred to as
the "Effective Time"). The closing of the transactions contemplated hereunder
(the "Closing") shall take place at the offices of Stearns Weaver Miller
Weissler Alhadeff & Sitterson, P.A., Museum Tower, Suite 2200, 150 West Flagler
Street, Miami, Florida 33130, at 10:00 A.M., local time, on such date as the
Parties shall agree in accordance with the provisions hereof.
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2.2 Actions and Deliveries.
----------------------
(a) No more than three (3) and no less than one (1) day prior to the
Effective Date, (i) B2B will deliver to IVAX the B2B Effective Balance Sheet,
and (ii) IVAX will deliver to B2B the Diagnostics Effective Date Balance Sheet.
(b) At the Closing, IVAX or Diagnostics will deliver to B2B the
following:
(i) stock certificates held by IVAX representing all of the
outstanding shares of Diagnostics Common Stock; and
(ii) the certificates, Consents, opinions and other items
described in Article 7.
---------
(c) At the Closing, B2B will deliver to IVAX the following:
(i) stock certificates representing the Merger Consideration;
and
(ii) the certificates, Consents, opinions and other items
described in Article 8.
---------
2.3 Effect of the Merger. At the Effective Time, all Diagnostics'
--------------------
property, rights, privileges, powers and franchises will vest in the Surviving
Corporation, and all obligations and duties of Diagnostics will become the
Surviving Corporation's obligations and duties.
2.4 Certificate of Incorporation; Bylaws. B2B's Certificate of
------------------------------------
Incorporation, as in effect immediately prior to the Effective Time, will be the
Surviving Corporation's Certificate of Incorporation; provided, however, the
Amendment will be filed with the Secretary of State of the State of Delaware on
the Effective Date. B2B's Bylaws, as in effect immediately prior to the
Effective Time, will be the Surviving Corporation's Bylaws; provided, however,
B2B's Bylaws will be amended to the extent necessary to comply with Section 2.5.
2.5 Directors and Officers. The individual's listed on Schedule 2.5 will
----------------------
be the Surviving Corporation's directors and officers upon consummation of the
Merger.
2.6 Effect on Capital Stock. At the Effective Time, because of the Merger
-----------------------
and without any action by the Parties:
(a) Conversion of Diagnostics Common Stock. Each share of Diagnostics
--------------------------------------
Common Stock issued and outstanding immediately prior to the Effective Time will
be converted into a portion of the Merger Consideration based on the Exchange
Ratio. All such shares of Diagnostics Common Stock, when so converted, will no
longer be outstanding and will automatically be canceled and retired and will
cease to exist, and the holder of a Diagnostics Common Stock certificate that,
immediately prior to the Effective Time, represented outstanding shares of
Diagnostics Common Stock will cease to have any rights with respect thereto,
except the right to receive, upon the surrender of such Diagnostics Common Stock
certificate (i) a portion of the Merger Consideration based on the Exchange
Ratio, and (ii) certain dividends and other distributions under Section 2.6(c).
--------------
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(b) Rights Prior to Surrender, Stock Splits, etc. and Stock Transfer
----------------------------------------------------------------
Books. Until surrendered as contemplated by Section 2.7, each Diagnostics Common
----- -----------
Stock certificate will be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender a portion of the Merger
Consideration based on the Exchange Ratio and certain dividends and other
distributions under Section 2.6(c). If between the date of this Agreement and
--------------
the Effective Time the outstanding shares of B2B Common Stock or Diagnostics
Common Stock are changed into a different number of shares or a different class,
because of any stock dividend, subdivision, reclassification, recapitalization,
split, combination or exchange of shares, the Exchange Ratio will be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares.
After the Effective Time, Diagnostics' stock transfer books will be closed and
there will be no further transfers of shares of Diagnostics Common Stock prior
to the Effective Time. If, at or after the Effective Time, any Diagnostics
Common Stock certificates are presented to the Surviving Corporation, they will
be canceled and exchanged in accordance with this Agreement.
(c) Dividends and Distributions on Merger Consideration. No dividends
---------------------------------------------------
or other distributions declared or made having a record date after the Effective
Time will be paid to the holder of any unsurrendered Diagnostics Common Stock
certificate until the record holder of such Diagnostics Common Stock certificate
has surrendered it under Section 2.7. Subject to the effect of Laws (including
-----------
escheat and abandoned property Laws), following surrender of any such
Diagnostics Common Stock certificate there will be paid to the record holder of
the certificates representing the Merger Consideration issued in exchange
therefor, without interest, (i) the amount of dividends or other distributions
with a record date after the Effective Time that, absent the failure to
surrender such Diagnostics Common Stock certificate, theretofore would have been
required to be paid with respect to such Merger Consideration, and (ii) if the
payment date for any dividend or distribution payable with respect to such
Merger Consideration has not occurred prior to the surrender of such Diagnostics
Common Stock certificate, at the appropriate payment date therefor, the amount
of such dividends or other distributions.
(d) B2B Common Stock. Each share of B2B Common Stock issued and
----------------
outstanding at and as of the Effective Time will remain issued and outstanding.
2.7 Surrender of Certificates.
--------------------------
(a) Exchange Procedures. At the Effective Time, (i) the holders of
-------------------
Diagnostics Common Stock certificates will surrender such certificates to B2B,
(ii) upon surrender of a Diagnostics Common Stock certificate the holder thereof
will be entitled to receive the applicable Merger Consideration, and (iii)
Diagnostics Common Stock certificates so surrendered will forthwith be canceled.
(b) Transfers of Ownership. If any certificate for B2B Common Stock
----------------------
is to be issued in a name other than that in which the Diagnostics Common Stock
certificate surrendered in exchange therefor is registered, B2B will not be
required to issue such B2B Common Stock until (i) the Diagnostics Common Stock
certificate so surrendered has been properly endorsed and is otherwise in proper
form for transfer and (ii) the Person requesting such exchange has paid to B2B
or any agent it designates any transfer or other Taxes required because of the
issuance of a certificate for B2B Common Stock in any name other than that of
the registered holder of
A-11
<PAGE>
Diagnostics Common Stock certificate surrendered, or established to the
satisfaction of B2B or any agent it designates that such Tax has been paid or is
not payable.
(c) No Further Ownership Rights in B2B Common Stock. All Merger
-----------------------------------------------
Consideration issued will be deemed to have been issued in full satisfaction of
all rights pertaining to Diagnostics Common Stock.
(d) Lost, Stolen or Destroyed Certificates. If any Diagnostics Common
--------------------------------------
Stock certificate has been lost, stolen, or destroyed, B2B will issue the
applicable Merger Consideration deliverable in respect thereof upon (i) the
making of an affidavit of that fact by the Person claiming such certificate to
be lost, stolen, or destroyed and (ii) if the Surviving Corporation requires,
the posting by such Person of a bond in such reasonable amount as B2B may direct
as indemnity against any claim that may be made against it with respect to such
Certificate.
2.8 Stock Options.
--------------
(a) Assumption of Commitments. At the Effective Time, automatically
-------------------------
and without any action on the part of the holder thereof, B2B will assume,
subject to any restriction or limitations imposed by Law, each outstanding
Diagnostics Common Stock Commitment listed on Schedule 2.8 outstanding at the
------------
Effective Time and it will become a Commitment (i) to purchase that number of
shares of B2B Common Stock obtained by multiplying the number of shares of
Diagnostics Common Stock issuable upon the exercise of such Diagnostics Common
Stock Commitment by the Exchange Ratio, (ii) at an exercise price per share
equal to the per share exercise price of the Commitment divided by the Exchange
Ratio, and (iii) otherwise upon the same terms and conditions as such
outstanding Diagnostics Common Stock Commitments to purchase shares of
Diagnostics Common Stock, except that if Code Section 421 applies to any
Diagnostics Common Stock Commitment because of the qualifications under Code
Section 422 or 423, the exercise price, the number of shares purchasable
pursuant to such Diagnostics Common Stock Commitment and the terms and
conditions of exercise of such Diagnostics Common Stock Commitment will comply
with Code Section 424(a).
(b) Reservation of Shares. B2B will take all corporate actions
---------------------
necessary to reserve for issuance a sufficient number of shares of B2B Common
Stock for delivery upon exercise of Diagnostics Common Stock Commitments assumed
under Section 2.8(a).
--------------
(c) Amendments to Plans. At the Effective Time, B2B will, subject to
-------------------
any restrictions or limitations imposed by Law, assume each Diagnostics plan
providing for the issuance or grant of a Diagnostics Common Stock Commitment.
Upon assumption of such plans, such amendments may be made thereto as may be
required to reflect the consummation of the Merger.
2.9 No Fractional Shares. No fractional shares of B2B Common Stock will be
--------------------
issued in the Merger and fractional share interests will not entitle the owner
thereof to vote or to any rights of a B2B stockholder, and no compensation will
be paid in lieu thereof.
2.10 Tax Treatment. The Parties intend that the Merger constitute a tax
-------------
free reorganization under Code Section 368.
A-12
<PAGE>
2.11 Accounting Treatment. The Parties intend that the Merger will be
--------------------
accounted for as a purchase under GAAP and the Commission's rules, regulations,
and interpretations.
2.12 Voting Agreements. Contemporaneous with the execution and
-----------------
delivery of this Agreement by the Parties, the B2B Affiliate Stockholders
(except ZERO.NET, Inc.) will enter into a voting agreement, substantially in the
form of Exhibit E (the "Voting Agreements").
---------
2.13 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers,
and franchises of Diagnostics, the officers and directors of B2B and Diagnostics
are fully authorized in the name of their respective corporations or otherwise
to take, and the Parties will cause them to take, all such lawful and necessary
action.
ARTICLE 3.
Representations and Warranties of B2B
In order to induce IVAX and Diagnostics to enter into this Agreement and
the Plan of Merger and to consummate the transactions contemplated hereby and
thereby, B2B hereby represents and warrants to IVAX and Diagnostics that the
representations and warranties contained in this Article 3 are true, correct and
---------
complete as of the date of this Agreement and will be true, correct and complete
as of the Effective Time (as though made then and, except as expressly provided
in a representation or warranty, as though the Effective Time were substituted
for the date of this Agreement).
3.1 Organization, Standing and Power. B2B is a corporation duly organized,
--------------------------------
validly existing and in good standing under the Laws of the State of Delaware
and has all requisite right, power and authority to enter into this Agreement
and the Plan of Merger and to consummate the transactions contemplated hereby
and thereby.
3.2 Authorization of Agreement; Enforceability. The execution, delivery
------------------------------------------
and performance of this Agreement and the Plan of Merger by B2B and the
consummation of the transactions contemplated hereby and thereby have been duly
and effectively authorized by all requisite corporate action on the part of B2B,
subject to receipt of the Consent of the stockholders of B2B as contemplated in
Section 5.7. Neither the Merger, this Agreement nor the transactions
-----------
contemplated thereby and hereby requires the Consent of the stockholders of B2B,
other than the Consent contemplated in Section 5.7. This Agreement and the Plan
-----------
of Merger constitute an Enforceable obligation of B2B.
3.3 No Violation or Conflict. The execution, delivery and performance of
------------------------
this Agreement and the Plan of Merger by B2B, and the consummation of the
transactions contemplated hereby and thereby, and compliance by B2B with the
provisions hereof and thereof (a) do not and will not (assuming the matters set
forth in the Proxy Statement are approved at the Special Meeting) violate or
conflict with any Law or any Order or any term or provision of the Certificate
of Incorporation or Bylaws (or other organizational documents) of B2B or any of
its Subsidiaries and (b) do not and will not, with or without the passage of
time or the giving of notice, result in the Breach of, or constitute a Breach or
require any Consent under or result in
A-13
<PAGE>
the creation of any Encumbrance upon any property or assets of B2B or any of its
Subsidiaries under any Contract to which B2B or any of its Subsidiaries is a
party or by which B2B or any of its Subsidiaries or any of their respective
properties may be bound or affected, except (i) for those Contracts as to which
Consent shall have been obtained at or prior to the Effective Time or (ii) where
the failure to obtain such Consent would not have a Material Adverse Effect on
B2B.
3.4 Certificate of Incorporation; Bylaws and Minute Books. A true and
-----------------------------------------------------
complete copy of the Certificate of Incorporation (as amended and in effect),
Bylaws (as amended and in effect) and minute books of B2B and each of its
Subsidiaries have been delivered by B2B to IVAX. The minute books of B2B and
each of its Subsidiaries in the form supplied to IVAX are complete and accurate
in all material respects and have embodied therein copies of all minutes of all
meetings and all actions by written Consent of the Board of Directors of B2B and
each of its Subsidiaries, any committee thereof, the incorporators and the
stockholders of B2B and each of its Subsidiaries from the dates of their
respective incorporations to the date of this Agreement, and such minutes and
actions by written Consent accurately reflect all material actions taken by the
Board of Directors of B2B or any of its Subsidiaries, any committees thereof,
the incorporators and the stockholders during such periods. All actions of B2B
or any of its Subsidiaries from the dates of their respective incorporations to
the date of this Agreement that required the approval of the directors or
stockholders of B2B or such Subsidiaries, as the case may be, have been so
approved
3.5 Consent of Government Authorities. Other than (a) in connection with
---------------------------------
or in compliance with the Delaware GCL, the Florida BCA, the Exchange Act, the
Securities Act and the state securities Laws of any jurisdiction and (b)
notification pursuant to, and expiration or termination of the waiting period
under the HSR Act, if required, no Consent of any Agency is required in
connection with the execution, delivery or performance by B2B of this Agreement
or the Plan of Merger or the consummation by B2B of the transactions
contemplated hereby or thereby.
3.6 Validity of B2B Common Stock. The B2B Common Stock to be issued to
----------------------------
IVAX in the Merger will, when issued in accordance with this Agreement and the
Plan of Merger at the Effective Time, be duly authorized, validly issued, fully
paid and non-assessable and free of any preemptive rights of any Person.
3.7 Commission Filings. B2B has filed all forms, reports and documents
------------------
required to be filed by it with the Commission including those forms, reports
and documents required to be filed by it pursuant to the Securities Act or the
Exchange Act (the "B2B SEC Filings"). B2B has furnished to IVAX and Diagnostics
a true and complete copy of each B2B SEC Filing. Each of the B2B SEC Filings
comply as to form with the applicable requirements of the Commission for such
filing in all material respects. None of the B2B SEC Filings, as of the dates
they were respectively filed with the Commission, contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.8 B2B Financial Statements. The financial statements of B2B and its
------------------------
Subsidiaries included in the B2B SEC Filings (the "B2B Financial Statements"),
as of the dates thereof and for the periods covered thereby, present fairly, in
all material respects, the consolidated financial
A-14
<PAGE>
position, results of operations, and cash flows of B2B and its Subsidiaries
(subject, in the case of unaudited statements, to normal recurring year-end
audit adjustments and the omission of certain footnote disclosure). Any
supporting schedules included in the B2B SEC Filings present fairly, in all
material respects, the information required to be stated therein. The B2B
Financial Statements and supporting schedules were prepared in all material
respects: (a) in accordance with Regulation S-X promulgated by the Commission,
(b) in conformity with generally accepted accounting principles applied on a
consistent basis ("GAAP") and (c) from the books and records of B2B and its
Subsidiaries. To the extent any such B2B Financial Statements and supporting
schedules were audited, they were audited by independent public accountants
within the meaning of the rules promulgated by the Commission. The B2B Financial
Statements comply as to form with the requirements of Regulation S-X promulgated
by the Commission in all material respects.
3.9 Absence of Undisclosed Liabilities. Except as set forth on Schedule
---------------------------------- --------
3.9, neither B2B nor any of its Subsidiaries has, and there is no Basis for
---
assertion against B2B or any of its Subsidiaries of, any material Liability,
which is not included, disclosed or noted in the September 30, 2000 B2B
Financial Statements, except for the Transaction Expenses of B2B incurred in
accordance with the provisions of this Agreement and as set forth on Schedule
--------
3.9 and any non-material Liabilities incurred since September 30, 2000 in the
---
Ordinary Course of Business to Persons not Affiliates of B2B or any of its
Subsidiaries (none of which result from, arise out of, relates to, is in the
nature of, or was caused by a Breach of Contract, Breach of warranty, tort,
infringement or violation of Law). Schedule 3.9 and the B2B Effective Date
------------
Balance Sheet set forth all of the material liabilities (known, asserted,
accrued, liquidated or due) of B2B.
3.10 Receivables. All Receivables of B2B and its Subsidiaries are
-----------
accurately reflected on the September 20, 2000 B2B Financial Statements, and are
valid, bona fide and binding claims arising in the Ordinary Course of the
Business, subject to the reserves for bad debt set forth in the September 20,
2000 B2B Financial Statements. No Receivables have been factored.
3.11 Product Warranty. Each product of B2B and its Subsidiaries has
----------------
manufactured, sold, leased, or delivered has been in conformity, in all material
respects, with all applicable Law, Contracts, and all express and implied
warranties, and, to the Knowledge of B2B, neither B2B has any Liability (and
there is no Basis for any present or future Action against any of them giving
rise to any Liability) for replacement or repair thereof or other Damages in
connection therewith. No product designed, manufactured, sold, leased, or
delivered by B2B or its Subsidiaries is subject to any guaranty, warranty, or
other indemnity or similar Liability beyond the applicable terms and conditions
of sale or lease by B2B. True and correct copies of the terms and conditions of
sale or lease used by B2B and its Subsidiaries (containing applicable guaranty,
warranty, and similar Liability indemnity provisions) have been delivered to
IVAX.
3.12 Product Liability. Neither B2B nor its Subsidiaries has received any
-----------------
written notice of or any written information as to any Liability (and there is
no Basis for any present or future Action against any of them giving rise to any
Liability) arising out of any injury to individuals or property as a result of
the ownership, possession, or use of any product designed, manufactured, sold,
leased or delivered by B2B or its Subsidiaries.
A-15
<PAGE>
3.13 Subsidiaries. Set forth on Schedule 3.13 is a list of each, direct or
------------ -------------
indirect, Subsidiary of B2B, including (a) its name and jurisdiction of
organization, (b) the number of authorized shares of each class of its capital
stock, (c) the number of issued and outstanding shares of each class of its
capital stock and (d) the names of each of its directors and officers, managers
or general or managing partners. All of the equity interests of each Subsidiary
of B2B have been duly authorized and are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 3.13, B2B owns no capital stock
-------------
or equity interests in any Person. Each Subsidiary of B2B is duly organized,
validly existing, and in good standing under the Laws of the jurisdiction of its
organization and has all necessary corporate power to own its properties and
assets and to carry on its business as presently conducted. Each Subsidiary of
B2B is duly qualified to conduct business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it requires such qualification, except where any such failure
would not have a Material Adverse Effect.
3.14 Compliance with Laws. B2B and each of its Subsidiaries has conducted
--------------------
its business in compliance, in all material respects, with all applicable Laws
and Orders including Environmental Laws, Laws relating to disclosure, equal
employment, foreign corrupt practices, antitrust, product quality,
discrimination, employment and health and safety, and no Action or notice
thereof has been filed, or, to the Knowledge of B2B, Threatened, to be filed or
commenced, against any of them alleging any failure to so comply. Neither B2B
nor any of its Subsidiaries has engaged in any fraudulent, misleading or
deceptive action or practice in connection with any print, television, internet
or radio advertising, programming or solicitation.
3.15 Brokers and Finders. Except as contemplated in Section 3.20, neither
------------------- ------------
B2B nor any of its Subsidiaries or Affiliates of B2B has employed any financial
advisor, broker or finder and has not incurred and will not incur any broker's,
finder's, investment banking, or similar fees, commissions or expenses to any
other Person in connection with the transactions contemplated by this Agreement.
3.16 Capitalization. Prior to giving effect to the Amendment, the
--------------
authorized capital stock of B2B consists solely of (a) 25,000,000 shares of B2B
Common Stock, of which 8,621,643 shares are issued and outstanding as of the
date of this Agreement and (b) 5,000,000 shares of B2B Preferred Stock, none of
which are issued and outstanding as of the date of this Agreement. No series of
the B2B Preferred Stock has been designated or established by B2B. All of the
issued and outstanding shares of B2B Common Stock have been duly authorized and
validly issued and are credited as fully paid and non-assessable, with no
personal Liability attaching to the ownership thereof. No class of equity
securities of B2B exists other than the stock noted above. All voting rights
with respect to B2B are vested exclusively in the B2B Common Stock. No
securities issued by B2B from the date of its incorporation to the date of this
Agreement were issued in violation of the preemptive rights of any Person. All
material Licenses and Consents required to be obtained from or effected with any
Person in connection with all issuances of securities of B2B since the date of
its incorporation have been obtained or effected and all securities of B2B have
been issued in accordance with the provisions of all applicable securities and
other Laws.
3.17 Commitments. Neither B2B nor any of its Subsidiaries has any
-----------
Commitment other than (i) warrants to purchase 400,000 shares of B2B Common
Stock held by GBI Capital
A-16
<PAGE>
Partners or its assigns, (ii) options to purchase 1,000,000 shares of B2B Common
Stock held by Affiliates of B2B, (iii) 1,285,882 options issued pursuant to B2B
1999 Performance Equity Plan and outstanding as of the date of this Agreement,
(iv) options to purchase 50,000 shares of B2B Common Stock by each of Jay
Raubvogel and David Walke to be issued upon execution and delivery of this
Agreement by the Parties and (v) this Agreement. The terms of each Commitment of
B2B or its Subsidiaries including exercise price, expiration date and vesting
are set forth on Schedule 3.17.
-------------
3.18 Statement to B2B's Stockholders. None of the information in the final
-------------------------------
Proxy Statement, including any post-effective amendment thereto contains, or
will contain, any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they are made, not
misleading; provided, however, that no representation or warranty is made as to
information relating to IVAX or Diagnostics supplied in writing by IVAX or
Diagnostics specifically for inclusion therein. The final Proxy Statement,
including any post-effective amendments thereto will comply with and be
distributed to B2B stockholders in accordance with, all applicable Laws and the
Certificate of Incorporation and Bylaws of B2B in all material respects.
3.19 Certain Beneficial Owners and Consents. Other than the B2B Affiliate
--------------------------------------
Stockholders, Gary Granoff and Mark Rice, no Person (together with such Person's
Affiliates) is the Beneficial Owner of five percent (5%) or more of the
aggregate voting power of any class or series of B2B's issued and outstanding
capital stock and, to the Knowledge of B2B, other than the B2B Affiliate
Stockholders, no Person (together with such Person's Affiliates) is the
Beneficial Owner of greater than one percent (1%) of the aggregate voting power
of any class or series of B2B's issued and outstanding capital stock. B2B has
furnished IVAX with a true and complete copy of each Schedule 13D or Schedule
13G filed by any Beneficial Owner of any class or series of B2B's capital stock
with respect to B2B. To the Knowledge of B2B, those certain Lock-Up Agreements
between the Persons set forth on Schedule 3.19, Gaines, Berland Inc. and Nolan
-------------
Securities Corp., pursuant to which, among other things, the Persons set forth
on Schedule 3.19 agreed for a period of twelve (12) months following the
-------------
effective date of B2B's registration statement in connection with the initial
public offering of the B2B Common Stock to not sell, assign or transfer the
shares of B2B Common Stock which were owned by such Persons prior to the
commencement of B2B's initial offering, without the prior written consent of
Gaines, Berland Inc. and Nolan Securities Corp., constitute an Enforceable
Contract of each party thereto and have not been waived other than with respect
to shares of B2B Common Stock purchased in the initial public offering on the
same terms as offered to the public or purchased subsequently in the open
market.
3.20 Fairness Opinion. B2B has received a written opinion from Houlihan
----------------
Lokey Howard & Zukin Capital, its financial advisor, a true, correct and
complete copy of which has been delivered to IVAX, that the terms of the Merger
are fair to the public stockholders of B2B from a financial point of view.
A-17
<PAGE>
3.21 Real Property; Leases.
----------------------
(a) Schedule 3.21(a) lists and describes briefly all real property
----------------
owned by any of B2B and its Subsidiaries. With respect to each such parcel of
owned real property and except as set forth on Schedule 3.21:
-------------
(i) the identified owner has good and marketable title to the
parcel of real property, free and clear of any Encumbrance, or other
restriction, except for installments of special assessments not yet
delinquent and recorded Encumbrances and other restrictions which do
not materially impair the current use or occupancy, or impair the
value (in excess of the Basket Limitation) or the marketability of
title, of the property subject thereto;
(ii) there are no pending or, to the Knowledge of B2B,
Threatened condemnation Actions relating to the property or other
matters affecting the current use, occupancy, or value thereof;
(iii) the legal description for the parcel contained in the deed
thereof describes such parcel fully and adequately, the buildings and
improvements are located within the boundary lines of the described
parcels of land, are not, to the Knowledge of B2B, in violation of
applicable setback requirements, zoning Laws (and none of the
properties or buildings or improvements thereon are subject to
"permitted non-conforming use" or "permitted non-conforming structure"
classifications), and do not encroach on any easement which may burden
the land, and the land does not serve any adjoining property for any
purpose inconsistent with the use of the land, and the property is not
located within any flood plain or subject to any similar type
restriction for which any Licenses necessary to the use thereof have
not been obtained;
(iv) all facilities have received all material approvals of all
Agencies (including Licenses) required in connection with the
ownership or operation thereof and have been operated and maintained
in accordance with applicable Laws;
(v) there are no Contracts granting to any party or parties the
right of use or occupancy of any portion of the parcel of real
property;
(vi) there are no outstanding Commitments to purchase the parcel
of real property, or any portion thereof or interest therein; and
(vii) to the Knowledge of B2B, there are no parties (other than
B2B and its Subsidiaries) in possession of the parcel of real
property, other than tenants under any leases disclosed in Schedule
--------
3.21(a)(vii) who are in possession of space to which they are
------------
entitled.
(b) Schedule 3.21(b) lists and describes briefly all real property
----------------
leased or subleased to any of B2B and its Subsidiaries. B2B has delivered to
IVAX correct and complete copies of the leases and subleases listed in Schedule
--------
3.21(b) (each as amended to date). With
-------
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<PAGE>
respect to each lease and sublease listed in Schedule 3.21(b) and except as set
----------------
forth on Schedule 3.21:
-------------
(i) the lease or sublease is Enforceable, and in full force
and effect;
(ii) the lease or sublease will continue to be Enforceable, and
in full force and effect, on identical terms following the
consummation of the transactions contemplated hereby;
(iii) to the Knowledge of B2B, no party to the lease or sublease
is in material Breach, and no event has occurred which, with notice or
lapse of time, would constitute a material Breach thereunder;
(iv) to the Knowledge of B2B, no party to the lease or sublease
has repudiated any provision thereof;
(v) there are no disputes, oral Contracts, or forbearances in
effect as to the lease or sublease;
(vi) with respect to each sublease, the representations and
warranties set forth in Sections 3.21(b)(i) through (v) are true and
-------------------------------
correct with respect to the underlying lease;
(vii) none of B2B and its Subsidiaries has assigned,
transferred, conveyed, mortgaged, deeded in trust, or Encumbered any
interest in the leasehold or subleasehold; and
(viii) all facilities leased or subleased thereunder have
received all approvals of all Agencies (including Licenses) required
in connection with the operation thereof and have been operated and
maintained in accordance with applicable Laws.
3.22 Title to Personal Property. Except as set forth on Schedule 3.22, B2B
-------------------------- -------------
and its Subsidiaries have good and marketable title, free and clear of any
Encumbrances, to each material item of personal property, tangible and
intangible, as reflected on the September 30, 2000 B2B Financial Statements and
to each material item of personal property, tangible and intangible, acquired
since September 30, 2000 (other than non-material property disposed of in the
Ordinary Course of Business since September 30, 2000 to Persons who are not
Affiliates of B2B or any of its Subsidiaries). Except for leasehold interests
and other leased properties identified on Schedule 3.21(b) or 3.22, there are no
------------------------
assets owned by any third party which are necessary to the operations of the
business of B2B and its Subsidiaries as presently conducted. Each such tangible
asset is free from material defects (patent and latent), has been maintained in
accordance with normal industry practice, is in operating condition (subject to
normal wear and tear), and is suitable for the purposes for which it is
currently used.
3.23 Insurance. B2B maintains liability (including product liability),
---------
casualty, property loss, worker's compensation and other insurance coverage with
respect to the conduct of its and its Subsidiaries' respective businesses, in
such insurance amounts and under terms and
A-19
<PAGE>
conditions, as required by applicable Law and as B2B deems reasonably necessary.
B2B has paid all premiums with respect thereto covering all periods up to and
including the date of this Agreement (other than retroactive premiums which may
be payable with respect to worker's compensation insurance policies or accrued
premiums not yet due and payable), and no written notice of cancellation or
termination has been received with respect to any such policy and there exists
no Basis for any such termination or cancellation. None of such policies are
subject to any retroactive premium adjustment feature. To the Knowledge of B2B,
neither B2B nor its Subsidiaries nor any other party to an insurance policy of
B2B nor its Subsidiaries is in default or Breach, and to the Knowledge of B2B no
event has occurred which, with notice as the lapse of time, would constitute
such a Breach or default or permit termination, modification or acceleration,
under such policy. B2B has provided IVAX and Diagnostics true and correct copies
of all of its insurance policies.
3.24 Employment Contracts. Except as set forth on Schedule 3.24, there are
-------------------- -------------
no employment, indemnification, consulting, severance or other similar Contracts
between B2B or any of its Subsidiaries and any of their respective officers,
directors, consultants or employees (the "B2B Employment Contracts"). Except as
set forth on Schedule 3.24, none of the B2B Employment Contracts contain any
-------------
"change of Control," severance or other provisions pursuant to which any of the
benefits of any other party thereto will be increased or the vesting of any such
benefits will be accelerated by the consummation of any of the transactions
contemplated by this Agreement or pursuant to which the value of any such
benefits will be calculated on the Basis of any of the transactions contemplated
by this Agreement. All of the B2B Employment Contracts are terminable by B2B
without penalty upon not more than thirty (30) days' notice, except as set forth
on Schedule 3.24. Schedule 3.24 indicates which B2B Employment Contracts will
------------- -------------
terminate on or before the Effective Time and sets forth the total amount of
severance payments of any kind or nature payable in connection with the
transactions contemplated by this Agreement. To the Knowledge of B2B, no
executive, key employee, or group of employees has any plans to terminate
employment with any of B2B and its Subsidiaries. None of B2B and its
Subsidiaries is a party to or bound by any collective bargaining Contract, nor
has any of them experienced any strikes, grievances, claims of unfair labor
practices, or other collective bargaining disputes. None of B2B and its
Subsidiaries has committed any unfair labor practice. B2B has no Knowledge of
any organizational effort presently being made or Threatened by or on behalf of
any labor union with respect to employees of any of B2B and its Subsidiaries.
3.25 Employee Benefits.
------------------
(a) Schedule 3.25 lists each Employee Benefit Plan that any of B2B or
-------------
a Subsidiary of B2B maintains or to which it contributes. Subsections 3.25(b)
-------------------
through (j) apply to each Employee Benefit Plan that any of B2B or a Subsidiary
-----------
of B2B or any ERISA Affiliate of B2B or a Subsidiary of B2B maintains or to
which any of B2B or a Subsidiary of B2B or any ERISA Affiliate of B2B or a
Subsidiary of B2B contributes.
(b) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all material
respects with its terms and with the applicable requirements of ERISA, the Code,
and other applicable Laws.
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<PAGE>
(c) All required reports and descriptions (including Form 5500 Annual
Reports, Summary Annual Reports, PBGC-l's, and Summary Plan Descriptions) have
been filed or distributed appropriately with respect to each such Employee
Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and
of Code Section 4980B have been met with respect to each such Employee Benefit
Plan that is an Employee Welfare Benefit Plan to which such requirements apply.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been paid to each
such Employee Benefit Plan which is an Employee Pension Benefit Plan and all
contributions for any period ending on or before the Effective Date which are
not yet due have been paid to each such Employee Pension Benefit Plan or accrued
in accordance with the past custom and practice of B2B and its Subsidiaries. No
"accumulated funding deficiency" (for which a Tax is due or would be due in the
absence of a waiver), as such term is defined in ERISA Section 302(a)(2) or Code
Section 412, has been incurred with respect to any such Employee Benefit Plan
that is an Employee Pension Benefit Plan, whether or not waived. All premiums
or other required payments which are due for all periods ending on or before the
Effective Date have been paid with respect to each such Employee Benefit Plan
which is an Employee Welfare Benefit Plan.
(e) Each Employee Pension Benefit Plan which is intended to qualify
under Section 401(a) of the Code does so qualify, and each related trust
qualifies under Section 501(a) of the Code, and each such Employee Pension
Benefit Plan is the subject of a favorable determination letter from the IRS.
Nothing has occurred to impair such determination, subject to the ability of the
employer that sponsors such Employee Pension Benefit Plan to amend such plan,
within its "remedial amendment period", or as otherwise provided by the IRS, to
comply with recent law changes."
(f) The market value of assets under each such Employee Benefit Plan
which is an Employee Pension Benefit Plan (other than any Multiemployer Plan)
equals or exceeds the present value of all "benefit liabilities," as such term
is defined in ERISA Section 4001(a)(16), thereunder determined in accordance
with PBGC methods, factors, and assumptions applicable to an Employee Pension
Benefit Plan terminating on the date for determination.
(g) B2B has delivered, or will upon request deliver, to IVAX and
Diagnostics correct and complete copies of the plan documents and summary plan
descriptions, the most recent determination letter received from the IRS, the
most recent Form 5500 Annual Report, and all related trust Contracts, insurance
Contracts, and other funding Contracts which implement each such Employee
Benefit Plan.
(h) With respect to each Employee Benefit Plan that any of B2B or a
Subsidiary of B2B or any ERISA Affiliate of B2B or a Subsidiary of B2B maintains
or ever has maintained or to which any of them contributes, ever has
contributed, or ever has been required to contribute:
(i) no such Employee Benefit Plan which is an Employee Pension
Benefit Plan described in Title IV of ERISA (other than any
Multiemployer Plan)
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has been completely or partially terminated or been the subject of a
Reportable Event as to which notices would be required to be filed
with the PBGC;
(ii) no proceeding by the PBGC to terminate any such Employee
Pension Benefit Plan described in Title IV of ERISA (other than any
Multiemployer Plan) has been instituted or, to the Knowledge of B2B,
Threatened;
(iii) there have been no Prohibited Transactions with respect
to any such Employee Benefit Plan;
(iv) no Fiduciary has any Liability for Breach of fiduciary
duty or any other failure to act or comply in connection with the
administration or investment of the assets of any such Employee
Benefit Plan. No Action with respect to the administration or the
investment of the assets of any such Employee Benefit Plan (other than
routine claims for benefits) is pending or, to the Knowledge of B2B,
Threatened;
(v) to the Knowledge of B2B, there is no Basis for any such
Action described in (iv) above; and
(vi) none of B2B or its Subsidiaries has incurred, and has any
reason to expect that any of B2B and its Subsidiaries will incur, any
Liability to the PBGC (other than PBGC premium payments) or otherwise
under Title IV of ERISA (including any withdrawal Liability) or under
the Code with respect to any such Employee Benefit Plan which is an
Employee Pension Benefit Plan.
(i) None of B2B, its Subsidiaries, or any ERISA Affiliate of B2B or
a Subsidiary of B2B contributes to, ever has contributed to, or ever has been
required to contribute to any Multiemployer Plan or has any Liability (including
withdrawal Liability) under any Multiemployer Plan.
(j) None of B2B or its Subsidiaries maintains or ever has maintained
or contributes, ever has contributed, or ever has been required to contribute to
any Employee Welfare Benefit Plan providing medical, health, or life insurance
or other welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than as required under Code
Section 4980B). No Employee Welfare Benefit Plan which B2B or any of its
Subsidiaries maintains or ever has maintained or to which any of them
contributes, ever has contributed, or ever has been required to contribute, is a
"multiple employer welfare arrangement," as such term is defined in ERISA
Section 3(40).
3.26 Guaranties. None of B2B and its Subsidiaries is a guarantor or
----------
otherwise is responsible for any Liability (including indebtedness) of any other
Person.
3.27 Environmental, Health, and Safety Matters.
-----------------------------------------
(a) Each of B2B, its Subsidiaries, and their respective predecessors
and Affiliates has, in material respects, complied and is in compliance with all
Environmental Laws.
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(b) Without limiting the generality of Section 3.27(a), each of B2B,
---------------
its Subsidiaries and their respective Affiliates has obtained, has complied
with, and is in compliance with, all material Licenses and other material
authorizations that are required pursuant to Environmental Laws for the
occupation of its facilities and the operation of its business. A list of all
such Licenses and other authorizations is set forth in Schedule 3.27(b).
----------------
(c) Neither B2B, its Subsidiaries, nor any of their respective
predecessors or Affiliates has received any written or oral notice, report or
other information regarding any actual or alleged violation of Environmental
Laws, or any Liabilities or potential Liabilities, including any investigatory,
remedial or corrective obligations, relating to any of them or its facilities
arising under Environmental Laws.
(d) None of the following exists at any property or facility owned
or operated by B2B or its Subsidiaries: (i) underground storage tanks, (ii)
asbestos containing materials in any form or condition (except as permitted by
and in accordance with Law), (iii) materials or equipment containing
polychlorinated biphenyls, or (iv) landfills, surface impoundments, or disposal
areas.
(e) None of B2B, its Subsidiaries, or their respective predecessors
or Affiliates has treated, stored, disposed of, arranged for or permitted the
disposal of, transported, handled, or released any substance, including any
hazardous substance, or owned or operated any property or facility (and no such
property or facility is contaminated by any such substance) in a manner that has
given or would give rise to Liabilities, including any Liability for response
costs, corrective action costs, personal injury, property damage, natural
resources damages or attorney fees, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Solid Waste
Disposal Act, as amended, or any other Environmental Laws.
(f) To the Knowledge of B2B, neither this Agreement nor the
consummation of the transaction that is the subject of this Agreement will
result in any obligations for site investigation or cleanup, or notification to
or Consent of government agencies or third parties, pursuant to any of the so-
called "transaction-triggered" or "responsible property transfer" Environmental
Laws.
(g) Neither B2B, its Subsidiaries, nor any of their respective
predecessors or Affiliates has, either expressly or by operation of Law, assumed
or undertaken any Liability, including any obligation for corrective or remedial
action, of any other Person relating to Environmental Laws.
(h) No facts, events or conditions relating to the past or present
facilities, properties or operations of B2B, its Subsidiaries, or any of their
respective predecessors or Affiliates will prevent, hinder or limit continued
compliance with Environmental Laws, give rise to any investigatory, remedial or
corrective obligations pursuant to Environmental Laws, or give rise to any other
Liabilities pursuant to Environmental Laws, including any relating to onsite or
offsite releases or Threatened Releases of hazardous materials, substances or
wastes, personal injury, property damage or natural resources damage.
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3.28 Litigation. Except as set forth on Schedule 3.28, there are no
---------- -------------
Actions pending, or, to the best of B2B's Knowledge, directly or indirectly,
Threatened, against or affecting B2B or any of its Subsidiaries or any officer,
director or employee of B2B or any of its Subsidiaries in their respective
capacities as such. Neither B2B nor any of its Subsidiaries is in violation or
in default of any Order of any Court or Agency.
3.29 Absence of Changes. Except as set forth on Schedule 3.29, since
------------------ -------------
September 30, 2000 B2B has conducted its business only in the Ordinary Course of
Business and there has not occurred any Material Adverse Change in the condition
(financial or otherwise), results of operations, properties, assets,
Liabilities, business operations or prospects of B2B or any of its Subsidiaries,
and, since September 30, 2000, neither B2B nor any of its Subsidiaries has (a)
incurred any material Liabilities, (b) voluntarily or involuntarily sold,
transferred, surrendered, abandoned or disposed of any of its material assets or
property rights (tangible or intangible), (c) granted any increase in the
compensation payable or to become payable to officers or employees (including
any bonus payments or payments pursuant to any pension, profit-sharing plan or
other B2B Employee Benefit Plan or commitment), (d) incurred, assumed or taken
any property subject to any Liability, (e) materially altered the manner of
keeping the books, accounts or records of B2B, or materially changed in any
manner the accounting practices therein reflected other than alterations or
changes required by GAAP or applicable Law, (f) amended its Certificate of
Incorporation or Bylaws in any material respect, (g) canceled, waived or
released any material debts, rights or claims, (h) amended or terminated any B2B
Contract, or (i) entered into any B2B Employment Contract, except for those
referred to on Schedule 3.29. B2B has a Basis to believe that B2B will have
-------------
cash and cash equivalents of at least $22,000,000 at the Effective Time.
3.30 Tax Matters.
------------
(a) Each of B2B and its Subsidiaries has timely filed all Tax
Returns that it was required to file. All such Tax Returns were correct and
complete in all material respects. All Taxes owed by any of B2B and its
Subsidiaries (whether or not shown on any Tax Return) have been paid. All Taxes
which may be owed by B2B or any of its Subsidiaries (whether or not shown or any
Tax Return) and which may be payable between the date of this Agreement and the
Effective Date will be timely paid in full or accrued or reserved for by B2B or
its Subsidiaries prior to the Effective Date. None of B2B and its Subsidiaries
currently is the beneficiary of any extension of time within which to file any
Tax Return. No claim has ever been made by an authority in a jurisdiction where
any of B2B and its Subsidiaries does not file Tax Returns that it is or may be
subject to taxation by that jurisdiction. There are no Encumbrances on any of
the assets of any of B2B and its Subsidiaries that arose in connection with any
failure (or alleged failure) to pay any Tax.
(b) Each of B2B and its Subsidiaries has withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or owed
to any employee, independent contractor, creditor, stockholder, or other third
party.
(c) No director or officer (or employee responsible for Tax matters)
of any of B2B and its Subsidiaries expects any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of
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any of B2B and its Subsidiaries either (i) claimed or raised by any authority in
writing or (ii) as to which B2B has Knowledge based upon personal contact with
any agent of such authority. Schedule 3.30(c) lists all Tax Returns of B2B and
----------------
its Subsidiaries that have been audited, and indicates those Tax Returns that
currently are the subject of audit. B2B has delivered to IVAX and Diagnostics
correct and complete copies of all Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by any of B2B and its
Subsidiaries since 1997.
(d) None of B2B and its Subsidiaries has waived any statute of
limitations in respect of Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency.
(e) None of B2B and its Subsidiaries has filed a Consent under Code
Section 341(f) concerning collapsible corporations.
(f) None of B2B and its Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any Contract that under certain
circumstances could obligate it to make any payments that will not be deductible
under Code Section 280G.
(g) None of B2B and its Subsidiaries has been a United States real
property holding corporation within the meaning of Code Section 897(c)(2) during
the applicable period specified in Code Section 897(c)(1)(A)(ii).
(h) Each of B2B and its Subsidiaries has disclosed on its federal
income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code
Section 6662.
(i) None of B2B and its Subsidiaries is, or has been, a party to any
Tax allocation or sharing Contract.
(j) With respect to B2B or its Subsidiaries, B2B has made an
election under Treas. Reg. Section 1.502-20(g)(1), if applicable.
(k) None of B2B and its Subsidiaries (i) has been a member of an
Affiliated Group filing a consolidated federal income Tax Return (other than a
group the common parent of which was B2B) or (ii) has any Liability for the
Taxes of any Person (other than any of B2B and its Subsidiaries) under Treas.
Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign
Law), as a transferee or successor, by contract, or otherwise.
(l) B2B will provide a Schedule 3.30(l) within sixty (60) days of
----------------
the date of this Agreement setting forth the following information with respect
to each of B2B and its Subsidiaries (or, in the case of clause (ii), with
respect to each of the Subsidiaries) as of the most recent practicable date (as
well as on an estimated pro forma basis as of the Closing giving effect to the
consummation of the transactions contemplated hereby): (i) the basis of B2B or
its Subsidiary in its assets; (ii) the basis of the stockholder(s) of the
Subsidiary in its stock (or the amount of any Excess Loss Account) determined in
accordance with Treas. Reg. Section 1.1502-32; (iii) the amount of any basis in
its subsidiaries attributable to any "extraordinary gain disposition" or
"duplicated Loss" as defined in Treas. Reg. Section 1.502-20; (iv) the amount of
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<PAGE>
any net operating loss, net capital loss, unused investment or other credit,
unused foreign Tax, or excess charitable contribution allocable to B2B or its
Subsidiary; and (iv) the amount of any deferred gain or loss allocable to B2B or
its Subsidiary arising out of any Deferred Intercompany Transaction and the
amount of any undistributed earnings and profits of B2B and its Subsidiaries
immediately prior to Closing as defined under Treas. Reg. Section 1.1502.33.
(m) The unpaid Taxes of B2B and its Subsidiaries (i) did not, as of
the September 30, 2000 B2B Financial Statements, exceed the reserve for Tax
Liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) set forth on the face of the
September 30, 2000 B2B Financial Statements (rather than in any notes thereto)
and (ii) do not exceed that reserve as adjusted for the passage of time through
the Effective Date in accordance with the past custom and practice of B2B and
its Subsidiaries in filing their Tax Returns.
3.31 B2B Contracts. Schedule 3.31 sets forth a true, correct and complete
------------- -------------
list of the B2B Contracts and indicates the B2B Contacts, if any, to be assumed
by the Surviving Corporation. B2B has provided IVAX and Diagnostics with a true,
correct and complete list of each written B2B Contract and a full and accurate
summary of the terms of any oral B2B Contract. Each B2B Contract is in full
force and effect and neither B2B nor any of its Subsidiaries, nor, to the
Knowledge of B2B, any other party thereto is in material Breach or default
thereunder.
3.32 Intellectual Property.
----------------------
(a) B2B and its Subsidiaries own or have the right to use pursuant
to an Enforceable License or Contract all Intellectual Property necessary or
desirable for the operation of the businesses of B2B and its Subsidiaries as
presently conducted and as presently proposed to be conducted. Each item of
Intellectual Property owned or used by any of B2B and its Subsidiaries
immediately prior to the Effective Date will be owned or available for use by
B2B or the Subsidiary on identical terms and conditions immediately subsequent
to the Effective Date. Each of B2B and its Subsidiaries has taken all necessary
and desirable action to maintain and protect each item of Intellectual Property
that it owns or uses. Schedule 3.32(a) identifies each License, Contract,
----------------
patent, copyright, trademark, service mark and domain name which has been issued
to any of B2B and its Subsidiaries, with respect to its Intellectual Property
necessary or desirable for the operation of the businesses of B2B and its
Subsidiaries as presently conducted and as presently proposed to be conducted.
B2B has delivered to IVAX and Diagnostics correct and complete copies of all
such patents, copyrights, trademarks, service marks, and domain names, including
all registrations, applications, renewals, Licenses, and Contracts (as amended
to date) and have made available to IVAX and Diagnostics correct and complete
copies of all other written documentation evidencing ownership and prosecution
(if applicable) of each such item.
(b) To the Knowledge of B2B, none of B2B and its Subsidiaries has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of third parties, and none of the
directors and officers (and employees with responsibility for Intellectual
Property matters) of B2B and its Subsidiaries has ever received any charge,
complaint, claim, demand, or notice alleging any such interference,
infringement,
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<PAGE>
misappropriation, or violation (including any claim that any of B2B and its
Subsidiaries must License or refrain from using any Intellectual Property rights
of any third party). To the Knowledge of B2B, no third party has interfered
with, infringed upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of any of B2B and its Subsidiaries.
(c) To the Knowledge of B2B, none of B2B will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of its businesses as presently conducted and as presently proposed to
be conducted that would have a Material Adverse Effect on B2B.
(d) B2B has no Knowledge of any new products, inventions,
procedures, or methods of manufacturing or processing that any competitors or
other third parties have developed which reasonably could be expected to
supersede or make obsolete any product or process of any of B2B and its
Subsidiaries that would have a Material Adverse Effect on B2B.
3.33 State Takeover Laws; Appraisal Rights. B2B has taken all necessary
-------------------------------------
actions to exempt the Merger from (a) Section 203 of the Delaware GCL, (b) any
applicable anti-takeover or similar provisions in B2B's Certificate of
Incorporation or Bylaws, and (c) any anti-takeover or similar provisions set
forth in any B2B Contract. Holders of B2B Common Stock will not have appraisal
rights under Section 262 of the Delaware GCL.
3.34 Reorganization. As of the date of this Agreement, B2B has no
--------------
Knowledge of any reason why the Merger will fail to qualify as a reorganization
under Section 368(a) of the Code.
3.35 Termination of Business. As of the Effective Date, B2B has no material
-----------------------
liabilities (known, asserted, absolute, accrued, liquidated or due) other than
as set forth on the B2B Effective Date Balance Sheet. B2B can terminate its
existing business, including all B2B Contracts and the B2B website
(www.b2bstores.com), at any time without incurring any material liabilities
-----------------
(known, asserted, absolute, accrued, liquidated or due).
3.36 Foreign Corrupt Practices Act Compliance. Neither B2B nor its
----------------------------------------
Subsidiaries has, directly or indirectly, in connection with B2B or its
Subsidiaries' business, made or agreed to make any payment to any Person
connected with or related to any government or Agency, except payments or
contributions required or allowed by applicable Law. The internal accounting
controls and procedures of B2B and its Subsidiaries are sufficient to cause B2B
and its Subsidiaries to comply with the Foreign Corrupt Practices Act
3.37 Disclosure. No representation or warranty of B2B herein (including the
----------
exhibits and schedules hereto), and no statement, report, or certificate
furnished or to be furnished by or on behalf of B2B or its agents pursuant
hereto, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which such statements are made, not misleading.
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ARTICLE 4.
Representations and Warranties of IVAX and Diagnostics
In order to induce B2B to enter into this Agreement and the Plan of Merger
and to consummate the transactions contemplated hereby and thereby, IVAX and
Diagnostics hereby, jointly and severally, represent and warrant to B2B that the
representations and warranties contained in this Article 4 are true, correct and
---------
complete as of the date of this Agreement and will be true, correct and complete
as of the Effective Time (as though made then and, except as expressly provided
in a representation or warranty, as though the Effective Time were substituted
for the date of this Agreement).
4.1 Organization, Standing and Power. Each of Diagnostics and IVAX is
--------------------------------
a corporation duly organized, validly existing and its status is active under
the Laws of the State of Florida and has all requisite right, power and
authority to enter into this Agreement and the Plan of Merger and to consummate
the transactions contemplated hereby and thereby.
4.2 Authorization of Agreement; Enforceability. The execution, delivery
------------------------------------------
and performance of this Agreement and the Plan of Merger by each of Diagnostics
and IVAX and the consummation of the transactions contemplated hereby and
thereby have been duly and effectively authorized by all requisite corporate
action on the part of Diagnostics and IVAX. All Consents relating to the
Merger, this Agreement and the transactions contemplated thereby and hereby will
be obtained prior to the Effective Time and will be in full force and effect at
the Effective Time, except where the failure to obtain such Consent would not
have a Material Adverse Effect on Diagnostics or any of its Subsidiaries. This
Agreement and the Plan of Merger constitute an Enforceable obligation of each of
Diagnostics and IVAX.
4.3 No Violation or Conflict. The execution, delivery and performance of
------------------------
this Agreement and the Plan of Merger by Diagnostics and IVAX, and the
consummation of the transactions contemplated hereby and thereby, and compliance
by Diagnostics and IVAX with the provisions hereof and thereof (a) do not and
will not violate or conflict with any Law or any Order or any term or provision
of the Articles of Incorporation or Bylaws (or other organizational documents)
of Diagnostics or any of its Subsidiaries and (b) do not and will not, with or
without the passage of time or the giving of notice, result in the Breach of, or
constitute a Breach or require any Consent under or result in the creation of
any Encumbrance upon any property or assets of Diagnostics or any of its
Subsidiaries under any Contract to which Diagnostics or any of its Subsidiaries
is a party or by which Diagnostics or any of its Subsidiaries or any of their
respective properties may be bound or affected, except (i) for those Contracts
as to which Consent shall have been obtained at or prior to the Effective Time
or (ii) where the failure to obtain such Consent would not have a Material
Adverse Effect on Diagnostics or any of its Subsidiaries.
4.4 Articles of Incorporation, Bylaws and Minute Books. A true and
--------------------------------------------------
complete copy of the Articles of Incorporation (as amended and in effect),
Bylaws (as amended and in effect) and minute books of Diagnostics and each of
its Subsidiaries have been delivered by Diagnostics to B2B, except for Delta's
organizational documents which have been made available to B2B. The minute
books of Diagnostics and each of its Subsidiaries in the form supplied to (or in
the case of Delta, made available) B2B are complete and accurate in all material
respects and have
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embodied therein copies of all minutes of all meetings and all actions by
written Consent of the Board of Directors of Diagnostics and each of its
Subsidiaries, any committee thereof, the incorporators and the stockholders of
Diagnostics and each of its Subsidiaries from the dates of their respective
incorporation or organization to the date of this Agreement, and such minutes
and actions by written Consent accurately reflect all material actions taken by
the Board of Directors of Diagnostics or any of its Subsidiaries, any committees
thereof, the incorporators and the stockholders during such periods. All actions
of Diagnostics or any of its Subsidiaries from the dates of their respective
incorporations or organizations to the date of this Agreement that required the
approval of the directors or stockholders of Diagnostics or such Subsidiaries,
as the case may be, have been so approved.
4.5 Consent of Governmental Authorities. Other than (a) in connection
-----------------------------------
with or in compliance with the Delaware GCL, the Florida BCA, the Exchange Act,
the Securities Act and the state securities Laws of any jurisdiction and (b)
notification pursuant to, and expiration or termination of the waiting period
under the HSR Act, if required, no Consent of any Agency is required in
connection with the execution, delivery or performance by Diagnostics or IVAX of
this Agreement or the Plan of Merger or the consummation by Diagnostics or IVAX
of the transactions contemplated hereby or thereby.
4.6 Diagnostics Financial Statements. Diagnostics has delivered to B2B
--------------------------------
true and complete copies of (i) the audited balance sheets of Diagnostics as of
December 31, 1997, December 31, 1998 and December 31, 1999 and the related
statements of operations, changes in stockholder's equity, and cash flows for
the years then ended and (ii) the unaudited balance sheet of Diagnostics dated
as of September 30, 2000 and the related statements of operations, changes in
stockholder's equity and cash flows for the nine months then ended
(collectively, the "Diagnostics Financial Statements") present fairly, in all
material respects, the consolidated financial position, results of operations,
and cash flows of Diagnostics and its Subsidiaries (subject, in the case of
unaudited statements, to normal recurring year-end audit adjustments and the
omission of certain footnote disclosure). The Diagnostics Financial Statements
and supporting schedules were prepared in all material respects: (a) in
accordance with Regulation S-X promulgated by the Commission, (b) in conformity
with GAAP applied on a consistent basis and (c) from the books and records of
Diagnostics and its Subsidiaries. The Diagnostics Financial Statements comply
as to form with the requirements of Regulation S-X promulgated by the Commission
in all material respects.
4.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule
---------------------------------- --------
4.7, neither Diagnostics nor any of its Subsidiaries has, and there is no Basis
---
for assertion against Diagnostics or any of its Subsidiaries of, any material
Liability, which is not included, disclosed or noted in the September 30, 2000
Diagnostics Financial Statements, except for the Transaction Expenses of
Diagnostics incurred in accordance with the provisions of this Agreement and as
set forth in Schedule 4.7 and any non-material Liabilities incurred since
------------
September 30, 2000 in the Ordinary Course of Business to Persons not Affiliates
of Diagnostics or any of its Subsidiaries (none of which result from, arise out
of, relates to, is in the nature of, or was caused by a Breach of Contract,
Breach of warranty, tort, infringement or violation of Law). Schedule 4.7 and
------------
the Diagnostic Effective Date Balance Sheet set forth all of the material
liabilities (known, asserted, absolute, accrued, liquidated or due) of
Diagnostics and its Subsidiaries.
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4.8 Receivables. All Receivables of Diagnostics and its Subsidiaries are
-----------
accurately reflected on the September 30, 2000 Diagnostics Financial Statements,
and are valid, bona fide and binding claims arising in the Ordinary Course of
the Business, subject to reserves for bad debt set forth in the September 30,
2000 Diagnostics Financial Statements. No Receivables have been factored.
4.9 Product Warranty. Each product of Diagnostics and its Subsidiaries
----------------
has manufactured, sold, leased, or delivered has been in conformity, in all
material respects, with all applicable Law, Contracts, and all express and
implied warranties, and, to the Knowledge of IVAX and Diagnostics, neither
Diagnostics or its Subsidiaries has any Liability (and there is no Basis for any
present or future Action against any of them giving rise to any Liability) for
replacement or repair thereof or other Damages in connection therewith. No
product designed, manufactured, sold, leased, or delivered by Diagnostics or its
Subsidiaries is subject to any guaranty, warranty, or other indemnity beyond the
applicable terms and conditions of sale or lease by Diagnostics or its
Subsidiaries. True and correct copies of the terms and conditions of sale or
lease for Diagnostics and its Subsidiaries (containing applicable guaranty,
warranty, and similar Liability indemnity provisions) have been delivered to
B2B.
4.10 Product Liability. Neither Diagnostics nor its Subsidiaries has
-----------------
received any written notice of or any written information as to any Liability
(and there is no Basis for any present or future Action against any of them
giving rise to any Liability) arising out of any injury to individuals or
property as a result of the ownership, possession, or use of any product
designed, manufactured, sold, leased or delivered by Diagnostics or its
Subsidiaries.
4.11 Subsidiaries. Set forth on Schedule 4.11 is a list of each, direct or
------------ -------------
indirect, Subsidiary of Diagnostics, including (a) its name and jurisdiction of
organization, (b) the number of authorized shares of each class of its capital
stock or equity interest, (c) the number of issued and outstanding shares of
each class of its capital stock or equity interest and (d) the names of each of
its directors and officers, managers or general or managing partners. All of the
capital stock or equity interests of each Subsidiary of Diagnostics have been
duly authorized and are validly issued, fully paid and nonassessable, and are
owned by Diagnostics. There are no commitments with respect to any capital stock
or equity interests of any Subsidiary of Diagnostics. Except as set forth on
Schedule 4.11, Diagnostics owns no capital stock or equity interests in any
-------------
Person. Each Subsidiary of Diagnostics is duly organized, validly existing, and
in good standing under the Laws of the jurisdiction of its organization and has
all necessary corporate power to own its properties and assets and to carry on
its business as presently conducted. Each Subsidiary of Diagnostics is duly
qualified to conduct business as a foreign corporation and is in good standing
in each jurisdiction in which the nature of the business transacted by it
requires such qualification, except where any such failure would not have a
Material Adverse Effect.
4.12 Compliance with Laws. Except as set forth in Schedule 4.12,
-------------------- -------------
Diagnostics and each of its Subsidiaries has conducted its business in
compliance, in all material respects, with all applicable Laws and Orders
including Environmental Laws, Food and Drug Administration and related Laws,
Laws relating to disclosure, equal employment, foreign corrupt practices,
antitrust, product quality, discrimination, employment and health and safety,
and no Action or notice thereof has been filed or commenced or notice of any
Action has been filed, or to the Knowledge
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of IVAX or Diagnostics, Threatened to be filed or commenced, against any of them
alleging any failure to so comply.
4.13 Brokers and Finders. Except as set forth on Schedule 4.13,
------------------- -------------
neither Diagnostics nor any of its Subsidiaries or Affiliates of Diagnostics has
employed any financial advisor, broker or finder and has not incurred and will
not incur any broker's, finder's, investment banking, or similar fees,
commissions or expenses to any other Person in connection with the transactions
contemplated by this Agreement.
4.14 Capitalization. The authorized capital stock of Diagnostics
--------------
consists solely of 30,000,000 shares of Diagnostics Common Stock, of which
14,600,000 shares are issued and outstanding as of the date of this Agreement.
All of the issued and outstanding shares of Diagnostics Common Stock have been
duly authorized and validly issued and are credited as fully paid and non-
assessable, with no personal Liability attaching to the ownership thereof. No
class of equity securities of Diagnostics exists other than the stock noted
above. All voting rights with respect to Diagnostics are vested exclusively in
the Diagnostics Common Stock. No securities issued by Diagnostics from the date
of its incorporation to the date of this Agreement were issued in violation of
the preemptive rights of any Person. All material Licenses and Consents
required to be obtained from or effected with any Person in connection with all
issuances of securities of Diagnostics since the date of its incorporation have
been obtained or effected and all securities of Diagnostics have been issued in
accordance with the provisions of all applicable securities and other Laws.
4.15 Beneficial Owners; Commitments. IVAX is the sole record and
------------------------------
Beneficial Owner of all of the issued and outstanding Diagnostics Common Stock,
free and clear of any Encumbrances or Commitments. Schedule 4.15 set forth all
-------------
of the Commitments relating to any capital stock of Diagnostics (listing in the
holder of the Commitment, date of grant, the expiration date, the exercise
price, a description of any anti-dilution or change of Control provisions and
all other material provisions).
4.16 Real Property; Leases.
----------------------
(a) Schedule 4.16(a) lists and describes briefly all real property
----------------
owned by any of Diagnostics and its Subsidiaries. With respect to each such
parcel of owned real property and except as set forth on Schedule 4.16:
-------------
(i) the identified owner has good and marketable title to the
parcel of real property, free and clear of any Encumbrance, or other
restriction, except for installments of special assessments not yet
delinquent and recorded Encumbrances and other restrictions which do
not materially impair the current use or occupancy, or impair the
value (in excess of the Basket Limitation) or the marketability of
title, of the property subject thereto;
(ii) there are no pending or, to the Knowledge of IVAX and
Diagnostics, Threatened condemnation Actions relating to the property
or other matters affecting materially and adversely the current use,
occupancy, or value thereof;
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<PAGE>
(iii) the legal description for the parcel contained in the
deed thereof describes such parcel fully and adequately, the buildings
and improvements are located within the boundary lines of the
described parcels of land, are not, to the Knowledge of IVAX and
Diagnostics, in violation of applicable setback requirements, zoning
Laws (and none of the properties or buildings or improvements thereon
are subject to "permitted non-conforming use" or "permitted non-
conforming structure" classifications), and do not encroach on any
easement which may burden the land, and the land does not serve any
adjoining property for any purpose inconsistent with the use of the
land, and the property is not located within any flood plain or
subject to any similar type restriction for which any Licenses
necessary to the use thereof have not been obtained;
(iv) all facilities have received all material approvals of
all Agencies (including Licenses) required in connection with the
ownership or operation thereof and have been operated and maintained
in accordance with applicable Laws;
(v) there are no Contracts granting to any party or parties
the right of use or occupancy of any portion of the parcel of real
property;
(vi) there are no outstanding Commitments to purchase the
parcel of real property, or any portion thereof or interest therein;
and
(vii) to the Knowledge of IVAX and Diagnostics, there are no
parties (other than Diagnostics and its Subsidiaries) in possession of
the parcel of real property, other than tenants under any leases
disclosed in Schedule 4.16(a)(vii) who are in possession of space to
---------------------
which they are entitled/
(b) Schedule 4.16(b) lists and describes briefly all real property
----------------
leased or subleased to any of Diagnostics and its Subsidiaries. Diagnostics has
delivered to B2B correct and complete copies of the leases and subleases listed
in Schedule 4.16(b) (each as amended to date). With respect to each lease and
----------------
sublease listed in Schedule 4.16(b) and except as set forth on Schedule 4.16:
---------------- -------------
(i) the lease or sublease is Enforceable and in full force
and effect;
(ii) the lease or sublease will continue to be Enforceable,
and in full force and effect, on identical terms following the
consummation of the transactions contemplated hereby;
(iii) to the Knowledge of IVAX and Diagnostics, no party to the
lease or sublease is in material Breach, and no event has occurred
which, with notice or lapse of time, would constitute a material
Breach thereunder;
(iv) to the Knowledge of IVAX and Diagnostics, no party to the
lease or sublease has repudiated any provision thereof;
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<PAGE>
(v) there are no disputes, oral Contracts, or forbearances in
effect as to the lease or sublease;
(vi) none of the Diagnostics and its Subsidiaries is a party
to any Sublease;
(vii) none of Diagnostics and its Subsidiaries has assigned,
transferred, conveyed, mortgaged, deeded in trust, or Encumbered any
interest in the leasehold or subleasehold; and
(viii) all facilities leased or subleased thereunder have
received all material approvals of all Agencies (including Licenses)
required in connection with the operation thereof and have been
operated and maintained in accordance with applicable Laws.
4.17 Title to Personal Property. Except as set forth on Schedule 4.17,
-------------------------- -------------
Diagnostics and its Subsidiaries have good and marketable title, free and clear
of any Encumbrances, to each material item of personal property, tangible and
intangible, as reflected on the September 30, 2000 Diagnostics Financial
Statements and to each material item of personal property, tangible and
intangible, acquired since September 30, 2000 (other than non-material property
disposed of in the Ordinary Course of Business since September 30, 2000 to
Persons who are not Affiliates of Diagnostics or any of its Subsidiaries).
Except for leasehold interests and other leased properties identified on
Schedule 4.16(b) or 4.17, there are no assets owned by any third party which are
------------------------
necessary to the operations of the business of Diagnostics and its Subsidiaries
as presently conducted. Each such tangible asset is free from material defects
(patent and latent), has been maintained in accordance with normal industry
practice, is in operating condition (subject to normal wear and tear), and is
suitable for the purposes for which it is currently used.
4.18 Insurance. Diagnostics maintains (or IVAX maintains on behalf of
---------
Diagnostics, whether through self insurance or otherwise) liability (including
product liability), casualty, property loss, worker's compensation and other
insurance coverage with respect to the conduct of Diagnostics and its
Subsidiaries' respective businesses, in such insurance amounts and under terms
and conditions, as required by applicable Law and as IVAX or Diagnostics deems
reasonably necessary. Diagnostics (or IVAX on behalf of Diagnostics) has, with
respect to insurance policies issued by third parties, paid all premiums with
respect thereto covering all periods up to and including the date of this
Agreement (other than retroactive premiums which may be payable with respect to
worker's compensation insurance policies or accrued premiums not yet due and
payable), and no written notice of cancellation or termination has been received
by IVAX with respect to any such policy and there exists no Basis for any such
termination or cancellation. Except as set forth in Schedule 4.18, none of such
-------------
policies are subject to any retroactive premium adjustment feature; provided,
however, the Surviving Corporation will have no Liability with respect to any
such retroactive premiums in excess of the Basket Limitation. To the Knowledge
of Diagnostics, neither Diagnostics or its Subsidiaries nor any other party to
an insurance policy of Diagnostics or its Subsidiaries is in default or Breach,
and to the Knowledge of Diagnostics, no event has occurred which, with notice as
the lapse of time, would constitute such a Breach or default or permit
termination, modification or acceleration, under
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<PAGE>
such policy. Diagnostics has provided B2B true and correct summaries of the
material terms and conditions of all of its insurance policies.
4.19 Employment Contracts. Except as set forth on Schedule 4.19, there
-------------------- -------------
are no employment, indemnification, consulting, severance or other similar
Contracts between Diagnostics or any of its Subsidiaries and any of their
respective officers, directors, consultants or employees (the "Diagnostics
Employment Contracts"). Except as set forth on Schedule 4.19, none of the
-------------
Diagnostics Employment Contracts contain any "change of Control," severance or
other provisions pursuant to which any of the benefits of any other party
thereto will be increased or the vesting of any such benefits will be
accelerated by the consummation of any of the transactions contemplated by this
Agreement or pursuant to which the value of any such benefits will be calculated
on the Basis of any of the transactions contemplated by this Agreement. To the
Knowledge of IVAX and Diagnostics, no executive, key employee, or group of
employees has any plans to terminate employment with any of Diagnostics and its
Subsidiaries. Except as set forth on Schedule 4.19, none of Diagnostics and its
-------------
Subsidiaries is a party to or bound by any collective bargaining Contract, nor
has any of them experienced any strikes, grievances, claims of unfair labor
practices, or other collective bargaining disputes. None of Diagnostics and its
Subsidiaries has committed any unfair labor practice. Diagnostics has no
Knowledge of any organizational effort presently being made or Threatened by or
on behalf of any labor union with respect to employees of any of Diagnostics and
its Subsidiaries.
4.20 Employee Benefits.
------------------
(a) Schedule 4.20 lists each Employee Benefit Plan that any of
-------------
Diagnostics or a Subsidiary of Diagnostics maintains or to which it contributes.
Subsections 4.20(b) through (j) apply to each Employee Benefit Plan that any of
Diagnostics or a Subsidiary of Diagnostics or any ERISA Affiliate of Diagnostics
or a Subsidiary of Diagnostics maintains or to which any of Diagnostics or a
Subsidiary of Diagnostics or any ERISA Affiliate of Diagnostics or a Subsidiary
of Diagnostics contributes.
(b) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all material
respects with its terms and with the applicable requirements of ERISA, the Code,
and other applicable Laws.
(c) All required reports and descriptions (including Form 5500 Annual
Reports, Summary Annual Reports, PBGC-l's, and Summary Plan Descriptions) have
been filed or distributed appropriately with respect to each such Employee
Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and
of Code Section 4980B have been met with respect to each such Employee Benefit
Plan that is an Employee Welfare Benefit Plan to which such requirements apply.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been paid to each
such Employee Benefit Plan which is an Employee Pension Benefit Plan and all
contributions for any period ending on or before the Effective Date which are
not yet due have been paid to each such Employee Pension Benefit Plan or accrued
in accordance with the past custom and practice of Diagnostics and its
Subsidiaries. No "accumulated funding deficiency" (for which a Tax is due or
would be
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<PAGE>
due in the absence of a waiver), as such terms is defined in ERISA Section
302(a)(2) or Code Section 412, has been incurred with respect to any such
Employee Benefit Plan that is an Employee Pension Benefit Plan, whether or not
waived. All premiums or other required payments which are due for all periods
ending on or before the Effective Date have been paid with respect to each such
Employee Benefit Plan that is an Employee Welfare Benefit Plan.
(e) Each Employee Pension Benefit Plan which is intended to qualify
under Section 401(a) of the Code does so qualify, and each related trust
qualifies under Section 501(a) of the Code, and each such Employee Pension
Benefit Plan is the subject of a favorable determination letter from the IRS.
Nothing has occurred to impair such determination, subject to the ability of the
employer that sponsors such Employee Pension Benefit Plan to amend such plan,
within its "remedial amendment period", or as otherwise provided by the IRS, to
comply with recent law changes."
(f) The market value of assets under each such Employee Benefit Plan
that is an Employee Pension Benefit Plan (other than any Multiemployer Plan)
equals or exceeds the present value of all "benefit liabilities," as such terms
is defined in ERISA Section 4001(a)(16), thereunder determined in accordance
with PBGC methods, factors, and assumptions applicable to an Employee Pension
Benefit Plan terminating on the date for determination.
(g) Diagnostics has delivered, or will upon request deliver, to B2B
correct and complete copies of the plan documents and summary plan descriptions,
the most recent determination letter received from the IRS, the most recent Form
5500 Annual Report, and all related trust Contracts, insurance Contracts, and
other funding Contracts which implement each such Employee Benefit Plan.
(h) With respect to each Employee Benefit Plan that any of
Diagnostics, a Subsidiary of Diagnostics, or any ERISA Affiliate of Diagnostics
or a subsidiary of Diagnostics maintains or ever has maintained or to which any
of them contributes, ever has contributed, or ever has been required to
contribute:
(i) no such Employee Benefit Plan which is an Employee Pension
Benefit Plan described in Title IV of ERISA (other than any
Multiemployer Plan) has been completely or partially terminated or
been the subject of a Reportable Event as to which notices would be
required to be filed with the PBGC;
(ii) no proceeding by the PBGC to terminate any Employee Pension
Benefit Plan described in Title IV of ERISA (other than any
Multiemployer Plan) has been instituted or, to the Knowledge of
Diagnostics, Threatened;
(iii) there have been no Prohibited Transactions with respect
to any such Employee Benefit Plan;
(iv) no Fiduciary has any Liability for Breach of fiduciary duty
or any other failure to act or comply in connection with the
administration or investment of the assets of any such Employee
Benefit Plan. No Action with respect to the administration or the
investment of the assets of any such Employee Benefit Plan
A-35
<PAGE>
(other than routine claims for benefits) is pending or, to the
Knowledge of Diagnostics, Threatened;
(v) to the Knowledge of IVAX and Diagnostics, there is no Basis
for any such Action described in (iv) above; and
(vi) none of Diagnostics or its Subsidiaries has incurred, and
has any reason to expect that any of Diagnostics and its Subsidiaries
will incur, any Liability to the PBGC (other than PBGC premium
payments) or otherwise under Title IV of ERISA (including any
withdrawal Liability) or under the Code with respect to any such
Employee Benefit Plan which is an Employee Pension Benefit Plan.
(i) None of Diagnostics, its Subsidiaries, or any ERISA Affiliate of
Diagnostics or a Subsidiary of Diagnostics contributes to, ever has contributed
to, or ever has been required to contribute to any Multiemployer Plan or has any
Liability (including withdrawal Liability) under any Multiemployer Plan.
(j) None of Diagnostics or its Subsidiaries maintains or ever has
maintained or contributes, ever has contributed, or ever has been required to
contribute to any Employee Welfare Benefit Plan providing medical, health, or
life insurance or (other welfare-type benefits for current or future retired or
terminated employees, their spouses, or their dependents as required under Code
Section 4980B). No Employee Welfare Benefit Plan which Diagnostics or any of
its Subsidiaries maintains or ever has maintained or to which any of them
contributes, ever has contributed, or ever has been required to contribute is a
"multiple employer welfare arrangement," as such term is defined in ERISA
Section 3(40).
4.21 Guaranties. None of Diagnostics and its Subsidiaries is a
----------
guarantor or otherwise is responsible for any Liability (including indebtedness)
of any other Person.
4.22 Environmental, Health, and Safety Matters.
------------------------------------------
(a) Each of Diagnostics, its Subsidiaries, and their respective
predecessors has, in a material respect, complied and is in compliance with all
Environmental Laws.
(b) Without limiting the generality of Section 4.22(a), each of
---------------
Diagnostics, its Subsidiaries has obtained, has complied with, and is in
compliance with all material Licenses and other material authorizations that are
required pursuant to Environmental Laws for the occupation of its facilities and
the operation of its business. A list of all such Licenses and other
authorizations is set forth in Schedule 4.22(b).
----------------
(c) Except as set forth on Schedule 4.22(c), neither Diagnostics,
----------------
its Subsidiaries, nor any of their respective predecessors has received any
written or oral notice, report or other information regarding any actual or
alleged violation of Environmental Laws, or any Liabilities or potential
Liabilities including any investigatory, remedial or corrective obligations,
relating to any of them or its facilities arising under Environmental Laws.
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<PAGE>
(d) Except as set forth on Schedule 4.22(d), none of the following
----------------
exists at any property or facility owned or operated by Diagnostics or its
Subsidiaries: (i) underground storage tanks, (ii) asbestos containing material
in any form or condition (except as permitted by and in accordance with Law),
(iii) materials or equipment containing polychlorinated biphenyls, or (iv)
landfills, surface impoundments, or disposal areas.
(e) None of Diagnostics, its Subsidiaries, or their respective
predecessors has treated, stored, disposed of, arranged for or permitted the
disposal of, transported, handled, or released any substance, including any
hazardous substance, or owned or operated any property or facility (and no such
property or facility is contaminated by any such substance) in a manner that has
given or would give rise to Liabilities, including any Liability for response
costs, corrective action costs, personal injury, property damage, natural
resources damages or attorney fees, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Solid Waste
Disposal Act, as amended, or any other Environmental Laws.
(f) To the Knowledge of IVAX and Diagnostics, neither this Agreement
nor the consummation of the transaction that is the subject of this Agreement
will result in any obligations for site investigation or cleanup, or
notification to or Consent of government agencies or third parties, pursuant to
any of the so-called "transaction-triggered" or "responsible property transfer"
Environmental Laws.
(g) Neither Diagnostics, its Subsidiaries, nor any of their
respective predecessors has, either expressly or by operation of Law, assumed or
undertaken any Liability, including any obligation for corrective or remedial
action, of any other Person relating to Environmental Laws.
(h) Except as set forth in Schedule 4.22(h), no facts, events or
----------------
conditions relating to the past or present facilities, properties or operations
of Diagnostics, its Subsidiaries, or any of their respective predecessors will
prevent, hinder or limit continued compliance with Environmental Laws, give rise
to any investigatory, remedial or corrective obligations pursuant to
Environmental Laws, or give rise to any other Liabilities pursuant to
Environmental Laws, including any relating to onsite or offsite releases or
Threatened Releases of hazardous materials, substances or wastes, personal
injury, property damage or natural resources damage.
4.23 Litigation. Except as set forth on Schedule 4.23, there are no
---------- -------------
Actions pending, or, to the best of Diagnostic's Knowledge, directly or
indirectly, Threatened, against or affecting Diagnostics or any of its
Subsidiaries or any officer, director or employee of Diagnostics or any of its
Subsidiaries in their respective capacities as such. Neither Diagnostics nor
any of its Subsidiaries is in violation or in default of any Order of any Court
or Agency.
4.24 Absence of Changes. Except as set forth on Schedule 4.24, since
------------------ -------------
September 30, 2000 Diagnostics has conducted its business only in the Ordinary
Course of Business and there has not occurred any Material Adverse Change in the
condition (financial or otherwise), results of operations, properties, assets,
Liabilities, business, operations or prospects of Diagnostics or any of its
Subsidiaries, and, since September 30, 2000, neither Diagnostics nor any of its
Subsidiaries has (a) incurred any material Liabilities, (b) voluntarily or
involuntarily sold, transferred, surrendered, abandoned or disposed of any of
its material assets or property rights
A-37
<PAGE>
(tangible or intangible), (c) granted any increase in the compensation payable
or to become payable to officers or employees (including any bonus payments or
payments pursuant to any pension, profit-sharing plan or other Diagnostics
Employee Benefit Plan or commitment), (d) incurred, assumed or taken any
property subject to any Liability, (e) materially altered the manner of keeping
the books, accounts or records of Diagnostics, or materially changed in any
manner the accounting practices therein reflected other than alterations or
changes required by GAAP or applicable Law, (f) amended its Articles of
Incorporation or Bylaws in any material respect, (g) canceled, waived or
released any material debts, rights or claims, (h) amended or terminated any
Diagnostics Contract, or (i) entered into any Diagnostics Employment Contract,
except for those referred to on Schedule 4.24. IVAX and Diagnostics have a Basis
-------------
to believe that Diagnostics will have cash and cash equivalents of at least
$2,000,000 at the Effective Time.
4.25 Tax Matters.
------------
(a) Except as set forth in Schedule 4.25(a): each of Diagnostics and
----------------
its Subsidiaries has timely filed all Tax Returns that it was required to file;
all such Tax Returns were correct and complete in all material respects; all
Taxes owed by any of Diagnostics and its Subsidiaries (whether or not shown on
any Tax Return) have been paid; all Taxes which may be owed by Diagnostics
(whether or not shown on any Tax Return) and which may be payable between the
date of this Agreement and the Effective Date will be timely paid in full; none
of Diagnostics and its Subsidiaries currently is the beneficiary of any
extension of time within which to file any Tax Return; no claim has ever been
made by an authority in a jurisdiction where any of Diagnostics and its
Subsidiaries does not file Tax Returns that it is or may be subject to taxation
by that jurisdiction; and, there are no Encumbrances on any of the assets of any
of Diagnostics and its Subsidiaries that arose in connection with any failure
(or alleged failure) to pay any Tax.
(b) Each of Diagnostics and its Subsidiaries has withheld and paid
all Taxes required to have been withheld and paid in connection with amounts
paid or owed to any employee, independent contractor, creditor, stockholder, or
other third party.
(c) No director or officer (or employee responsible for Tax matters)
of any of Diagnostics and its Subsidiaries expects any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of any of Diagnostics and its
Subsidiaries either (i) claimed or raised by any authority in writing or (ii) as
to which Diagnostics has Knowledge based upon personal contact with any agent of
such authority. Schedule 4.25(c) lists all Tax Returns that have been audited,
----------------
and indicates which of those Tax Returns that currently are the subject of
audit. Diagnostics has delivered to B2B correct and complete copies of all Tax
Returns, examination reports, and statements of deficiencies assessed against or
agreed to by any of Diagnostics and its Subsidiaries since 1997.
(d) Except as set forth on Schedule 4.25(d), none of Diagnostics and
----------------
its Subsidiaries has waived any statute of limitations in respect of Taxes or
agreed to any extension of time with respect to a Tax assessment or deficiency.
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<PAGE>
(e) None of Diagnostics and its Subsidiaries has filed a Consent
under Code Section 341(f) concerning collapsible corporations.
(f) None of Diagnostics and its Subsidiaries has made any payments,
is obligated to make any payments, or is a party to any Contract that under
certain circumstances could obligate it to make any payments that will not be
deductible under Code Section 280G.
(g) None of Diagnostics and its Subsidiaries has been a United States
real property holding corporation within the meaning of Code Section 897(c)(2)
during the applicable period specified in Code Section 897(c)(1)(A)(ii).
(h) Each of Diagnostics and its Subsidiaries has disclosed on its
federal income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code
Section 6662.
(i) None of Diagnostics and its Subsidiaries is, or has been, a party
to any Tax allocation or sharing Contract.
(j) With respect to Diagnostics or its Subsidiaries, IVAX has made no
election under Treas. Reg. Section 1.1502-20(g)(1).
(k) None of Diagnostics and its Subsidiaries (i) has been a member of
an Affiliated Group filing a consolidated federal income Tax Return (other than
a group the common parent of which was IVAX or Diagnostics) or (ii) has any
Liability for the Taxes of any Person (other than any of Diagnostics and its
Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any similar provision of
state, local, or foreign Law), as a transferee or successor, by contract, or
otherwise.
(l) Schedule 4.25(l) sets forth with respect to Diagnostics and each
----------------
of its Subsidiaries a reasonable estimate of the basis of the stockholders of
the Subsidiary in its stock as of the date of this Agreement. Additionally,
IVAX will provide a revised Schedule 4.25(l) within sixty (60) days of the date
----------------
of this Agreement setting forth the following information with respect to each
of Diagnostics and its Subsidiaries (or, in the case of clause (ii), with
respect to each of the Subsidiaries) as of the most recent practicable date (as
well as on an estimated pro forma basis as of the Closing giving effect to the
consummation of the transactions contemplated hereby): (i) the basis of
Diagnostics or its Subsidiary in its assets; (ii) the basis of the
stockholder(s) of the Subsidiary in its stock (or the amount of any Excess Loss
Account) determined in accordance with Treas. Reg. Section 1.1502-32; (iii) the
amount of any basis in its subsidiaries attributable to any "extraordinary gain
disposition" or "duplicated loss" as defined in Treas. Reg. Section 1.1502-20;
(iv) the amount of any net operating loss, net capital loss, unused investment
or other credit, unused foreign Tax, or excess charitable contribution allocable
to Diagnostics or its Subsidiary; and (iv) the amount of any deferred gain or
loss allocable to Diagnostics or its Subsidiary arising out of any Deferred
Intercompany Transaction and the amount of any undistributed earnings and
profits of Diagnostics and its Subsidiaries immediately prior to Closing as
defined under Treas. Reg. Section 1.1502.33.
(m) The unpaid Taxes of Diagnostics and its Subsidiaries (i) did not,
as of the September 30, 2000 Diagnostics Financial Statements, exceed the
reserve for Tax Liability
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<PAGE>
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of the September
30, 2000 Diagnostics Financial Statements (rather than in any notes thereto) and
(ii) do not exceed that reserve as adjusted for the passage of time through the
Effective Date in accordance with the past custom and practice of Diagnostics
and its Subsidiaries in filing their Tax Returns.
4.26 Diagnostics Contracts. Schedule 4.26 sets forth a true, correct
--------------------- -------------
and complete list of the Diagnostics Contracts and indicates the Diagnostics
Contracts that will terminate as a result of the Merger. Diagnostics has
provided B2B with a true, correct and complete list of each written Diagnostics
Contract and a full and accurate summary of the terms of any oral Diagnostics
Contract. Each Diagnostics Contract is in full force and effect and neither
Diagnostics nor any of its Subsidiaries, nor, to the Knowledge of Diagnostics,
any other party thereto is in material Breach or default thereunder.
4.27 Intellectual Property.
---------------------
(a) Diagnostics and its Subsidiaries own or have the right to use
pursuant to an Enforceable License or Contract all Intellectual Property
necessary or desirable for the operation of the businesses of Diagnostics and
its Subsidiaries as presently conducted and as presently proposed to be
conducted. Each item of Intellectual Property owned or used by any of
Diagnostics and its Subsidiaries immediately prior to the Effective Date will be
owned or available for use by Diagnostics or the Subsidiary on identical terms
and conditions immediately subsequent to the Effective Date. Each of
Diagnostics and its Subsidiaries has taken all necessary and desirable action to
maintain and protect each item of Intellectual Property that it owns or uses.
Schedule 4.27(a) identifies each License, Contract, patent, copyright, trademark
--------
and service mark which has been issued to any of Diagnostics and its
Subsidiaries, with respect to its Intellectual Property necessary or desirable
for the operation of the businesses of Diagnostics and its Subsidiaries as
presently conducted and as presently proposed to be conducted. Diagnostics has
delivered to B2B correct and complete copies of all such patents, copyrights,
trademarks and service marks, including all registrations, applications,
renewals, Licenses, and Contracts (as amended to date) and have made available
to B2B correct and complete copies of all other written documentation evidencing
ownership and prosecution (if applicable) of each such item.
(b) Except as set forth on Schedule 4.27(b), to the Knowledge of
----------------
IVAX and Diagnostics, none of Diagnostics and its Subsidiaries has interfered
with, infringed upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of third parties, and none of the directors and
officers (and employees with responsibility for Intellectual Property matters)
of Diagnostics and its Subsidiaries has ever received any charge, complaint,
claim, demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that any of Diagnostics and
its Subsidiaries must License or refrain from using any Intellectual Property
rights of any third party). To the Knowledge of Diagnostics, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of any of Diagnostics and its
Subsidiaries.
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<PAGE>
(c) Except as set forth on Schedule 4.27(c), to the Knowledge of IVAX
----------------
and Diagnostics, none of Diagnostics and its Subsidiaries will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of its businesses as presently conducted and as presently proposed to
be conducted that would have a Material Adverse Effect on Diagnostics or any of
its Subsidiaries.
(d) None of IVAX and Diagnostics has any Knowledge of any new
products, inventions, procedures, or methods of manufacturing or processing that
any competitors or other third parties have developed which reasonably could be
expected to supersede or make obsolete any product or process of any of
Diagnostics and its Subsidiaries that would have a Material Adverse Effect on
Diagnostics or any of its Subsidiaries.
4.28 Reorganization. As of the date of this Agreement, neither Diagnostics
--------------
nor IVAX has any Knowledge of any reason why the Merger will fail to qualify as
a reorganization under Section 368(a) of the Code.
4.29 Investment. IVAX (a) understands that the Merger Consideration has
----------
not been registered under the Securities Act, or under any state securities
Laws, and is being offered and sold in reliance upon federal and state
exemptions for transactions not involving any public offering, (b) is acquiring
the Merger Consideration solely for IVAX's own account for investment purposes,
and not with a view to the distribution thereof, (c) is a sophisticated investor
with knowledge and experience in business and financial matters, (d) has
received certain information concerning B2B and has had the opportunity to
obtain additional information as desired in order to evaluate the merits and the
risks inherent in holding the Merger Consideration, (e) is able to bear the
economic risk and lack of liquidity inherent in holding the Merger
Consideration, and (f) is an Accredited Investor.
4.30 Foreign Corrupt Practices Act Compliance. Neither IVAX, Diagnostics
----------------------------------------
nor their Subsidiaries has, directly or indirectly, in connection with
Diagnostics or its Subsidiaries business, made or agreed to make any payment to
any Person connected with or related to any government or Agency, except
payments or contributions required or allowed by applicable Law. The internal
accounting controls and procedures of IVAX, Diagnostics and their Subsidiaries
are sufficient to cause Diagnostics and its Subsidiaries to comply with the
Foreign Corrupt Practices Act.
4.31 Certain Business Relationships. Schedule 4.31 lists all material
------------------------------ -------------
Contracts, business arrangements and business relationships between Diagnostics
and its Subsidiaries, on the one hand, and IVAX and its Affiliates, on the other
hand. Except as set forth in Schedule 4.31, neither IVAX nor any of its
-------------
Affiliates owns any assets or properties of, or leases any assets or properties
to, Diagnostics of its Subsidiaries.
4.32 Effect of Merger. Except as disclosed on Schedule 4.32, the
---------------- -------------
consummation of the Merger will not result in the impairment or loss of any
assets or properties of Diagnostics or it Subsidiaries, including any Contract,
License, real property, personal property, or intangible property, the loss or
impairment of which could have a Material Adverse Effect on Diagnostics or any
of its Subsidiaries.
A-41
<PAGE>
4.33 Disclosure. No representation or warranty of Diagnostics or IVAX
----------
herein (including the exhibits and schedules hereto), and no statement, report,
or certificate furnished or to be furnished by or on behalf of Diagnostics or
its agents pursuant hereto, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements contained herein or therein, in light of the
circumstances under which such statements are made, not misleading.
ARTICLE 5.
Covenants and Agreements
5.1 Interim Operations of B2B. During the period from the date of
-------------------------
this Agreement to the Effective Date, B2B and its Subsidiaries shall conduct its
business only in the Ordinary Course of Business, except to the extent otherwise
necessary to comply with the provisions hereof and with applicable Laws and
regulations. Additionally, during the period from the date of this Agreement to
the Effective Date, except as required hereby in connection with the Merger, B2B
shall not and shall cause each of its Subsidiaries not, without the prior
consent of IVAX, to (i) amend or otherwise change its Certificate of
Incorporation or Bylaws, (ii) issue, sell or authorize for issuance or sale
(including, but not limited to, by way of stock split or dividend), shares of
any class of its securities or except as contemplated in Section 3.17, any
------------
Commitments of any character obligating it to issue such securities, other than
pursuant to stock options granted to directors, officers or employees of B2B
prior to the date of this Agreement; (iii) declare, set aside, make or pay any
dividend or other distribution (whether in cash, stock or property) with respect
to its capital stock, (iv) redeem, purchase or otherwise acquire, directly or
indirectly, any of its capital stock, (v) enter into any material Contract
(excluding any renewal of B2B's officer and director insurance policy) or
material transaction or make any material capital expenditure other than those
relating to the transactions contemplated by this Agreement, (vi) create, incur,
assume, maintain or permit to exist any indebtedness other than the Transaction
Expenses or as otherwise incurred in the Ordinary Course of Business, (vii) pay,
discharge or satisfy claims or Liabilities (absolute, accrued, contingent or
otherwise) other than the Transaction Expenses or in the Ordinary Course of
Business, (viii) cancel any material debts or waive any material claims or
rights, (ix) make any loans, advances or capital contributions to, or
investments in financial instruments of any Person, (x) assume, guarantee,
endorse or otherwise become responsible for the Liabilities or other Commitments
existing of any other Person, (xi) grant any increase in the compensation
payable or to become payable by B2B or any of its Subsidiaries to any of its
employees or any material increase in any bonus, insurance, pension or other
employee benefit plan, payment or arrangement made to, for or with any such
employees, (xii) enter into any employment Contract or grant any severance or
termination pay or make any such payment with or to any officer, director or
employee of B2B or any of its Subsidiaries other than the Transaction Expenses,
(xiii) alter in any material way the manner of keeping the books, accounts or
records of B2B or any of its Subsidiaries or the accounting practices therein
reflected other than alterations or changes required by GAAP or applicable Law,
(xiv) enter into any indemnification, contribution or similar Contract pursuant
to which B2B or any of its Subsidiaries may be required to indemnify any other
Person or make contributions to any other Person, (xv) terminate or amend any
B2B Employee Benefit Plan in any manner other than as required by applicable
Law, (xvi) dispose of or permit to lapse any rights to any intangible property
or Intellectual Property, (xvii) amend or terminate any existing B2B Contracts
in any manner that would result in any material Liability to B2B for or on
account of such amendment
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<PAGE>
or termination or (xviii) or change any existing or adopt any new tax accounting
principle, method of accounting or tax election except as provided herein or
agreed to in writing by IVAX.
5.2 Interim Operations of Diagnostics. During the period from the date of
---------------------------------
this Agreement to the Effective Date, Diagnostics shall operate its business
(and the business of each of its Subsidiaries) only in the Ordinary Course of
Business and shall (a) use its Best Efforts to preserve intact its business
organization and goodwill in all material respects, (b) use its Best Efforts to
keep available the services of its key officers and employees and (c) use its
Best Efforts to maintain its relationships with material customers, suppliers
and others having material business relationships with it. Additionally, during
the period from the date of this Agreement to the Effective Date, except as
required hereby in connection with the Merger, Diagnostics shall not, without
the prior Consent of B2B, (i) amend or otherwise change its Articles of
Incorporation or Bylaws, (ii) issue, sell or authorize for issuance or sale
(including, but not limited to, by way of stock split or dividend), shares of
any class of its securities or any Commitments of any character obligating it to
issue such securities, in each case, other than pursuant to stock options
granted to directors, officers or employees of Diagnostics prior to the date of
this Agreement, (iii) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property) with respect to its capital
stock, (iv) redeem, purchase or otherwise acquire, directly or indirectly, any
of its capital stock, (v) enter into any material Contract or material
transaction (or make any material capital expenditure or sale of assets), in
each case, other than in the Ordinary Course of Business, (vi) create, incur,
assume, maintain or permit to exist any indebtedness other than the Transaction
Expenses or as otherwise incurred in the Ordinary Course of Business, (vii) pay,
discharge or satisfy claims or Liabilities other than the settlement of
intercompany debt between IVAX and Diagnostics or its Subsidiaries, the
Transaction Expenses or in the Ordinary Course of Business, (viii) cancel any
debts or waive any claims or rights other than the settlement of intercompany
debt between IVAX and Diagnostics or its Subsidiaries or in the Ordinary Course
of Business, (ix) make any loans, advances or capital contributions to, or
investments in financial instruments of any Person, (x) assume, guarantee,
endorse or otherwise become responsible for the Liabilities of any other Person,
(xi) grant any increase in the compensation payable or to become payable by
Diagnostics or any of its Subsidiaries to any of its employees or any increase
in any bonus, insurance, pension or other employee benefit plan, payment or
arrangement made to, for or with any such employees other than in the Ordinary
Course of Business, (xii) terminate or amend any Diagnostics Employee Benefit
Plan in any manner other than as required by applicable Law, (xiii) enter into
any employment Contract or grant any severance or termination pay with or to any
officer, director or employee of Diagnostics or any of its Subsidiaries, (xiv)
alter in any way the manner of keeping the books, accounts or records of
Diagnostics or any of its Subsidiaries or the accounting practices therein
reflected other than alterations or changes required by GAAP or applicable Law,
(xv) dispose of or permit to lapse any rights to any intangible property of
Intellectual Property, (xvi) amend, or terminate any existing Diagnostics
Contracts other than in Ordinary Course of Business in any manner that would
result in any material Liability to B2B for or on account of such amendment or
termination, or (xvii) enter into any indemnification, contribution or similar
Contract pursuant to which Diagnostics or its Subsidiaries may be required to
indemnify any other Person or make contributions to any other Person or (xviii)
or change any existing or adopt any new tax accounting principle, method of
accounting or tax election except as provided herein or agreed to in writing by
B2B.
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<PAGE>
5.3 Access. Diagnostics and B2B shall afford to the other (and if
------
requested, B2B shall also afford to IVAX) and their respective agents and
representatives full access during normal business hours throughout the period
prior to the Effective Time to all of their respective properties, books,
contracts, commitments and records and during such period shall promptly furnish
copies of all other information concerning such business, properties and
personnel of Diagnostics or B2B, as the case may be, as may reasonably be
requested. Each recipient shall hold such documents and other material in
confidence unless and until such time as such information otherwise becomes
publicly available and, in the event of the termination of this Agreement, upon
request by the party providing such information, shall deliver to the party
providing such information all documents and other material so obtained by it.
5.4 Consents. B2B, IVAX and Diagnostics will each use their respective
--------
Best Efforts to obtain as promptly as practicable all Consents and Orders
required in connection with and waivers of any Breaches that may be caused by
the consummation of the transactions contemplated by this Agreement, including
the expiration of any applicable waiting period under the HSR Act.
5.5 Notification. Each of the Parties hereto shall promptly notify the
------------
other in writing of any event, condition, circumstance, occurrence, transaction
or other item occurring from the date of this Agreement through the Effective
Time (a) that would in itself, or with any notice, lapse of time or both,
constitute a violation or Breach of this Agreement or (b) which would have been
required to have been disclosed on any schedule or exhibit hereto had such
event, condition, circumstance, occurrence, transaction or item existed on the
date of this Agreement. Any such notification shall not diminish or alter any
of the representations, warranties or covenants of the parties set forth in this
Agreement nor shall it limit or restrict any rights or remedies either Party may
have with respect to a Breach or violation of any such representations,
warranties or covenants. If at any time after the Proxy Statement is filed with
the Commission any event or circumstance relating to B2B, Diagnostics or IVAX
should occur or exist which would be required to be described in an amendment of
or supplement to the Proxy Statement or which would cause the Proxy Statement to
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein, in light of the
circumstances under which such statements were made, not misleading, B2B or
IVAX, as the case may be, shall promptly inform the other in writing of such
event or circumstance.
5.6 Proxy Statement. B2B, IVAX and Diagnostics will cooperate with each
---------------
other in order to promptly prepare the Proxy Statement and to file the Proxy
Statement with the Commission as soon as practicable. IVAX shall furnish all
information concerning IVAX or Diagnostics as may be reasonably required in
connection with the preparation of the Proxy Statement. B2B shall cause the
Proxy Statement to comply as to form and substance in all material respects with
the applicable requirements of the Exchange Act and all other applicable Laws,
and each Party shall ensure that none of the information that it furnishes for
inclusion in the Proxy Statement will, at (a) the time the Proxy Statement (or
any amendment or supplement thereto) is first mailed to the stockholders of B2B
or (b) the time of the special meeting of the stockholders of B2B as
contemplated by Section 5.7, contain any untrue statement of a material fact or
-----------
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Unless required by applicable Law, no amendment
or supplement to the Proxy
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<PAGE>
Statement shall be filed with the Commission without the approval of IVAX, which
approval shall not be unreasonably withheld. B2B shall promptly advise IVAX of
any request by the Commission for amendment of the Proxy Statement or comments
thereon and responses thereto or requests by the Commission for additional
information. B2B shall take all actions required to be taken under any
applicable or securities Laws to permit the issuance of the B2B Common Stock
pursuant to the Merger.
5.7 B2B Stockholder Approval. B2B will call a special meeting of its
------------------------
stockholders (the "Special Meeting") in order that the stockholders of B2B may
consider and vote upon the matters set forth in the Proxy Statement and solicit
proxies in favor of approving such matters. The Proxy Statement will contain
the affirmative recommendation by the Board of Directors of B2B of all matters
to be considered and voted upon at the Special Meeting; provided, however, no
director or officer of B2B will be required to make such affirmative
recommendation if it would constitute a violation of any fiduciary duty or other
requirement imposed by Law.
5.8 Acquisition Proposals. Except for the transactions contemplated by
---------------------
this Agreement, unless and until this Agreement shall have been validly
terminated in accordance with Article 9, B2B shall not (nor will it permit any
---------
of its officers, directors, agents or Affiliates to), directly or indirectly,
(a) solicit, encourage or initiate any negotiations or discussions with respect
to a Competing Transaction (as defined below) or (b) except as required by Law
or pursuant to a valid, lawful subpoena, disclose any information not
customarily disclosed to any Person concerning the business and properties of
B2B, afford to any Person (other than IVAX or Diagnostics and their respective
designees) access to the properties, books or records of B2B or otherwise assist
or encourage any Person in connection with any of the foregoing.
Notwithstanding anything to the contrary contained in this Section 5.8, the
-----------
Board of Directors of B2B shall not be prohibited from furnishing information
to, or entering into discussions or negotiations with, any Person in connection
with an unsolicited proposal by such Person for a Competing Transaction if, and
only to the extent that, (i) the B2B Board of Directors, after consultation with
outside legal counsel (which may include its regularly engaged outside legal
counsel), determines in good faith that such action is required for the B2B
Board of Directors to comply with its duties to its stockholders imposed by
applicable Law and (ii) prior to furnishing such information to, or entering
into discussions or negotiations with, such Person, B2B obtains from such Person
an executed confidentiality agreement on terms no less favorable to B2B than
those contained in the Confidentiality Agreement between B2B and IVAX. A
"Competing Transaction" means any of the following involving B2B (other than the
Merger contemplated by this Agreement): (i) a merger, consolidation, share
exchange, business combination, joint venture or other similar transaction, (ii)
any sale, lease, exchange, transfer or other disposition of 15% or more of the
assets of B2B and its Subsidiaries, taken as a whole or (iii) a tender offer or
exchange offer for 15% or more of the outstanding voting securities of B2B or
its Subsidiaries. B2B agrees to promptly notify IVAX the commencement of any
significant discussions or negotiations relating to a proposed Competing
Transaction. IVAX agrees not to interfere with or take any action adverse to a
Competing Transaction.
5.9 Public Statements. The Parties hereto shall consult and cooperate
-----------------
with each other concerning the terms and substance of all press releases,
announcements and public statements with respect to the transactions
contemplated by this Agreement prior to the Effective Time,
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<PAGE>
provided that such consultation and cooperation shall not interfere with any
obligation of IVAX or B2B to disclose any information as required by applicable
Law.
5.10 SEC Filings. B2B shall use its Best Efforts to timely file all
-----------
reports required to be filed by it pursuant to Section 13(a) or 15 of the
Exchange Act and all other documents required to be filed by it with the
Commission under the Securities Act or the Exchange Act from the date of this
Agreement to the Effective Date.
5.11 Resignation of Directors and Officers. The members of the Board
-------------------------------------
of Directors (except Jay Raubvogel and Randall Davis) and the officers and
employees of B2B and its Subsidiaries shall deliver their respective
resignations from such positions to B2B on or prior to the Effective Date. The
remaining members of the Board of Directors of B2B shall promptly fill the
vacancies created by such resignations from the Board of Directors of B2B with
the five (5) designees of IVAX at and as of the Effective Time.
5.12 State Takeover Laws; Certificate of Incorporation. B2B shall not take
-------------------------------------------------
any action that would cause the transactions contemplated by this Agreement to
be subject to any applicable state takeover statute and B2B shall take all
necessary steps to except or exempt (or ensure the continued exemption of) the
transactions contemplated by this Agreement from (a) any applicable state
takeover Law, as now or hereafter in effect, including Section 203 of the
Delaware GCL, (b) any applicable takeover provisions in B2B Certificate of
Incorporation or Bylaws and (c) any takeover provisions set forth in any
Contract to which B2B is a party or may be bound.
5.13 General Release by IVAX. IVAX will deliver to B2B at and as of the
-----------------------
Effective Time an unconditional and irrevocable release and discharge of the
Surviving Corporation and each of its Subsidiaries, and their respective
officers, directors, employees and agents, from any and all rights, claims,
demands, judgement, obligations (contractual or otherwise), Liabilities and
Damages relating, directly or indirectly, to Diagnostics and/or its Subsidiaries
which ever existed, now exist, or may hereafter exist, by reason of tort, Breach
of Contract (except this Agreement and the transactions and agreements
contemplated hereby), violation of Law or other act or failure to act which
shall have occurred at or prior to the Effective Date.
5.14 General Release by B2B. Except as set forth on Schedule 5.13, B2B
---------------------- -------------
shall use it Best Efforts to obtain from Enviro-Clean of America, Inc. and each
of the officers, directors and employees (including any of these employees who
will be or have been terminated and who have entered or will enter into any type
of severance agreement with B2B) of B2B an unconditional and irrevocable release
and discharge of B2B and each of its Subsidiaries and, as appropriate, their
respective officers, directors, employees and agents, from any and all rights,
claims, demands, judgments, obligations (contractual or otherwise), Liabilities
and Damages relating, directly or indirectly, to B2B and/or any of its
Subsidiaries which ever existed, now exist, or may hereafter exist, by reason of
any tort, Breach of Contract (except this Agreement and the transactions and
agreements contemplated hereby), violation of Law or other act or failure to act
which shall have occurred at or prior to the Effective Date.
5.15 HSR Act. Each of the Parties will file (and each of the Parties will
-------
cause their Affiliates to file, if necessary) any Notification and Report Forms
and related materials that may
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<PAGE>
be required to be filed with the Federal Trade Commission and the Antitrust
Division of the United States Justice Department under the HSR Act (and will use
their respective Best Efforts to obtain (and will cause their respective
Affiliates to use their Best Efforts to obtain, if necessary) an early
termination of the applicable waiting period, and will make (and will cause
their respective Affiliates to make, if necessary) any further filings pursuant
thereto that may be necessary, proper or advisable in connection therewith.
5.16 Transition Services. The Parties agree to negotiate, in good faith,
-------------------
the transition services that the Surviving Corporation may require from any
Party; provided, however, such transition services will be provided (i) at such
Party's actual costs plus 15% and (ii) for a period not to exceed three months
after the Effective Date, unless the Parties otherwise agree.
5.17 Further Assurances. The Parties shall deliver any and all other
------------------
instruments or documents required to be delivered pursuant to, or necessary or
proper in order to give effect to, all of the terms and provisions of this
Agreement including, all necessary stock powers and such other instruments of
transfer as may be necessary or desirable to transfer ownership.
ARTICLE 6.
Survival
6.1 Survival of the Representations and Warranties. The
----------------------------------------------
representations and warranties contained in this Agreement shall survive the
Effective Time to the extent and for the periods set forth in Section 6.3.
------------
6.2 Investigation. The representations, warranties, covenants and
-------------
agreements of this Agreement shall not be affected or diminished in any way by
any investigation (or failure to investigate) at any time by or on behalf of the
Party for whose benefit such representations, warranties, covenants and
agreements were made.
6.3 Liability for Breach of Representations and Warranties, etc.
------------------------------------------------------------
(a) By B2B. Subject to the limitations set forth in this Section 6.3,
------ -----------
B2B agrees to pay and reimburse IVAX and Diagnostics for the full amount of any
and all Damages arising from, in connection with, or incident to (i) any Breach
of any of the representations, warranties, covenants or agreements of B2B
contained in this Agreement, and (ii) any and all Actions incidental to any of
the foregoing.
(b) By IVAX. Subject to the limitations set forth in this Section
------- -------
6.3, IVAX agrees to pay and reimburse B2B for the full amount of any and all
---
Damages arising from, in connection with, or incident to (i) any Breach of any
of the representations, warranties, covenants or agreements of IVAX or
Diagnostics contained in this Agreement, and (ii) any and all Actions incidental
to any of the foregoing.
(c) Method of Payment. All obligations required to be paid under this
-----------------
Section 6.3 shall be satisfied as follows: (i) IVAX's obligations, if any,
-----------
hereunder shall be satisfied by payment of an amount equal to the Damages for
which IVAX or Diagnostics is obligated hereunder, either, at IVAX's sole
discretion, in cash or by surrendering to B2B for redemption shares of the B2B
Common Stock having such value as calculated in accordance
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<PAGE>
with this Section 6.3. B2B's obligations under this Section 6.3 shall be
----------- -----------
satisfied by payment of an amount equal to the Damages for which B2B is
obligated hereunder, either, at the sole discretion of Jay Raubvogel and Randall
Davis, in cash or by issuing to IVAX the number of additional shares of B2B
Common Stock that have such value as calculated in accordance with this Section
-------
6.3. For purposes of this Section 6.3, each share of B2B Common Stock shall be
--- -----------
valued at the closing sale price of the B2B Common Stock on the date preceding
the date on which such claim is satisfied; and (ii) notwithstanding the
foregoing or any limitation set forth in Section 6.3(d), the Parties acknowledge
--------------
and agree that in the event B2B fails to satisfy the minimum cash holdings
described in Section 8.9, IVAX will, if IVAX elects to waive such condition and
-----------
consummate the Merger, be entitled to receive one additional share of B2B Common
Stock for each $1.00 dollar that the B2B cash and cash equivalents as of the
Effective Date, as reflected on the face of the B2B Effective Date Balance Sheet
(as finally determined by the Parties and verified by their respective
independent accountants at or prior to the Effective Time), is less than
$22,000,000. For example, if the cash and cash equivalents on the face of the
B2B Effective Date Balance Sheet (as finally determined by the Parties and
verified by their respective accountants at or prior to the Effective Time) is
$21,600,000, IVAX would be entitled to receive an additional 400,000 shares of
B2B Common Stock upon consummation of the Merger.
(d) Limitations. Except as otherwise set forth herein, no Party shall
-----------
have any obligation under Sections 6.3(a) or 6.3(b): (i) unless notice of a
--------------- ------
claim for a Breach of a representation or warranty made herein (but not for a
Breach of any covenant or agreement) in respect of any matter has been given to
such Party on or before the date which is one year after the Effective Date;
provided, however, that with respect to a Breach of any of the representations
and warranties set forth in Sections 3.16, 3.30, 4.14 and 4.25 notice of a claim
----------------------------------
must be given on or before the date which is the later of one year after the
Effective Date or the expiration of the applicable statute of limitations; (ii)
until the aggregate of all Damages for which such Party is responsible with
respect to any Breach of a representation or warranty (but not any covenant or
agreement) exceeds $150,000 (the "Basket Limitation") (unless such
representation or warranty is qualified by the Basket Limitation); provided,
however, that if any Party is responsible for any payment hereunder, then the
indemnification obligation of such Party shall be limited to the amount by which
the amount of such Damages exceeds the Basket Limitation; and (iii) neither
Party shall (in the aggregate) be liable for any amounts in excess of
$10,000,000; provided, however, any Breach of Sections 3.16, 3.30, 4.14 and 4.25
----------------------------------
will not be subject to the Basket Limitation.
(e) Exclusive Remedy. The Parties acknowledge and agree that (i) the
----------------
provisions of this Section 6.3 shall be the sole and exclusive remedy of the
-----------
Parties with respect to any obligation under Section 6.3(a) or 6.3(b), and (ii)
------------------------
in the event of any termination of this Agreement in accordance with Article 9,
---------
the remedies set forth in this Article 6 shall be null and void.
---------
6.4 Procedure for Matters Involving Third Parties.
---------------------------------------------
(a) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may give rise
to a claim for indemnification against any other Party (the "Indemnifying
Party") under this Article 6, then
---------
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<PAGE>
the Indemnified Party shall promptly issue a Claim Notice to the Indemnifying
Party with respect thereto.
(b) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as (i) the Indemnifying
Party notifies the Indemnified Party in writing within 15 days following the
receipt of the Claim Notice that the Indemnifying Party will indemnify the
Indemnified Party may from and against all Damages, the Indemnified Party suffer
resulting from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party
with evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder, (iii) the
Third Party Claim involves only money damages and does not seek an injunction or
other equitable relief, (iv) settlement of, or an adverse judgment with respect
to, the Third Party Claim is not in the good faith judgement of the Indemnified
Party, likely to establish a precedential custom or practice materially adverse
to the continuing business interests of the Indemnified Party, and (v) the
Indemnifying Party conducts the defense of the Third Party Claim actively and
diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third party Claim in accordance with Section 6.4(b), (i) the Indemnified Party
--------------
may retain separate co-counsel at its sole cost and expense and participate in
the defense of the Third Party Claim, (ii) the Indemnified Party will not
consent to the entry of any judgement or enter into any settlement with respect
to the Third Party Claim without the prior written consent of the Indemnifying
Party (not to be withheld reasonably), and (iii) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with respect
to the Third Party Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).
(d) In the event any of the conditions in Section 6.4(b) is or becomes
--------------
unsatisfied, (i) the Indemnified Party may defend against, and consent to the
entry of any judgment or enter any settlement with respect to, the Third Party
Claim in any manner it reasonably may deem appropriate (and the Indemnified
party need not consult with, or obtain any consent from, any Indemnifying Party
in connection therewith), (ii) the Indemnifying parties will reimburse the
Indemnified Party promptly any periodically for the costs of defending against
the Third Party Claim (including reasonable attorneys' fees and expense), and
(iii) the Indemnifying Parties will remain responsible for any Damages the
Indemnified party may suffer resulting from, arising out of, relating to, in the
nature of, or caused by the Third Party Claim to the fullest extent provided in
this Article 6.
---------
6.5 Notice of Claim. A Party suffering Damages that gives or could
---------------
give rise to a claim for indemnification under this Article 6 shall promptly
notify each other Party thereof in writing (a "Claim Notice") in accordance with
Section 11.1. The Claim Notice shall contain a brief description of the nature
------------
of the Damages suffered and, if practicable, an aggregate dollar value estimate
of the Adverse Consequence suffered. No delay in the issuance of a Claim Notice
shall relieve any Party from any obligations under this Article 6, unless and
---------
solely to the extent such Party is thereby prejudiced.
A-49
<PAGE>
ARTICLE 7.
Conditions Precedent to the Obligations of B2B
All of the obligations of B2B under this Agreement and the Plan of Merger
are subject to the satisfaction at or prior to the Effective Time of each and
every one of the following conditions precedent (any of which may be waived in
writing by B2B in its sole discretion):
7.1 Representations and Warranties True. Each of the representations and
-----------------------------------
warranties of IVAX and Diagnostics contained herein or in any certificate or
document delivered by IVAX or Diagnostics pursuant to the provisions hereof
shall be true and correct in all material respects (except for such
representations and warranties qualified by materiality which shall be true and
correct in all respects) as of the Effective Time with the same force and effect
as though made at and as of such time.
7.2 Performance. IVAX and Diagnostics shall have performed and complied
-----------
in all material respects with all of the agreements, covenants and obligations
required under this Agreement to be performed or complied with by them prior to
or at the Effective Time (except for agreements, covenants and obligations set
forth herein to be performed or complied with prior to or at the Effective Time
which are qualified by materiality, which shall have been performed or complied
with in all respects).
7.3 Certificates. Diagnostics shall have delivered to B2B a certificate
------------
executed by its President and its Chief Financial Officer, dated the Effective
Date, certifying in such detail as B2B may reasonably request, that (a) the
conditions specified in Sections 7.1 and 7.2 (insofar as they are to be met or
--------------------
performed by IVAX or Diagnostics) have been fulfilled, (b) the condition set
forth in Section 7.9 is satisfied and (c) attached to such certificate is a true
-----------
and correct copy of the resolutions of the Boards of Directors of Diagnostics
and IVAX, as the sole stockholder of Diagnostics, authorizing the execution,
delivery and performance of this Agreement and the Plan of Merger by
Diagnostics. IVAX shall deliver to B2B a certificate, duly executed, complying
with Code Section 1445 and Treas. Reg. Section 1.1445-2. IVAX and Diagnostics
shall deliver to Akin, Gump, Strauss, Hauer & Feld, L.L.P. and Stearns Weaver
Miller Weissler Alhadeff & Sitterson, P.A. an officers certificate containing
the customary representations, warranties and covenants required to render its
opinion pursuant to Sections 7.8 and 8.8 hereof.
--------------------
7.4 Absence of Litigation. No Action shall have been commenced or shall
---------------------
be pending by or before any Court or Agency, and no judicial or administrative
decision shall have been rendered, which (a) enjoins or prohibits the
consummation of all or any of the transactions contemplated by this Agreement or
the Plan of Merger, or (b) is an Action by any Agency thereof, which seeks to
enjoin or prohibit the consummation of all or any of the transactions
contemplated by this Agreement or the Plan of Merger.
7.5 Consents. IVAX and Diagnostics shall have obtained all Consents and
--------
Orders as may be required in connection with the consummation of the
transactions contemplated hereby, except where the failure to obtain a Consent
would not have a Material Adverse Effect on Diagnostics or any of its
Subsidiaries. All applicable waiting periods (and any extensions thereof) under
the HSR Act shall have expired or otherwise been terminated.
A-50
<PAGE>
7.6 Stockholder Approval. The stockholders of B2B shall have approved all
--------------------
of the matters to be considered and voted upon at the Special Meeting.
7.7 Opinion of Counsel. B2B shall have received from Stearns Weaver
------------------
Miller Weissler Alhadeff & Sitterson, P.A., counsel to IVAX and Diagnostics, an
opinion letter in form and substance reasonably acceptable to B2B and its
counsel.
7.8 Tax Opinion. B2B shall have received a legal opinion of Akin, Gump,
-----------
Strauss, Hauer & Feld, L.L.P., counsel to B2B, dated as of the Effective Date,
to the effect that, on the basis of certain facts, representations and
assumptions set forth in such opinion, the Merger constitutes a reorganization
within the meaning of Section 368(a) of the Code.
7.9 Minimum Cash Holdings. At the Effective Time, Diagnostics shall have,
---------------------
after giving effect to the payment of all Transaction Expenses of Diagnostic
(excluding any changes to stockholders' equity as a result of exchange rate
gains or losses attributable to the Lira), a minimum of Two Million Dollars
($2,000,000) in cash or cash equivalents and shall have stockholders' equity of
at least Four Million Four Hundred Thousand Dollars ($4,400,000) as of the
Effective Date, in each case, as reflected on the face of the Diagnostics
Effective Date Balance Sheet.
7.10 Fairness Opinion. The fairness opinion described in Section 3.20 must
----------------
be reaffirmed and in full force and effect and must not have been amended,
modified or altered, without the prior approval of the Board of Directors of B2B
in their reasonable judgment.
7.11 Intercompany Indebtedness. All intercompany indebtedness between
-------------------------
IVAX (and any IVAX Affiliates) and Diagnostics and its Subsidiaries will be
eliminated at and as of the Effective Time, and IVAX will deliver evidence
thereof satisfactory to B2B.
7.12 Trademark License. IVAX and B2B will enter into a perpetual
-----------------
trademark/service mark license for the use of the trademark/service mark "IVAX"
for payment of $1.00 and subject to such other reasonable terms and conditions
acceptable to IVAX and B2B, including the right of IVAX to terminate such
license upon three months prior written notice to the Surviving Corporation at
any time after the first anniversary of the Effective Date.
7.13 General Release. B2B shall have received the general release
---------------
contemplated by Section 5.13.
------------
7.14 No Material Adverse Effect. There shall not have occurred or be
--------------------------
existing any event or condition which has had a Material Adverse Effect on
Diagnostics or any of its Subsidiaries.
ARTICLE 8.
Conditions Precedent to the Obligations of IVAX and Diagnostics
All of the obligations of IVAX and Diagnostics under this Agreement are
subject to the satisfaction at or prior to the Effective Time of each and every
one of the following conditions precedent (any of which may be waived in writing
by IVAX in its sole discretion):
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<PAGE>
8.1 Representations and Warranties True. Each of the representations and
-----------------------------------
warranties of B2B contained herein or in any certificate or document delivered
by B2B pursuant to the provisions hereof shall be true and correct in all
material respects (except for such representations and warranties qualified by
materiality which shall be true and correct in all respects) on and as of the
Effective Time with the same force and effect as though made at and as of such
time.
8.2 Performance. B2B shall have performed and complied in all material
-----------
respects with all of the agreements, covenants and obligations required under
this Agreement to be performed or complied with by them prior to or at the
Effective Time (except for agreements, covenants and obligations set forth
herein to be performed or complied with prior to or at the Effective Time which
are qualified by materiality, which shall have been performed or complied with
in all respects).
8.3 Certificates. B2B shall have delivered to IVAX certificates executed
------------
by the President and the Chief Financial Officer of B2B, dated the Effective
Date, certifying in such detail as IVAX may reasonably request, that: (a) the
conditions specified in Sections 8.1, 8.2 and 8.11 (insofar as they are to be
------------ --- ----
met or performed by B2B) have been fulfilled, (b) the condition set forth in
Section 8.9 is satisfied and (c) attached to such certificate is a true and
-----------
correct copy of the resolutions of the Board of Directors and stockholders of
B2B authorizing the execution, delivery and performance of this Agreement and
the Plan of Merger by B2B. B2B shall deliver to Akin, Gump, Strauss, Hauer &
Feld, L.L.P. and Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A. an
officers certificate containing the customary representations, warranties and
covenants required to render its opinion pursuant to Sections 7.8 and 8.8
--------------------
hereof.
8.4 Absence of Litigation. No Action shall have been commenced or shall
---------------------
be pending by or before any Court or Agency, and no judicial or administrative
decision shall have been rendered, which (a) enjoins or prohibits the
consummation of all or any of the transactions contemplated by this Agreement or
the Plan of Merger or (b) is an Action by any Agency thereof, which seeks to
enjoin or prohibit the consummation of all or any of the transactions
contemplated by this Agreement or the Plan of Merger.
8.5 Consents. Each of B2B shall have obtained all Consents and Orders as
--------
may be required in connection with the consummation of the transactions
contemplated hereby, except where the failure to obtain a Consent would not have
a Material Adverse Effect on B2B. All applicable waiting periods (and any
extensions thereof) under the HSR Act shall have expired or otherwise been
terminated.
8.6 Stockholder Approval. The stockholders of B2B shall have approved all
--------------------
of the matters to be considered and voted upon at the Special Meeting.
8.7 Opinion of Counsel. IVAX shall have received from Akin, Gump,
------------------
Strauss, Hauer & Feld, L.L.P., counsel to B2B, an opinion letter in form and
substance reasonably acceptable to IVAX and its counsel.
8.8 Tax Opinion. IVAX shall have received a legal opinion of Stearns
-----------
Weaver Miller Weissler Alhadeff & Sitterson, P.A., counsel to IVAX and
Diagnostics, dated as of the Effective
A-52
<PAGE>
Date, to the effect that on the basis of certain facts, representations and
assumptions set forth in such opinion, the Merger constitutes a reorganization
within the meaning of Section 368(a) of the Code.
8.9 Minimum Cash Holdings. At the Effective Time, B2B and its
---------------------
Subsidiaries shall have, after giving effect to the payment of all B2B
Transaction Expenses and after giving effect to all accruals made for the
termination of B2B's existing business and for the payment of all obligations
associated with the termination of B2B's existing business, a minimum of Twenty-
Two Million Dollars ($22,000,000) in cash or cash equivalents and shall have
stockholders' equity of at least Twenty-Two Million Dollars ($22,000,000) as of
the Effective Date, in each case, as reflected on the face of the B2B Effective
Date Balance Sheet.
8.10 Resignations. B2B shall have received the resignations of the
------------
directors, officers and employees of B2B and its Subsidiaries, except Jay
Raubvogel and Randall Davis. Such remaining members of the Board of Directors
shall have filled the vacancies created by such resignations from the Board of
Directors with the five (5) designees of IVAX.
8.11 General Releases. B2B shall have received the general releases
----------------
contemplated by Section 5.14.
------------
8.12 B2B Underwriters' Waiver. IVAX and B2B shall have received a
------------------------
written waiver from GBI Capital Partners and any other firm that performed
investment banking services for B2B whether in connection with B2B's initial
public offering or otherwise waiving all future and ongoing rights such entities
may have related to B2B, including, but not limited to, GBI Capital Partners'
right to appoint a representative to B2B's Board of Directors.
8.13 No Material Adverse Effect. There shall not have occurred or be
--------------------------
existing any event or condition which has had a Material Adverse Effect on B2B
or any of its Subsidiaries.
ARTICLE 9.
Termination
9.1 Termination. This Agreement and the Plan of Merger may be
-----------
terminated and the Merger contemplated herein may be abandoned:
9.1.1 By the mutual, written Consent of B2B, IVAX and Diagnostics;
9.1.2 By B2B at any time after June 30, 2001 (the "Termination
Date") if, by that date, the conditions set forth in Article 7 have not
---------
been satisfied or waived;
9.1.3 By IVAX at any time after the Termination Date, if, by the
Termination Date, the conditions set forth in Article 8 have not been
---------
satisfied or waived;
9.1.4 By B2B if there has been any material Breach of any
representation or warranty of IVAX or Diagnostics in this Agreement or a
material Breach of any of the covenants of IVAX or Diagnostics in this
Agreement which cannot be cured by the Termination Date;
A-53
<PAGE>
9.1.5 By IVAX if there has been any material Breach of any
representation or warranty of B2B in this Agreement or a material Breach of
any of the covenants of B2B in this Agreement which cannot be cured by the
Termination Date;
9.1.6 By IVAX if any Person (together with such Person's Affiliates)
shall, after the date hereof, become the Beneficial Owner of five percent
(5%) or more of the aggregate voting power of all of B2B's issued and
outstanding capital stock, and, such Person has not, within two business
days after such acquisition, delivered to IVAX, a Voting Agreement,
pursuant to which such Person has agreed to vote all shares of B2B capital
stock of which such Person (or any of such Person's Affiliates) is the
Beneficial Owner in favor of the Merger and the transactions contemplated
by this Agreement;
9.1.7 By IVAX if (i) in accordance with Section 5.7, the Board of
-----------
Directors of B2B withdraws, modifies or changes its recommendation of this
Agreement and the Merger in a manner adverse to IVAX or Diagnostics or (ii)
the Board of Directors of B2B shall have recommended to the stockholders of
B2B a Competing Transaction; or
9.1.8 By B2B if the Board of Directors of B2B shall, after
consultation with outside legal counsel (who may be B2B's regularly engaged
outside legal counsel) determine that failure to so terminate would be
inconsistent with its duties to its stockholders under applicable Law, in
good faith have withdrawn, modified or changed its recommendation of the
approval of this Agreement and the Merger in a manner adverse to IVAX or
Diagnostics; provided further, however, that B2B may not terminate this
Agreement pursuant to this Section 9.1.8 until three business days have
-------------
elapsed following delivery to IVAX of written notice of such determination
of B2B (which written notice shall inform IVAX of the material terms and
conditions of the Competing Transaction).
9.2 Termination Fee
---------------
(a) B2B agrees that, if this Agreement is terminated pursuant to
Section 9.1.3 (except as a result of the failure to satisfy the condition set
-----------------------------------------------------------------------------
forth in Section 8.4), 9.1.5, 9.1.6, 9.1.7, or 9.1.8, then B2B shall promptly
----------------------------------------------------
pay to IVAX the cash sum of One Million Dollars ($1,000,000) (the "Termination
Fee") as liquidated damages.
(b) IVAX agrees that if this Agreement is terminated pursuant to
Section 9.1.2 (except as a result of the failure to satisfy the condition set
------------------------------------------------------------------------------
forth in Section 7.4) or 9.1.4, then IVAX shall promptly pay to B2B the
--------------------- -----
Termination Fee as liquidated damages.
(c) No Termination Fee will be payable by either IVAX or B2B if this
Agreement is terminated pursuant to Sections 9.1.1, 9.1.2 (as a result of the
-----------------------------------------
failure to satisfy the condition set forth in Section 7.4) or 9.1.3 (as a result
--------------------------------------------------------------------------------
of the failure to satisfy the condition set forth in Section 8.4).
-----------------------------------------------------------------
(d) Any payment required to be made pursuant to this Section 9.2
-----------
shall be made not later than two days after delivery of a notice of demand for
payment and shall be made by wire transfer of immediately available funds to an
account designated by the Party entitled to such payment. In the event the
failure of a Party to pay the Termination Fee when due, the
A-54
<PAGE>
amount of the Termination Fee shall be increased to include the costs or
expenses actually incurred (including fees and expenses of counsel) in
connection with the collection and enforcement of this Section 9.1, together
-----------
with interest on such unpaid Termination Fee, commencing on the date such
Termination Fee became due, at the "prime" rate of interest as reported by The
Wall Street Journal, plus three percent (3%).
9.3 Exclusive Remedy. The Parties acknowledge and agree that (i) this
----------------
Agreement may only be terminated in accordance with this Article 9, (ii) the
---------
payment of the Termination Fee, pursuant to and in accordance with Section 9.2,
-----------
shall be the sole and exclusive remedy of the Parties with respect to any
termination of this Agreement in accordance with Section 9.1, (iii) payment of
-----------
the Termination Fee, pursuant to Section 9.2, represents the payment of fair and
-----------
reasonable liquidated damages due to the difficulty in determining actual
Damages and (iv) the remedies set forth in Article 6 will not be applicable with
---------
respect to any termination of this Agreement in accordance with Article 9.
---------
ARTICLE 10.
Tax Matters
The following provisions shall govern the allocation of responsibilities as
between Parties for certain Tax matters following the Effective Date:
10.1 Filing of Tax Returns. Diagnostics and its Subsidiaries shall
---------------------
continue to be included for all taxable periods (or portions thereof) ending on
or before the Effective Date in the consolidated federal income Tax Return and
any required state or local consolidated or combined income or franchise Tax
Returns of any Affiliated Group of which Diagnostics and its Subsidiaries are
members (each of which is herein referred to as a "IVAX Filing Affiliated
Group") which Tax Returns include Diagnostics and its Subsidiaries, (all such
Tax Returns including taxable periods or portions thereof of Diagnostics or its
Subsidiaries ending on or before the Effective Date are hereinafter referred to,
collectively, as "Pre-Merger Consolidated Tax Returns"). IVAX shall cause the
IVAX Filing Affiliated Groups to prepare and file (or cause to be prepared and
filed) timely and correctly all Pre-Merger Consolidated Tax Returns and shall
timely pay all Taxes shown as due and payable on Pre-Merger Consolidated Tax
Returns (except that Diagnostics and its Subsidiaries shall contribute to the
payment of any Taxes to the extent of any reserves for unpaid Taxes on the
Diagnostics Effective Date Balance Sheet).
10.2 Tax Periods Ending on or Before the Effective Date. B2B shall
--------------------------------------------------
prepare or cause to be prepared and file or cause to be filed all Tax Returns
for Diagnostics and its Subsidiaries for all periods ending on or prior to the
Effective Date which are filed after the Effective Date other than Pre-Merger
Consolidated Tax Returns. IVAX shall reimburse B2B for Taxes of Diagnostics and
its Subsidiaries with respect to such periods within 15 days after payment by
B2B, Diagnostics or its Subsidiaries of such Taxes to the extent the amount of
Taxes payable by Diagnostics or its Subsidiaries under Sections 10.1, 10.2 or
----------------------
10.3 in the aggregate exceed reserves established for unpaid Taxes on the
----
Diagnostics Effective Date Balance Sheet.
10.3 Tax Periods Beginning Before and Ending After the Effective Date.
----------------------------------------------------------------
B2B shall prepare or cause to be prepared and file or cause to be filed any Tax
Returns of Diagnostics and
A-55
<PAGE>
its Subsidiaries for Tax periods which begin before the Effective Date and end
after the Effective Date. IVAX shall pay to B2B within 15 days after the date on
which Taxes are paid with respect to such periods an amount equal to the portion
of such Taxes which relates to the portion of such Taxable period ending on the
Effective Date to the extent the amount of Taxes payable by Diagnostics or its
Subsidiaries under Sections 10.1, 10.2 or 10.3 in the aggregate exceed reserves
------------------- ----
established for unpaid Taxes on the Diagnostics Effective Date Balance Sheet.
For purposes of this Section 10.3, in the case of any Taxes that are imposed on
------------
a periodic basis and are payable for a Taxable period that includes (but does
not end on) the Effective Date, the portion of such Tax which relates to the
portion of such Taxable period ending on the Effective Date shall (a) in the
case of any Taxes other than Taxes based upon or related to income or receipts,
be deemed to be the amount of such Tax for the entire Taxable period multiplied
by a fraction the numerator of which is the number of days in the Taxable period
ending on the Effective Date and the denominator of which is the number of days
in the entire Taxable period, and (b) in the case of any Tax based upon or
related to income or receipts be deemed equal to the amount which would be
payable if the relevant Taxable period ended on the Effective Date and based on
a closing of the books of Diagnostics and its Subsidiaries. Any credits relating
to a Taxable period that begins before and ends after the Effective Date shall
be taken into account as though the relevant Taxable period ended on the
Effective Date. All determinations necessary to give effect to the foregoing
allocations shall be made in a manner consistent with prior practice of
Diagnostics and its Subsidiaries.
10.4 Cooperation on Tax Matters.
--------------------------
(a) The Parties shall cooperate fully, as and to the extent
reasonably requested by the other party, in connection with the filing of Tax
Returns pursuant to this Section and any audit, litigation or other proceeding
with respect to Taxes. Such cooperation shall include the retention and (upon
the other party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. The Parties
agree (i) to retain all books and records with respect to Tax matters pertinent
to Diagnostics and its Subsidiaries relating to any taxable period beginning
before the Effective Date until the expiration of the statute of limitations
(and, to the extent notified by B2B or IVAX, any extensions thereof) of the
respective taxable periods, and to abide by all record retention agreements
entered into with any taxing authority, and (ii) to give the other party
reasonable written notice prior to transferring, destroying or discarding any
such books and records and, if the other party so requests, B2B or IVAX, as the
case may be, shall allow the other Party to take possession of such books and
records.
(b) B2B and IVAX agree, upon request, to use their best efforts to
obtain any certificate or other document from any Agency or any other Person as
may be necessary to mitigate, reduce or eliminate any Tax that could be imposed
(including, but not limited to, with respect to the transactions contemplated
hereby).
(c) B2B and IVAX agree, upon request, to provide the other Party with
all information that either Party may be required to report pursuant to Code
Section 6043 and all Treas. Regs.
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<PAGE>
10.5 Certain Taxes. All transfer, documentary, sales, use, stamp,
-------------
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement (including any gains or
transfer Tax and any similar tax imposed in any Agency) shall be paid by IVAX
when due, and IVAX will, at its own expense, file all necessary Tax Returns and
other documentation with respect to all such transfer, documentary, sales, use,
stamp, registration and other Taxes and fees, and, if required by Law, B2B will
join in the execution of any such Tax Returns and other documentation.
ARTICLE 11.
Miscellaneous
11.1 Notices. Any notices, requests, demands and other communications
-------
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given, received or made (a) as of the date sent if
delivered personally , (b) as of the date sent if sent by facsimile prior to
5:00 P.M. (with confirmation of receipt of facsimile transmission), and
otherwise on the next business day, (c) the first business day after the date
sent, if sent by prepaid overnight carrier, or (d) five business days after the
date sent, if sent by first class mail, postage prepaid to the parties at the
following addresses (or at such other addresses as shall be specified by the
parties by like notice):
If to IVAX or to Diagnostics
----------------------------
IVAX Corporation
400 Biscayne Boulevard
Miami, Florida 33137
Attention: General Counsel
Facsimile: (305) 575-6049
With a copy to (which will not be deemed notice to IVAX or Diagnostics):
-----------------------------------------------------------------------
Stearns Weaver Miller Weissler
Alhadeff & Sitterson, P.A.
Museum Tower, Suite 2200
150 West Flagler Street
Miami, Florida 33130
Attention: Alison W. Miller, Esq.
Facsimile: (305) 789-3395
A-57
<PAGE>
If to B2B:
---------
B2BStores.com, Inc.
c/o Richard Kandel
211 Park Avenue
Hicksville, NY 11801
Facsimile: (516) 931-3530
With a copy to (which will not be deemed notice to B2B):
-------------------------------------------------------
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Covenant Street, Suite 1500
San Antonio, TX 78205
Attention: Alan Schoenbaum, Esq.
Facsimile: 210-224-2035
11.2 Entire Agreement. This Agreement constitutes the complete and
----------------
entire agreement among the parties hereto and supersedes all prior Contracts,
negotiations and discussions, among the Parties hereto with respect to the
subject matter hereof. This Agreement may not be amended or modified in any way
except by a written instrument executed by all of the Parties.
11.3 Benefits; Binding Effect. This Agreement shall be for the benefit of
------------------------
and binding upon the parties hereto, their respective heirs, estates, personal
representatives, legal representatives, successors and assigns.
11.4 Assignment. The rights and obligations of the parties under this
----------
Agreement may not be assigned.
11.5 Waiver. No waiver of any of the provisions of this Agreement shall be
------
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall any such waiver constitute a continuing waiver unless
otherwise expressly so provided.
11.6 No Third Party Beneficiary. Nothing in this Agreement is intended, or
--------------------------
shall be construed or implied, to confer upon or give any Person other than the
parties hereto and their respective heirs and permitted successors or assigns
hereunder, any rights or remedies under or by reason of this Agreement.
11.7 Severability. The invalidity of any one or more of the words,
------------
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the enforceability of the remaining portions of the Agreement
or any part hereof, and, in the event that any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall be declared invalid, this Agreement shall be construed as if such invalid
word or words, phrase or phrases, sentence or sentences, clause or clauses,
section or sections, or subsection or subsections, had not been inserted.
11.8 Expenses. Except as provided by in Article 9 or Section 11.12, all
-------- --------- -------------
Transaction Expenses incurred in connection with this Agreement and any of the
transactions contemplated
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<PAGE>
hereby shall be borne by the Party incurring such expenses. Except for the
payment of the Transaction Expenses of Diagnostics that will be paid by IVAX, no
Party shall be obligated for any cost or expense incurred by any other Party
unless this Agreement expressly so provides. In no event shall B2B's Transaction
Expenses exceed $3,000,000. Notwithstanding the foregoing, HSR Act filing fees
will be shared equally between IVAX and B2B.
11.9 Section Headings. The section and other headings contained in this
----------------
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of any provisions of this Agreement.
11.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the several Parties hereto in separate counterparts, each of
which shall be deemed to be one and the same instrument.
11.11 Time of Essence. Wherever time is specified for the doing or
---------------
performance of any act or the payment of any funds time shall be considered of
the essence.
11.12 Litigation; Prevailing Party. Subject to the provisions of
----------------------------
Section 6.4, in the event of any litigation with regard to this Agreement, the
-----------
prevailing Party shall be entitled to receive from the non-prevailing Party and
the non-prevailing Party shall pay all reasonable fees and expenses of counsel
for the prevailing Party.
11.13 Injunctive Relief. Except as provided in Section 6.3(e) and 9.3, it
----------------- ----------------------
is possible that remedies at Law may be inadequate and, therefore, the Parties
hereto shall be entitled to equitable relief including injunctive relief,
specific performance or other equitable remedies in addition to all other
remedies provided hereunder or available to the parties hereto at Law or in
equity.
11.14 Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the internal Laws of the State of Delaware,
without regard to the conflict of Laws principles thereof.
11.15 Participation of Parties; Construction. The Parties have
--------------------------------------
participated jointly in the negotiation and drafting of this Agreement. If an
ambiguity or question of intent or interpretation arises, this Agreement will be
construed as if drafted jointly by the Parties and no presumption or burden of
proof will arise favoring or disfavoring any Party because of the authorship of
any provision of this Agreement. Any reference to any federal, state, local, or
foreign Law will be deemed also to refer to Law as amended and all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
words "include," "includes," and "including" will be deemed to be followed by
"without limitation." Pronouns in masculine, feminine, and neuter genders will
be construed to include any other gender, and words in the singular form will be
construed to include the plural and vice versa, unless the context otherwise
requires. The words "this Agreement," "herein," "hereof," "hereby," "hereunder,"
and words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. The Parties intend that each
representation, warranty, and covenant contained herein will have independent
significance. If any Party has Breached any representation, warranty, or
covenant contained herein in any respect, the fact that there exists
A-59
<PAGE>
another representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
Breached will not detract from or mitigate the fact that the Party is in Breach
of the first representation, warranty, or covenant.
[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
A-60
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each executed and delivered
this Agreement as of the day and year first above written.
ATTEST: IVAX CORPORATION
By: /s/ PHILLIP FROST
_________________________________
Name: Dr. Phillip Frost, M.D.
Title: Chairman and Chief Executive Officer
ATTEST: IVAX DIAGNOSTICS, INC.
By: /s/ GIORGIO D'URSO
_________________________________
Name: Giorgio D'Urso
Title: President and Chief Executive Officer
ATTEST: B2BSTORES.COM, INC.
By: /s/ RICHARD KANDEL
_________________________________
Name: Richard Kandel
Title: Chairman of the Board
A-61
<PAGE>
ANNEX B
-------
VOTING AGREEMENT
This Voting Agreement (this "Agreement"), dated November 21, 2000, is
by and among (i) IVAX Corporation, a Florida corporation ("IVAX"), (ii) IVAX
Diagnostics, Inc., a Florida corporation ("Diagnostics" and, together with IVAX,
the "IVAX Parties"); (iii) b2bstores.com, Inc., a Delaware corporation ("B2B"),
and (iv) the B2B's Supporting Stockholders set forth in Exhibit A (individually,
---------
a "Supporting Stockholder" and, collectively, the "Supporting Stockholders")(the
IVAX Parties, B2B and Supporting Stockholders are hereinafter referred to
individually as a "Party" and collectively as the "Parties").
RECITALS:
A. The Supporting Stockholders own shares of the B2B's outstanding
capital stock.
B. Simultaneous with the execution of this Agreement, B2B has entered into
a Merger Agreement (as defined herein) under which Diagnostics will be merged
(the "Merger") with and into the B2B, with B2B continuing as the surviving
entity (the "Surviving Corporation") and successor to the business of the
Diagnostics.
C. The Supporting Stockholders will receive substantial benefit as a
result of the IVAX Parties entering into the Merger Agreement and the IVAX
Parties would not have entered into the Merger Agreement if the Supporting
Stockholders had not executed this Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants contained herein, the IVAX Parties and each Supporting Stockholder
agree as follows:
ARTICLE 1.
DEFINITIONS
1.1 Definitions
The following terms have the indicated meanings or are defined in the
indicated places.
"Agreement" is defined in the preamble to this Agreement.
"B2B" is defined in the preamble to this Agreement.
"B2B Share" means any share of the Common Stock, par value $0.01 per share,
of B2B.
B-1
<PAGE>
"Confidential Information" means any information concerning the businesses
and affairs of any of the Parties.
"Expiration Date" means June 30, 2001, or such later date as the
Termination Date is extended.
"Merger Agreement" means the Merger Agreement by and between the B2B and
the IVAX Parties, including all exhibits and other documents related thereto,
and any amendments permitted thereunder.
"IVAX" is defined in the preamble to this Agreement.
"IVAX Parties" is defined in the preamble to this Agreement.
"Organizational Documents" of an entity means Articles of Incorporation,
Certificate of Incorporation, Charter, By-laws or other organizational
documentation of such entity.
"Subject Shares" is defined in Section 3.2(b).
--------------
"Supporting Stockholder" and "Supporting Stockholders" are defined in the
preamble to this Agreement.
"Diagnostics" is defined in the preamble to this Agreement.
"Termination Date" means June 30, 2001.
"Transaction Documents" means this Agreement and any ancillary agreements
hereto.
"Transactions" means all of the transactions contemplated by this
Agreement.
1.2 Other Definitions
Undefined terms in this Agreement are defined in the Merger Agreement.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES
CONCERNING THE TRANSACTION
2.1 Representations and Warranties of the Supporting Stockholders
The Supporting Stockholders represent and warrant to the B2B and IVAX
Parties that the statements contained in this Section 2.1 are correct and
-----------
complete as of the date of this Agreement and will be correct and complete as of
the Effective Date (as though made then and, except as expressly provided in a
representation or warranty, as though the Effective Date were substituted for
the date of this Agreement throughout this Section 2.1).
-----------
B-2
<PAGE>
(a) Status of Certain Supporting Stockholders. Each Supporting
Stockholder that is an entity is an entity duly created, formed or
organized, validly existing, and in good standing under the Laws of the
jurisdiction of its creation, formation, or organization.
(b) Power and Authority; Enforceability. Each Supporting Stockholder
that is an entity has the entity power and authority to execute and deliver
each Transaction Document to which such Supporting Stockholder is a party,
and to perform and consummate the Transactions. Each Supporting Stockholder
that is an individual has the requisite competence and authority to execute
and deliver each Transaction Document to which he or she is a party, and to
perform and to consummate the Transactions. Each Supporting Stockholder has
taken all actions necessary to authorize the execution and delivery of each
Transaction Document to which it is party, the performance of such
Supporting Stockholder's obligations thereunder, and the consummation of
the Transactions. Each Transaction Document has been duly authorized,
executed, and delivered by, and is Enforceable against, each Supporting
Stockholder party thereto.
(c) No Violation. The execution and the delivery of the Transaction
Documents by each Supporting Stockholder party thereto and the performance
and consummation of the Transactions by such Supporting Stockholder will
not (i) Breach any Law or Order to which any Supporting Stockholder is
subject and, if a Supporting Stockholder is an entity, any provision of its
Organizational Documents, (ii) Breach any Contract, Order, or Permit to
which Supporting Stockholder is a party or by which Supporting Stockholder
is bound or to which any of a Supporting Stockholder's assets is subject,
or (iii) require any Consent. No Supporting Stockholder is party to any
Contract to which the B2B is a party or by which the B2B is bound or any of
its assets is subject has Breached any such Contract.
(d) Brokers' Fees. No Supporting Stockholder has any Liability to pay
any compensation to any broker, finder, or agent with respect to the
Transactions for which either IVAX Party or Surviving Corporation could
become directly or indirectly Liable.
(e) Shares; Supporting Stockholder Information. Each Supporting
Stockholder holds of record and owns beneficially the number of B2B Shares
as set forth next to such Supporting Stockholder's name in Exhibit A. No
---------
Supporting Stockholder is a party to any Contract that could require such
Supporting Stockholder to sell, transfer, or otherwise dispose of any
capital stock of the B2B.
ARTICLE 3.
AGREEMENT TO VOTE IN FAVOR OF MERGER
3.1 Voting of Shares
(a) Each Supporting Stockholder will attend the Special Meeting, and
any adjournment thereof, at which the matters contemplated by the Proxy
Statement are to be presented to a vote of the B2B's Supporting
Stockholders, in person or by proxy, and to vote (or cause to be voted) all
Subject Shares.
B-3
<PAGE>
(b) Each Supporting Stockholder agrees to vote (or cause to be voted)
all of the Subject Shares, at the Special Meeting:
(i) in favor of the Merger and the approval and adoption of the
terms contemplated by the Merger Agreement and any actions required in
furtherance thereof as set forth in the Proxy Statement;
(ii) against any action or agreement that is reasonably likely
to result in a Breach in any material respect of any covenant,
representation or warranty, or any other obligation of the B2B under
this Agreement or the Merger Agreement; and
(iii) against any Competing Transaction.
3.2 Transfer; Additional Shares
(a) Each Supporting Stockholder will not sell, transfer, assign,
pledge, or otherwise dispose of, or enter into any Contract or
understanding with respect to the sale, transfer, assignment, or other
disposition of, the Converted Shares or any interest contained therein.
(b) Without limiting the provisions of the Merger Agreement, upon (i)
any stock dividend, stock split, recapitalization, reclassification,
combination or exchange of shares of capital stock of the B2B on, of, or
affecting a Supporting Stockholder's B2B Shares or (ii) such Supporting
Stockholder becoming the beneficial record owner of any additional B2B
Shares or other securities entitling the holder thereof to vote or give
consent with respect to the matters set forth in Section 3.1, then this
-----------
Agreement will apply to the shares of capital stock or other securities of
the B2B the Supporting Stockholder holds immediately following the
effectiveness of the events described in clause (i) or the Supporting
Stockholder becoming the beneficial record owner thereof, as described in
clause (ii), as though they were B2B Shares hereunder (collectively, the
"Subject Shares"). While this Agreement is in effect, each Supporting
Stockholder will promptly notify IVAX of the number of new B2B Shares such
Supporting Stockholder acquires after the date hereof.
3.3 Revocation of other Proxies
To the extent inconsistent with the foregoing provisions of this Article 3
---------
or the other provisions of this Agreement, each Supporting Stockholder hereby
revokes any and all previous proxies with respect to such Supporting
Stockholder's Subject Shares.
3.4 Grant of Proxy
Each Supporting Stockholder hereby appoints IVAX its proxy to vote all of
such Supporting Stockholder's Subject Shares at the Special Meeting (including
any adjournments and postponements thereof) and to execute and deliver any
written consents to fulfill such Supporting
B-4
<PAGE>
Stockholder's obligations under this Agreement. This proxy is coupled with an
interest and is irrevocable until the earlier of the Effective Date and the
Termination Date.
3.5 No Limit on Fiduciary Duty
Notwithstanding anything to the contrary set forth herein, this Agreement
will not (a) restrict, limit or prohibit any Supporting Stockholder or any
individuals who may represent a Supporting Stockholder on the B2B's Board of
Directors from exercising (in their capacity as a director or officer) their
fiduciary duties to the B2B under applicable Law, or (b) require any individual,
in their capacity as an officer of the B2B, to take any action in contravention
of, or omit to take any action pursuant to, or otherwise take or refrain from
taking any actions which are inconsistent with, instructions or directions of
the B2B's Board of Directors undertaken in the exercise of their fiduciary
duties, provided that nothing in this Section 3.5 will be deemed to relieve any
-----------
Supporting Stockholder from its obligations under any other provision of this
Agreement.
ARTICLE 4.
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the earlier of the Effective Date and the
Termination Date:
4.1 General
Each Supporting Stockholder will use its Best Efforts to take all actions
and to do all things necessary to consummate, make effective, and comply with
the terms of this Agreement.
4.2 Notice of Developments
The Supporting Stockholders will give prompt written notice to the B2B and
IVAX of any development occurring after the date of this Agreement that causes
or reasonably could be expected to cause a Breach of any of the representations
and warranties in Section 2.1. No Supporting Stockholder's disclosure under this
-----------
Section 4.2 will be deemed to amend this Agreement or to prevent or cure any
-----------
misrepresentation or Breach of representation, warranty, or covenant.
4.3 Confidentiality; Publicity
Except as may be required by Law, stock exchange, or other regulation or as
otherwise expressly contemplated herein, no Supporting Stockholder or their
respective Affiliates, employees, agents and representatives will disclose to
any third party the existence of this Agreement, the subject matter or terms
hereof or any Confidential Information concerning the business or affairs of any
other Party which it may have acquired from such Party in the course of pursuing
the Transactions without prior written consent from that Party; provided,
however, any Supporting Stockholder may disclose any such Confidential
Information as follows: (a) to such Supporting Stockholder's Affiliates and its
or its Affiliates' employees, lenders, counsel, or accountants, the actions for
which the applicable Supporting Stockholder will be responsible; (b)
B-5
<PAGE>
to comply with any applicable Law or Order, provided that prior to making any
such disclosure the Supporting Stockholder making the disclosure notifies the
Party whose Confidential Information will be disclosed of any Action of which it
is aware which may result in disclosure and uses its Best Efforts to limit or
prevent such disclosure; (c) to the extent that the Confidential Information is
or becomes generally available to the public through no fault of the Supporting
Stockholder or its Affiliates making such disclosure; (d) to the extent that the
same information is in the possession of the Supporting Stockholder making such
disclosure prior to receipt of such Confidential Information; (e) to the extent
that the Supporting Stockholder that received the Confidential Information
independently develops the same information without in any way relying on any
Confidential Information; or (f) to the extent that the same information becomes
available to the Supporting Stockholder making such disclosure on a
nonconfidential basis from a source other than a Party or their respective
Affiliates, which source, to the disclosing Supporting Stockholder's Knowledge,
is not prohibited from disclosing such information by a legal, Contractual, or
fiduciary obligation to the other Supporting Stockholder. No Supporting
Stockholder or any of its Affiliates will issue any press release or other
public announcement related to this Agreement or the Transactions without IVAX's
and the B2B's prior written approval.
ARTICLE 5.
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Effective Date:
5.1 General
In case at any time after the Merger any further action is necessary to
carry out the purposes of this Agreement, each Party will take such further
action (including the execution and delivery of such further instruments and
documents) as any other Party reasonably may request, all at the requesting
Party's sole cost and expense (unless the requesting Party is entitled to
indemnification therefor under the Merger Agreement).
5.2 Litigation Support
So long as any Party actively is contesting or defending against any Action
in connection with (a) the Transactions or (b) any fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction on or prior to the Effective
Date involving the Merger, each other Party will cooperate with such Party and
its counsel in the contest or defense, make available their personnel, and
provide such testimony and access to their books and records as will be
necessary in connection with the contest or defense, at the sole cost and
expense of the contesting or defending Party (unless the contesting or defending
Party is entitled to indemnification therefor under the Merger Agreement).
5.3 Release
Each Supporting Stockholder, on behalf of such Supporting Stockholder and
each of such Supporting Stockholder's heirs, representatives, successors, and
assigns, hereby releases and forever discharges the B2B, IVAX Parties and the
Surviving Corporation and each of their
B-6
<PAGE>
respective officers, directors, employees, agents, Supporting Stockholders,
controlling persons, representatives, Affiliates, successors, assigns, and the
Surviving Corporation (individually, a "Releasee" and collectively, "Releasees")
from any and all Actions, Orders, Damages, Liabilities and Contracts whatsoever,
whether known or unknown, suspected or unsuspected, both at Law and in equity,
which such Supporting Stockholder or any of such Supporting Stockholder's
respective heirs, representatives, successors or assigns now has, have ever had
or may hereafter have against the respective Releasees arising contemporaneously
with or prior to the Effective Date or on account of or arising out of any
matter, cause or event occurring contemporaneously with or prior to the
Effective Date including any rights to indemnification or reimbursement from the
Surviving Corporation, whether pursuant to its Organizational Documents,
Contract or otherwise and whether or not relating to Actions pending on, or
asserted after, the Closing Date; provided, however, that nothing contained
herein will operate to release any obligations of the B2B, IVAX Parties or
Surviving Corporation arising under this Agreement or under the Merger
Agreement.
Each Supporting Stockholder hereby irrevocably covenants to refrain from,
directly or indirectly, asserting any cause of Action, or commencing,
instituting or causing to be commenced, any Action, of any kind against any
Release, based upon any matter purported to be released hereby.
ARTICLE 6.
TERMINATION
6.1 Termination of Agreement
This Agreement will automatically terminate upon any termination of
the Merger Agreement in accordance with its terms.
6.2 Effect of Termination
Except for the obligations under Section 4.3, this Article 6 and Article 7,
----------- --------- ---------
if this Agreement is terminated under Section 6.1, then, except as provided in
-----------
this Section 6.2 all further obligations of the Parties under this Agreement
-----------
will terminate.
ARTICLE 7.
MISCELLANEOUS
7.1 Entire Agreement.
This Agreement, together with the Exhibits and any attachments hereto and
the certificates, documents, instruments and writings that are delivered
pursuant hereto, constitute the entire agreement and understanding of the
Parties hereto and supersede all prior agreements and understandings with
respect to the subject matter hereof.
7.2 Successors.
B-7
<PAGE>
All of the terms, agreements, covenants, representations, warranties, and
conditions of this Agreement are binding upon, and inure to the benefit of and
are enforceable by, the Parties and their respective successors.
7.3 Assignments.
No Party may assign either this Agreement or any of its rights, interests,
or obligations hereunder without the prior written approval of IVAX Parties and
Supporting Stockholders; provided, however, that a IVAX Party may assign any or
all of its respective rights and interests hereunder to one or more of its
Affiliates and may designate one or more of its Affiliates to perform its
obligations hereunder.
7.4 Notices.
All notices, requests, demands, and other communications hereunder will be
in writing and shall be delivered by hand, overnight courier, facsimile
transmission or by United States Mail, postage prepaid, by registered or
certified mail (return receipt requested), to the address indicated below and
shall be deemed given when received by the intended recipient as set forth
below. Any Party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.
<TABLE>
<CAPTION>
If to IVAX Parties: Copy to (which will not constitute notice):
<S> <C>
IVAX Corporation Stearns Weaver Miller Weissler
400 Biscayne Boulevard Alhadeff & Sitterson, P.A.
Miami, Florida 33137 Museum Tower, Suite 2200
Attention: General Counsel 150 West Flagler Street
Facsimile: (305) 575-6049 Miami, Florida 33130
Attention: Alison W. Miller, Esq.
Facsimile: (305) 789-3395
If to B2B: Copy to (which will not constitute notice):
b2bstores.com, Inc. Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Attn: Richard Kandel Attn: Alan Schoenbaum, Esq.
211 Park Avenue 300 Convent Street, Suite 1500
Hicksville, New York 11801 San Antonio, Texas
Fax: (516) 931-3530 Tel.: (210) 281-7000
Fax: (210) 224-2035
</TABLE>
If to Supporting Stockholders:
To the addresses specified in Exhibit A.
---------
B-8
<PAGE>
7.5 Specific Performance.
Each Party acknowledges and agrees that the other Parties would be damaged
irreparably if any provision of this Agreement is not performed in accordance
with its specific terms or is otherwise Breached. Accordingly, each Party
agrees that the other Parties will be entitled to an injunction or injunctions
to prevent Breaches of the provisions of this Agreement and to enforce
specifically this Agreement and its terms and provisions in any Action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, subject to Sections 7.8, in
------------
addition to any other remedy to which they may be entitled, at Law or in equity.
7.6 Counterparts.
This Agreement may be executed in two or more counterparts, each of which
will be deemed an original but all of which together will constitute one and the
same instrument.
7.7 Headings.
The article and section headings contained in this Agreement are inserted
for convenience only and will not affect in any way the meaning or
interpretation of this Agreement.
7.8 Governing Law.
This Agreement and the performance of the Transactions and obligations of
the Parties hereunder will be governed by and construed in accordance with the
laws of the State of Delaware, without giving effect to any choice of Law
principles.
7.9 Amendments and Waivers.
No amendment, modification, replacement, termination or cancellation of any
provision of this Agreement will be valid, unless the same will be in writing
and signed by IVAX Parties and Supporting Stockholders. No waiver by any Party
of any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, may be deemed to extend to any prior or subsequent
default, misrepresentation, or Breach of warranty or covenant hereunder or
affect in any way any rights arising because of any prior or subsequent such
occurrence.
7.10 Severability.
Any provision of this Agreement that is invalid, unenforceable or illegal
in any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such invalidity, unenforceability, or illegality without affecting the
remaining provisions hereof and without affecting the validity, enforceability
or legality of such provision in any other jurisdiction.
7.11 Expenses.
Except as otherwise expressly provided in this Agreement, each Party will
bear its own costs and expenses incurred in connection with the preparation,
execution and performance of
B-9
<PAGE>
this Agreement and the Transactions. Supporting Stockholders agree that the B2B
has not borne nor will bear any costs and expenses (including any legal fees and
expenses of any Supporting Stockholder Party) in connection with this Agreement
or any of the Transactions.
7.12 Construction.
The Parties have participated jointly in the negotiation and drafting of
this Agreement. If an ambiguity or question of intent or interpretation arises,
this Agreement will be construed as if drafted jointly by the Parties and no
presumption or burden of proof will arise favoring or disfavoring any Party
because of the authorship of any provision of this Agreement. Any reference to
any federal, state, local, or foreign Law will be deemed also to refer to Law as
amended and all rules and regulations promulgated thereunder, unless the context
requires otherwise. The word "including" means "including without limitation."
Pronouns in masculine, feminine, and neuter genders will be construed to include
any other gender, and words in the singular form shall be construed to include
the plural and vice versa, unless the context otherwise requires. The words
"this Agreement," "herein," "hereof," "hereby," "hereunder," and words of
similar import refer to this Agreement as a whole and not to any particular
subdivision unless expressly so limited. The Parties intend that each
representation, warranty, and covenant contained herein will have independent
significance. If any Party has breached any representation, warranty, or
covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached will not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty, or covenant.
7.13 Incorporation of Exhibits and Annexes.
The Exhibits and Annexes identified in this Agreement are incorporated
herein by reference and made a part hereof.
The remainder of this page is intentionally left blank.
B-10
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement on the date
first above written.
IVAX CORPORATION
By: /s/ Neil Flanzraich
-----------------------------------------------
Neil Flanzraich, President and Vice-Chairman
IVAX DIAGNOSTICS, INC.
By: /s/ Giorgio D'Urso
-----------------------------------------------
Giorgio D'Urso, President and CEO
B2BSTORES.COM, INC.
By: /s/ Richard Kandel
-----------------------------------------------
Richard Kandel, Chairman
SUPPORTING SHAREHOLDERS:
ENVIRO-CLEAN OF AMERICA, INC.
By: /s/ Richard Kandel
-----------------------------------------------
Richard Kandel, Chairman
B-11
<PAGE>
RICHARD KANDEL
By: /s/ Richard Kandel
-----------------------------------------------
Richard Kandel, individually
KANDEL AND SON PROFIT SHARING PLAN
By: /s/ Richard Kandel
-----------------------------------------------
Richard Kandel, Trustee
MINT CORPORATION OF NEW YORK
By: /s/ Richard Kandel
-----------------------------------------------
Richard Kandel, President
RANDALL K. DAVIS
By: /s/ Randall K. Davis
-----------------------------------------------
Randall K. Davis, individually
STEVEN ETRA
By: /s/ Steven Etra
-----------------------------------------------
Steven Etra, individually
SRK ASSOCIATES L.L.C.
By: /s/ Steven Etra
-----------------------------------------------
Steven Etra, President
dotCOM Fund, L.L.C.
By: /s/ Mark A. Rice
-----------------------------------------------
Mark A. Rice, Managing Member
B-12
<PAGE>
EXHIBIT A
---------
The Supporting Stockholders of b2bstores.com, Inc.
--------------------------------------------------------------------------------
Supporting Stockholder # of Shares of b2bstores.com, Inc.
Owned
--------------------------------------------------------------------------------
Enviro-Clean of America, Inc. 930,000
1023 Morales Street
San Antonio, Texas 78207
--------------------------------------------------------------------------------
Richard Kandel 1,066,666
211 Park Avenue
Hicksville, New York 11801
--------------------------------------------------------------------------------
Kandel and Son Profit Sharing Plan 100,000
% Richard Kandel
211 Park Avenue
Hicksville, New York 11801
--------------------------------------------------------------------------------
Mint Corporation 66,667
% Richard Kandel
211 Park Avenue
Hicksville, New York 11801
--------------------------------------------------------------------------------
Randall K. Davis 333,333
1023 Morales Street
San Antonio, Texas 78207
--------------------------------------------------------------------------------
Steven Etra 162,667
5830 57th Street
Maspeth, New York 11378
--------------------------------------------------------------------------------
SRK Associates, L.L.C. 10,667
% Steven Etra
5830 57th Street
Maspeth, New York 11378
--------------------------------------------------------------------------------
DotCOM Fund L.L.C. 273,400
% Mark A. Rice
666 Dundee Road, Suite 1901,
Northbrook, Illinois 60022
--------------------------------------------------------------------------------
TOTALS 2,943,400
--------------------------------------------------------------------------------
B-13
<PAGE>
HOULIHAN, LOKEY, HOWARD & ZUKIN
ANNEX C
November 20, 2000
Board of Directors
B2bstores.com, Inc.
1023 Morales Street
San Antonio, TX 78207
Dear Directors:
We understand that b2bstores.com, Inc. ("b2b") has entered into a merger
agreement with IVAX Diagnostics, Inc. and its subsidiaries Diamedix Corporation,
Immunovision, Inc. and Delta S.r.l. (collectively referred to as "Diagnostics").
Pursuant to a Merger Agreement (the "Merger Agreement"), Diagnostics will be
merged with and into the B2b by converting the issued and outstanding shares of
Diagnostics Common Stock into 20 million shares of b2b Common Stock. The issued
and outstanding shares of b2b will continue to remain outstanding. The merger
and other related transactions are collectively referred to as the "Merger". At
the time of the Merger, Diagnostics will merge into b2b, and b2b shall be the
surviving corporation ("Surviving Corporation"). b2b will issue 20 million
shares of common stock for all outstanding shares of IVAX Diagnostics, Inc. b2b
will not have a control position in the new company, but will have approximately
32 percent of the combined equity on a fully diluted basis. IVAX Corporation
will own the balance of the equity. The consideration assumes Diagnostics will
have no interest-bearing debt, either to third-parties or affiliated entities,
and have approximately $2 million of cash or cash equivalents at closing. The
Board of Directors will consist of seven persons, five appointed by IVAX
Corporation and two by b2b. The Chairman of the Board of b2b will be Dr. Phillip
Frost. The Surviving Corporation will be a majority-owned subsidiary of IVAX
Corporation, a publicly traded AMEX company. The Agreement of Merger provides
the b2b Board of Directors with fiduciary discretion, which allows the b2b Board
of Directors to proceed with a higher and better offer, but in that event, b2b
must pay a termination fee of $1 million.
Such transaction and all related transactions are referred to collectively
herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address b2b's underlying business decision to effect
the Transaction. We have been retained to: examine strategic alternatives for
b2b, solicit and evaluate indications of interest from interested parties,
assist in the negotiations of any transaction involving b2b, advise the Board of
Directors with regard to structure of a transaction, and provide a fairness
opinion in connection with the Transaction.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the audited financial statements of IVAX Diagnostics for the
fiscal years ended December 31, 1999 and 1998 and the interim
unaudited preliminary statements for the nine months period ended
September 30, 2000, which Diagnostic's management has identified as
being the most current financial statements available;
C-1
<PAGE>
Board of Directors
B2bstores.com, Inc.
1023 Morales Street
San Antonio, TX 78207
2. met and interviewed certain members of management of Diagnostics to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Diagnostics businesses,
and met with representatives of Diagnostic's independent accounting
firm, investment bankers and counsel to discuss certain matters;
3. visited manufacturing facilities of Diagnostics to review operations;
4. reviewed forecasts and projections prepared by the Diagnostic's
management with respect to Diagnostics for the years ended December
31, 2000 through 2004;
5. reviewed due diligence reports on Diagnostics prepared by Robert
Michel, editor-in-chief of The Dark Report, intelligence service for
laboratory CEOs, COOs and CFOs. Mr. Michel analyzed the product
offerings and strategic plan of Diagnostics, provided a written
assessment and visited two sites;
6. reviewed certain other publicly available financial data for certain
companies that we deem comparable to Diagnostics, and publicly
available prices and premiums paid in other transactions that we
considered similar to the Transaction;
7. reviewed the prospectus dated February 16, 2000 and the form 10-Q
dated September 30, 2000 for b2b, which management has identified as
being the most current financial statements available;
8. reviewed the historical market prices and trading volume for b2b's
publicly-traded securities;
9. reviewed the draft of the Merger Agreement dated November 17, 2000,
the draft of the Voting Agreement dated November 20, 2000; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of b2b and Diagnostics, and that there has been no
material change in the assets, financial condition, business or prospects of b2b
and Diagnostics since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to b2b and Diagnostics and do not assume
any responsibility with respect to it. We have not made any physical inspection
or independent appraisal of any of the properties or assets of b2b or
Diagnostics. Our opinion is necessarily based on business, economic, market and
other conditions as they exist and can be evaluated by us at the date of this
letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Transaction is fair to the public stockholders of b2b from a financial point of
view.
/s/ HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
C-2
<PAGE>
ANNEX D
-------
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
B2BSTORES.COM, INC.
Pursuant to Section 242 of the Delaware General Corporation Law, the
undersigned President of B2BSTORES.COM, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation is B2BSTORES.COM, INC.
2. Article First of the Certificate of Incorporation of the Corporation
is amended and restated in its entirety as follows:
"FIRST: The name of the Corporation is IVAX Diagnostics, Inc."
-----
3. Article Fourth of the Certificate of Incorporation of the Corporation
is amended and restated in its entirety as follows:
"FOURTH: The total number of shares of stock which the
------
Corporation is authorized to issue is 55,000,000 shares, which are to
be divided into two classes consisting of (i) 50,000,000 shares of
common stock, par value $.01 per share, and (ii) 5,000,000 shares of
preferred stock, par value $.01 per share, issuable in series as may
be provided from time to time by resolution of the Board of
Directors."
4. This Certificate of Amendment has been duly adopted, pursuant to and
in accordance with Section 242 of the General Corporation Law of the State of
Delaware, by written consent of all the directors of the Corporation in
accordance with Section 141 of the General Corporation Law of the State of
Delaware and by approval of the stockholders of the corporation at a special
meeting of the stockholders.
SIGNED this ____ day of _____________ , 2001.
IVAX DIAGNOSTICS, INC.
(formerly b2bstores.com)
By: ______________________________________
Title: ___________________________________
D-1
<PAGE>
ANNEX E
-------
PROSPECTUS
4,000,000 SHARES
B2BSTORES.COM INC.
COMMON STOCK
________________________
[LOGO]
b2bstores.com
This is the initial public offering of shares of our common stock. In
considering this offering, you should know that:
. no public market existed for our shares prior to this offering;
. our shares are quoted on the Nasdaq SmallCap Market under the symbol
"BTBC;"
. our shares are listed on the Boston Stock Exchange under the symbol
"BTB;"
. this offering is made on a firm-commitment basis; and
. we have granted the underwriters a 45-day option to purchase up to
600,000 additional shares of our common stock solely to cover over-
allotments, if any.
PER SHARE TOTAL
--------- -----------
Public offering price.................................. $8.00 $32,000,000
Underwriting discount and commissions.................. $0.56 $ 2,240,000
Proceeds to b2bstores.com Inc.......................... $7.44 $29,760,000
________________________
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________________________
Gaines, Berland Inc., on behalf of the underwriters, expects to deliver the
shares on or about February 18, 2000.
GAINES, BERLAND INC. NOLAN SECURITIES CORP.
________________________
E-1
<PAGE>
The date of this prospectus is February 15, 2000
[THIS PAGE IS THE INSIDE COVER OF THE PROSPECTUS AND CONTAINS ARTWORK DEPICTING
EXAMPLES OF WEB PAGES AVAILABLE AT WWW.B2BSTORES.COM]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... E-3
Risk Factors............................................................. E-6
Use of proceeds.......................................................... E-7
Dilution................................................................. E-9
Capitalization........................................................... E-10
Plan of Operations....................................................... E-11
Business................................................................. E-20
Management............................................................... E-31
Principal Stockholders................................................... E-37
Certain Transactions..................................................... E-40
Description of Securities................................................ E-42
Underwriting............................................................. E-44
Where You Can Find More Information...................................... E-47
Legal Matters............................................................ E-47
Experts.................................................................. E-47
Index to Financial Statements............................................ E-47
</TABLE>
_____________________________________________
UNTIL MARCH 12, 2000, ALL DEALERS SELLING SHARES OF THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
TO NEW JERSEY RESIDENTS:
The Common Stock of b2bstores.com, Inc., may only be offered and sold,
during the initial distribution of the securities and for ninety days after the
initial distribution of the securities, to persons who come within any of the
following categories, or who the Company reasonably believes comes within any of
the following categories, at the time of the sale of the securities to that
person:
(1) Any bank as defined in section 3(a)(2) of the Securities Act of 1933
(the "Act"), or any savings and loan association or other institution as defined
in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934; any insurance company as defined in section
2(13) of the Act; any investment company registered under the Investment Company
Act of 1940 or a business development company as defined in section 2(a)(48) of
that Act; Small Business Investment Company licensed by the U.S. Small Business
E-2
<PAGE>
Administration under section 301(c) or (d) of the Small Business Investment Act
of 1958; any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions for the benefit of its employees, if such plan has total assets in
excess of $5,000,000; employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974 if the investment decision is made by a
plan fiduciary, as defined in section 3(21) of such act, which is either a bank,
savings and loan association, insurance company, or registered investment
adviser, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions made solely by
persons that are accredited investors;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000.
(4) Any director, executive officer, or general partner of the issuer of
the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in ss.230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited investors.
PROSPECTUS SUMMARY
GENERAL
b2bstores.com(TM) is an Internet web site specifically designed to assist
business customers in the operation and development of their businesses.
b2bstores.com provides user-friendly online access to business products and
supplies. We are currently expanding our web site to provide access to business
services, auctions and business-related information and content. Our objective
is to become a leading, one-stop Internet destination for business customers--a
place where they conduct their business-to-business transactions, build
relationships with customers, suppliers and colleagues, and conduct their
business-related research.
CORPORATE BACKGROUND
b2bstores.com Inc. was formed under the laws of the State of Delaware in
June 1999. Our principal offices are located at 249 East Ocean Boulevard, Suite
620, Long Beach, California 90802. Our phone number is 562-491-7180. Our web
site is available at http://www.b2bstores.com. Information contained in our web
site is not part of this prospectus.
TO CALIFORNIA RESIDENTS ONLY:
The Common Stock of b2bstores.com may only be offered and sold to
E-3
<PAGE>
(i) persons with a net worth, individually or jointly with his or her spouse, of
at least $250,000 (exclusive of home, home furnishings and automobiles) and an
annual income of at least $65,000 or (ii) persons with a net worth, individually
or jointly with his or her spouse, of at least $500,000 (exclusive of home, home
furnishings and automobiles).
The Common Stock offered hereby has been registered by a limited
qualification. The exemption afforded by Section 25104(h) of the California
Securities Law shall be withheld by the Commissioner of Corporations.
THE OFFERING
Common stock offered......................... 4,000,000 shares
Common stock outstanding prior to the
offering.................................. 4,021,643 shares
Common stock to be outstanding after the
offering.................................. 8,021,643 shares
Use of proceeds.............................. We intend to use the net proceeds
of this offering
. for sales and marketing
activities, including brand promotion;
. to fund the development of our
web site and customer support
operations;
. to repay loans made to us by
Enviro-Clean of America, Inc.;
. to pay cash bonuses to some of
our officers; and
. for working capital and general
corporate purposes.
Nasdaq SmallCap Market symbol................ BTBC
Boston Stock Exchange symbol................. BTB
If the underwriters fully exercise their over-allotment option to purchase
additional shares, the total number of shares to be offered in this offering
will be 4,600,000 and the total number of shares outstanding after this offering
will be 8,621,643.
Enviro-Clean is a principal stockholder of b2bstores.com Inc. Richard
Kandel, our founder and chairman of the board, is also the chairman of the
board, chief executive officer and principal stockholder of Enviro-Clean.
SUMMARY FINANCIAL INFORMATION
This summary financial information should be read in conjunction with the
section of this prospectus entitled "Plan of Operations" and our audited
E-4
<PAGE>
financial statements and related notes included elsewhere in this prospectus.
The financial information as of December 31, 1999 and for the period from our
inception on June 28, 1999 to December 31, 1999 has been derived from our
audited financial statements. The historical results presented in this
prospectus are not necessarily indicative of our future financial position or
results of operations.
We began our commercial operations in September 1999:
<TABLE>
<CAPTION>
JUNE 28, 1999
(INCEPTION) TO
DECEMBER 31, 1999
-----------------
<S> <C>
STATEMENT OF OPERATIONS DATA
Sales........................................................................................ $ 2,191
Cost of sales................................................................................ 3,495
-----------
Gross loss................................................................................ (1,304)
-----------
Operating expenses:
General and administrative................................................................ 709,810
Sales and marketing....................................................................... 23,060
Start-up costs............................................................................ 55,036
Stock-based compensation relating to general and administrative activities................ 216,430
Stock-based compensation relating to start-up activities.................................. 1,901,500
-----------
Total operating expenses............................................................... 2,905,836
-----------
Loss from operations......................................................................... (2,907,140)
Interest expense............................................................................. 23,097
-----------
Net loss..................................................................................... $(2,930,237)
===========
Basic and diluted loss per share............................................................. $ (.75)
===========
Weighted average common shares outstanding................................................... 3,910,780
===========
</TABLE>
BALANCE SHEET DATA
DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
Working capital (deficit)......................... $(880,344) $27,053,656
Total assets...................................... 815,581 27,901,648
Total liabilities................................. 991,888 143,955
Stockholders' equity (deficit).................... (176,307) 27,757,693
The information presented in this table under the "As Adjusted" column
gives effect to:
. an offering price of $8.00 per share;
. the sale of 4,000,000 shares of our common stock in this offering;
. our receipt of net proceeds of $28,064,000 in this offering; and
. our immediate application of a portion of the net proceeds to repay
loans made to us by Enviro-Clean and to pay cash bonuses due to some
of our officers upon completion of this offering.
E-5
<PAGE>
Subsequent to December 31, 1999, we have continued to fund our operations
with proceeds from loans from Enviro-Clean. As of February 15, 2000, we had
borrowed an aggregate of $1,400,000 from Enviro-Clean. The repayment of the
principal and related interest under these loans as of the consummation date of
this offering will be made from the net proceeds of the offering. Our working
capital and total assets will be reduced by this same amount.
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in b2bstores.com. Our business, financial condition and
results of operations could be adversely affected by these risks. You should be
able to bear a complete loss of your investment.
RISKS RELATING TO OUR FINANCIAL CONDITION
BECAUSE WE HAVE A VERY SHORT OPERATING HISTORY, WE MAY NOT BE ABLE TO
SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE PROFITABILITY.
We may not be able to grow our business as planned or ever become a
profitable business. We began our commercial operations in September 1999.
Because of this very limited operating history, there are no meaningful
financial results which you can use to evaluate the merits of making an
investment in us. Accordingly, investment decisions must be made based on our
business prospects. Our business prospects are subject to all the risks,
expenses and uncertainties encountered by any new company. We also face the
risks inherent in operating in the rapidly evolving markets for Internet
products and services. If we are unable to successfully address these risks or
grow our business as planned, the value of our common stock will be diminished.
BECAUSE OUR OPERATING EXPENSES AND CAPITAL EXPENDITURES WILL OUTPACE OUR
REVENUES, WE WILL INCUR SIGNIFICANT LOSSES IN THE NEAR TERM.
We expect to incur significant operating expenses and make relatively high
capital expenditures as we develop our Internet business. These operating
expenses and capital expenditures will initially outpace revenues and result in
significant losses in the near term. We may never be able to reduce these
losses. We have generated only nominal revenues to date and have incurred an
aggregate net loss of $2,930,237 during the period from our inception to
December 31, 1999.
THE REPORT OF OUR INDEPENDENT ACCOUNTANTS CONTAINS A GOING CONCERN QUALIFICATION
WHICH STATES THAT WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS IF WE DO NOT
RECEIVE THE PROCEEDS OF THIS OFFERING.
Our independent certified public accountants' report for the period from
our inception on June 28, 1999 through December 31, 1999 contains an explanatory
paragraph. This paragraph states that our limited working capital position prior
to our receipt of the net proceeds of this offering raises substantial doubt
about our ability to continue as a going concern. Accordingly, if we do not
consummate this offering, we may not be able to continue our operations.
RISKS RELATING TO OUR OPERATIONS
BECAUSE ONE OF OUR OPERATING AGREEMENTS REQUIRES US TO SHARE A SIGNIFICANT
PORTION OF THE REVENUES WE GENERATE WITH A THIRD-PARTY, IT WILL BE MORE
DIFFICULT FOR US TO BECOME A PROFITABLE BUSINESS.
We will not retain all revenues generated through our web site, which
E-6
<PAGE>
will make it more difficult for us to become a profitable business. We have an
agreement with Netgateway, Inc. through February 2001, under which it provides
us with e-commerce processing and other technology services integral to our
business. During the term of this agreement, we are obligated to share equally
with Netgateway all advertising and "click-through" revenues generated through
our web site. We also pay Netgateway a small percentage of all revenues
generated through sales of products through our web site.
BECAUSE OUR EXECUTIVE OFFICERS LACK SIGNIFICANT MANAGEMENT EXPERIENCE, WE MAY
NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH.
The growth of our business may place a significant strain on our management
team and we may not be able to effectively manage our growth. None of our
executive officers has significant experience in managing a company or
overseeing a company's rapid growth.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS MAY PROVE
TO BE INACCURATE.
Some of the statements in this prospectus are forward-looking statements
that involve risks and uncertainties. These forward-looking statements include
statements about our plans, objectives, expectations, intentions and assumptions
that are not statements of historical fact. You can identify these statements by
the following words:
. "may," . "plans,"
. "will," . "expects,"
. "should," . "believes,"
. "estimates," . "intends"
and similar expressions. We cannot guarantee our future results, performance or
achievements. Our actual results and the timing of corporate events may differ
significantly from the expectations discussed in the forward-looking statements.
You are cautioned not to place undue reliance on any forward-looking statements.
USE OF PROCEEDS
We will receive net proceeds from this offering of approximately
$28,064,000. If the underwriters exercise their over-allotment option in full,
the net proceeds will be approximately $32,384,000. In either case, the net
proceeds will reflect underwriting discounts and commissions and other expenses
payable by us. We estimate that these discounts, commissions and expenses will
be an aggregate of approximately $3,936,000 or $4,416,000, if the over-allotment
option is fully exercised.
We intend to use the net proceeds as set forth below. The information
regarding our use of the proceeds assumes no exercise of the over-allotment
option.
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
----------------------- ----------- -------
<S> <C> <C>
Sales and marketing..................................................... $18,000,000 64.1%
Development of our web site and customer support operations............. 2,500,000 8.9
Repayment of debt to principal stockholder.............................. 1,500,000 5.3
Payment of bonuses to officers.......................................... 130,000 0.5
Working capital and general corporate purposes.......................... 5,934,000 21.2
----------- -------
Total................................................................ $28,064,000 100.0%
=========== =======
</TABLE>
E-7
<PAGE>
We intend to use approximately $18,000,000 of the net proceeds for sales
and marketing activities and operations. An important part of these activities
will be the development of the "b2bstores.com" brand and promotion of our web
site and product and service offerings. These activities include:
. the advertising of our web site in trade journals and
magazines,
. direct mailings to businesses,
. online marketing initiatives,
. the appointment of one or more advertising agencies,
. the hiring of sales and marketing personnel, and
. the making of up-front payments that may be required by
fulfillment agents prior to their actual delivery of products
to our customers.
We intend to use approximately $2,500,000 of the proceeds for the continued
technological development of our web site, including:
. the in-house development of software and related technologies,
. the hiring of design and technology personnel,
. the purchase or leasing of hardware and third-party
technologies that we believe will enhance our web site's ease
of use and sense of community,
. the expansion of our customer support operations, including our
24-hour customer service telephone operations and live, online
customer service chat area, and
. the commercial launch and expansion of our auction capabilities
and offerings, business referral services and business content
offerings.
We will use approximately $1,500,000 of the net proceeds to repay loans
made to us by Enviro-Clean, one of our principal stockholders. These loans were
made in the aggregate principal amount of approximately $1,400,000 in June,
July, November and December 1999 and January and February 2000. They bear
interest at the annual rate of 8%. All principal and interest is payable by us
on the the date this offering is consummated.
We will use approximately $130,000 of the net proceeds to pay cash bonuses
to some of our officers. These payments are required under their employment
agreements.
We intend to use the remaining net proceeds for working capital and general
corporate purposes. These purposes may include:
. the payment of salaries of additional management and
back-office personnel,
. expenditures of capital for the expansion of our financial and
accounting infrastructure; and
. consideration paid for acquisitions, investments or strategic
E-8
<PAGE>
alliances domestically or abroad which have not yet been
identified.
Our management will have broad discretion in allocating the proceeds to be
applied for working capital and general corporate purposes. If the underwriters
exercise their over-allotment option in full, we intend to use the net proceeds
from the sale of the shares sold under of the over-allotment option for working
capital and general corporate purposes.
Pending application of the net proceeds as described above, we intend to
invest the net proceeds in:
. short-term, interest-bearing investment grade securities,
. money market accounts,
. certificates of deposit, or
. direct or guaranteed obligations of the United States
government.
DILUTION
A company's net tangible book value is equal to its total tangible assets,
minus its total liabilities. A company's net tangible book value per share is
calculated by dividing its net tangible book value, by the total number of
shares of common stock outstanding. As of December 31, 1999, we had a net
tangible deficit of $(496,674), or approximately $(.12) per share of common
stock .
As of December 31, 1999, after adjusting for the issuance of 4,000,000
shares of our common stock in this offering at $8.00 per share, our as adjusted
net tangible book value would have been approximately $27,757,693, or
approximately $3.46 per share of common stock. Upon completion of this offering,
there will be an immediate increase in our net tangible book value of
approximately $3.58 per share of common stock to existing stockholders and an
immediate dilution of approximately $4.54 per share, or approximately 57%, to
new investors.
The following table illustrates this dilution:
<TABLE>
<S> <C>
Initial public offering price per share......................................... $ 8.00
Net tangible book value per share as of December 31, 1999.............. (.12)
Increase per share attributable to sale of shares in this offering..... 3.58
---------
As adjusted net tangible book value per share of common stock after this
offering..................................................................... 3.46
---------
Dilution per share of common stock to investors in this offering................ $ 4.54
=========
</TABLE>
E-9
<PAGE>
Assuming the exercise in full of the underwriters' over allotment option,
our adjusted net tangible book value at December 31, 1999 would have been
approximately $3.72 per share. This represents an immediate increase in net
tangible book value of $3.84 per share to our existing stockholders and an
immediate dilution in net tangible book value of $4.28 per share to new
investors.
The next table summarizes, as of December 31, 1999:
. the number and percentage of shares of common stock purchased from
b2bstores.com,
. the amount and percentage of the cash consideration paid for those
shares, and
. the average price per share paid by existing stockholders and by new
investors in this offering.
The information in the table gives effect to an initial public offering
price of $8.00 per share. It does not give effect to underwriting discounts and
offering expenses that we will pay in connection with the offering or the
exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
----------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 4,021,643 50.1% $ 636,000 1.9% $ 0.16
New investors............. 4,000,000 49.9% 32,000,000 98.1% 8.00
----------- ----- ----------- -----
Total.................. 8,021,643 100.0% $32,636,000 100.0%
=========== ===== =========== =====
</TABLE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on an actual and as adjusted basis. The "As Adjusted" column shows our
capitalization adjusted to reflect:
. the issuance of 4,000,000 shares in this offering at a public
offering price of $8.00 per share,
. the repayment of all of our short-term debt.
. the payment of cash bonuses to some of our executive officers that
will be due upon completion of this offering.
Subsequent to December 31, 1999, we have continued to fund our operations
with proceeds from loans from Enviro-Clean. As of February 15, 2000, we had
borrowed an aggregate of approximately$1,400,000 from Enviro-Clean. The
repayment of the principal and related interest under these loans as of the
consummation date of this offering will be made from the net proceeds of the
offering.
E-10
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------
ACTUAL AS ADJUSTED
----------- --------------
<S> <C> <C>
Short-term debt................................................................. $ 824,836 $ --
=========== ============
Stockholders' equity:
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized; no
shares issued, actual and as adjusted..................................... $ -- $ --
Common stock, par value $0.01 per share, 25,000,000 shares authorized;
4,021,643 issued and outstanding, actual; and 8,021,643 shares issued and
outstanding, as adjusted.................................................. 40,216 80,216
Additional paid-in capital................................................... 2,713,714 30,737,714
Deficit accumulated during development stage................................. (2,930,237) (3,060,237)
----------- ------------
Total stockholders' equity (deficit)...................................... (176,307) 27,757,693
----------- ------------
Total capitalization...................................................... $ (176,307) 27,757,693
=========== ============
</TABLE>
PLAN OF OPERATIONS
OVERVIEW
We commercially introduced our web site, b2bstores.com, in September 1999.
Since its introduction, our web site has provided our customers with the ability
to purchase online business products and supplies in a growing number of
categories.
In addition to regularly adding new categories of available products, we
are currently in the process of expanding our web site to provide our customers
with access to:
. online auctions;
. business referral services; and
. business information and content.
We expect to be providing commercial access to each of these areas through our
web site by the end of the first quarter of 2000. We may, however, encounter
problems or unexpected costs in connection with the introduction of any of these
areas as described below.
EXPANSION OF OUR PRODUCT CATEGORIES
We regularly seek to expand our product categories by establishing
relationships with additional fulfillment agents. These fulfillment agents are
vendors that actually supply the products purchased by our customers through our
web site. The terms of any agreement governing a relationship with a new
fulfillment agent must be negotiated and will vary on a case-by-case basis. If
we cannot negotiate agreements on commercially reasonable terms, we will not be
able to expand our product offerings. Further, in each instance where we are
able to establish a relationship with a new fulfillment agent, we must integrate
that agent's electronic inventory and ordering system with the e-commerce system
used by our web site. To successfully integrate our respective systems, we must
work closely with the personnel of technology suppliers to the fulfillment
agent. This integration can be time consuming. Although we are not required to
make any advance payments under our existing fulfillment arrangements, these
type of payments could be required under future arrangements.
IMPLEMENTATION OF AUCTION FUNCTIONS
We are currently integrating the necessary technology to provide online
auctions at our web site. The technology we are using for the auction functions
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is being developed internally. Although basic auction functions are currently
available at our website, we are expanding these functions. We deem our auction
area to be in the development phase. Further, we have not marketed our auctions.
Accordingly, there are only a few products currently up for auction at our web
site. Once commercially launched, our auction functions will provide our
customers with utility only to the extent other customers place items up for
auction. Accordingly, we will have to spend material amounts of time and capital
to market and promote our web site's auction functions. Our expanded auction
functions are scheduled for commercial launch during the first quarter of 2000.
The anticipated costs associated with the implementation of our expanded auction
functions is approximately $120,000. We will use a portion of the proceeds of
this offering to fund these costs. We will face intense competition from
established web sites that provide auction access to users.
INTRODUCTION OF BUSINESS SERVICE REFERRALS
We are currently negotiating with providers of financial services,
accounting services, legal services and other services to serve as service
providers to customers at our web site. We are spending significant time in
connection with our efforts to assemble a group of service providers willing to
utilize our web site for the promotion of their services. For each provider, we
must negotiate the terms of our referral relationship, including the amount of
commission to be paid to us for each customer we refer. Some industries may have
stringent guidelines relating to the payment of commissions for referral
services. We must ensure in each instance that we are in compliance with these
guidelines. It is our current intention to not engage in any business referals
that would require us to become licensed or regulated by any agency.
In each case, we must design and integrate into our web site a link to the
web site of the service provider. This will require us to expend significant
time and capital. The anticipated costs for implementing our business service
referral functions include one-time expenses of approximately $60,000 during the
first quarter of 2000. These costs will relate to the development and
integration of approximately ten complex service-provider projects and 20 simple
links to service providers. These costs will be funded by a portion of the
proceeds of this offering.
PROVISION OF BUSINESS INFORMATION AND CONTENT
We have already begun to provide business information and other content to
our customers, including:
. computer product reviews,
. news,
. stock market information, and
. downloadable driving directions.
This information is supplied by third-party content providers. We are required
to pay a fee for the content we make available through our web site. We intend
to expand our roster of content providers and the information available through
our web site. The arrangement we have with each content provider varies on a
case-by-case basis.
The anticipated cost for our business content and information functions
will be approximately $12,000 per month on an ongoing basis for licensing of
content and a one-time cost of $15,000 for the development and integration of
our functions. We anticipate that these costs will be partially covered by
corporate sponsorships at our web site. The remaining costs will be funded by a
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portion of the proceeds of this offering.
SOURCES OF REVENUE
We believe that we will derive our revenues from the following sources:
. product sales;
. service referral fees and commissions;
. advertising;
. "click through" fees; and
. vendor management fees.
We will recognize revenues according to:
. the type of product or service being sold,
. the structure of the contract negotiated with the individual
vendor, and
. the substantive nature of the risks of ownership we incur in
connection with the sale and shipment of the product.
For product sales involving substantive risk of ownership, we will
generally recognize revenue at the gross transaction value. For service and
referral sales where risk of loss is minimal, we will generally recognize
revenue on a net fee or commission basis. For auction sales where we incur risk
of loss in the transactions, we will recognize gross revenues. For auction sales
where we act as auctioneer and have little risk of loss, we will recognize
revenue on a net basis or transaction fee basis.
Currently policy setting groups of the Emerging Issues Task Force and the
Financial Accounting Standards Board are reviewing the guidelines under which
revenue is recognized on a gross basis versus a net basis. As we currently
recognize certain of our revenue on a gross basis, there is a risk that future
guidelines may require us to change, retroactively, our revenue recognition
policy. This could cause us to report markedly lower revenues than currently
anticipated. Although such a change would cause us to report markedly lower
revenues and costs of products, it would not change our reporting with respect
to other expenses, net revenue or earnings before and after tax.
PRODUCT SALES
We sell products from our expanding catalog of products -- from cleaning
products to office supplies to computers. We also intend to provide our business
customers with the ability to purchase flowers, collectibles, vacation packages
and other ancillary products. We expect a substantial majority of our revenue to
come from the online sale of products.
Enviro-Clean is our fulfillment agent for janitorial and sanitary
maintenance products offered through our web site. All Enviro-Clean products
purchased through our web site are distributed directly to our customers by
Enviro-Clean through this fulfilment relationship. Enviro-Clean charges us a
price for each product equal to its cost for the product. Enviro-Clean also is
entitled to receive a payment from us equal to 2% to 5% percentage of all
revenues generated by us through the sale of products supplied by Enviro-Clean.
In connection with our auctions, we list products for sale by vendors. In
these auctions, we will either take physical possession of the product or the
vendor will retain possession of the product. We also will act as an auctioneer,
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conducting auctions on behalf of web site users who place items up for auction.
When acting as an auctioneer, we will receive a commission on the sale of the
product at the conclusion of the auction. When acting as an auctioneer, we will
not take title to or possession of the product and the person or entity placing
the product up for auction will bear the risk of credit card charge backs and
fraud.
SERVICE REFERRAL FEES
We will provide our business customers with access to a broad range of
business services. Subject to regulation in applicable industries, we will
generate revenues from our service referral activities through the collection of
commissions and referral fees from the service providers to which we direct our
business customers.
ADVERTISING REVENUE
Revenue from advertising on the Internet is driven by the size and quality
of a web site's audience. We believe that our target audience -- business
customers -- will give us the ability to structure attractive transactions with
advertisers. Advertising revenue, if any, will be earned from:
. the sale of advertising banners,
. the placement of pop-up windows and
. the sale of other sponsorship or promotional rights placed on our
web site. We believe that advertising on our web site will be an
important source of our revenue in the future.
In order to effectively sell advertising on our web site, we believe we
will need to consistently achieve more than 1,000,000 hits per month. As of
December 31, 1999, our monthly run rate for hits is approximately 40,000.
The rates that we intend to charge our advertisers for the placement of the
advertisements at our web site will range from $0.005 to $0.02 per hit, based
upon the amount of advertising purchased and the relative placement of
advertising within our web site. During the term of our agreement with
Netgateway, we are obligated to share equally with Netgateway all advertising
revenue generated through our web site.
"CLICK-THROUGH" REVENUE
We will participate in affiliate programs with online retail partners by
placing "click-through" tags in our web site. When a business customer points
his or her mouse to one of these click-through tags and clicks the mouse, he or
she will be brought to the e-commerce web site of one of our retail partners.
Our click-through tags will allow us to generate revenues through the collection
of sales commissions from our click-through retail partners. Commissions from
our click-through initiatives will vary. During the term of our agreement with
Netgateway, we are obligated to share equally with Netgateway all revenues
generated through our "click-through" arrangements. Our agreement with
Netgateway is through February 2001.
VENDOR MANAGEMENT FEES
Enviro-Clean operates its own product web site at www.b2bgoods.com. This
web site offers janitorial and sanitary maintenance products, along with
products in a limited number of other categories. All of those products are also
available at our web site. Enviro-Clean's web site also offers hyperlink access
to our web site. Under our agreement with Enviro-Clean, Enviro-Clean has agreed
that, until it owns less than 10% of our outstanding common stock, it will
refrain from selling its own products through any web
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sites other than its own or ours. It will also refrain from offering any other
types of products at its own web site.
We provide Enviro-Clean with access to web site transaction processing and
e-commerce services for its b2bgoods.com web site through our e-commerce
backbone. For these services we receive from Enviro-Clean a fee equal to the
greater of (a) 10% of Enviro-Clean's revenues generated through e-commerce
activities conducted through www.b2bgoods.com and (b) 50% of Enviro-Clean's
gross profits generated through e-commerce activities conducted at
www.b2bgoods.com.
EXPENSES
Our expenses are composed of:
. salaries;
. sales and marketing costs;
. costs of products;
. web site and technology development costs;
. customer satisfaction operations; and
. general and administrative costs.
SALARIES
We believe that there are four key components to our success. They are:
. effective marketing of our web site to vendors, advertisers and
business customers;
. efficient management of fulfillment agents, which are the entities
that will supply and distribute products purchased at our web site;
. availability of useful and attractive web site features and
leading-edge technology; and
. effective execution of our operations.
In order to excel in all of these areas, we must hire talented personnel.
Competition for qualified, experienced personnel in the high-tech market is
intense. In order to compete effectively in this labor market, we must provide
generous compensation plans. Accordingly, we will incur significant expense in
hiring and retaining the personnel we need to grow our business.
SALES AND MARKETING COSTS
We will use a significant portion of the proceeds of this offering for our
sales and marketing activities. These activities will be extremely important to:
. the development of our brand name,
. the creation of traffic to our web site, and
. the promotion of our business, products and services.
We will incur significant expenses in connection with:
. advertising,
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. promotional and public relations activities,
. merchandising,
. market research and consultancy, and
. customer database management.
COSTS OF PRODUCTS
Product orders are actually fulfilled by one of our fulfillment agents,
which charges us a negotiated price for the product. Generally, upon shipment of
a product from one of our fulfillment agent's premises, we assume title to the
product. Accordingly, risk of loss is assumed by us until the product is
received by our customer. The amounts we are charged by our fulfillment agents
for the products we purchase from them are expensed by us as part of our cost of
sales.
WEB SITE AND TECHNOLOGY DEVELOPMENT COSTS
Competition for user traffic among business-related web sites is intense.
Web sites can differentiate themselves from others by providing users with an
online experience that is easy, efficient and useful. By providing an online
experience that is also informative and entertaining and visually pleasing, web
sites can increase the percentage of first time users that return to the web
site again. The quality of the online experience is directly related to the
underlying technologies utilized by the web site. This technology includes:
. web site content,
. design,
. operational software,
. transaction processing systems, and
. telecommunications infrastructure.
We will be required to consistently update our hardware and software systems in
order to deliver leading-edge technical solutions on our web site and provide
users with an online experience superior to that provided by competitors.
Accordingly, we will incur significant ongoing expense with respect to our
technology.
Currently, we rely heavily on Netgateway for our technical infrastructure
and to host and deliver our web site. For these services we paid Netgateway an
up-front fee, with additional nominal operating fees payable to Netgateway based
on the number of hits on our web site. We also are required to pay Netgateway a
small percentage of all revenues generated from sales processed through our
e-commerce backbone. The percentage we must pay varies according to sales
volume. We must pay this percentage for sales of products by us and sales by
other web sites to which we provide vendor management or processing services.
Our agreement with Netgateway is through February 2001.
We believe that by initially outsourcing a large portion of our technology
infrastructure, we will be able to reduce the up-front costs associated with
constructing and expanding a complex e-commerce and business information
community, pay for a large portion of the services provided by third-party
technology providers only as we generate revenues from our web site, and harness
the proven experience of these technology providers. Over time, as our web site
and operations mature, we intend to internally
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develop or otherwise internalize a significant portion of the technology used to
operate our business.
CUSTOMER SATISFACTION OPERATIONS
In order to effectively compete with traditional retailers, as well as
overcome any hesitancy potential customers may have in purchasing products over
the Internet, we have implemented a customer satisfaction program. We believe
that most e-commerce companies do not provide users with real customer service.
We intend to differentiate our web site from other business web sites by
providing live, attentive customer service. Our customer satisfaction system
manages customer service issues 24 hours a day, seven days a week both in person
and online. We will incur substantial ongoing costs in connection with the
operation of this system, including fees payable to companies to which we
outsource parts of our customer satisfaction program.
As part of our customer satisfaction program, we plan to offer customers
the guarantee that they will get the products they ordered, in a timely fashion,
and in working order. If our customers are dissatisfied with a product, they
will have 30 days to return it, and we will refund their money. Accordingly, we
may be required to make significant reserves for returns and to defer
recognition of revenues for periods of time.
GENERAL AND ADMINISTRATIVE COSTS
We will incur significant expense in connection with the salary, benefits
and staff costs for general management and administrative employees, costs
relating to our facilities and professional services.
RESULTS OF OPERATIONS
We have a very limited operating history and our activities to date have
been limited to launching our service, establishing relationships with
e-commerce partners and refining our product presentation. As a result, our
historical financial information is not necessarily indicative of our future
financial performance.
We have generated nominal revenue to date. Since our inception on June 28,
1999 through December 31, 1999 we have incurred operating expenses of $2,905,836
which were comprised of the following:
. $709,810 of general and administrative expenses, primarily comprised of
payroll and related expenses.
. $23,060 for sales and marketing, virtually all of which was installation
costs associated with of our phone system to support customer service.
. Start up costs of $55,036, which includes development costs associated
with the Netgateway agreement, legal fees, and identity design expenses.
. $216,430 of non-cash stock based compensation charges relating to
general and administrative activities.
. $1,901,500 of non-cash stock based compensation charges relating to
start-up activities.
Since our inception through December 31, 1999, we have incurred an
aggregate net loss of $2,930,237.
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We have cash commitments of approximately $932,000 during 2000 and $973,000
during 2001. These commitments arise under:
. our agreements with our key employees; and
. operating leases.
Our near-term losses will be increased as a result of charges to earnings
that we must recognize. Specifically, we have an obligation to grant options to
some of our officers on the effective date of this prospectus. We will incur
non-cash compensation charges as a result of these option grants. These charges
will be recognized as the options vest. The amount of the charges will be equal
to the number of shares purchasable under the options multiplied by (a) the
aggregate market value on the effective date of the shares of common stock
purchasable under the options, less (b) the aggregate exercise price of the
options. Based on a market price of $8.00 per share, these charges will be:
. $1,061,666 in 2000;
. $340,000 in 2001; and
. $198,334 in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our working capital requirements have been satisfied
through:
. capital contributions by our current stockholders, including
Richard Kandel, our chairman of the board, and Enviro-Clean of
America Corp., a principal stockholder of b2bstores.com and
. loans made to us by Enviro-Clean.
In June 1999, we sold 3,666,667 shares of our common stock to Mr. Kandel,
Enviro-Clean and others for $27,500 in the form of $11,000 cash and the transfer
to us of the web address, www.b2bstores.com.
In June, July, November and December 1999 and January and February 2000,
Enviro-Clean made loans to us in the aggregate principal amount of approximately
1,400,000. These loans bear interest at the rate of 8% per annum and are
repayable on the date this offering is consummated. All of the proceeds of these
loans have been, or will be, used to fund operating losses and development and
operating costs.
In August 1999, we raised proceeds of $625,000 through the sale of 333,333
shares of our common stock to Mr. Kandel, and other persons, some of whom are
affiliated with Enviro-Clean. The purchase price was $1.88 per share.
In September 1999, we issued:
. an aggregate of 16,643 shares of our common stock to various
persons in consideration of accounting services rendered by them to
us during our start-up phase.
. 2,500 shares of our common stock to each of John Higgins and Philip
Ellett in consideration of their becoming directors of
b2bstores.com.
Our working capital deficit at December 31, 1999 was $880,344. Our
independent certified public accountants' report for the period from our
inception on June 28, 1999 through December 31, 1999 states that our limited
working capital position prior to our receipt of the net proceeds of this
offering raises substantial doubt about our ability to continue as a going
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concern. Accordingly, the continuation of our operations is dependent upon our
receipt of the net proceeds of this offering.
We anticipate that the net proceeds of this offering will satisfy our
capital requirements for at least the 18-month period following the consummation
of this offering. Thereafter, we must either generate cash from our operations
sufficient to fund our continued growth, or access sufficient capital from
external sources. These sources could include the public or private markets for
our equity or debt securities. However, external sources of capital may not be
available when or in the amounts needed.
Any issuance of equity securities would dilute the interest of our
stockholders. If we incur debt, our cash flow may be insufficient to pay the
principal and interest on that debt. Further, the instruments governing any debt
we incur will typically contain extensive covenants restricting our activities.
These restrictions could have important consequences for our business,
including:
. limiting our ability to access the additional capital we will need
to sustain and grow our business;
. limiting our flexibility in planning for, or reacting to, changes
in our business; and
. placing us at a competitive disadvantage to less leveraged
competitors, which could have more capital to invest in their
operations.
SEASONALITY
Although we have a limited operating history, we expect to experience
seasonal variations in our e-commerce and advertising revenue, especially during
the summer period, when user traffic levels are expected to decline. Our
e-commerce revenue may be affected by stronger consumer goods sales during the
fourth calendar quarter of the year. In addition, our advertising revenue may
experience the same seasonal and cyclical patterns as those in traditional
media, where advertising increases ahead of the year-end holiday buying season.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We utilize software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
problem. We also depend on telecommunications providers to maintain network
reliability.
Our year 2000 compliance program covers proprietary and internal systems as
well as third party systems.
PROPRIETARY AND INTERNAL SYSTEMS
Our program involves the following phases:
Systems Review. We have completed a comprehensive review of all internal
financial, informational and operational systems. To date, we have not found or
experienced any year 2000 problems.
Testing. We created a test environment and performed testing. These tests
indicate that our internal systems will continue to function properly during
2000 and beyond.
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Contingency Planning. We believe that we would be able to produce a minimum
acceptable level of service in the event of internal or external critical
systems failure.
THIRD PARTY SYSTEMS
Third parties provide and support much of our service. A large part of our
year 2000 program involves confirming that these third party systems are year
2000 compliant. In particular, we depend on telecommunications providers to
maintain network reliability and Netgateway to manage the computer servers for
our web site. Netgateway has informed us that it has completed the evaluation of
its own internal year 2000 compliance and that it believes it is year 2000
compliant.
YEAR 2000 COMPLIANCE COSTS
We have not incurred any costs to date in connection with revising our
systems to ensure that they are year 2000 compliant. We do not expect to incur
any significant costs in connection with our ongoing efforts to ensure that our
systems and the systems of our third-party technology suppliers are year 2000
compliant.
YEAR 2000 RISKS
An extended year 2000-related disruption could cause our business customers
to seek alternative web sites or cause an unmanageable burden on our technical
and customer support services. This could materially and adversely affect our
business, financial condition and results of operations.
In addition, there can be no assurance that governmental bodies, utility
companies, Internet access companies and others outside of our control will be
year 2000 compliant. The failure by any of these entities to be year 2000
compliant could result in prolonged Internet, telecommunications or electrical
failure. This could prevent us from delivering our services to our customers and
decrease the use of the Internet or prevent users from accessing web sites. This
could materially and adversely affect our business, financial condition and
results of operations.
It is likely that the computer equipment used by some of our business
customers may not be year 2000 compliant. As a result, some of our business
customers may not be able to access our service for some time during the
beginning of 2000 which may result in a decrease in the number of our active
registered accounts and in our revenue generally.
BUSINESS
GENERAL
b2bstores.com is an Internet web site specifically designed to assist
business customers in the operation and development of their businesses. Our
objective is to become a leading, one-stop Internet destination that enables
business customers to conduct e-commerce, communications and other online
interaction with their customers, suppliers and colleagues.
The concept for b2bstores.com was created by Richard Kandel. Mr. Kandel
offered the "b2bstores.com" concept to Enviro-Clean. However, the board of
directors of Enviro-Clean determined that Enviro-Clean would not focus its
business operations on the concept. In turn, Mr. Kandel was given permission by
Enviro-Clean to form b2bstores.com. b2bstores.com was formed in June 1999.
After the formation of b2bstores.com, 2,000,000 shares of common stock were
issued to Enviro-Clean in consideration of:
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. a nominal contribution to the capital of b2bstores.com;
. the transfer of the web address, www.b2bstores.com, which had
previously been applied for by Mr. Kandel in the name of Enviro-
Clean; and
. the waiver of any other rights Enviro-Clean might have in the
"b2bstores.com" concept.
Concurrently, an aggregate of 1,666,667 additional shares of common stock
were issued to Mr. Kandel and other persons for nominal capital contributions to
b2bstores.com. Some of these persons are affiliated with Enviro-Clean.
At the time of the issuance of the shares to Enviro-Clean and the other
persons described above, b2bstores.com had only nominal assets and needed to
assemble a management team and hire an employee staff. The number of shares
issued to Enviro-Clean and these other persons were determined through
arm's-length negotiations. These transactions between b2bstores.com and
Enviro-Clean were unanimously approved by their respective board of directors.
OUR OPPORTUNITY
THE GROWTH OF THE INTERNET
The Internet is a mass communications medium, enabling millions of people
worldwide to share information and interact with one another. This ability to
interact serves to create community among individuals with similar interests and
objectives. In August 1999, Jupiter Communications projected that the number of
Internet users in the United States will grow from 100 million in 1999 to 150
million in 2003.
The interactive nature of the Internet allows online merchants to
communicate effectively with one another, and with customers, and allows
advertisers to target customer bases having specific demographic characteristics
and interests. As a result, the Internet is emerging as an attractive, and in
many cases, preferred medium for the transaction of business, including
e-commerce activities. In November 1998, Forrester Research projected
business-to-business e-commerce to grow from $100 billion in 1999 to $1.3
trillion in 2003.
THE ADVENT OF BUSINESS WEB SITES
We believe that businesses have historically had to go to a number of
separate, traditional sources to obtain the products, supplies, services and
information necessary for their operations. Similarly, they have used a variety
of traditional channels, such as trade magazine, trade shows, buyer's guides,
direct mail initiatives and trade journals for the advertising and marketing of
their products and services.
Businesses are now increasingly utilizing the Internet as a valuable tool
to access customers and suppliers, to communicate with partners and to operate
more efficiently. Currently, the vast majority of business web sites focus on
the offering of one of the following three types of solutions:
. Product sites. These web sites focus primarily on the online sale
of products.
. Service referral sites. These web sites focus primarily on the
referral of business customers to services provided by other
companies.
. Business content sites. These web sites primarily offer business
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customers access to a wide array of articles, information and news
services that are aimed at the business customer. These web sites
seek to generate revenues through the sale of business information
and by attracting high-volume traffic and then leveraging this
traffic into advertising revenue.
We believe that b2bstores.com will provide business customers with the
combined abilities to purchase a broad range of quality products, access a wide
variety of business-related services and research comprehensive business
information, all at a single, user-friendly web site.
OUR OBJECTIVE AND STRATEGY
We are creating an easy-to-use Internet web site that provides our business
customers with access to quality products and supplies, a premier network of
business services and a broad menu of business content. The key elements of our
strategy include:
CREATING AWARENESS OF THE B2BSTORES.COM BRAND. It is imperative that we
create awareness of the b2bstores.com brand in order to attract business
customers to our web site, garner advertisers for our web pages and place
b2bstores.com in a favorable position when creating our relationships with
vendors and other fulfillment partners. We intend to conduct extensive marketing
activities, including the placement of advertisements online and in trade
journals and other print publications, in order to create and enhance awareness
of the b2bstores.com brand. Our marketing efforts strive to present
b2bstores.com as an enjoyable, easy-to-use Internet web site that helps
businesses work more efficiently and cost effectively. We intend to use a
significant portion of the proceeds of this offering for extensive marketing
activities to build awareness of our brand and drive traffic to our web site.
EXPANDING OUR PRODUCT OFFERINGS. We regularly seek to expand our product
offering categories and the breadth of products available in these categories
through the creation of relationships with vendors and distributors. We also
will be commercially introducing auction capabilities in the first quarter of
2000. Auctions will allow us to increase the types of products available at
b2bstores.com and provide our business customers with the
opportunity to transact business directly with one another. We believe that one
of b2bstores.com's competitive strengths will be our highly diverse product mix,
allowing us to offer low margin commodity products as well as higher-margin
specialty goods.
CREATING AND EXPANDING OUR BUSINESS REFERRAL SERVICES. In the first quarter
of 2000, we will begin to offer our business customers access to many business
services on a referral basis. It is currently anticipated that these service
will include 401(k) consulting; accounting; insurance; advertising; leasing
services; legal services; and telecommunications services. Our customers will be
able to research service providers and interact with them and, in many cases,
engage their services without leaving our web site.
CREATING MARKETING AND DISTRIBUTION ALLIANCES. In order to increase the
number of business customers that visit our web site, and to enhance our product
and service offerings and e-commerce infrastructure, we are actively pursuing
relationships with:
. providers of business, business related and ancillary products;
. suppliers of industry specific raw materials and raw goods;
. providers of business and professional services;
. proprietary online services;
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. operators of leading Internet portals; and
. producers of Internet content.
ENHANCING WEB SITE UTILITY THROUGH THE CREATION OF COMMUNITY AND THE
PROVISION OF BUSINESS CONTENT. Our web site strives to create community among
our business customers and their customers, suppliers and colleagues. Our web
site's community and business information functions are designed to provide easy
interaction between the business customer and the web site, and the business
customer and other business customers. Our web site also will provide our
business customers with access to highly specific information.
CREATING AND EXPLOITING ADVERTISING REVENUE OPPORTUNITIES. We believe that
a concentrated user base of business customers will possess characteristics
highly desirable to business-to-business advertisers, and will differentiate our
web site from most other e-commerce web sites.
ACQUIRING COMPLEMENTARY CONTENT AND TECHNOLOGY. We will regularly seek to
acquire business content and e-commerce technologies that are complementary to
our business focus and community objective. We may acquire content and/or
technologies through the purchase of assets or the acquisition of companies
possessing these assets. We may pay for any asset purchase or acquisition in
cash, through the issuance of our securities or a combination of cash and
securities.
THE B2BSTORES.COM WEB SITE
Our web site moves business-to-business transactions and other business
operations away from traditional modes to the Internet. Our web site is designed
as a community mall--a place where business customers can visit a "virtual
storefront" or product category of their choice, seek out services from
professionals, research issues important to their business and meet and
communicate with customers, suppliers, colleagues and
competitors. We strive to make our web site user friendly and to create an
experience that is highly useful, efficient, enjoyable and informative for the
business customer.
PRODUCT CATEGORIES
Our business customers have access to a growing number of product
categories online. The products in these categories are sold by us. All product
fulfillment will be done through our vendors and other third parties. We believe
that there are numerous sources of products for each of our product categories.
The various product catalogs available at our web site are designed to be
visually attractive, informative and easy to use. Our online product catalogs
provide our vendors with the ability to monitor and evaluate e-commerce
activity, and provide our web site advertisers with the ability to track the
number of visitors and leads generated from a particular catalog, product
category or banner advertisement.
We currently offer business and business-related products in the following
categories:
. office supplies . safety and industrial supplies
. janitorial supplies . desktop computer systems
. computer supplies . computer peripherals, including
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. notebook computer systems monitors and disk drives
. software . office furniture
During 2000, we intend to expand our product offerings to include the
following additional categories:
. books . music
. printing supplies . pre-paid calling cards
. promotional products . executive travel accessories
. time management products . fitness products
. videos . stationery
. travel . magazine subscriptions
Enviro-Clean is our fulfillment agent for janitorial and sanitary
maintenance products offered through our web site. All Enviro-Clean products
purchased through our web site are distributed directly to our customers by
Enviro-Clean through this fulfilment relationship.
SERVICE REFERRALS
The operation of a business requires not only the purchase of supplies and
business products, but also the use of professional services. In the first
quarter of 2000, we will begin to offer our business customers online access to
business and professional services on a referral basis. The service categories
will include, among others, the following:
. 401(k) consulting and products . event planning services
. accounting services . human resources consulting
. advertising agencies . insurance brokerage services
. leasing services . Internet service providers
. legal services . executive recruiters
. commercial real estate brokerages . telecommunications services
. computer networking services . marketing agencies and services
. e-commerce merchant hosting . computer repair services
services through which businesses . payroll services
can have their e-commerce initiatives
handled by third-party providers
BUSINESS CONTENT AND COMMUNITY
We believe that the creation of an active online community at our web site
and the provision of valuable business information will create loyalty among our
business customers and promote repeat visitation and web site use. We are
designing our web site to provide business customers with access to:
. information and reviews relating to products and services offered
through our web site;
. industry specific news and publications;
. chat rooms and bulletin boards, where industry specific and general
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topics relevant to the community interest are discussed;
. an events calendar, which publishes the dates, time and other
relevant information relating to events that are important to web
site users;
. a personal calendar, which is a customizable interactive calendar
that allows the business customer to schedule and keep track of
important dates, times and other information and receive e-mail
reminders;
. classified advertisements, where job listings and other business
relevant advertising may be placed and reviewed;
. educational resource centers;
. up to the minute national and regional news;
. stock quotes;
. yellow and white page directory services;
. franchise and other business opportunities; and
. trade association newsletters and information.
SALES AND MARKETING
SALES AND DISTRIBUTION
When an order is placed at our web site, the order is electronically
processed by our systems and then forwarded to the inventory management system
of one of our fulfillment agents. Our fulfillment agent then packages and
delivers the order to the business customer. We bill the business customer
directly and collect the purchase price. We pay our fulfillment agents directly
for their services and supplies.
Business services accessible through our web site will be provided to our
business customers by third-party professionals and other businesses. Subject to
regulation in applicable industries, we will generate revenues from our service
referral activities through the collection of commissions and referral fees from
the service providers to which we direct our business customers.
As is the case with most web sites, we also will place "click-through" tags
in our web site. When a business customer points his or her mouse to one of
these click-through tags and clicks the mouse, he or she will be brought to the
e-commerce web site of one of our retail partners. These click-through tags will
allow b2bstores.com to generate revenues through the collection of sales
commissions from our click-through retail partners.
MARKETING
We will use a variety of marketing programs to increase awareness of the
"b2bstores.com" brand and to drive traffic to our web site. Our marketing
strategy contains a mix of print advertising, outbound e-mail, telemarketing,
new media banner campaigns, trade shows and direct mail. We also will
participate in industry specific events, industry association activities and
partnerships with interactive services companies.
Users of our web site are referred to as "members." Our members are able to
purchase products through our web site at "member prices." Member prices are
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simply our every day lowest price on the products we sell. These prices are
available to any user of our web site. The use of the terms "members" and
"member prices" are therefore strictly marketing tools which are designed to
promote a sense of community at our web site.
An important part of our strategy to drive traffic to our web site is to
market our web site through online advertising and hyperlinks maintained by
other Internet companies. If we cannot secure or maintain marketing agreements
with other Internet companies, our business will be harmed. We may not be able
to enter into marketing agreements with these companies on favorable terms or at
all. Web sites that also seek to sell products and services to businesses may be
unwilling to advertise our web site. In addition, other e-commerce companies
that advertise on popular web sites may have exclusive advertising relationships
with these web sites or may otherwise object to our attempts to enter into
marketing agreements with these web sites.
We must be able to develop new products and services that address the
increasingly sophisticated and varied needs of our customers and prospective
customers. If we are unable to expand our systems and introduce new products and
services in a timely manner, our financial results will be harmed. Numerous
factors could prevent us from responding effectively to changes in our markets,
including:
. our lack of control over a substantial portion of the technology we
use in our business, which could limit our ability to effectively
adapt new technologies into our business;
. our limited operating history and our limited number of personnel,
which could compromise our ability to recognize changes in consumer
preferences and translate them into the development of new products
and services; and
. the nonacceptance by the market of any new products and services we
introduce.
TECHNOLOGY
We have entered, and continue to seek to enter, into relationships with
technology providers in connection with the development, operation and
maintenance of our web site. We rely on Netgateway for the design, development,
maintenance and hosting of our web site. As part of this relationship, we also
have use of Netgateway's state-of-the-art data center and its experienced staff
of software and e-commerce technology developers.
In conjunction with our original agreement with Netgateway, we recently
entered into a development agreement with Netgateway. Under this ancillary
agreement, our internal technology personnel are able to customize the
Netgateway technology we currently use for applications relating to our web site
and related business. All customization and improvements created in connection
with this agreement will be owned by Netgateway. Upon the termination of our
agreements with Netgateway, we will retain a perpetual license to utilize the
modifications we develop in the operation of our web site and business. Our
agreements with Netgateway are through February 2001.
We are assembling a staff of in-house designers and programers to
continually add functionality to our site. Our technology staff updates our
site's look and feel, and ensures that all content stays current and useful. We
believe that an internal technology staff will enable us to address specific
customer requirements for functionality, as well as handle custom integration
issues which may arise from large vendor partners or business customers.
In structuring our technology backbone, we ensure that the resulting
platform has the following characteristics:
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SCALABILITY. We require our backbone to be scalable for the rapid
deployment of functions, features and content as required to meet the demand of
our business customers while maintaining desired performance standards. In the
rapidly changing Internet environment, the ability to update an application to
stay current with new technologies is important. Our site system and related
technologies allow for the addition, modification, or replacement of web site
based applications in a cost-efficient and expeditious manner.
RELIABILITY AND SECURITY. We use leading-edge software to protect our web
servers. The majority of our hardware and software is maintained by Netgateway,
which provides us with professional data center hosting facilities and redundant
high-speed Internet connectivity. Netgateway monitors and supports our systems
24 hours a day, seven days a week. We also are currently developing our own
content and web site management tools to facilitate the maintenance and updating
of our web site.
We must ensure that our business customers do not experience significant or
frequent disruptions in their access to our web site. Web site failures could
result in loss of existing customers and opportunities to garner additional
customers. Our business also is highly dependent on our systems to process, on a
daily basis, transactions across numerous and diverse markets. We rely heavily
on our data processing systems, as well as our telecommunications systems. If
any of these systems do not operate properly or are unavailable due to problems
with our physical infrastructure, we could suffer disruptions to our business.
These disruptions could expose us to liabilities to clients, regulatory
interventions or damage to our reputation and the development of our brand name.
The need to securely transmit confidential information over the Internet
has been a significant barrier to e-commerce and communications. We are
potentially vulnerable to attempts by unauthorized computer users to penetrate
our network security. If successful, those individuals could cause serious
interruptions in our services. We may be required to expend significant capital
and resources to protect against the threat of security breaches or to alleviate
resulting problems. Despite efforts we make to maintain network security, we may
not be successful.
If third parties are able to successfully penetrate our network security
and misappropriate our business customer's personal or credit card information,
we could be subject to liability. This could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. We also could be subject to claims for violation of data protection
rights. Any of these claims could result in litigation. Publicized acts of
misappropriation of our customers' information would also likely harm our
reputation.
PROPRIETARY RIGHTS
We regard the protection of our intellectual property, including our URL
"www.b2bstores.com" and our "b2bstores.com" trademark, as critical to our
success. A URL is a website's address, which when entered by a user into a web
browser, takes the user to the desired web site. We also rely on the proprietary
technology of third parties, including Netgateway. Unauthorized use of the
intellectual property used in our business by third parties may damage our brand
and our reputation. We rely on intellectual property laws and confidentiality
and license agreements with our employees, customers, partners and others to
protect our intellectual property rights.
If we are unable to protect our "b2bstores.com" domain name our business
could be harmed. We may be unable to prevent third parties from acquiring
Internet domain names that are similar to ours. We anticipate that many web
sites will use the term "b2b" as part of their URL or brand name. Creating brand
awareness for a brand containing the term "b2b" may prove difficult if the
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markets confuse, or are unable to differentiate among, the numerous web sites
branded with the term "b2b."
VENDOR MANAGEMENT SERVICES
We intend to utilize our capabilities in the management of vendor
relationships to provide commerce management services to other web sites. We
will allow other business-related web sites to access our product offerings and
offer these products to their own users. Product orders placed through these web
sites will be processed through our systems, and fulfilled by our fulfillment
agents. We will charge our e-commerce web site partners negotiated commissions
based on sales of our product offerings generated through their web sites.
Enviro-Clean operates its own product web site at www.b2bgoods.com. This
web site offers janitorial, sanitary maintenance and products in a limited
number of other categories. We provide Enviro-Clean with access to web site
transaction processing and e-commerce services for its b2bgoods.com web site
through our e-commerce backbone. See section of this prospectus entitled
"Certain Transactions" for a description of this relationship.
GOVERNMENT REGULATION
We are subject to various laws and regulations relating to our business.
Few laws or regulations are currently directly applicable to access to the
Internet. However, because of the Internet's popularity and increasing use, new
laws and regulations may be adopted. These laws and regulations may cover issues
that include:
. user privacy;
. pricing;
. tax;
. content;
. copyrights;
. distribution; and
. characteristics and quality of products and services.
In addition, the growth of the Internet and e-commerce, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations may impede the
growth of the Internet, which could decrease our potential revenues from
electronic commerce or otherwise adversely affect our business, financial
condition and operating results.
Our ability to generate revenues from the sale of advertising on our web
site depends on demonstrating to advertisers that our web site traffic is
comprised of users that are attractive to these advertisers. Advertisers focus
their efforts on reaching particular demographic groups, which are groups of
users having common characteristics, including similar buying habits and similar
income levels, or which reside in the same geographic locations. If we are not
able to legally share information regarding our customers with potential
advertisers, our ability to generate advertising revenues will suffer. The
public is becoming increasingly concerned about issues relating to privacy on
the Internet. This increased sensitivity could result in the adoption of
stringent legislation that prevents or limits our ability to use personal and
other data about our customers.
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Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. The most recent session of Congress
enacted Internet laws regarding online copyright infringement. Although not yet
enacted, Congress also is considering laws regarding Internet taxation. These
are all recent enactments, and there is uncertainty regarding their marketplace
impact. In addition, various jurisdictions already have enacted laws that are
not specifically directed to e-commerce but that could affect our business. The
applicability of many of these laws to the Internet is uncertain and could
expose us to substantial liability.
Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could materially
adversely affect us. If we were alleged to violate federal, state or foreign,
civil or criminal law, even if we could successfully defend the claims, it could
materially adversely affect us.
We believe that our use of third-party material on our web site is
permitted under current provisions of copyright law. However, because legal
rights relating to Internet content and commerce are not clearly settled, our
ability to rely upon exemptions or defenses under copyright law is uncertain.
Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the Federal Communications Commission in the same
manner as other telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to regulate
Internet providers and online service providers in a manner similar to long
distance telephone carriers and to impose access fees on these providers. If
either of these petitions is granted, the costs of communicating on the Internet
could increase substantially. This, in turn, could slow the growth of use of the
Internet. Any legislation or regulation of this type could materially adversely
affect our business, financial condition and operating results.
COMPETITION
Our web site competes with numerous other web sites that offer any
combination of e-commerce capabilities, business content and online community
access. Our competitors vary in size and in the scope and breadth of the
services they offer. In addition to competition from several e-commerce trade
communities, we primarily encounter competition from:
. business related e-commerce web sites, including PurchasePro.com,
VerticalNet and OnVia.com,
. enterprise software purchasing systems providers, including Ariba,
Commerce One and TRADE'ex,
. large Internet companies, including Yahoo.com, E-Bay and AOL, and
. traditional business product vendors, including Office Depot and
Staples, who are establishing their own Internet presence.
Virtually all of our current and potential competitors have longer
operating histories, larger customer bases and greater brand recognition in the
business products and Internet markets. They also have significantly greater
financial, marketing, technical and other resources. These superior resources
could allow competitors to:
. devote significantly greater resources to marketing and promotional
campaigns than we can,
. adopt pricing policies that are more aggressive than ours,
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. attract greater numbers of users than we can by offering services
for free,
. devote substantially more resources to the development of their
products and services than we can.
E-COMMERCE
The markets for business products and services offered through traditional
channels and Internet channels are intensely competitive. We expect competition
in these markets to increase.
There are few barriers to the business e-commerce market. The rapid growth
of the Internet in general, and online e-commerce activity specifically, has
attracted the attention of numerous companies, including business product
manufacturers and suppliers who have historically operated through traditional
channels. Competitors could enter into exclusive distribution arrangements with
our vendors and deny us access to their products. Increased competition also
could result in pricing pressures, increased marketing expenditures and loss of
market share, and could have a material adverse effect on b2bstores.com.
COMMUNITY SERVICES
The market for community services is highly competitive, and we expect
competition to continue to increase significantly. There are no substantial
barriers to entry in these markets. We compete with many providers of community
services, including companies that attempt, as we do, to target business
consumers. We believe that to successfully compete, our communities must be
structured around themes that are important to our users. Further, our community
functions must be easily accessible at our web site through simple mouse clicks.
Ultimately, our communities must provide users with utility. This utility can
only be provided if meaningful dialog and user interaction develops within the
communities.
CONTENT AND INFORMATION
A large number of web sites and online services offer information features
and content, including news, stock quotes, industry specific content, yellow
pages, e-mail listings, job listing and other content and features that are
competitive with the content we plan to offer.
ADVERTISING OPPORTUNITIES
We compete with all types of online companies for advertisers. We also
compete with traditional media, including television, radio and print, for a
share of advertisers' total advertising budgets. We believe the number of
companies selling web-based advertising and the available inventory of
advertising space have increased substantially during recent periods.
We believe that the principal competitive factors in our markets are:
. brand recognition;
. ease of use;
. comprehensiveness;
. breadth and quality of products, services and content offered;
. access to customers; and
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. with respect to advertisers and sponsors, the number of users,
duration and frequency of visits and user demographics.
Many of our competitors in all of our target markets have significantly
greater financial, technical, marketing and distribution resources. In addition,
providers of Internet tools and services may be acquired by, receive investments
from, or enter into other commercial relationships with larger, well-established
and well-financed companies.
EMPLOYEES
As of December 31, 1999, we had 22 full-time employees and one part-time
employee. We also use six to eight independent contractors on a
project-to-project basis. We consider our relationships with our employees to be
good. None of our employees are covered by collective bargaining agreements.
PROPERTIES
Our corporate headquarters are located in approximately 4,000 square feet
of space at 249 East Ocean Boulevard, Long Beach, California. We lease these
premises at a monthly rental of $6,381. Currently all servers utilized in the
operation of our site are managed by Netgateway and housed at an Exodus
Communications data center in Irvine, California. Our server location is
monitored 24 hours a day, seven days per week, and connected to multiple,
redundant Internet access points and power sources.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard Kandel................................. 47 Chairman of the board and director
Woo Jin Kim.................................... 32 Chief executive officer, president and director
Jeffrey Crandell............................... 33 Chief technology officer
Mark Voorhis................................... 52 Chief financial officer and chief operating officer
Shannon Jessup................................. 29 Executive vice president of business development
Brian Wharton.................................. 32 Executive vice president of development
John Higgins................................... 54 Director
Philip Ellett.................................. 45 Director
</TABLE>
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Richard Kandel founded b2bstores.com in June 1999 and has been our chairman
of the board since inception. He also was our president from inception until
August 1999. From 1974 through 1998, Mr. Kandel was the owner and president of
Kandel and Son, Inc., a sanitary supply distributor in the New York metropolitan
region. In January 1999, Mr. Kandel sold Kandel and Son to Enviro-Clean, a
distributor of janitorial and sanitary maintenance supplies and a principal
stockholder of b2bstores.com. Mr. Kandel served as president of Enviro-Clean
from January 1999 through September 1999. In September 1999, Mr. Kandel became
the chairman of the board and chief executive officer of Enviro-Clean. He
received his Bachelor of Science degree from Michigan State University.
Woo Jin Kim has served as our chief executive officer, president and a
director since August 1999. From December 1998 until joining b2bstores.com in
August 1999, Mr. Kim was the senior vice president of channel development at
Netgateway, Inc., a provider of e-commerce, web design and web hosting services.
From June 1998 to December 1998, Mr. Kim was the director of channel sales for
Admor Memory Corporation, a supplier of third-party memory products. From
November 1996 to May 1998, Mr. Kim served as the director of distribution sales
for TechWorks, Inc., a manufacturer of third-party computer memory products.
From November 1994 to November 1996, Mr. Kim was a senior product manager for
Merisel, Inc., a distributor of computer products. From December 1992 to
November 1994, Mr. Kim served as the director of marketing for MIC Systems and
Software Corp, a provider of dealership automation systems to the automotive,
motorcycle and marine industries.
Jeffrey Crandell has served as our chief technology officer since August
1999. From June 1998 until joining b2bstores.com in August 1999, he was senior
vice president of e-commerce for Netgateway. From June 1996 to June 1998, he
served as the chief operating officer of Digital Genesis, Inc., a provider of
e-commerce services. From October 1994 to June 1996, Mr. Crandell was the
manager of application systems at Mattel Toys, a toy and games manufacturer.
From June 1992 to October 1994, he was a systems engineer for Fabrik
Communications, an Internet e-mail service provider. From January 1990 to June
1992, he was a systems operator for Dresser Industries Inc., a supplier of
equipment and services for the energy industry. Mr. Crandell received his
Bachelor of Science degree in computer science from the University of Maryland.
Mark Voorhis has served as our chief financial officer and chief operating
officer since September 1999. In March 1999, Mr. Voorhis founded PC HouseCalls,
Inc., an Internet-based computer service company, where he served as chairman
and chief financial officer until joining b2bstores.com in September 1999. From
November 1997 until February 1999, he served as chief financial officer and
chief operating officer for Admor. From October 1994 until November 1997, Mr.
Voorhis was an independent consultant. From November 1983 until September 1994,
Mr. Voorhis worked with Montano Securities Corporation in several different
capacities, including as chief operating officer and chief financial officer.
Mr. Voorhis has a Bachelor of Arts degree in business administration from
California State University.
Shannon Jessup has served as our executive vice president of business
development since August 1999. From January 1999 until joining b2bstores.com in
August 1999, Ms. Jessup was the vice president of channel marketing for
Netgateway. From August 1994 to January 1999, Ms. Jessup held several executive
positions at Merisel, including director of product marketing from June 1998 to
January 1999 and director of North American strategic operations from January
1998 to June 1998. Prior to joining Merisel, from February 1992 to August 1994,
Ms. Jessup was the manager of sales and marketing for ADAM systems, a value
added reseller and software solutions provider in the health care industry. Ms.
Jessup received her Bachelor of Arts degree in economics from the University of
California.
Brian Wharton has served as our executive vice president of technology
development since August 1999. Mr. Wharton is also currently a member of
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Microsoft's Internet advisory board. From June 1998 until joining b2bstores.com
in August 1999, Mr. Wharton was the senior vice president of development at
Netgateway. From June 1996 to June 1998, Mr. Wharton was the chief technology
officer at Digital Genesis, a provider of e-commerce services, which was
acquired by Netgateway in June 1998. From May 1992 to June 1996, Mr. Wharton was
the lead developer at Mattel Toys. From May 1990 to May 1992, Mr. Wharton was
the manager of research and development at Tarp Information Systems Inc., a
software development company. Mr. Wharton received his Bachelor of Science
degree in geography from the University of Maryland.
John Higgins has served as a director of b2bstores.com since September
1999. Since May 1998, Mr. Higgins has been an executive vice president and a
partner at Reliant Innovations, a corporate reseller of computer products. From
March 1997 to April 1998, Mr. Higgins served as the executive vice president of
sales and marketing for TechWorks. From February 1996 to February 1997, Mr.
Higgins was the senior vice president of Sales for Bell Microproducts Inc., an
industrial distributor of storage products to high-end value added and corporate
resellers. From June 1993 to January 1996, he was senior vice president of sales
and marketing at NCD Inc., a computer distributor, which was acquired by
Ameriquest Corp. during his tenure.
Philip Ellett has served as a director of b2bstores.com since September
1999. Mr. Ellett is currently an executive vice president and president of the
Americas division for Ingram Micro Inc., a wholesale distributor of computer
equipment, for which Mr. Ellett has worked since January 1996. From September
1989 to December 1995, Mr. Ellett held several positions with Gates/Arrow,
including as president of Gates/Arrow and chief executive officer. Mr. Ellett
received his HNC in electrical engineering from the Upper Thames College of
Technology in England.
Because we are a small company, we are currently dependent on the efforts
of a limited number of management personnel. We believe that, given the
development stage of our business and the large amount of responsibility being
placed on each member of our management team, the loss of the services of any
member of this team at the present time would harm our business. Each member of
our management team supervises the operation and growth of one or more integral
parts of our business.
BOARD OF DIRECTORS AND COMMITTEES
Our board of directors is divided into three classes, each of which
generally serves for a term of three years, with only one class of directors
being elected in each year. The term of office of the first class of directors,
currently consisting of Mr. Kandel, will expire in 2002, the term of office of
the second class of directors, currently consisting of Mr. Kim, will expire in
2001, and the term of office of the third class of directors, currently
consisting of Messrs. Higgins and Ellett, will expire in 2000. In each case,
each director will hold office until the next annual meeting of stockholders at
which his class of directors is to be elected, or until his successor is duly
qualified and appointed.
The board maintains an audit committee, currently composed of Messrs.
Higgins, Ellett and Kandel. The board also maintains a compensation committee
composed of Messrs. Higgins, Ellett and Kandel.
The responsibilities of the audit committee include, in addition to other
duties that the board may specify:
. recommending to the board the appointment of independent certified
public accountants;
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. reviewing the timing, scope and results of the independent certified
public accountants' audit examination and the related fees;
. reviewing periodic comments and recommendations by our independent
certified public accountants and our responses to those comments;
. reviewing the scope and adequacy of internal accounting controls and
internal auditing activities; and
. making recommendations to the board with respect to significant
changes in accounting policies and procedures.
The responsibilities of the compensation committee include, in addition to
other duties that the board may specify:
. reviewing and recommending to the board the salaries, compensation
and benefits of our executive officers and key employees;
. reviewing any related party transactions on an ongoing basis for
potential conflicts of interest; and
. administering our stock option plans, if not administered by the
full board.
COMPENSATION OF DIRECTORS
Non-employee directors will be reimbursed for reasonable travel and lodging
expenses incurred in attending meetings of the board of directors and any
committee on which they may serve. Each non-employee director also will receive
$500 for each board or committee meeting he attends. Each director also will be
eligible to receive grants of options at the discretion of the compensation
committee. In September 1999, we issued 2,500 shares of our common stock to each
of Messrs. Higgins and Ellett in consideration of their becoming directors of
b2bstores.com.
EXECUTIVE COMPENSATION
We have entered into employment agreements with each of our officers. Each
of our officers are full-time employees of b2bstores.com, except Richard Kandel,
our chairman of the board. Under his employment agreement with us, Mr. Kandel is
required to devote only 50% of his business time to b2bstores.com.
The basic terms of each employment agreement are as follows:
<TABLE>
<CAPTION>
TERM OF
NAME OF OFFICER AGREEMENT ANNUAL SALARY BONUS OPTIONS
--------------- --------- ------------------- -------- ---------
<S> <C> <C> <C> <C>
Richard Kandel 11/1/99 1st Year: $150,000 -- --
Chairman of the board to 2nd Year: 200,000
10/31/02 3rd Year: 250,000
Woo Jin Kim 08/1/99 $175,000 $ 75,000 300,000
Chief executive officer to shares
07/31/02
Jeffrey Crandell 08/15/99 $130,000 $ 70,000 175,000
Chief technology officer to shares
08/14/02
Mark Voorhis 09/15/99 $140,000 $ 70,000 175,000
Chief financial officer to shares
09/14/02
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Shannon Jessup 08/15/99 $130,000 $ 70,000 175,000
Executive vice president to shares
08/14/02
Brian Wharton 08/15/99 $130,000 $ 70,000 175,000
Executive vice president to shares
08/14/02
</TABLE>
The bonuses payable to Mr. Kim are due in installments upon the attainment
by b2bstores.com of performance objectives as follows:
. $25,000 upon the hiring of qualified persons to fill key management
positions. This has been accomplished.
. $25,000 upon the introduction of 25 or more product categories at
our web site.
. $25,000 upon consummation of this offering.
The bonuses payable to the other officers set forth above include a payment
of $20,000 to each officer upon consummation of this offering. For each officer,
the remaining bonus amounts represent up to $12,500 payable after each quarter
in 2000 that performance objectives are achieved by b2bstores.com. The
objectives are as follows:
GOALS FOR CASH BONUSES
<TABLE>
<CAPTION>
Q1-2000 Q2-2000 Q3-2000 Q4-2000
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue................................ $626,000 $1,867,500 $4,252,000 $7,280,000
Margin................................. 6.00% 6.00% 7.00% 7.00%
Avg. hits per month.................... 333,333 750,000 1,300,000 2,083,333
</TABLE>
Each of Mr. Crandell, Mr. Voorhis, Ms. Jessup and Mr. Wharton will be
granted options upon the effective date of this prospectus with an exercise
price equal to 80% of the offering price in this offering. These options will
vest as follows:
. Mr. Kim's options vest with respect to 150,000 shares upon
completion of this offering. Options to purchase an additional
50,000 shares will vest in each of August 2000, 2001 and 2002.
. Each of Mr. Crandell's and Mr. Wharton's options vest with respect
to 87,500 shares, 43,750 shares and 43,750 shares in August 2000,
2001 and 2002, respectively.
. Mr. Voorhis' options vest with respect to 87,500 shares, 43,750
shares and 43,750 shares in September 2000, 2001 and 2002,
respectively.
. Ms. Jessup's options with respect to 50,000 shares vest upon
consummation of this offering. Options to purchase an additional
62,500 shares, 31,250 shares and 31,250 shares will vest in August
2000, 2001 and 2002, respectively.
In addition, each of Mr. Crandell, Mr. Voorhis, Ms. Jessup and Mr. Wharton
will also be entitled to receive options to purchase up to 12,500 additional
E-35
<PAGE>
shares at fair market value on the date the option is granted after each quarter
in 2000 upon the attainment by b2bstores.com of performance objectives. These
objectives are as follows:
GOALS FOR STOCK BONUSES
<TABLE>
<CAPTION>
Q1-2000 Q2-2000 Q3-2000 Q4-2000
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue................................ $688,600 $2,054,250 $4,677,200 $8,008,000
Margin................................. 6.60% 6.60% 7.70% 7.70%
Avg. hits per month.................... 366,666 825,000 1,430,000 2,291,666
</TABLE>
Our employment agreement with each of these officers contains provisions
prohibiting competition with us during their employment with us and for
prescribed periods of time after termination of employment. However, some state
courts may not enforce one or more of these provisions as a matter of public
policy. In these circumstances, we may not be able to prevent an officer from
competing with us, which could have an adverse impact on our business.
POTENTIAL CONFLICTS OF INTEREST
Mr. Kandel's position as a director, officer and stockholder of each of
b2bstores.com and Enviro-Clean may create or appear to create potential
conflicts of interest when he is faced with decisions that could have different
implications for b2bstores.com and Enviro-Clean. These decisions may relate to:
. potential acquisitions of businesses,
. intercompany agreements,
. the establishment of e-commerce marketing arrangements and other
areas of competition,
. the issuance or disposition of securities, and
. the election of directors.
We have an intercompany agreement with Enviro-Clean relating to, among
other things, its provision to us of fulfillment services for some of our
products, and our provision to it of various e-commerce services. This
agreement, as well as other aspects of our relationship with Enviro-Clean are
described under the section of this prospectus entitled "Certain Transactions."
We believe that the terms of this agreement are no less favorable to us than
could have been obtained from an unaffiliated third party.
Our by-laws provide that we will not enter into new material agreements
with Enviro-Clean or any other affiliate unless those agreements are approved by
a majority of our directors who are not affiliated with that affiliate. This
provision of our by-laws can only be amended by a majority of our directors who
are not affiliated with Enviro-Clean.
It is our policy that future transactions with affiliates, if any, will be
on terms no less favorable to us than we could have obtained from third-party
businesses.
1999 PERFORMANCE EQUITY PLAN
In September 1999, the board of directors adopted, and the stockholders
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<PAGE>
approved our 1999 Performance Equity Plan. The plan authorizes the granting of
awards of up to 2,000,000 shares of common stock to our key employees, officers,
directors and consultants. Awards consist of nonqualified options and options
intended to qualify as "incentive" stock options under Section 422 of the
Internal Revenue Code of 1986, restricted stock awards, deferred stock awards,
stock appreciation rights and other stock-based awards, as described in the
plan. As of the date of this prospectus, no options are outstanding under the
plan. We are obligated to grant options to purchase up to an aggregate of
200,000 shares of common stock under our plan to some of our officers in 2000 if
we achieve defined operating objectives. All of these grants would be at the
fair market value of our common stock at the date of grant. No person may be
awarded options to purchase more than 200,000 shares of common stock under the
plan in any year.
The plan is administered by the board of directors which determines the
persons to whom awards will be granted, the number of awards to be granted and
the specific terms of each grant, including the vesting of the options, subject
to the provisions of the plan.
In connection with incentive stock options, the exercise price of each
option may not generally be less than 100% of the fair market value of the
common stock on the date of grant. With respect to a grantee holding more than
10% of our outstanding stock the exercise price of each option may not be less
than 110% of that fair market value. The aggregate fair market value of shares
for which incentive stock options are exercisable for the first time by an
employee during any calendar year may not exceed $100,000. Nonqualified stock
options granted under the plan may be granted at a price determined by the board
of directors, not to be less than the fair market value of the common stock on
the date of grant.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our by-laws include provisions permitted under Delaware law by which our
officers and directors are to be indemnified against various liabilities. These
provisions of the by-laws have no effect on any director's liability under
federal securities laws or the availability of equitable remedies, including
injunction or recission, for breach of fiduciary duty. We believe that these
provisions will facilitate our ability to continue to attract and retain
qualified individuals to serve as our directors and officers.
With respect to indemnification for liabilities arising under the
Securities Act of 1933 we have been advised that in the opinion of the
Securities and Exchange Commission this type of indemnification is against
public policy as expressed in the Securities Act and is unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this prospectus, the
number of shares of our outstanding common stock beneficially owned by:
. each of our directors;
. each person who is known by us to beneficially own 5% or more of our
common stock; and
. all of our directors and executive officers as a group.
E-37
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING SHARES
AMOUNT AND NATURE OWNED
OF BENEFICIAL --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP BEFORE OFFERING AFTER OFFERING
-------------------------------------------------------- ----------------- --------------- --------------
<S> <C> <C> <C>
Richard Kandel.......................................... 3,233,333 80.4% 40.3%
Woo Jin Kim............................................. 150,000 4.0% 1.8%
Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, New York 11802........................... 2,000,000 49.7% 24.9%
Randall Davis
c/o Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, New York 11802........................... 2,333,333 58.0% 29.0%
Steven Etra
c/o Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, New York 11802........................... 2,169,334 53.9% 27.0%
John Higgins............................................ 2,500 -- --
Philip Ellett........................................... 2,500 -- --
All executive officers and directors as a group......... 3,438,333 81.4% 41.8%
</TABLE>
The address for each specified person, if not included under each person's
name, is c/o b2bstores.com Inc., at 249 East Ocean Boulevard, Suite 620, Long
Beach, California 90802.
A person is deemed to beneficially own voting securities that can be
acquired by that person within 60 days from the date of this prospectus upon the
exercise of options. Each beneficial owner's percentage ownership is determined
by assuming that the options held by that person, but not those held by any
other person, and which are exercisable within 60 days of the date of this
prospectus have been exercised. Unless otherwise noted, we believe that all
persons named in the table have sole voting and investment power with respect to
all shares of common stock beneficially owned by them.
Richard Kandel, Randall Davis and Steven Etra are principals of
Enviro-Clean.
The information for Mr. Kandel
. 1,066,666 shares owned directly by Mr. Kandel,
. 100,000 shares owned by a profit sharing plan controlled by Mr.
Kandel on behalf of Kandel & Sons, another company owned by him,
. 66,667 shares owned by Mint Corp. of N.Y., an entity controlled by
Mr. Kandel, and
. 2,000,000 shares owned by Enviro-Clean.
Because our chairman of the board, Richard Kandel, will continue to
control b2bstores.com after the offering, your ability as a stockholder to
influence the management of b2bstores.com will be extremely limited. Mr. Kandel
beneficially owns approximately 80.4% of our outstanding common stock prior to
this offering, and will own approximately 40.3% upon completion of this
offering. He will be in a position to significantly influence any matter put to
a vote of our stockholders, including with respect to the election of our
directors.
Given his positions with both b2bstores.com and Enviro-Clean, Mr. Kandel's
interests, at times, could conflict with the interest of b2bstores.com and our
stockholders. Enviro-Clean maintains an online presence at www.b2bgoods.com and
through this web site sells products related to its janitorial and sanitary
maintenance operations. All of these products are also available through our web
site. In this regard, Enviro-Clean could be deemed a competitor of ours.
E-38
<PAGE>
The information for Mr. Kim represents shares issuable upon exercise of
options that will vest upon consummation of this offering. It does not include
150,000 shares issuable upon exercise of options that will vest in three equal
annual installments commencing in August 2000.
The information for Mr. Davis represents (a) 333,333 shares owned directly
by Mr. Davis and (b) 2,000,000 shares owned by Enviro-Clean, a company of which
Mr. Davis is president and a principal stockholder.
The information for Mr. Etra represents:
. 158,667 shares owned directly by Mr. Etra;
. 10,667 shares owned by SRK Associates, a company of which Mr. Etra
is an owner; and
. 2,000,000 shares owned by Enviro-Clean, of which Mr. Etra is a
stockholder and director.
Our executive officer and director group is comprised of the following
eight persons:
. Richard Kandel
. Woo Jin Kim
. Mark Voorhis
. Jeffrey Crandell
. Shannon Jessup
. Brian Wharton
. John Higgins
. Philip Ellett
The information for the group includes:
. all the shares beneficially owned by Messrs. Kandel, Kim, Higgins
and Ellett; and
. includes 50,000 shares issuable to Ms. Jessup upon exercise of the
options that will vest upon consummation of this offering.
The information for the group does not include:
. the shares specifically excluded from each person's ownership as
described above;
. 125,000 shares issuable to Ms. Jessup upon exercise of options that
will vest in annual installments commencing in August 2000;
. 175,000 shares issuable to Mr. Wharton upon exercise of options
that will vest in annual installments commencing in August 2000;
. 175,000 shares issuable to Mr. Crandell upon exercise of options
that will vest in annual installments commencing in August 2000;
and
. 175,000 shares issuable to Mr. Voorhis upon exercise of options
that will vest in annual installments commencing in September 2000.
E-39
<PAGE>
CERTAIN TRANSACTIONS
Enviro-Clean is a supplier of janitorial and maintenance products and
services. It is a principal stockholder of b2bstores.com. There are aspects of
our relationship with Enviro-Clean of which you should be aware, including the
following:
. Richard Kandel, our chairman of the board is also the chairman of
the board, chief executive officer and principal stockholder of
Enviro-Clean;
. Enviro-Clean sells through the Internet many of the same janitorial
and maintenance products that we sell, and may be deemed a
competitor of ours in this regard;
. Given Mr. Kandel's roles with both b2bstores.com and Enviro-Clean
and the potentially competitive position of each business, he may
not always be able to align his interest with the interests of both
businesses. The manner in which any conflict of interest in any
situation is resolved may not be the manner that would be most
beneficial to the interests of the stockholders of b2bstores.com;
. Under an agreement we have with Enviro-Clean, it is prohibited from
selling other types of products through its own web site until it
owns less than 10% of our outstanding common stock;
. Under an agreement we have with Enviro-Clean, it is prohibited from
selling its products through any web site other than its own and
ours until it owns less than 10% of our outstanding common stock;
. Randall Davis, a principal stockholder of our b2bstores.com, is
also president and a principal stockholder of Enviro-Clean. Steven
Etra, a stockholder of b2bstores.com, also is a director and
stockholder of Enviro-Clean.
. Mr. Kandel is the founder and promoter of b2bstores.com.
The relationship between Enviro-Clean and b2bstores.com and their
affiliates is more fully described below. All transactions between b2bstores.com
and Enviro-Clean have been on terms no less favorable to b2bstores.com than
could have been obtained from third parties. Each transaction has been
unanimously approved by the respective board of directors of b2bstores.com and
Enviro-Clean.
EARLY FINANCING OF B2BSTORES.COM.
Since our inception in June 1999, our working capital requirements had been
satisfied through:
. capital contributions made by our current stockholders, including
Mr. Kandel, Mr. Davis, Mr. Etra and Enviro-Clean, and
. loans made to us by Enviro-Clean.
In June 1999, we issued an aggregate of 3,666,667 shares of our common
stock for $27,500 in the form of $11,000 in cash and the transfer to us of the
web address, www.b2bstores.com. These shares were issued as follows:
. 1,000,000 shares to Mr. Kandel;
. 2,000,000 shares to Enviro-Clean;
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<PAGE>
. 66,667 shares to Mint Corp. of NY, a company owned by Mr. Kandel;
. 66,667 shares to Steven Etra, a director and stockholder of
Enviro-Clean;
. 333,333 to Randall Davis, a director and officer of Enviro-Clean;
and
. an aggregate of 200,000 shares to other persons not affiliated with
Enviro-Clean of b2bstores.com.
In June, July, November and December 1999 and January and February 2000,
Enviro-Clean made loans to us in the aggregate principal amount of approximately
$1,400,000. These loans bear interest at the rate of 8% per annum and are
repayable on the date this offering is consummated. A portion of the proceeds of
this offering will be used to repay these loans, together with interest.
At the time of the issuance of the shares to Enviro-Clean and the other
persons described above, b2bstores.com had only nominal assets and needed to
assemble a management team and hire an employee staff. The number of shares
issued to Enviro-Clean and these other persons were determined through
arm's-length negotiations. These transactions between b2bstores.com and
Enviro-Clean were unanimously approved by their respective board of directors.
In August 1999, we consummated a financing in which we raised proceeds of
$625,000 through the sale of 333,333 shares of our common stock as follows:
. 66,666 shares to Mr. Kandel;
. 100,000 shares to K&S PSP, a profit sharing plan of which Mr.
Kandel is a trustee;
. 92,000 shares to Steven Etra;
. 26,667 shares to Richard Etra, Steven Etra's cousin;
. 37,333 shares to Kenneth Etra, Steven Etra's cousin and brother of
Richard Etra;
. 10,667 shares to SRK Associates, a company owned by Steven, Richard
and Kenneth Etra.
In September 1999, we issued an aggregate of 16,643 shares of our common
stock to various persons in consideration of services rendered by them to
b2bstores.com. These persons also render services to or are employed by
Enviro-Clean. We also issued 2,500 shares of our common stock to each of John
Higgins and Philip Ellett in consideration of their becoming directors of
b2bstores.com.
ENVIRO-CLEAN HAS GUARANTEED SOME OF OUR OBLIGATIONS
Enviro-Clean has furnished some of our vendors with guarantees with respect
to our obligations to them as part of our early stage development. Although we
anticipate that our receipt of the net proceeds of this offering will eliminate
our need to supply similar guarantees to vendors in the future, if additional
guarantees should be necessary, Enviro-Clean has no obligation, and may not have
the financial ability, to provide them.
During its formation, b2bstores.com used the offices of Enviro-Clean as a
mailing and contact address. No commercial operations were ever conducted from
the offices of Enviro-Clean and no rent, fees or other consideration was paid to
Enviro-Clean in this regard. Shortly after its formation, b2bstores.com obtained
the office space described in the "Business" section under the subsection
entitled "Properties." Because we are a development stage enterprise without an
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<PAGE>
operating history, the owner of the premises required a guarantor for the lease.
Enviro-Clean signed the lease as the guarantor. Enviro-Clean received no
compensation or other consideration for acting as our guarantor.
We will seek to have Enviro-Clean released from these guarantees upon
completion of the offering.
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 25,000,000 shares of common stock,
$.01 par value per share, and 5,000,000 shares of preferred stock, $.01 par
value per share. Upon consummation of this offering, there will be outstanding
8,021,643 shares of common stock and no shares of preferred stock.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. The holders of common stock do not
have cumulative voting rights, which means that the holders of more than 50% of
the outstanding shares can elect all of our directors. The holders of our common
stock are entitled to receive dividends, if any, as may be declared from time to
time by the board of directors out of legally available funds. In the event we
are liquidated or dissolved, the holders of our common stock are entitled to
receive all assets available for distribution to the stockholders. The holders
of common stock have no preemptive or other subscription rights, and there are
no conversion rights or redemption or sinking fund provisions with respect to
the common stock. All outstanding shares of common stock are, and the shares to
be issued in this offering will be, validly issued, fully paid and
nonassessable.
Prior to this offering, there had been no public market for our shares. Our
common stock has been approved for quotation on the Nasdaq SmallCap Market. Even
though our common stock is quoted on the Nasdaq SmallCap Market, an active
trading market for our shares may not develop. If an active trading market is
not developed or maintained, the liquidity and trading price of our common stock
could be adversely affected. The per-share price in this offering was determined
by negotiations between us and the underwriters. It may bear no relationship to
the price at which the shares will trade upon completion of this offering. It
also is not indicative of the future market performance of our common stock.
PREFERRED STOCK
We are authorized to issue preferred stock, which may be issued from time
to time in one or more series upon authorization by the board of directors. The
board of directors, without further approval of the stockholders, is authorized
to fix the dividend rights, voting rights, redemption rights and any other
rights, preferences, privileges and restrictions applicable to each series of
preferred stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could, among
other things, adversely affect the voting power of the holders of common stock
and, in some circumstances, make it more difficult for a third party to gain
control of b2bstores.com, discourage bids for our common stock at a premium or
otherwise adversely affect the market price of the common stock.
SHARES AVAILABLE FOR FUTURE SALE
Substantially all of the 4,021,643 shares of our common stock outstanding
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<PAGE>
prior to this offering will become saleable under Rule 144 of the Securities Act
in June 2000, with the balance becoming saleable in August and September 2000.
Although the holders of these shares of common stock have signed agreements with
the underwriters under which they are restricted from selling these shares of
common stock during the 12-months period following consummation of this
offering, sales or the expectation of sales of a substantial number of shares of
our common stock in the public market could adversely affect the prevailing
market price of our common stock.
In general, under Rule 144 as currently in effect, a person who has owned
restricted shares of common stock beneficially for at least one year is entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of the then average weekly trading volume and 1% of the total number
of outstanding shares of the same class. Sales under Rule 144 are also subject
to manner of sale provisions, notice requirements and the availability of
current public information about us. A person who has not been one of our
affiliates for at least the three months immediately preceding the sale and who
has beneficially owned shares of common stock for at least two years is entitled
to sell the shares under Rule 144 without regard to any of the limitations
described above.
The exercise of options and other securities to purchase our common stock
may also adversely affect the market price for our common stock and will dilute
the percentage ownership of our other stockholders. The dilutive effect upon the
exercise of these securities might also adversely affect our ability to obtain
additional capital. The holders of these securities may be expected to exercise
them when we would be able to obtain additional equity capital on terms more
favorable than these securities.
At the date of consummation of this offering, there will be outstanding
options to purchase 1,000,000 shares of our common stock. We also have
obligations under existing employment agreements which may cause us to grant
additional options to purchase up to 200,000 shares of our common stock under
our 1999 Performance Equity Plan during 2000. We also may grant options to
purchase up to an additional 1,800,000 shares of common stock under our plan and
other options and warrants to purchase common stock outside of the plan. We will
also issue warrants to the representatives to purchase up to 400,000 shares of
our common stock in connection with this offering.
TRANSFER AGENT
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005, acts as transfer agent for our common stock.
DIVIDENDS
We expect to retain all earnings generated by our operation for the
development and growth of our business, and do not anticipate paying any cash
dividends to our stockholders in the foreseeable future. The payment of future
dividends on the common stock and the rate of those dividends, if any, will be
determined by our board of directors in light of our earnings, financial
condition, capital requirements and other factors.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management that a stockholder might consider favorable. These provisions
include, among others:
. the division of the board of directors into three separate classes;
. the right of the board to elect a director to fill a space created
by
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<PAGE>
the expansion of the board;
. the ability of the board to alter our bylaws; and
. the ability of the board to issue series of preferred stock without
stockholder approval.
Further, because we are incorporated in Delaware, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions prohibit some stockholders, including those owning 15% or more of the
outstanding voting stock, from consummating a merger or combination with a
corporation unless:
. 66 2/3% of the shares of voting stock not owned by the significant
stockholder approve the merger or combination; or
. our board of directors approves the merger or combination or the
transaction which resulted in the significant stockholder owning
15% or more of our outstanding voting stock.
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, b2bstores.com Inc. has agreed to sell to each of the underwriters
named below, and each of the underwriters, for which Gaines, Berland Inc. and
Nolan Securities Corp. are acting as representatives, has severally, and not
jointly, agreed to purchase on a firm commitment basis the number of shares
offered in this offering set forth opposite their respective names below:
NUMBER
NAME OF SHARES
-------------------------------------------------------------------- ---------
Gaines, Berland Inc................................................. 3,465,000
KSH Investment Group, Inc........................................... 125,000
First Security Van Kasper........................................... 100,000
GKN Securities Corp................................................. 100,000
Kirlin Securities Inc............................................... 100,000
Ladenberg, Thalmann & Co., Inc...................................... 100,000
Nolan Securities Corp............................................... 10,000
---------
Total......................................................... 4,000,000
---------
---------
A copy of the underwriting agreement has been filed as an exhibit to this
registration statement.
The representatives have advised us that the underwriters propose to offer
the shares to the public at the initial public offering price on the cover page
of this prospectus. They may allow some dealers who are members of the NASD, and
some foreign dealers, concessions not in excess of $0.34 per share and the
dealers who receive concessions may reallow a sum not in excess of $0.06 per
share to other dealers who are members of the NASD and to some foreign dealers.
Upon completion of this offering, the offering price, the concession to selected
dealers, and the reallowance to other dealers may be changed by the
representatives. The representatives have informed us that they do not expect
discretionary sales by the underwriters to exceed five percent of the shares
offered by this prospectus.
We have agreed to pay to the representatives an expense allowance on a non-
accountable basis, equal to 3.0% of the gross proceeds derived from the sale of
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<PAGE>
shares offered in this offering. We paid an advance on this allowance in the
amount of $50,000.
We have also granted to the underwriters an option, exercisable during the
45-day period commencing on the date of this prospectus, to purchase at the
public offering price per share, less the underwriting discount and commissions
and the non-accountable expense allowance, up to an aggregate of 600,000 shares
of common stock. The underwriters may exercise that option if the underwriters
sell more shares than the total number set forth in the table above. If any
shares are purchased pursuant to this option, the underwriters will severally
purchase shares in approximately the same proportion as set forth in the table
above. The underwriters may exercise this right of purchase only for the purpose
of covering over-allotments, if any, made in connection with the sale of shares.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
EXERCISE OF EXERCISE OF
DISCOUNT OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
b2bstores.com.................................................... $0.56 $2,240,000 $2,576,000
</TABLE>
We have also agreed to sell to the representatives for nominal
consideration, the representatives' warrants to purchase up to 400,000 shares of
common stock. The representatives' warrants are exercisable for a period of four
years commencing one year after the date of this prospectus at an exercise price
per share equal to $13.20.
The representatives' warrants may not be sold, transferred, assigned,
pledged, or hypothecated for a period of 12 months from the date of this
prospectus, except to officers or partners of the members of the selling group.
b2bstores.com has granted to the representatives one demand registration right
at b2bstores.com's expense for a period of five years from the effective date of
this offering and piggyback registration rights for a period of five years from
the effective date of this offering with respect to registration under the
Securities Act of the securities directly or indirectly issuable upon exercise
of the representatives' warrants.
The representatives' warrants contain anti-dilution provisions providing
for adjustments of the exercise price and number of shares issuable on exercise
of the representatives' warrants, upon the occurrence of some events, including
stock dividends, stock splits, and recapitalizations. The holders of the
representatives' warrants have no voting, dividend, or other rights as a
stockholder with respect to shares of common stock underlying the
representatives' warrants, unless the representatives' warrants shall have been
exercised.
In connection with this offering, we have granted the representatives the
right to designate one person for election to our board of directors for the
three-year period commencing on the closing date of this offering. In the event
the representatives elect not to exercise this right, then they may appoint an
E-45
<PAGE>
observer to attend all meetings of our board of directors. This designee has the
right to notice of all meetings of the board of directors and to receive
reimbursement for all out-of-pocket expenses incurred to attend these meetings.
In addition, the designee will be entitled to indemnification to the same extent
as our directors.
Each of our officers, directors and stockholders has entered into lock-up
agreements under which they have agreed not to offer, assign, issue, sell,
hypothecate, or otherwise dispose of any shares of common stock or securities of
b2bstores.com convertible into, or exercisable or exchangeable for, shares of
common stock, without the prior written consent of the representatives for a
period of at least twelve months after the date of this prospectus. Each
securityholder may transfer securities of b2bstores.com, or a beneficial
interest in those securities, in a private transaction under an exemption from
registration provided that the transferee agrees in writing to be bound by the
terms of the lock-up agreement. The representatives may, at any time and without
notice, waive the terms of the lock-up agreements.
Before this offering, there has been no public market for the common stock
of b2bstores.com. The public offering price, negotiated between b2bstores.com
and the representatives, is based upon b2bstores.com's financial and operating
history and condition, its prospects, the prospects for the industry we are in
and prevailing market conditions.
Rules of the Securities and Exchange Commission may limit the ability of
the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions. The underwriters may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the
shares, so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate coverage transactions. The underwriters
may create a short position in the shares by selling more shares than
are set forth on the cover page of this prospectus. If a short position
is created in connection with the offering, the representatives may
engage in syndicate covering transactions by purchasing shares in the
open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option.
. Penalty bids. If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate coverage transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of these transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither we nor the underwriters makes any representation or prediction as
to the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq SmallCap Market, in the
over-the-counter market or on any trading market. If any of these transactions
are commenced, they may be discontinued without notice at any time.
We have agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in this respect.
E-46
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We will file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings will be available to the public
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. These documents are also available at the
public reference rooms at the SEC's regional offices in New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms.
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933 with the SEC. This prospectus is part of that registration statement
and, as permitted by the SEC's rules, does not contain all of the information
included in the registration statement. For further information about us and our
common stock, you may refer to the registration statement and its exhibits and
schedules. You can review and copy these documents at the public reference
facilities maintained by the SEC or on the SEC's web site as described above.
This prospectus may contain summaries of contracts or other documents. If
you would like complete information about a contract or other document, you
should read the copy filed as an exhibit to the registration statement.
LEGAL MATTERS
Legal matters in connection with this offering are being passed upon by the
law firm of Graubard Mollen & Miller, New York, New York. Orrick, Herrington &
Sutcliffe LLP is acting as counsel for the underwriters in connection with the
offering.
EXPERTS
The financial statements included in this prospectus and in the
registration statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the period set forth in
their report appearing elsewhere herein and in the registration statement, and
are included in reliance upon this report, given upon the authority of BDO
Seidman, LLP, as experts in auditing and accounting. This report contains an
explanatory paragraph indicating substantial doubt about our ability to continue
as a going concern.
B2BSTORES.COM INC.
INDEX
-----
Report of Independent Certified Public Accountants........................ E-48
Financial Statements:
Balance Sheet.......................................................... E-49
Statement of Loss...................................................... E-49
E-47
<PAGE>
Statement of Stockholders' Deficit..................................... E-50
Statement of Cash Flows................................................ E-50
Summary of Business and Significant Accounting Policies................ E-51
Notes to Financial Statements.......................................... E-54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders
b2bstores.com Inc.
Long Beach, California
We have audited the accompanying balance sheet of b2bstores.com Inc., a company
in the development stage, as of December 31, 1999, and the related statements of
loss, stockholders' deficit and cash flows for the period from June 28, 1999
(inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of b2bstores.com Inc. at December
31, 1999, and the results of its operations and its cash flows for the period
from June 28, 1999 (inception) to December 31, 1999, in conformity with
generally accepted accounting principles.
As discussed in Note 1, the accompanying financial statements have been prepared
assuming b2bstores.com Inc. will continue as a going concern. The Company is in
the development stage and has had nominal revenues from operations and will
require substantial additional funds for development and marketing of its
products. These matters raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The Company is pursuing
sources of additional financing (see Note 7) and there can be no assurance that
any such financing will be available to the Company on commercially reasonable
terms, or at all. Any inability to obtain additional financing will have a
material effect on the Company, including possibly requiring the Company to
significantly curtail or cease operations.
/S/ BDO SEIDMAN, LLP
New York, New York
January 7, 2000, except for
Notes 3 and 5 which are as of February 14, 2000
E-48
<PAGE>
B2BSTORES.COM INC.
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current:
Cash......................................................................................... $ 72,629
Prepaid expenses and other current assets.................................................... 38,915
-----------
Total current assets............................................................................ 111,544
Security deposit................................................................................ 20,796
Deferred offering costs (Note 6)................................................................ 320,367
Property and equipment, net (Note 2)............................................................ 362,874
-----------
$ 815,581
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................................. $ 72,129
Accrued expenses............................................................................. 93,936
Deferred revenue............................................................................. 987
Due to principal stockholder (Note 3)........................................................ 824,836
-----------
Total current liabilities....................................................................... 991,888
-----------
Commitments (Note 4)
Stockholders' deficit (Notes 5 and 7):
Preferred stock, $.01 par value--shares authorized 5,000,000; none issued.................... --
Common stock, $.01 par value--shares authorized 25,000,000; issued 4,021,643................. 40,216
Additional paid-in capital................................................................... 2,713,714
Deficit accumulated during the development stage............................................. (2,930,237)
-----------
Total stockholders' deficit..................................................................... (176,307)
-----------
$ 815,581
===========
</TABLE>
See accompanying summary of business and significant accounting policies and
notes to financial statements.
B2BSTORES.COM INC.
STATEMENT OF LOSS
PERIOD FROM JUNE 28, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
Sales............................................................................................ $ 2,191
Cost of sales.................................................................................... 3,495
-----------
Gross loss................................................................................. (1,304)
-----------
Operating expenses:
General and administrative.................................................................... 709,810
Sales and marketing........................................................................... 23,060
Start-up costs................................................................................ 55,036
Stock-based compensation relating to general and administrative activities (Note 5)........... 216,430
Stock-based compensation relating to start-up activities (Note 5)............................. 1,901,500
-----------
Total operating expenses................................................................... 2,905,836
-----------
Loss from operations....................................................................... (2,907,140)
Interest expense................................................................................. 23,097
-----------
Net loss......................................................................................... $(2,930,237)
===========
Loss per share (basic and diluted)............................................................... $ (.75)
===========
Weighted average common shares outstanding....................................................... 3,910,780
===========
</TABLE>
E-49
<PAGE>
See accompanying summary of business and significant accounting policies and
notes to financial statements.
B2BSTORES.COM INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM JUNE 28, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TOTAL
------------------- PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
founding and other stockholders:
June 29, 1999................... 3,666,667 $36,667 $ -- $ -- $ 36,667
Issuance of common stock to
investors:
August 23, 1999................. 333,333 3,333 2,497,500 -- 2,500,833
Issuance of common stock to
directors and consultants:
September 15, 1999.............. 21,643 216 216,214 -- 216,430
Net loss........................... -- -- -- (2,930,237) (2,930,237)
--------- ------- ---------- ----------- -----------
Balance, December 31, 1999......... 4,021,643 $40,216 $2,713,714 $(2,930,237) $ (176,307)
========= ======= ========== =========== ===========
</TABLE>
See accompanying summary of business and significant accounting policies and
notes to financial statements.
B2BSTORES.COM INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JUNE 28, 1999 (INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss...................................................................................... $(2,930,237)
-----------
Adjustments to reconcile net loss to net cash used in operating activities: Expense recognized
in connection with issuance of common stock relating to start-up and general and
administrative activities................................................................... 2,117,930
Depreciation and amortization................................................................. 28,533
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets...................................... (38,915)
Increase in security deposit............................................................... (20,796)
Increase in accrued expenses............................................................... 93,936
Increase in accounts payable............................................................... 72,129
Increase in deferred revenue............................................................... 987
-----------
Total adjustments....................................................................... 2,253,804
-----------
Net cash used in operating activities................................................... (676,433)
-----------
Cash flows from investing activities:
Capital expenditures.......................................................................... (391,407)
-----------
Cash flows from financing activities:
Deferred offering costs....................................................................... (320,367)
Loans from principal stockholder.............................................................. 824,836
Proceeds from issuance of common stock........................................................ 636,000
-----------
</TABLE>
E-50
<PAGE>
<TABLE>
<S> <C>
Net cash provided by financing activities............................................... 1,140,469
-----------
Net increase in cash............................................................................. 72,629
Cash, beginning of period........................................................................ --
-----------
Cash, end of period.............................................................................. $ 72,629
===========
</TABLE>
See accompanying summary of business and significant accounting policies and
notes to financial statements.
B2BSTORES.COM INC.
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
b2bstores.com Inc. ("b2bstores" or the "Company"), a development stage
enterprise, was incorporated on June 28, 1999 under the laws of the State of
Delaware. b2bstores is a branded Internet web site specifically designed to
assist business customers in the operation and development of their businesses.
The Company currently provides user-friendly online access to business products
and supplies, and will be expanded to provide access to business services,
auctions and business-related information and content.
Basis of Presentation
The financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises," which requires
development stage enterprises to employ the same accounting principles as
operating companies.
Property and Equipment
Property and equipment are stated at cost. Depreciation will be computed
using the straight-line method over the estimated useful lives of the assets,
which range from two to five years. Amortization of leasehold improvements is
provided for over the lesser of the term of the related lease or the estimated
useful life of the improvement. The cost of additions and betterments is
capitalized, and repairs and maintenance are charged to operations in the period
incurred. Depreciation and amortization expense has been included in general and
administrative expenses.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash, other
receivables, accounts payable, accrued expenses and due to principal
stockholder, approximated fair value as of December 31, 1999 because of the
relatively short maturity of the instruments.
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
disclosures 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.
Revenue Recognition
E-51
<PAGE>
To date, the Company has generated nominal revenues. b2bstores anticipates
that its revenue will primarily be comprised of sales of merchandise either
purchased by b2bstores or placed on consignment with b2bstores, commissions,
advertising and other revenue.
B2BSTORES.COM INC.
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company will recognize revenues according to:
. the type of product or service being sold,
. the structure of the contract negotiated with the individual vendor, and
. the substantive nature of the risks of ownership we incur in connection
with the sale and shipment of the product.
For product sales involving substantive risk of ownership, the Company will
generally recognize revenue at the gross transaction value. For service and
referral sales where risk of loss is minimal, the Company will generally
recognize revenue on a net fee or commission basis. For auction sales where the
Company incurs risk of loss in the transactions, it will recognize gross
revenues. For auction sales where the Company acts as auctioneer and has little
risk of loss, it will recognize revenue on a net basis or transaction fee basis.
Currently, policy setting groups of the Emerging Issues Task Force and the
Financial Accounting Standards Board are reviewing the guidelines under which
revenue is recognized on a gross basis versus a net basis. As the Company
currently recognizes certain of its revenue on a gross basis, there is a risk
that future guidelines may require the Company to change, retroactively, its
revenue recognition policy. This could cause the Company to report markedly
lower revenues than currently anticipated. Although such a change would cause
the Company to report markedly lower revenues and costs of products, it would
not change the Company's reporting with respect to other expenses, net revenue
or earnings before and after tax.
The Company will allow customers to return merchandise in certain
circumstances; accordingly, the Company will not recognize revenue from the sale
of those products covered by the return policy until the return policy period
has expired or the customer's right of return has expired. The Company will
recognize the sales amount as deferred revenue upon verification of the credit
card transaction authorization and shipment of the merchandise until such time
that the Company is able to estimate returns.
Advertising Revenue
The Company will also earn revenue from the sale of advertising on its web
site. These revenues will be recognized as the advertisement is displayed.
Comprehensive Income
The Company is required to report comprehensive income under SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments
B2BSTORES.COM INC.
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
E-52
<PAGE>
by owners and distributions to owners. There were no items of comprehensive
income during the period presented.
Income Taxes
The Company uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes". Deferred income tax
assets and liabilities are recognized based on the temporary differences between
the financial statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
The Company has net operating losses ("NOL") of approximately $740,000
which expire in 2019. The deferred tax asset resulting from this NOL has been
offset with a valuation allowance.
Loss Per Share
Basic loss per share is based only on the average number of common shares
outstanding for the period. Diluted loss per share is similar to basic loss per
share except that the weighted average number of common shares outstanding is
increased to include the number of additional common shares that would have been
outstanding if dilutive potential common shares, such as options and warrants,
had been issued. Dilutive potential common shares are excluded from the
computation if their effect is antidilutive.
All references in the financial statements with regard to the average
number of shares of common stock and related per share amounts have been
calculated giving retroactive effect to the stock split.
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Under the intrinsic value based
method, compensation cost is the excess, if any, of the fair market value of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock. The Company will make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied, as required by SFAS No. 123, "Accounting for Stock-Based
Compensation."
B2BSTORES.COM INC.
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Capitalized Software Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs.
The Company has capitalized certain incurred software development costs in
connection with its online services. The costs associated with research and
development of such technology were expensed as incurred. Software development
costs incurred subsequent to establishing technological feasibility have been
capitalized. Technological feasibility is established upon the completion of a
detailed program design (in the absence of any high risk issues or
uncertainties). Capitalized software costs are being amortized over a period of
E-53
<PAGE>
two years. Maintenance costs incurred in connection with the software are being
expensed as incurred.
B2BSTORES.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and has had no revenues from operations since inception. There can be no
assurance that the Company will be able to obtain the substantial additional
capital resources necessary to pursue its business plan or that any assumptions
relating to its business plan will prove to be accurate. The Company is pursuing
sources of additional financing (see Note 7) and there can be no assurance that
any such financing will be available to the Company on commercially reasonable
terms, or at all. Any inability to obtain additional financing will have a
material adverse effect on the Company, including possibly requiring the Company
to significantly curtail or cease operations. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
DECEMBER 31, 1999
-----------------------------------------------------------------------
Capitalized software development costs:
Purchased software....................................... $120,011
Internally developed software............................ 117,860
Computer equipment.......................................... 118,545
Furniture and equipment..................................... 32,691
Leasehold improvements...................................... 2,300
--------
391,407
Less: Accumulated depreciation and amortization............. 28,533
--------
Property and equipment, net................................. $362,874
========
Depreciation and amortization expense was $28,533 for the period from June
28, 1999 (inception) to December 31, 1999.
3. DUE TO PRINCIPAL STOCKHOLDER
At December 31, 1999, the Company had a promissory note payable to one
stockholder which provides for borrowings of up to $1,000,000 with interest
payable at 8% per annum on the earlier of (i) February 1, 2000 and (ii) the date
the Company consummates an initial public offering ("IPO") of its equity
securities yielding gross proceeds of at least $2,000,000. On January 20, 2000,
this note was amended to provide for borrowings of up to $1,500,000 with
interest payable at the rate of 8% per annum due upon the earlier of (i) March
1, 2000 and (ii) the date an initial public offering of the Corporation is
consummated. Subsequent to December 31, 1999, the Company increased its
borrowings to approximately $1,400,000.
E-54
<PAGE>
B2BSTORES.COM INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS
Employment Agreements
In August and September 1999, the Company entered into employment
agreements with certain key employees providing for future minimum annual
compensation as follows:
YEAR ENDING DECEMBER 31,
------------------------
2000............................................................ $ 855,000
2001............................................................ 922,000
2002............................................................ 698,000
----------
$2,475,000
==========
Certain of these employees are entitled to receive aggregate bonuses of up
to $355,000 upon the attainment by the Company of certain objectives, including
the hiring of certain key employees and the consummation of the IPO of the
Company's common stock. Of this amount, $25,000 has been earned during the
period from June 28, 1999 (inception) to December 31, 1999 and $105,000 will be
earned upon consummation of the IPO. These amounts will be paid out of the
proceeds of the IPO.
These employees will also be granted on the effective date of the
registration statement for the Company's IPO (the "Effective Date") stock
options to purchase 1,000,000 shares of the Company's common stock at an
exercise price equal to 80% of the market price established on the Effective
Date. The options will have a contractual life of approximately 10 years. Of
these options, 200,000 will vest at the time of grant. The remaining options
will vest over a period of three years. In connection with the issuance of these
options, the Company will record compensation expense based on the excess of the
fair market value on the Effective Date and the exercise price of such options.
The agreements also provide for certain key employees, for each calendar
quarter during calendar year 2000, to be granted options under the 1999
Performance Equity Plan (the "Plan") (see Note 7) (if they are still employed)
to purchase 50,000 shares of common stock at a per share price equal to the last
sales price of the Company's common stock on the last trading day prior to the
date of grant, assuming the successful completion of the IPO, or fair value.
Lease Commitments
The Company leases office space for its corporate headquarters in Long
Beach, California under an operating lease through August 2001.
The minimum lease payments required under the noncancellable operating
lease for the years subsequent to December 31, 1999 are:
YEAR ENDING DECEMBER 31,
------------------------
2000........................................................... $ 77,000
2001........................................................... 51,000
--------
$128,000
========
E-55
<PAGE>
B2BSTORES.COM INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS--(CONTINUED)
Total rent expense for the period from June 28, 1999 (inception) to
December 31, 1999 was approximately $9,600.
Service Agreement
During July 1999, the Company entered into an e-commerce system service
agreement with Netgateway pursuant to which Netgateway designs, develops,
maintains and houses the Company's web site. For these services the Company has
paid an up-front fee with additional nominal operating fees payable to
Netgateway based on the number of hits on the web site. Netgateway will also be
entitled to a small percentage of all revenues generated from sales (varying
according to sales volume) processed through the Company's e-commerce
infrastructure, whether as a result of sales of products by the Company or sales
by other web sites to which the Company provides vendor management or processing
services. The Company is also obligated to share equally with Netgateway all
advertising and "click-through" revenues generated through the Company's web
site. This service agreement extends through February 2001 and is subject to
automatic renewals for successive one-year terms unless terminated by either
party with six months notice prior to the lapse of the initial term or any
renewal term thereafter.
5. STOCKHOLDERS' DEFICIT
Capital Stock
On June 28, 1999, the Company's Board of Directors authorized capital stock
consisting of 25,000,000 shares of common stock, $.01 par value per share, and
5,000,000 shares of preferred stock, $.01 par value per share.
Issuance of Common Stock
On June 29, 1999, the founding stockholders of the Company purchased
3,666,667 shares of common stock with an original par value of $27,500 for
$11,000 in cash. The difference between the cash paid and the par value of the
stock of $16,500, which represented the value of the web address b2bstores.com
contributed by the principal stockholder, was recorded as a non-cash
compensation charge to operations. In connection with the stock split of the
Company's common stock referred to below, the Company recorded an additional
non-cash compensation charge to operations of approximately $9,000.
On August 23, 1999, the Company sold 333,333 shares of its common stock for
$625,000 to certain investors including its Chairman of the Board and certain
affiliates. In connection with the August 23, 1999 issuance, the Company
recorded a non-cash compensation charge to operations of $1,875,000,
representing the difference between the selling price of the stock and its
estimated fair value. In connection with the stock split of the Company's common
stock referred to below, the Company recorded an additional non-cash
compensation charge to operations of approximately $1,000.
B2BSTORES.COM INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' DEFICIT--(CONTINUED)
E-56
<PAGE>
On September 15, 1999, the Company issued an aggregate of 16,643 shares of
common stock to consultants in connection with services rendered to the Company
and 5,000 shares to directors. In connection with the issuance of such shares,
the Company recorded a non-cash compensation charge to operations of $216,430,
representing the fair value of the common stock issued.
Stock Splits
The Company's Board of Directors authorized a 4 for 3 split of its common
stock in the form of a stock dividend, effective September 28, 1999. All shares
and per-share amounts in the accompanying financial statements have been
restated to give effect to the 4 for 3 stock split. The Company's Board of
Directors also authorized a 0.93 for 1 reverse split of its common stock on
January 20, 2000. The Board of Directors retracted the 0.93 for 1 reverse split
on February 14, 2000 and this split was never given effect.
6. DEFERRED OFFERING COSTS
The Company has incurred costs of $320,367, in connection with the IPO (see
Note 7). Upon consummation of the IPO, the deferred offering costs will be
charged to equity. Should the IPO prove to be unsuccessful, these deferred
costs, as well as additional expenses to be incurred, will be charged to
operations.
7. INITIAL PUBLIC OFFERING
On September 27, 1999, the Board of Directors authorized the management of
the Company to file a registration statement for the IPO of the Company's common
stock. On February 14, 2000, the Board of Directors authorized an increase in
the number of shares to be sold in the IPO. The Company plans to raise gross
proceeds of $32,000,000. There can be no assurance that the financing will
occur. The Company plans to issue 400,000 common stock purchase warrants to
representatives of the underwriters in connection with the IPO.
8. 1999 PERFORMANCE EQUITY PLAN
On September 30, 1999, the Board of Directors and stockholders approved the
Plan. The Plan authorizes the granting of awards up to 2,000,000 shares of
common stock to key employees, officers, directors and consultants. Awards
consist of stock options (both nonqualified options and options intended to
qualify as "Incentive" stock options under Section 422 of the Internal Revenue
Code of 1986, as amended), registered stock awards, deferred stock awards, stock
appreciation rights and other stock-based awards, as described in the Plan. No
options have been granted under the Plan.
E-57
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF COMMON STOCK.
GAINES, BERLAND INC. NOLAN SECURITIES CORP.
E-58
<PAGE>
ANNEX F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934:
For the Quarterly Period ended March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from __________________ to __________________
Commission File number 1-14798
b2bstores.com Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3500746
------------------------------- ----------------------
(State or other jurisdiction of I.R.S. Employer ID No.
incorporation or organization)
249 East Ocean Boulevard
Suite 620
Long Beach, California 90802
----------------------------
(Address of principal executive offices)
(562) 491-7180
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 ______
----
As of May 11, 2000, 8,621,643 shares of the Issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES ____ NO X
---
F-1
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------------------------------------------------------
Financial Statements (Unaudited and Condensed):
Balance Sheets 2
Statements of Loss 3
Statements of Stockholders' Equity (Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6-10
F-2
<PAGE>
b2bstores.com Inc.
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
ASSETS (unaudited)
<S> <C> <C>
Current:
Cash and cash equivalents $11,404,078 $ 72,629
Marketable securities 13,426,681 --
Finance proceeds receivable 4,320,000 --
Prepaid expenses and other current assets 198,144 38,915
-----------------------------
Total current assets 29,348,903 111,544
Deposits 51,813 20,796
Deferred offering costs -- 320,367
Property and equipment, net 2,010,911 362,874
-----------------------------
$31,411,627 $ 815,581
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 706,478 $ 72,129
Accrued expenses and other current liabilities 3,913 93,936
Deferred revenue -- 987
Due to principal stockholder -- 824,836
-----------------------------
Total current liabilities 710,391 991,888
-----------------------------
Commitments
Stockholders' equity
Preferred stock, $.01 par value - shares authorized
5,000,000; none issued -- --
Common stock, $.01 par value - shares authorized
25,000,000; issued 8,621,643 and 4,021,643 86,216 40,216
Additional paid-in capital 35,261,266 2,713,714
Deficit accumulated during the development stage (4,646,246) (2,930,237)
-----------------------------
Total stockholders' equity (deficit) 30,701,236 (176,307)
-----------------------------
$31,411,627 $ 815,581
=============================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
b2bstores.com Inc.
Statements of Loss
<TABLE>
<CAPTION>
Cumulative, period from
June 28, 1999 (Inception) Three months Ended Period from
to March 31, 2000 March 31, 2000 June 28, 1999 (inception)
(unaudited) (unaudited) to December 31, 1999
------------------------- ------------------ -------------------------
<S> <C> <C> <C>
Sales $ 6,383 $ 4,192 $ 2,191
Cost of Sales 176,122 115,614 60,508
------------------------------------------------------------
Gross Loss (169,739) (111,422) (58,317)
------------------------------------------------------------
Operating Expenses
General and administrative 948,178 622,423 325,755
Sales and marketing 579,145 380,175 198,970
Technology 299,500 196,604 102,896
Fulfillment Management 140,400 92,164 48,236
Start-up Costs 55,036 -- 55,036
Stock-based compensation relating to general
and administrative activities 216,430 -- 216,430
Stock-based compensation relating to start-up
activities 2,359,962 458,462 1,901,500
------------------------------------------------------------
Total operating expenses 4,598,651 1,749,828 2,848,823
------------------------------------------------------------
Loss from operations (4,768,390) (1,861,250) (2,907,140)
Interest income (expense) 122,144 145,241 (23,097)
------------------------------------------------------------
Net loss $(4,646,246) $(1,716,009) $(2,930,237)
============================================================
Loss per share (basic and diluted) $ (0.28) $ (0.75)
=======================================
Weighted average common shares outstanding 6,063,401 3,910,780
=======================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
b2bstores.com Inc.
Statements of Stockholders' Equity (Deficit)
(unaudited)
<TABLE>
<CAPTION>
Period from June 28, 1999 (inception) to March 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
Deficit
accumulated
Common Stock Additional during the Total
------------------- paid-in development stockholders'
shares Amount capital stage equity (deficit)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founding & other stockholders: June 29, 1999 3,666,667 $ 36,667 $ -- $ -- $ 36,667
Issuance of common stock to investors: August 23, 1999 333,333 3,333 2,497,500 -- 2,500,833
Issuance of common stock to directors
& consultants: September 15, 1999 21,643 216 216,214 -- 216,430
Net loss for the period -- -- -- (2,930,237) (2,930,237)
------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 4,021,643 40,216 2,713,714 (2,930,237) (176,307)
Issuance of common stock in connection with
initial public offering, net February 15, 2000 4,000,000 40,000 27,775,090 -- 27,815,090
Issuance of common stock in connection with
overallotment, net, March 29, 2000 600,000 6,000 4,314,000 -- 4,320,000
Stock based compensation from vesting of
options to officers -- -- 458,462 -- 458,462
Net loss for three months -- -- -- (1,716,009) (1,716,009)
------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2000 (unaudited) 8,621,643 $ 86,216 $35,261,266 $(4,646,246) $30,701,236
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
b2bstores.com Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative, period
from June 28, 1999 Three months Period from
(inception) to ended June 28, 1999
March 31, 2000 March 31, 2000 (Inception) to
(unaudited) (unaudited) December 31, 1999
--------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,646,246) $ (1,716,009) $ (2,930,237)
--------------------------------------------------------
Adjustments to reconcile net loss to net cash used in
operating Activities:
Expense recognized in connection with issuance of common stock
relating to start-up and general and administrative activities 2,576,392 458,462 2,117,930
Depreciation and amortization 74,427 45,894 28,533
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (198,145) (159,230) (38,915)
Increase/(Decrease) in other assets (51,812) (31,016) (20,796)
Decrease in deferred revenue 987 -- 987
Increase/(Decrease) in accrued expenses 2,926 (91,010) 93,936
Increase in accounts payable 706,478 634,349 72,129
--------------------------------------------------------
Total adjustments 3,111,253 857,449 2,253,804
--------------------------------------------------------
Net cash, used in operating activities (1,534,993) (858,560) (676,433)
--------------------------------------------------------
Cash flows from investing activities:
Marketable securities (13,426,681) (13,426,681) --
Capital expenditures (2,085,338) (1,693,931) (391,407)
--------------------------------------------------------
Net cash, used in investing activities (15,512,019) (15,120,612) (391,407)
Cash flows from financing activities:
Deferred offering costs (320,367) - (320,367)
Loans from principal stockholder 1,399,836 575,000 824,836
Repayment of loans from principal stockholder (1,399,836) (1,399,836) -
Proceeds from issuance of common stock 28,771,457 28,135,457 636,000
--------------------------------------------------------
Net cash provided by financing activities 28,451,090 27,310,621 1,140,469
--------------------------------------------------------
Net Increase in cash 11,404,078 11,331,449 72,629
Cash and equivalents, beginning of period -- 72,629 --
--------------------------------------------------------
Cash and equivalents, end of period $ 11,404,078 $ 11,404,078 $ 72,629
========================================================
Non-cash items:
Deferred offering costs $ 320,367 $ 320,367 $ --
Finance proceeds receivable (4,320,000) (4,320,000) --
Supplemental cash flow information:
Interest paid on loans from principal stockholder $ 22,838 $ 22,838 $ --
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Business
b2bstores.com Inc. ("b2bstores" or the "Company"), a development stage
enterprise, was incorporated on June 28, 1999 under the laws of the State of
Delaware. The Company operates an Internet web site that is specifically
designed to assist business customers in the operation and development of their
businesses. The site provides our business customers with access to quality
products and supplies, a premier network of business services and a broad menu
of business content.
The Company's web site moves business-to-business transactions and other
business operations away from traditional modes to the Internet. This web site
is designed as a community mall, a place where business customers can visit a
"virtual storefront" or product category of their choice, seek out services from
professionals, research issues important to their business and meet and
communicate with customers, suppliers, colleagues and competitors. The Company
is developing its web site to make it user friendly and to create an experience
that is highly useful, efficient, enjoyable and informative for the business
customer.
Basis of Presentation
The financial statements 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 such rules and
regulations, although the Company's management believe that the disclosures are
adequate to make the information presented not misleading.
F-7
<PAGE>
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained herein. You should read these
financial statements together with the audited financial statements and notes
thereto for the period from June 28, 1999 (Inception) to December 31, 1999
included in the Company's Registration Statement on Form SB-2MEF (No. 333-30376)
which was declared effective by the Securities and Exchange Commission on
February 14, 2000. The Company follows the same accounting policies in
preparation of its interim reports.
Results of operations for the interim periods may not be indicative of annual
results.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period's presentation.
Cash and Cash Equivalents
The Company invests certain of its excess cash in debt instruments of the US
Government, municipalities and their agencies, money market accounts, and of
high quality corporate issuers and 94% of the balances are held at one broker.
All highly liquid instruments with an original maturity of three months or less
are considered cash equivalents.
Marketable Securities
The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents; those with an original
maturity greater than 90 days are considered marketable securities. At March 31,
2000, short-term investments consist of investments in high quality corporate
issuers and have been classified as held to maturity. Unrealized gains and
losses for the period ending March 31, 2000 were not significant. All short-term
investments and 94% of cash equivalents are held at one broker. Accordingly, the
Company is subject to credit risk if the broker is unable to repay the balance
in the account or deliver the Company's securities. The Company manages this
credit risk by only investing in high-quality money market instruments,
municipal securities, and corporate issuers.
Revenue Recognition
To date, the Company has generated nominal revenues. b2bstores anticipates
that its revenue will primarily be comprised of sales of merchandise either
purchased by b2bstores or placed on consignment with b2bstores, commissions,
advertising and other revenue.
The Company will recognize revenues according to:
. the type of product or service being sold,
. the structure of the contract negotiated with the individual vendor, and
. the substantive nature of the risks of ownership we incur inconnection
with the sale and shipment of the product.
For product sales involving substantive risk of ownership, the Company will
generally recognize revenue at the gross transaction value. For service and
referral sales where risk of loss is minimal, the Company will generally
recognize revenue on a net fee or commission basis. For auction sales where the
Company incurs risk of loss in the transactions, it will recognize gross
revenues. For auction sales where the Company acts as auctioneer and has little
risk of loss, it will recognize revenue on a net basis or transaction fee basis.
Currently, policy setting groups of the Emerging Issues Task Force and the
Financial Accounting Standards Board are reviewing the guidelines under which
revenue is recognized on a gross basis versus a net basis. As the Company
F-8
<PAGE>
currently recognizes certain of its revenue on a gross basis, there is a risk
that future guidelines may require the Company to change, retroactively, its
revenue recognition policy. This could cause the Company to report markedly
lower revenues than currently anticipated. Although such a change would cause
the Company to report markedly lower revenues and costs of products, it would
not change the Company's reporting with respect to other expenses, net revenue
or earnings before and after tax.
The Company will allow customers to return merchandise in certain
circumstances; accordingly, the Company will not recognize revenue from the sale
of those products covered by the return policy until the return policy period
has expired or the customer's right of return has expired. The Company will
recognize the sales amount as deferred revenue upon verification of the credit
card transaction authorization and shipment of the merchandise until such time
that the Company is able to estimate returns.
Advertising Revenue
The Company will also earn revenue from the sale of advertising on its web
site. These revenues will be recognized as the advertisement is displayed.
Property and Equipment
Property and equipment, net consists of the following:
Capitalized software development costs: March 31, 2000
--------------
Purchased software................................ $1,120,011
Internally developed software..................... 521,137
Computer equipment................................ 406,603
Furniture and equipment........................... 34,587
Leasehold improvements............................ 3,000
----------
2,085,338
Less: Accumulated depreciation and amortization.. 74,427
----------
Property and equipment, net....................... $2,010,911
----------
Depreciation expense for the three months ended March 31, 2000 was $45,894.
F-9
<PAGE>
Capitalized software development costs: December 31, 1999
------------------
Purchased software......................................... $120,011
Internally developed software.............................. 117,860
Computer equipment......................................... 118,545
Furniture and equipment.................................... 32,691
Leasehold improvements..................................... 2,300
------------
391,407
Less: Accumulated depreciation and amortization........... 28,533
------------
Property and equipment, net................................ $362,874
------------
Depreciation and amortization expense was $28,533 for the period from June 28,
1999 (inception) to December 31, 1999.
Capitalized Software Development Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs.
The Company has capitalized certain incurred software development costs in the
amount of approximately $1.6 million in connection with its online services. The
majority of these costs were in connection with purchasing the perpetual, non-
revocable license to the software technology used for the e-commerce platform
from Netgateway upon which the Company has built its e-commerce portal. As part
of this transaction, the Company no longer has any future obligations to
Netgateway. The costs associated with research and development of such
technology were expensed as incurred. Software development costs incurred
subsequent to establishing technological feasibility have been capitalized.
Technological feasibility is established upon the completion of a detailed
program design (in the absence of any high risk issues or uncertainties).
Capitalized software costs are being amortized over a period of two years.
Maintenance costs incurred in connection with the software are being expensed as
incurred.
Stockholders' Equity
On February 15, 2000, the Company completed its initial public offering
("IPO") of 4,000,000 shares of its common stock at $8.00 per share. Net proceeds
to the Company aggregated approximately $27.8 million (net of underwriters'
commission and offering expenses of $4.2 million). Additionally, on March 29,
F-10
<PAGE>
2000, the over-allotment option on the common stock offering was exercised in
full, resulting in an additional issuance of 600,000 shares of common stock with
net proceeds of approximately $4.3 million to the Company (net of underwriters'
commission and offering expenses of $500 thousand) which was received on April
3, 2000. This amount is reflected on the balance sheet as finance proceeds
receivable.
The Company used approximately $1.41 million of the net proceeds of the IPO to
repay in full the principal and interest due on a loan made by Enviro-Clean of
America Inc., a principal stockholder of the Company.
The Company issued warrants to purchase up to 400,000 shares of common stock
to the underwriter representatives in connection with the IPO.
The Company granted 1,000,000 options to officers of the Company in connection
with their initial employment by the Company.
1999 Performance Equity Plan
The Company has a Performance Equity Plan that authorizes the granting of up
to 2,000,000 shares of common stock to key employees, officers, directors and
consultants. Awards consist of stock options (both nonqualified options and
options intended to qualify as "Incentive" stock options under Section 422 of
the Internal Revenue Code of 1986, as amended), registered stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards,
as described in the plan. As of March 31, 2000, 832,500 options were granted
under the plan to employees and directors.
F-11
<PAGE>
Loss Per Share
Basic loss per share is based only on the weighted average number of common
shares outstanding for the period. Diluted loss per share is similar to basic
loss per share except that the weighted average number of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if dilutive potential common shares, such as options
and warrants, had been issued. Dilutive potential common shares are excluded
from the computation if their effect is antidilutive.
Basic and diluted loss per share are the same due to the options being
antidilutive in accordance with SFAS 128.
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Under the intrinsic value based
method, compensation cost is the excess, if any, of the fair market value of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock.
During the three months ended March 31, 2000, the Company charged to
operations $458,462 relating to officers' options granted in connection with the
IPO, and vested in the first quarter of the year.
Income Taxes
The company has not generated any taxable income to date and therefore has not
paid any federal or state income taxes since inception. The Company has provided
a full valuation allowance on the deferred tax asset created from these taxable
losses due to the uncertainty of future income streams and limitation provisions
created by the completion of the IPO.
Item 2. Management's Discussions and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to our
future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained
under Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations.
F-12
<PAGE>
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. These factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations;
changes in technology and the development of new technology; foreign currency
fluctuations; reductions in sales to any significant customers; changes in sales
mix; industry capacity; competition; disruptions of established supply channels;
manufacturing capacity constraints; and the availability, terms and deployment
of capital. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected.
We do not undertake to update our forward-looking statements to reflect future
events or circumstances.
Overview
b2bstores.com Inc. is a development stage company. We were formed in June 1999
and assembled a core set of operating assets during the remainder of 1999. These
assets include a management team, a technology infrastrucuture, financing and
our basic web site, www.b2bstores.com, which first became available in September
1999. In February 2000, we completed our Initial Public Offering ("IPO").
During the first quarter of 2000, we have continued to assemble additional
core assets, including the acquisition of a perpetual, nonrevocable license to
the software technology used for our core business. This technology will also
allow us to provide vendor management and other e-commerce services to other
businesses that seek to utilize the Internet for their inventory management
requirements and business products purchasing and selling. We have also expanded
the number of our employees from 23 to 45. This growth results from its
expansion of its development team in preparation of its launching site and its
expansion of its sales and marketing team hired to add new product vendors,
service vendors and content to the site. Our technology group has also increased
as it develops the electronic connectivity between the b2bstores.com Inc. portal
and our numerous vendors. All of this activity has resulted in increased
operating expenses as discussed below.
In addition to the continuing assembly of additional core assets, we engaged
in the following activities, which are currently ongoing during the first
quarter of 2000:
Expansion of our business product categories. We regularly seek to expand our
product categories by establishing relationships with additional fulfillment
agents. These fulfillment agents are vendors that actually supply the products
purchased by our customers through our web site. The terms of any agreement
governing a relationship with a new fulfillment agent must be negotiated and
will vary on a case-by-case basis.
Implementation of auction functions. We are currently integrating the
necessary technology to provide online auctions at our web site. The technology
we are using for the auction functions is being developed internally.
F-13
<PAGE>
Introduction and expansion of business referrals. We negotiate with providers
of financial services, accounting services, legal services and other services to
serve as service providers to customers at our web site. We are spending
significant time in connection with our efforts to assemble a group of service
providers willing to utilize our web site for the promotion of their services.
Provision of business information and content. We provide business information
and other content to our customers, including:
. computer product reviews,
. news,
. stock market information, and
. downloadable driving directions.
This information is supplied by third-party content providers. We are required
to pay a fee for the content we make available through our web site. We intend
to expand our roster of content providers and the information available through
our web site. The arrangement we have with each content provider varies on a
case-by-case basis.
Sources of Revenue
We believe that we will derive our revenues from the following sources:
. product sales;
. service referral fees and commissions;
. advertising;
. "click through" fees; and
. vendor management fees.
We will recognize revenues according to:
. the type of product or service being sold,
. the structure of the contract negotiated with the individual vendor, and
. the substantive nature of the risks of ownership we incur in connection
with the sale and shipment of the product.
F-14
<PAGE>
For product sales involving substantive risk of ownership, we will generally
recognize revenue at the gross transaction value. For service and referral sales
where risk of loss is minimal, we will generally recognize revenue on a net fee
or commission basis. For auction sales where we incur risk of loss in the
transactions, we will recognize gross revenues. For auction sales where we act
as auctioneer and have little risk of loss, we will recognize revenue on a net
basis or transaction fee basis.
Seasonality
Although we have a limited operating history, we expect to experience seasonal
variations in our e-commerce and advertising revenue, especially during the
summer period, when user traffic levels are expected to decline. Our e-commerce
revenue may be affected by stronger consumer goods sales during the fourth
calendar quarter of the year. In addition, our advertising revenue may
experience the same seasonal and cyclical patterns as those in traditional
media, where advertising increases ahead of the year-end holiday buying season.
Results of Operations
Three Months ended March 31, 2000
We incurred a net loss of approximately $1.7 million for the three month
period ended March 31, 2000 and a $2.9 million loss for the period from June 28,
1999 (inception) to December 31, 1999. At March 31, 2000 we had an accumulated
deficit of $4.7 million. The net losses and accumulated deficit resulted from
our lack of substantial revenues, while incurring development and operational
costs and stock based compensation expense. Because of our expansion plans, we
expect to incur significant operating losses for the foreseeable future.
Although we are expecting revenue growth in current periods, such growth may not
be substantial and, therefore, these current periods should not be considered
indicative of future performance. We may never achieve significant revenues or
profitability or if we achieve significant revenues, it may not be sustained.
Revenues. Revenues were nominal for the three months ending March 31, 2000. We
continue to operate as a development stage company. The Company was established
on June 29, 1999 and, therefore, comparative amounts to the period ended
December 31, 1999 have not been presented.
Cost of Sales. Cost of sales includes the costs of the products or service
sold, which was approximately $2,400 for the three-month period and overhead
costs for the three-month period of approximately $113,000, necessary to support
and keep the site functioning properly for all 24 hour periods.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and related costs for our officers, management,
administrative, finance, legal, and human resources department, as well as
support services and professional service fees. The general and administrative
expenses of approximately $622,000 are mainly comprised of salaries, bonuses and
related costs of $233,000, facility management costs of $94,000, professional
services of $97,000, directors' and officers' insurance costs of $40,000 and
travel and entertainment costs of $92,000.
F-15
<PAGE>
Sales and marketing expenses. Sales and marketing expenses consist primarily
of salaries for sales and marketing personnel, advertising, trade shows, and
travel and entertainment costs, including costs of attending trade shows. The
sales and marketing expense of approximately $380,000 for the three months ended
March 31, 2000 was mainly comprised of salaries and related costs of
$253,000,travel and entertainment expenses of $5,000, and advertising and
marketing costs of $73,000. We expect these expenses to continue to grow
significantly, as we pursue an aggressive growth strategy.
Technology expenses. Technology expenses consist primarily of the management
of the hardware and software systems necessary to operate an internet sales
portal. Portal issues include the electronic communications between the
company's web-based systems and the numerous product and service vendors
represented on the site. The technology expense of approximately $197,000 for
the three months ended March 31, 2000 were mainly comprised of salaries and
related costs of $136,000, and subscription fees of $40,000. We expect these
expenses to continue to grow as business expands.
Fulfillment management expenses. Fulfillment management expenses consist of
all customer service issues relating to the "customer experience" in shopping at
the b2b portal and the management of all vendor fulfillment issues (delivery of
the products to the customers). The fulfillment management expense of
approximately $92,000 for the three months ended March 31, 2000 was mainly
comprised of salaries and related costs of $54,000, service fees of $23,000 and
training costs of $13,000. We expect these expenses will continue to grow as we
expand our business.
Stock-based compensation expense. Stock-based compensation expense of $458,462
consists of expense relating to officers options vested in connection with the
IPO. There are additional options that were granted in connection with the IPO
that will vest over the next two years and create compensation charges of
approximately $822,000.
Interest Income earned on our cash management account for the three months
ended was $145,000.
As a result of all of the above, the net loss to common shareholders for the
three months ended March 31, 2000 was $1.7 million. On a basic and diluted per
share basis, the net loss to common shareholders for the three months ended
March 31, 2000 was $ (.28) per share.
Liquidity and Capital Resources
For the three months ended March 31, 2000, cash provided by financing
activities of $27 million was primarily due to our initial public offering of
4,000,000 shares of its common stock at $8.00 per share. Thereafter, on March
29, 2000, we completed the sale of an additional 600,000 shares pursuant to the
over-allotment option granted to the underwriters in the IPO. Net proceeds to us
from the IPO (and the over-allotment option) aggregated approximately $32.1
F-16
<PAGE>
million (net of underwriters' commission and offering expenses of approximately
$4.7 million) of which $4.3 million relating to the over-allotment was received
on April 3, 2000.
In connection with the IPO, bonuses in the aggregate amount of $105,000 were
paid.
We used approximately $1.41 million of the net proceeds of the IPO to repay in
full the principal and interest due on a loan made by Enviro-Clean of America
Inc., a principal stockholder of the Company.
As of March 31, 2000, our primary source of liquidity consisted of cash and
cash equivalents derived from the IPO. At March 31, 2000, the Company had cash
and cash equivalents of $24,830,759. Giving effect to the over-allotment, we had
Finance Proceeds receivable of $4.3 million, which was received on April 3,
2000.
For the three months ended March 31, 2000, cash used in operating activities
was $858,000. Cash used in operating activities consisted mostly of net
operating losses and increases in accounts payable and accrued expenses. We
expect these expenses to grow as we transition from a development stage company.
Net cash used in investing activities was $1.7 million for the three months
ended March 31, 2000. Our investing activities were for capital expenditures
which mainly comprised of purchasing the perpetual non-revocable license to the
software technology used for the e-commerce platform from Netgateway which the
Company has built its e-commerce portal on. As a part of this transaction, the
Company no longer has any future obligations to Netgateway.
Risks relating to our financial condition
In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects:
Because we have a very short operating history, there is no track record to
indicate that we will successfully manage our business or achieve profitability.
We may not be able to grow our business as planned or ever become a profitable
business. We began our commercial operations in September 1999 and have a
limited operating history upon which you may evaluate us. Our business prospects
are subject to all the risks, expenses and uncertainties encountered by any new
company. We also face the risks inherent in operating in the rapidly evolving
markets for Internet products and services.
Because our operating expenses and capital expenditures will outpace our
revenues, we will incur significant losses in the near term.
We expect to incur significant operating expenses and make relatively high
capital expenditures as we develop our Internet business. These operating
expenses and capital expenditures will initially outpace revenues and result in
F-17
<PAGE>
significant losses in the near term. We have generated only nominal revenues for
three months ended March 31, 2000 and have incurred a net loss of $1.7 million,
and since inception have incurred a net loss of $4.6 million.
Because our executive officers lack significant management experience, we may
not be able to effectively manage our growth.
The growth of our business may place a significant strain on our management
team and we may not be able to effectively manage our growth. None of our
executive officers has significant experience in managing a company or
overseeing a company's rapid growth.
PART II OTHER INFORMATION
Item 2(c). Unregistered Securities
During the first quarter of 2000, our board approved or ratified option grants
to the following seven directors and thirty employees. These options allow for
the purchase up to an aggregate of 832,500 stock options under our 1999
Performance Equity Plan:
No. of Shares
Director Subject to Options Exercise Price
----------------------------------------------------------
Ellett, Philip 50,000 $11.50
Godfrey, Ralph 50,000 $11.50
Higgins, John 50,000 $11.50
Hileman, Garrick 50,000 $11.50
Raubvogel, Jay 50,000 $11.50
Strauss, William 50,000 $11.50
Walke, David 50,000 $11.50
No. of Shares
Employee Subject to Options Exercise Price
----------------------------------------------------------
Anderson, Marsten G. 10,000 $ 8.00
Chu, Michelle 10,000 $11.50
Conley, Michael 25,000 $11.50
Crookston, Duncan 10,000 $11.50
DeFranco, Robert 25,000 $11.50
Ferguson, Ron 20,000 $ 8.00
Gardiner, Mark 5,000 $ 8.00
Goodsell, Laura 50,000 $ 8.00
Hoge, Thomas 25,000 $ 8.00
Jarrard, Lee 10,000 $ 8.00
Leimer, Shawna 25,000 $ 8.00
Mannarino, Amy 10,000 $11.50
Maybry, Terri 18,000 $11.50
F-18
<PAGE>
No. of Shares
Employee Subject to Options Exercise Price
-------------------------------------------------------------
McClaugherty, Catherine 5,000 $ 8.00
Metzler, Timothy A. 40,000 $ 8.00
Morris, Robert 5,000 $ 8.00
Mosio, Eva 10,000 $11.50
Mourer, Darrin M. 5,000 $ 8.00
Muramoto, David 3,000 $11.50
Olea, David 16,500 $ 8.00
Price, Anne 10,000 $ 8.00
Privett, Brianna M. 10,000 $ 8.00
Schneider, Darrin D. 25,000 $ 8.00
Summers, Chris 5,000 $ 8.00
Sussex, Eileen 25,000 $11.50
Valera, Vanessa 15,000 $11.50
Van Doren, La Mar 20,000 $11.50
Weber, Libby L. 25,000 $ 8.00
Wharton, Kate 10,000 $ 8.00
Williams, Eartha Kitt 10,000 $ 8.00
Item 2(d). Use of Proceeds
On February 14, 2000, the Company's Registration Statement on Form SB-2MEF
covering the Offering of 4,000,000 shares of the Company's Common Stock,
Commission file number 333-30376 was declared effective.
The net proceeds of the offering to the Company (after deducting expenses)
were $27,815,090. On March 29, 2000, the over-allotment option was also
exercised and declared effective, resulting in the proceeds (after deducting
expenses) of $4,320,000, which were received upon settlement on April 3, 2000.
From the effective date of the Registration Statement to March 31, 2000, the net
proceeds have been used for the following purposes:
<TABLE>
<S> <C>
Repayment of indebtedness....................................................... $ 1,422,676
Development costs............................................................... 1,000,000
Purchases of machinery and equipment............................................ 100,000
Working capital................................................................. 461,655
Other purposes (for which $100,00 has been used), including:
investments, including commercial
paper, short-term municipal securities, and
money markets funds....................................................... 24,830,759
-----------
$27,815,090
</TABLE>
F-19
<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.
Date: May 12, 2000 b2bstores.com Inc.
(Registrant)
By: /s/ Woo Jin Kim
-------------------------
Woo Jin Kim
Chief Executive Officer
By: /s/ Mark Voorhis
-------------------------
Mark Voorhis
Chief Financial Officer
F-20
<PAGE>
ANNEX G
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934:
For the Quarterly Period ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to ________________
Commission File number 1-14798
b2bstores.com Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3500746
------------------ ------------------
(State or other jurisdiction of I.R.S. Employer ID No.
incorporation or organization)
249 East Ocean Boulevard
Suite 620
Long Beach, California 90802
------------------------------------
(Address of principal executive offices)
(562) 491-7180
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 ___
---
As of August 11, 2000, 8,621,643 shares of the Issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES ___ NO X
---
G-1
<PAGE>
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Information
Condensed Financial Statements: Page
Balance Sheet as of June 30, 2000 (unaudited) 3
Unaudited Statements of Loss for the three and
six months ended June 30, 2000, the period from June 28, 1999 (inception)
through June 30, 1999 and the period from inception (June 28, 1999)
through June 30, 2000 4
Statements of Stockholders' Equity (Deficit) audited for the period
from inception (June 28, 1999) through December 31, 1999 and unaudited
from the period January 1, 2000 through June 30, 2000 (unaudited) 5
Unaudited Statements of Cash Flows for the period from inception (June 28,
1999) through June 30, 2000, the six months ending June 30, 2000, and the
period from inception (June 28, 1999) through June 30, 1999 (unaudited) 6
Notes to unaudited condensed financial statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
PART II OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults upon senior securities 20
Item 4: Submissions of matters to a vote of security holders 20
Item 5: Other information 20
Item 6: Exhibits and reports on form 8-K 21
Signatures 22
</TABLE>
G-2
<PAGE>
b2bstores.com Inc.
Balance Sheet
(condensed and unaudited)
<TABLE>
<CAPTION>
June 30, 2000
-------------
ASSETS
<S> <C>
Current:
Cash and cash equivalents $ 23,426,032
Marketable Securities 3,250,000
Prepaid Expenses and other current assets 294,480
---------------
Total Current Assets 26,970,512
Deposits 51,813
Property and equipment, net 2,358,388
---------------
$ 29,380,713
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 313,003
Accrued bonuses 108,000
Other current liabilities 9,328
Deferred revenue 1,736
---------------
Total Current Liabilities 432,067
---------------
Stockholders' equity
Preferred stock, $.01 par value - shares authorized 5,000,000; none -
Common stock, $.01 par value - shares authorized 25,000,000; issued
8,621,643 86,216
Additional Paid-in Capital 35,474,370
Deficit accumulated during the development stage (6,611,940)
---------------
Total stockholders' equity 28,948,646
---------------
$ 29,380,713
===============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
G-3
<PAGE>
b2bstores.com Inc.
Statements of Loss
(condensed and unaudited)
<TABLE>
<CAPTION>
Cumulative, period from Three months ended Six months ended
June 28, 1999 June 30, and period from June 30,and period from
(Inception) inception(June 28, 1999) inception (June 28, 1999)
through June 30, 1999 through June 30, 1999
to June 30, 2000 2000 1999 2000 1999
------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 74,207 $ 67,824 - $ 72,016 -
Cost of Sales 570,432 378,559 - 509,924 -
----------- ----------- ---------- ----------- --------
Gross Loss (496,225) (310,735) - (437,908) -
Operating Expenses
General and administrative 1,656,089 707,911 - 1,330,334 -
Sales and marketing 1,311,984 748,590 - 1,113,014 -
Technology 460,028 160,527 - 357,132 -
Fulfillment Management 319,976 179,577 - 271,740 -
Start-up Costs 55,036 - - - -
Stock-based compensation relating to general and 216,430 - - - -
administrative activities
Stock-based compensation relating to start-up
activities $ 2,636,886 276,924 - 735,386 -
Total operating expenses 6,656,429 2,073,529 - 3,807,606 -
Loss from operations (7,152,654) (2,384,264) - (4,245,514) -
Interest Income (expense) $ 540,714 418,570 - 563,811 -
Net loss $(6,611,940) $(1,965,694) - $(3,681,703) -
Loss per share (basic and diluted) $(0.23) - $(0.50) -
Weighted average common shares outstanding 8,621,643 - 7,342,522 -
</TABLE>
See accompanying notes to financial statements.
G-4
<PAGE>
Statement of Stockholders' Equity (Deficit)
Period from June 28, 1999 (inception) to June 30, 2000
<TABLE>
<CAPTION>
Period from June 28, 1999 (inception) to December 31, 1999 (audited)
Deficit
Accumulated
Additional during the Total
Common Stock paid-in Development stockholders'
Shares Amount capital Stage equity (deficit)
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
Founding and other stockholders: June 29, 1999 3,666,667 $ 36,667 $ - $ - $ 36,667
Issuance of common stock to investors: August 23, 1999 333,333 3,333 2,497,500 - 2,500,833
Issuance of common stock to directors
and consultants: September 15, 1999 21,643 216 216,214 - 216,430
Net loss for the period - - - (2,930,237) (2,930,237)
Balance December 31, 1999 4,021,643 $ 40,216 $ 2,713,714 $(2,930,237) $ (176,307)
Period from January 1 to June 30, 2000 (unaudited)
Issuance of common stock in connection with
initial public offering, net February 15, 2000 4,000,000 40,000 27,775,090 - 27,815,090
Issuance of common stock in connection with
overallotment, net, March 29, 2000 600,000 6,000 4,314,000 - 4,320,000
Stock based compensation from vesting of
options to officers - - 735,386 - 735,386
Additional expenses in connection with initial
public offering - - (63,820) - (63,820)
Net loss for the period - - - (3,681,703) (3,681,703)
Balance June 30, 2000 (unaudited) 8,621,643 $ 86,216 $35,474,370 $(6,611,940) $28,948,646
</TABLE>
See accompanying notes to financial statements.
G-5
<PAGE>
b2bstores.com Inc.
STATEMENT OF CASH FLOWS
(Condensed and Unaudited)
<TABLE>
<CAPTION>
Cumulative, period
from June 28,1999 Six months Period from June 28, 1999
(inception) to ended (inception) through
June 30, 2000 June 30, 2000 June 30, 1999
--------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,611,940) $(3,681,703) -
--------------------------------------------------------------
Adjustments to reconcile net Loss to net cash used in
operating activities:
Expense recognized in connection with issuance of common stock for
relating to start-up and general and administrative activities 2,853,316 735,386 -
Depreciation and amortization 347,424 318,891 -
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (294,480) (255,565) -
Increase in deposits (51,813) (31,017) -
Increase in deferred revenue 1,736 749 -
Increase in accrued bonuses 108,000 - -
Increase in accrued expenses 9,328 23,392 -
Increase in accounts payable 313,003 240,874 -
--------------------------------------------------------------
Total adjustments 3,286,514 1,032,710 -
--------------------------------------------------------------
Net cash, used in operating activities (3,325,426) (2,648,993) -
--------------------------------------------------------------
Cash flows from investing activities:
Marketable Securities (3,250,000) (3,250,000) -
Capital expenditures (2,705,812) (2,314,405) -
--------------------------------------------------------------
Net cash used in investing activities (5,955,812) (5,564,405) -
Cash flows from financing activities:
Loans from principal stockholder 1,399,836 575,000 -
Repayment of loans from principal stockholder (1,399,836) (1,399,836) -
Proceeds from issuance of common stock 33,027,637 32,391,637 36,667
--------------------------------------------------------------
Net cash provided by financing activities 32,707,270 31,566,801 36,667
--------------------------------------------------------------
Net Increase in Cash 23,426,032 23,353,403 36,667
Cash and cash equivalents, beginning of period - 72,629 -
Cash and cash equivalents, end of period $23,426,032 $23,426,032 $36,667
==============================================================
Non-cash items:
Deferred offering costs $ - $ 320,367 -
Supplemental cash flow information:
Interest paid on loans from principal stockholder $ 22,838 $ 22,838 -
</TABLE>
See accompanying notes to financial statements
G-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Business
b2bstores.com Inc. ("b2bstores" or the "Company"), a development stage
enterprise, was incorporated on June 28, 1999 under the laws of the State of
Delaware. The Company is a comprehensive business-to-business Internet
destination for organizations of all sizes, delivers quality business-related
products and services combined with information resources through an,
integrated, user-friendly web site. In addition, b2bstores.com offers its
Integrated Merchandising Solution (IMS), which provides complete e-commerce
solutions for businesses. IMS creates a marketplace featuring the products,
services, and content selected by a business under a fully branded, co-branded,
or private label offering.
The Company's web site moves business-to-business transactions and other
business operations away from traditional modes to the Internet. This web site
is designed as a community mall, a place where business customers can visit a
"virtual storefront" or product category of their choice, seek out services from
professionals, research issues important to their business and meet and
communicate with customers, suppliers, colleagues and competitors. The Company
is developing its web site to make it user friendly and to create an experience
that is highly useful, efficient, enjoyable and informative for the business
customer.
Basis of Presentation
The financial statements 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 such rules and
regulations, although the Company's management believe that the disclosures are
adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained herein. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the period from June 28, 1999 (Inception) to December 31, 1999
included in the Company's Registration Statement on Form SB-2MEF (No. 333-30376)
which was declared effective by the Securities and Exchange Commission on
February 14, 2000. The Company follows the same accounting policies in the
preparation of its interim reports.
Results of operations for the interim periods may not be indicative of annual
results.
G-7
<PAGE>
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period's presentation.
Cash and Cash Equivalents
The Company invests certain of its excess cash in debt instruments of the US
Government, municipalities and their agencies, money market accounts, and of
high quality corporate issuers and 99% of the balances are held at one broker.
All highly liquid instruments with an original maturity of three months or less
are considered cash equivalents.
Marketable Securities
The Company considers all highly liquid investments with original maturities
of 90 days or less to be cash equivalents; those with an original maturity
greater than 90 days are considered marketable securities. At June 30, 2000,
short-term investments consist of investments in high-quality corporate issuers
and have been classified as held to maturity. Unrealized gains and losses for
the period ending June 30, 2000 were not significant. All short-term
investments and 99% of cash equivalents are held at one broker. Accordingly,
the Company is subject to credit risk if the broker is unable to repay the
balance in the account or deliver the Company's securities. The Company manages
this credit risk by only investing in high-quality money market instruments,
municipal securities, and corporate issuers. These funds are insured by
Travelers Insurance Group.
Revenue Recognition
To date, the Company has generated nominal revenues from product sales.
b2bstores anticipates that its revenue will primarily be comprised of sales of
merchandise either purchased by b2bstores or placed on consignment with
b2bstores, commissions, advertising and other revenue.
The Company will recognize revenues according to:
. the type of product or service being sold,
. the structure of the contract negotiated with the individual vendor,
and
. the substantive nature of the risks of ownership we incur in connection
with the sale and shipment of the product.
For product sales involving substantive risk of ownership, the Company will
generally recognize revenue at the gross transaction value. For service and
referral sales where risk of loss is minimal, the Company will generally
recognize revenue on a
G-8
<PAGE>
net fee or commission basis. For auction sales where the Company incurs risk of
loss in the transactions, it will recognize gross revenues. For auction sales
where the Company acts as auctioneer and has little risk of loss, it will
recognize revenue on a net basis or transaction fee basis.
Currently, policy setting groups of the Emerging Issues Task Force and the
Financial Accounting Standards Board are reviewing the guidelines under which
revenue is recognized on a gross basis versus a net basis. As the Company
currently recognizes certain of its revenue on a gross basis, there is a risk
that future guidelines may require the Company to change, retroactively, its
revenue recognition policy. This could cause the Company to report markedly
lower revenues than currently anticipated. Although such a change would cause
the Company to report markedly lower revenues and costs of products, it would
not change the Company's reporting with respect to other expenses, net revenue
or earnings before and after tax.
The Company will allow customers to return merchandise in certain
circumstances; accordingly, the Company will not recognize revenue from the sale
of those products covered by the return policy until the return policy period
has expired or the customer's right of return has expired. The Company will
recognize the sales amount as deferred revenue upon verification of the credit
card transaction authorization and shipment of the merchandise until such time
that the Company is able to estimate returns.
Advertising Revenue
The Company will also earn revenue from the sale of advertising on its web
site. These revenues will be recognized as the advertisement is displayed.
Property and Equipment
Property and equipment, net consists of the following:
June 30, 2000
-------------
Capitalized software development costs:
Purchased software $1,120,011
Internally developed software 743,238
Computer equipment 795,943
Furniture and equipment 43,220
Leasehold improvements 3,400
----------
2,705,812
Less: Accumulated depreciation and amortization 347,424
----------
Property and equipment $2,358,388
----------
Depreciation expense for the three and six months ended June 30, 2000 was
$272,997 and $318,891 respectively.
G-9
<PAGE>
Capitalized Software Development Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs.
The Company has capitalized certain software development costs in the amount
of approximately $ 1.9 million in connection with its online services. The
majority of these costs were in connection with purchasing the perpetual, non-
revocable license to the software technology used for the e-commerce platform
from Netgateway upon which the Company has built its e-commerce portal. As part
of this transaction, the Company no longer has any future obligations to
Netgateway. The costs associated with research and development of such
technology were expensed as incurred. Software development costs incurred
subsequent to establishing technological feasibility have been capitalized.
Technological feasibility is established upon the completion of a detailed
program design (in the absence of any high risk issues or uncertainties).
Capitalized software costs are being amortized over a period of two years.
Maintenance costs incurred in connection with the software are being expensed as
incurred.
Stockholders' Equity
On February 15, 2000, the Company completed its initial public offering
("IPO") of 4,000,000 shares of its common stock at $8.00 per share. Net
proceeds to the Company aggregated approximately $27.8 million (net of
underwriters' commission and offering expenses of $4.2 million). Additionally,
on March 29, 2000, the over-allotment option on the common stock offering was
exercised in full, resulting in an additional issuance of 600,000 shares of
common stock with net proceeds of approximately $4.3 million to the Company (net
of underwriters' commission and offering expenses of $500,000.
The Company used approximately $1.4 million of the net proceeds of the IPO to
repay in full the principal and interest due on a loan made by Enviro-Clean of
America Inc., a principal stockholder of the Company.
The Company issued warrants to purchase up to 400,000 shares of common stock
to the underwriter representatives in connection with the IPO.
The Company granted 1,000,000 options to officers of the Company in connection
with their initial employment by the Company.
Subsequent to June 30, 2000, there were 71,790 performance options granted to
employees relating to the second quarter bonuses.
G-10
<PAGE>
1999 Performance Equity Plan
The Company has a Performance Equity Plan that authorizes the granting of up
to 2,000,000 shares of common stock to key employees, officers, directors and
consultants. Awards consist of stock options (both nonqualified options and
options intended to qualify as "Incentive" stock options under Section 422 of
the Internal Revenue Code of 1986, as amended), registered stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards,
as described in the plan. As of June 30, 2000, 1,209,500 options were granted
under the plan to employees and directors.
Loss Per Share
Basic loss per share is based only on the weighted average number of common
shares outstanding for the period. Diluted loss per share is similar to basic
loss per share except that the weighted average number of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if dilutive potential common shares, such as options
and warrants, had been issued. Dilutive potential common shares are excluded
from the computation if their effect is antidilutive.
Basic and diluted loss per share are the same due to the options being
antidilutive in accordance with SFAS 128.
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Under the intrinsic value based
method, compensation cost is the excess, if any, of the fair market value of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock.
During the six months ended June 30, 2000, the Company charged to operations
approximately $735,000 relating to officers' options granted in connection with
the IPO, and vested in the first two quarters of the year.
Income Taxes
The company has not generated any taxable income to date and therefore has not
paid any federal or state income taxes since inception. The Company has
provided a full valuation allowance on the deferred tax asset created from these
taxable losses due to the uncertainty of future income streams and limitation
provisions created by the completion of the IPO.
G-11
<PAGE>
Item 2. Management's Discussions and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to our
future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained
under Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. These factors include, but are not limited to, the following:
changes in general economic and business conditions; changes in current pricing
levels; changes in political, social and economic conditions and local
regulations; changes in technology and the development of new technology;
foreign currency fluctuations; reductions in sales to any significant customers;
changes in sales mix; industry capacity; competition; disruptions of established
supply channels; manufacturing capacity constraints; and the availability, terms
and deployment of capital. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, our actual results
may vary materially from those expected, estimated or projected.
Due to changes in the market place, the Company has re-evaluated its sales and
marketing strategy. The original strategy of creating a branded site through
the use of advertising mediums to create market awareness of b2bstores.com name
has been altered in response to changing market conditions. The new strategy
which still focuses on driving the purchases through increasing traffic to the
site, will do so through strategic partnership with our existing customers. We
will not be spending the amount of money for marketing and advertising as it was
originally anticipated in our registration statement due to the change in the
above strategy.
In June, upon authorization of the Board of Directors, the Company hired the
investment banking firm of Houlihan Lokey Howard & Zukin to review strategic
alternatives available to the company and its shareholders. Among the
alternatives that Houlihan Lokey will research will be acquisitions, mergers and
other alliances that will help the company execute its growth strategy.
We do not undertake to update our forward-looking statements to reflect future
events or circumstances.
G-12
<PAGE>
Overview
b2bstores.com Inc. is a development stage company which was formed in June
1999 and assembled a core set of operating assets during the remainder of 1999.
These assets include a management team, a technology infrastrucuture, financing
and our basic web site, www.b2bstores.com, which first became available in
September 1999. In February 2000, we completed our Initial Public Offering
("IPO").
Since the introduction of our site, our web site has provided our customers
with the ability to purchase online business products and supplies in a growing
number of categories. We will continue doing business on our site, along with
expanding our vendor management services of our business model. We have more
than enough cash to fund operations for next twelve months. Currently we are
not expecting any major capital expenditures. We will need to add more
employees as support as our transaction grows on our web site and as our vendor
management services grows.
In a letter to the Board of Directors dated July 10, 2000, Woo Jin Kim, Chief
Executive Officer of the Company, submitted notice of his intent to terminate
his employment. The Board accepted this resignation of employment and notice of
the Board's decision was delivered to Mr. Kim. Chief Financial Officer Mark
Voorhis has replaced Mr. Kim on an interim basis. Subsequent to his resignation
of employment, Mr. Kim's resignation from the Board of Directors was deemed
effective. In addition, on July 12, 2000, Garrick Hileman submitted a letter of
resignation from the Board of Directors, which was accepted by the Board.
During the first two quarters of 2000, we have continued to assemble
additional core assets, including the acquisition of a perpetual, nonrecoverable
license to the software technology used for our core business. This technology
will also allow us to provide vendor management and other e-commerce services to
other businesses that seek to utilize the Internet for their inventory
management requirements and business products purchasing and selling. We have
also expanded the number of our employees from 23 to 43. This growth results
from our expansion of our development team in preparation of launching our
site and expansion of our sales and marketing team hired to add new product
vendors, service vendors and content to the site. Our technology group has also
increased as it develops the electronic connectivity between the b2bstores.com
Inc. portal and our numerous vendors. All of this activity has resulted in
increased operating expenses as discussed below.
In addition to the continuing assembly of additional core assets, we have
engaged in the following activities, which are currently ongoing during the
second quarter of 2000:
Vendor Management Model We have expanded the Vendor Management services
-----------------------
portion of our business model. Vendor Management is a concept where b2b
stores.com repackages a portion or all of it products, services and content
catalog under a fully branded, co-branded or "private labeled" offering for our
partners and clients. Offering our products, services and content in this
manner allows b2bstores.com to leverage ourselves into an indirect channel sales
model, creating the
G-13
<PAGE>
ability to address a much larger audience of potential buyers. We are able to do
this by offering this additional e-commerce functionality to our partner's
websites, giving them the ability to add value to their constituents. This
allows b2bstores.com to access new markets and potential buyer populations
through these Vendor Management partnerships.
Expansion of our business product categories. We regularly seek to expand our
--------------------------------------------
product categories by establishing relationships with additional fulfillment
agents. These fulfillment agents are vendors that actually supply the products
purchased by our customers through our web site. The terms of any agreement
governing a relationship with a new fulfillment agent must be negotiated and
will vary on a case-by-case basis.
Introduction and expansion of business referrals. We negotiate with providers
------------------------------------------------
of financial services, accounting services, legal services and other services to
serve as service providers to customers at our web site. We are spending time in
connection with our efforts to assemble a group of service providers willing to
utilize our web site for the promotion of their services.
Provision of business information and content. We provide business
---------------------------------------------
information and other content to our customers, including:
. computer product reviews,
. news,
. stock market information, and
. downloadable driving directions.
This information is supplied by third-party content providers. We are required
to pay a fee for the content we make available through our web site. We intend
to expand our roster of content providers and the information available through
our web site. The arrangement we have with each content provider varies on a
case-by-case basis.
Sources of Revenue
We believe that we will derive our revenues from the following sources:
. product sales;
. service referral fees and commissions;
. advertising;
. "click through" fees; and
G-14
<PAGE>
. vendor management fees. We offer Integrated Merchandising Solution (IMS),
which provides complete e-commerce solutions for businesses. IMS creates a
market place featuring the products, services, and content selected by a
business under a fully branded, co-branded, or private label offering. As
of June 30, 2000 we have signed 17 IMS contracts through this IMS partner
program.
We will recognize revenues according to:
. the type of product or service being sold,
. the structure of the contract negotiated with the individual vendor, and
. the substantive nature of the risks of ownership we incur in connection
with the sale and shipment of the product.
For product sales involving substantive risk of ownership, we will generally
recognize revenue at the gross transaction value. For service and referral
sales where risk of loss is minimal, we will generally recognize revenue on a
net fee or commission basis. For auction sales where we incur risk of loss in
the transactions, we will recognize gross revenues. For auction sales where we
act as auctioneer and have little risk of loss, we will recognize revenue on a
net basis or transaction fee basis. To date, our current revenues are derived
from product sales.
Seasonality
Although we have a limited operating history, we expect to experience seasonal
variations in our e-commerce and advertising revenue, especially during the
summer period, when user traffic levels are expected to decline. Our e- commerce
revenue may be affected by stronger consumer goods sales during the fourth
calendar quarter of the year. In addition, our advertising revenue may
experience the same seasonal and cyclical patterns as those in traditional
media, where advertising increases ahead of the year-end holiday buying season.
Results of Operations
We incurred a net loss of approximately $2.0 million for the three month and
$3.7 million for the six month period ended June 30, 2000. At June 30, 2000 we
had an accumulated deficit of $6.6 million. The net losses and accumulated
deficit resulted from our lack of substantial revenues, while incurring
development and operational costs and stock based compensation expense. Because
of our expansion plans, we expect to incur significant operating losses for the
foreseeable future. Although we are expecting revenue growth in current
periods, such growth may not be substantial and, therefore, these current
periods should not be considered indicative of future performance. We may never
achieve significant revenues or profitability or if we achieve significant
revenues, it may not be sustained.
G-15
<PAGE>
Revenues. Revenues were nominal for the three months and six months ending
June 30, 2000, totaling approximately $68,000 and $72,000, respectively. We
continue to operate as a development stage company, which means that, although
we have commenced our planned principal operations, we have not obtained
significant revenues as of yet.
Cost of Sales. Cost of sales includes the costs of the products or service
sold, which was approximately $79,000 for the three-month period and $82,000 for
the six-month period ending June 30, 2000 and overhead costs of approximately
$300,000 for the three-month period and $428,000 for the six-month period ending
June 30, 2000, which are necessary to support and keep the site functioning
properly for all 24 hour periods.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and related costs for our officers, management,
administrative, finance, legal, and human resources department, as well as
support services and professional service fees. The general and administrative
expenses for three months ending June 30, 2000 are approximately $708,000. They
are mainly comprised of salaries, bonuses and related costs of $215,000,
facility management costs of $144,000, professional services of $152,000,
directors' and officers' insurance costs of $50,000, travel and entertainment
costs of $60,000, and employee relations' expense of $42,000. The general and
administrative expenses for period ending six months ending June 30, 2000 are
approximately $1,330,000. They are mainly comprised of salaries, bonuses and
related costs of $448,000, facility management costs of $240,000, professional
services of $250,000, directors' and officers' insurance costs of $90,000,
travel and entertainment costs of $174,000, and employee relations' expense of
$43,000.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, advertising, trade
shows, and travel and entertainment costs, including costs of attending trade
shows. The sales and marketing expense of approximately $749,000 for the three
months ended June 30, 2000 was mainly comprised of salaries and related costs of
$319,970, and advertising and marketing costs of $371,000. The sales and
marketing expense of approximately $1,113,000 for the six months ended June 30,
2000 was mainly comprised of salaries and related costs of $494,000, advertising
and marketing costs of $462,000 and employee relations' costs of $121,000. Due
to changes in the market place, the Company has re-evaluated its sales and
marketing strategy. The original strategy of creating a branded site through the
use of advertising mediums to create market awareness of b2bstores.com name has
been altered in response to changing market conditions. The new strategy which
still focuses on driving the purchases through increasing traffic to the site,
will do so through strategic partnership with our existing customers.
G-16
<PAGE>
We will not be spending the amount of money for marketing and advertising as it
was originally anticipated in our registration statement due to the change in
the above strategy.
Technology expenses. Technology expenses consist primarily of the
management of the hardware and software systems necessary to operate an internet
sales portal. Portal issues include the electronic communications between the
company's web-based systems and the numerous product and service vendors
represented on the site. The technology expense of approximately $161,000 for
the three months ended June 30, 2000 were mainly comprised of salaries and
related costs of $83,000, and depreciation expense of $53,000. The technology
expense of approximately $357,000 for the six months ended June 30, 2000 were
mainly comprised of salaries and related costs of $206,000, depreciation expense
of $64,000, and subscription fees of $48,000. We expect these expenses to
continue to grow as business expands.
Fulfillment management expenses. Fulfillment management expenses consist of
all customer service issues relating to the "customer experience" in shopping at
the b2b portal and the management of all vendor fulfillment issues (delivery of
the products to the customers). The fulfillment management expense of
approximately $180,000 for the three months ended June 30, 2000 was mainly
comprised of salaries and related costs of $160,000, and service fees of $9,000.
The fulfillment management expense of approximately $272,000 mainly comprised of
salaries and related costs of $203,000, professional fees of $32,000, employee
relations' cost of $24,000 and service fees of $9,000. We expect these expenses
will continue to grow as we expand our business.
Stock-based compensation expense. Stock-based compensation expense of
approximately $277,000 and $735,000 for three months and six months ended June
30, 2000 respectively consists of expense relating to officers options vested in
connection with the IPO. There are additional options that were granted in
connection with the IPO that will vest over the next two years and create
compensation charges of approximately $865,000.
Interest Income earned on our cash management account for the three months
and six months ended June 30, 2000 was $419,000 and $564,000 respectively.
As a result of all of the above, the net loss to shareholders for the three
months and six months ended June 30, 2000 was $2.0 and $3.7 million
respectively. On a basic and diluted per share basis, the net loss to common
shareholders for the three months and six months ended June 30, 2000 was $ (.23)
and $ (.50) per share respectively.
G-17
<PAGE>
Liquidity and Capital Resources
For the six months ended June 30, 2000, cash provided by financing
activities of $31.6 million was primarily due to our initial public offering of
4,000,000 shares of its common stock at $8.00 per share and sale of an
additional 600,000 shares pursuant to the over-allotment option granted to the
underwriters in the IPO. Net proceeds to us from the IPO (and the over-
allotment option) aggregated approximately $32.1 million (net of underwriters'
commission and offering expenses of approximately $4.7 million). This amount
should satisfy our cash requirements for the next 12 months.
In connection with the IPO, bonuses in the aggregate amount of $105,000
were paid.
We used approximately $1.4 million of the net proceeds of the IPO to repay
in full the principal and interest due on a loan made by Enviro-Clean of America
Inc., a principal stockholder of the Company.
As of June 30, 2000, our primary source of liquidity consisted of cash and
cash equivalents derived from the IPO. At June 30, 2000, the Company had cash
and cash equivalents of approximately $23,000,000.
For the six months ended June 30, 2000, cash used in operating activities
was $2,649,000. Cash used in operating activities consisted mostly of net
operating losses and increases in accounts payable and accrued expenses offset
by prepaid expenses and other current assets. We expect these expenses to grow
as we transition from a development stage company.
Net cash used in investing activities was $5.6 million for the six months
ended June, 30, 2000. Our investing activities were for investing in marketable
securities and for capital expenditures which mainly comprised of purchasing the
perpetual non-revocable license to the software technology used for the e-
commerce platform from Netgateway on which the Company has built its e-commerce
portal. As a part of this transaction, the Company no longer has any future
obligations to Netgateway.
Risks relating to our financial condition
In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects:
Because we have a very short operating history, there is no track record to
indicate that we will successfully manage our business or achieve profitability.
We may not be able to grow our business as planned or even become a profitable
business. We began our commercial operations in September 1999 and have a
limited operating history upon which you may evaluate us. Our business
prospects are subject to all the risks, expenses and uncertainties encountered
by any new company. We also face the
G-18
<PAGE>
risks inherent in operating in the rapidly evolving markets for Internet
products and services.
Because our operating expenses and capital expenditures will outpace our
revenues, we will incur significant losses in the near term. We expect to incur
significant operating expenses and make relatively high capital expenditures as
we develop our Internet business. These operating expenses and capital
expenditures will initially outpace revenues and result in significant losses in
the near term. We have generated only nominal revenues for six months ended
June 30, 2000 and have incurred a net loss of $3.7 million, and, since
inception, have incurred a net loss of $6.6 million. Because our executive
officers lack significant management experience, we may not be able to
effectively manage our growth.
The growth of our business may place a significant strain on our management
team and we may not be able to effectively manage our growth. None of our
executive officers has significant experience in managing a company or
overseeing a company's rapid growth. Our new business focus on Vendor Management
Agreements may not prove to be profitable.
We have more than enough cash to fund operations for the next twelve months.
Currently we are not expecting any major capital expenditures. We will need to
add more employees as support as our transaction grows on our web site and as
our vendor management services grows.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not currently a party to any pending legal proceeding, nor
is any of the Company's property subject to any pending legal proceeding.
Item 2 Changes in Securities
(d). Use of Proceeds
On February 14, 2000, the Company's Registration Statement on Form SB-2MEF
covering the Offering of 4,000,000 shares of the Company's Common Stock,
Commission file number 333-30376 was declared effective. The net proceeds of the
offering to the Company (after deducting expenses) were $27,815,090. On March
29, 2000, the over-allotment option was also exercised and declared effective,
resulting in the proceeds (after deducting expenses) of $4,320,000, which were
received upon settlement on April 3, 2000. During the first two quarters, the
net proceeds have been used for the following purposes:
Repayment of indebtedness and related
interest............................................... $ 1,422,676
G-19
<PAGE>
Development
costs.................................................. 1,863,249
Purchases of machinery and equipment................... 839,163
Working capital........................................ 1,333,970
Other purposes including:
investments, including commercial paper, short-term
municipal securities, and money markets funds.......... 26,676,032
-----------
$32,135,090
Item 3. Defaults Upon Senior Securities
There have been no material defaults with respect to any indebtedness of
the Company to be disclosed pursuant to this item.
Item 4. Submissions of Matters to a vote of Security Holders
There have been no matters submitted to a vote of security holders during
the quarter ended June 30, 2000.
Item 5. Other Information
. Resignation of the Chief Executive Officer
In a letter to the Board of Directors dated July 10, 2000, Woo Jin Kim,
Chief Executive Officer of the Company, submitted notice of his intent to
terminate his employment. The Board accepted this resignation of employment and
notice of the Board's decision was delivered to Mr. Kim. Chief Financial Officer
Mark Voorhis has replaced Mr. Kim on an interim basis. Subsequent to his
resignation of employment, Mr. Kim's resignation from the Board of Directors was
deemed effective. In addition, on July 12, 2000, Garrick Hileman submitted a
letter of resignation from the Board of Directors, which was accepted by the
Board.
. Hiring of Investment Banking Firm
In June, upon authorization of the Board of Directors, the Company hired
the investment banking firm of Houlihan Lokey Howard & Zukin to review strategic
alternatives available to the company and its shareholders. Among the
alternatives that Houlihan Lokey will research will be acquisitions, mergers and
other alliances that will help the company execute its growth strategy.
G-20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------------------------------------------------------------
3.1 Certificate of Incorporation (incorporated by reference to the
exhibits of the Company's Registration Statement on Form SB-2
(Reg. No. 333-30376) dated October 6, 1999).
3.1(a) Amendment to Certificate of Incorporation (incorporated by
reference to the exhibits of the Company's Registration Statement
on Form SB-2 (Reg. No. 333-30376) dated October 6, 1999).
3.2 By-Laws (incorporated by reference to the exhibits of the
Company's Registration Statement on Form SB-2
(Reg. No. 333-30376) dated October 6, 1999).
3.2(a) Amended Bylaws (incorporated by reference to the exhibits of the
Company's Registration Statement on Form SB-2/A
(Reg. No. 333-30376) dated December 2, 1999).
4.1 Specimen Common Stock Certificate (incorporated by reference to
the exhibits of the Company's Registration Statement on Form SB-2
(Reg. No. 333-30376) dated October 6, 1999).
4.2 Form of Representatives' Warrant Agreement, including form of
Representatives' Warrant (incorporated by reference to the
exhibits of the Company's Registration Statement on Form SB-2
(Reg. No. 333-30376) dated October 6, 1999).
4.2(a) Amended Form of Representatives' Warrant Agreement (incorporated
by reference to the exhibits of the Company's Registration
Statement on Form SB-2 (Reg. No. 333-30376) dated January 1,
2000).
27.1 Financial Data Schedule at June 30, 2000.
(b) Reports on 8-K:
The Company had no reports during the quarter on Form 8-K.
G-21
<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.
Date: August 11, 2000 b2bstores.com Inc.
(Registrant)
/s/ Richard Kandel
---------------------
Richard Kandel
Chairman of the Board
/s/ Mark Voorhis
----------------------
Mark Voorhis
Chief Financial Officer
G-22
<PAGE>
ANNEX H
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934:
For the Quarterly Period ended September 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to __________________
Commission File number 1-14798
b2bstores.com Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3500746
------------------------------- ----------------------
(State or other jurisdiction of I.R.S. Employer ID No.
incorporation or organization)
249 East Ocean Boulevard
Suite 620
Long Beach, California 90802
----------------------------
(Address of principal executive offices)
(562) 491-7180
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
-------- -------
As of November 13, 2000, 8,621,643 shares of the Issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
H-1
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Information
<TABLE>
<CAPTION>
Condensed Financial Statements: Page
<S> <C>
Balance Sheet as of September 30, 2000 (unaudited) 3
Unaudited Statements of Loss for the three and nine months ended
September 30, 2000, the period from June 28, 1999 (inception) through
September 30, 1999 and the period from inception (June 28, 1999)
through September 30, 2000 4
Statements of Stockholders' Equity (Deficit) audited for the period
from inception (June 28, 1999) through December 31, 1999 and unaudited
from the period January 1, 2000 through September 30, 2000 (unaudited) 5
Unaudited Statements of Cash Flows for the period from inception (June
28, 1999) through September 30, 2000, the nine months ending September
30, 2000, and the period from inception (June 28, 1999) through
September 30, 1999 6
Notes to unaudited condensed financial statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11-15
PART II OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults upon senior securities 16
Item 4: Submissions of matters to a vote of security holders 16
Item 5: Other information 16
Item 6: Exhibits and reports on form 8-K 16
Signatures 17
</TABLE>
H-2
<PAGE>
b2bstores.com Inc.
Balance Sheet
(condensed and unaudited)
<TABLE>
<CAPTION>
September 30, 2000
-------------------
<S> <C>
ASSETS
Current:
Cash and cash equivalents $ 16,539,682
Marketable Securities 8,718,896
Prepaid Expenses and other current assets 94,143
------------
Total Current Assets 25,352,721
Deposits 45,596
Property and equipment, net 211,610
------------
$ 25,609,927
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 373,630
Accrued Expenses and Other Current Liabilities 17,867
Deferred revenue 57
------------
Total Current Liabilities 391,554
Stockholders' equity
Preferred stock, $.01 par value - shares authorized 5,000,000; none
Common stock, $.01 par value - shares authorized 25,000,000; issued
8,621,643 and 4,021,643 86,216
Additional Paid-in Capital 35,744,462
Deficit accumulated during the development stage (10,612,305)
------------
Total stockholders' equity 25,218,373
------------
$ 25,609,927
============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
H-3
<PAGE>
Statements of Loss
(condensed and unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 2000 September 30, 2000
and period from and period from
Cumulative, period from Inception (June 28, 1999) inception (June 28, 1999)
June 28, 1999 (Inception) through September 30, 1999 through September 30, 1999
to September 30, 2000 2000 1999 2000 1999
------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 122,479 $ 48,272 $ 1,658 $ 120,288 $ 1,658
Cost of Sales 1,180,973 610,541 17,591 1,120,465 17,591
------------ ----------- ----------- ----------- -----------
Gross Loss (1,058,494) (562,269) (15,932) (1,000,177) (15,932)
Operating Expenses
General and administrative 2,505,738 849,649 99,225 2,179,983 99,225
Sales and marketing 1,714,712 402,728 60,606 1,515,742 60,606
Technology 781,250 321,222 31,342 678,354 31,342
Fulfillment Management 383,500 63,524 14,693 335,264 14,693
Start-up Costs 55,036 0 55,036 55,036
Loss on Sale of Computer Assets 50,580 50,580 50,580
Impairment of Assets 1,902,508 1,902,508 1,902,508
Stock-based compensation relating to
general and administrative activities 216,430 0 216,430 216,430
Stock-based compensation relating to
start-up activities $ 2,906,978 270,092 $ 1,901,500 1,005,478 $ 1,901,500
------------ ----------- ----------- ----------- -----------
Total operating expenses 10,516,731 3,860,302 2,378,832 7,667,908 2,378,832
------------ ----------- ----------- ----------- -----------
Loss from operations (11,575,225) (4,422,571) (2,394,764) (8,668,085) (2,394,764)
Interest Income (expense) $ 962,920 422,206 $ 0 986,017 $ 0
------------ ----------- ----------- ----------- -----------
Net loss $(10,612,305) $(4,000,365) $(2,394,764) $(7,682,068) $(2,394,764)
============ =========== =========== =========== ===========
Loss per share (basic and diluted) $ (0.46) $ (0.62) $ (0.99) $ (0.62)
============ =========== =========== =========== ===========
Weighted average common shares outstanding 8,621,643 3,878,311 7,772,008 3,878,311
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
H-4
<PAGE>
b2bstores.com Inc.
Statement of Stockholders' Equity (Deficit)
Period from June 28, 1999 (inception) to September 30, 2000
<TABLE>
<CAPTION>
Period from June 28, 1999 (inception) to December 31, 1999 (audited) Deficit
Accumulated
Common Stock Additional during the Total
------------ paid-in Development stockholders'
Shares Amount capital Stage equity (deficit
------ -------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to
Founding and other stockholders: June 29, 1999 3,666,667 $ 36,667 $ - $ - $ 36,667
Issuance of common stock to investors: August 23, 1999 333,333 3,333 2,497,500 - 2,500,833
Issuance of common stock to directors
and consultants: September 15, 1999 21,643 216 216,214 - 216,430
Net loss for the period - - - (2,930,237) (2,930,237)
----------------------------------------------------------------
Balance December 31, 1999 4,021,643 $ 40,216 $ 2,713,714 $ (2,930,237) $ (176,307)
Period from January 1 to September 30, 2000 (unaudited)
Issuance of common stock in connection with
initial public offering, net February 15, 2000 4,000,000 40,000 27,775,090 - 27,815,090
Issuance of common stock in connection with
over allotment, net, March 29, 2000 600,000 6,000 4,250,180 - 4,256,180
Stock based compensation from vesting of options to officers - - 1,005,478 - 1,005,478
Net loss for the period - - - (7,682,068) (7,682,068)
----------------------------------------------------------------
Balance September 30, 2000 (unaudited) 8,621,643 $ 86,216 $ 35,744,462 $(10,612,305) $25,218,373
================================================================
</TABLE>
See accompanying notes to unaudited condensed financial statements.
H-5
<PAGE>
STATEMENT OF CASH FLOWS
(Condensed and Unaudited)
<TABLE>
<CAPTION>
Cumulative, period
from June 28, 1999 Nine months Period from June 28, 1999
(inception) to ended (inception) through
September 30, 2000 September 30, 2000 September 30, 1999
-------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,612,305) $ (7,682,068) (2,394,764)
-------------------------------------------------------------------
Adjustments to reconcile net Loss to net cash used in
Expense recognized in connection with issuance of
common stock 3,123,408 1,005,478 -
Depreciation and amortization 551,266 522,733 -
Loss on Sale of Computer Assets 50,580 50,580
Impairment of Assets 1,902,508 1,902,508
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (94,143) (55,228) (6,882)
Increase in deposits (45,596) (24,800) (45,596)
Increase in deferred revenue 57 (930) -
Increase in accrued expenses 17,868 (76,068) 3,928
Increase in accounts payable 373,630 301,501 43,549
-------------------------------------------------------------------
Total adjustments 5,879,577 3,625,773 (5,001)
-------------------------------------------------------------------
Net cash, used in operating activities (4,732,728) (4,056,295) (2,399,765)
-------------------------------------------------------------------
Cash flows from investing activities:
Marketable Securities (8,718,896) (8,718,896) -
Capital expenditures (2,737,395) (2,345,988) (97,458)
Proceeds from Sale of Computer Assets 21,432 21,432
-------------------------------------------------------------------
Net cash used in investing activities (11,434,859) (11,043,452) (97,458)
Cash flows from financing activities:
Deferred Offering Costs (104,809)
Loans from principal stockholder 1,399,836 575,000 179,836
Repayment of loans from principal stockholder (1,399,836) (1,399,836) -
Proceeds from issuance of common stock 33,027,637 32,391,637 2,753,930
-------------------------------------------------------------------
Net cash provided by financing activities 32,707,270 31,566,801 2,828,957
-------------------------------------------------------------------
Net Increase in Cash 16,539,682 16,467,053 331,734
Cash and cash equivalents, beginning of period - 72,629 -
Cash and cash equivalents, end of period $ 16,539,682 $ 16,539,682 $ 331,734
===================================================================
Non-cash items:
Deferred offering costs $ - $ 320,367 -
Supplemental cash flow information:
Interest paid on loans from principal stockholder $ 22,838 $ 22,838 -
</TABLE>
See accompanying notes to unaudited condensed financial statements
H-6
<PAGE>
b2bstores.com Inc.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Business
b2bstores.com Inc. ("b2bstores" or the "Company"), a development stage
enterprise, was incorporated on June 28, 1999 under the laws of the State of
Delaware. The Company was developed as a comprehensive business-to-business
Internet destination for organizations of all sizes, to deliver quality
business-related products and services combined with information resources
through an, integrated, user-friendly web site. The Company developed its web
site to move business-to-business transactions and other business operations
away from traditional modes to the Internet. The web site was designed as a
community mall, a place where business customers could visit a "virtual
storefront" or product category of their choice, seek out services from
professionals, research issues important to their business and meet and
communicate with customers, suppliers, colleagues and competitors.
In June 2000, as a result of several months of turmoil in the financial
markets surrounding the Dot Com industry, the Company hired the investment
banking firm of Houlihan Lokey Howard & Zukin to help it review and identify its
strategic business alternatives. In July, the company's CEO, Mr. Woojin Kim,
resigned, and in August the company announced a reorganization of its existing
business. The effect of the reorganization was the resignation or lay-off of 50
people, termination of operational contracts and the sale of most of the
company's operating assets. The Company eliminated its Sales & Marketing and
Development departments completely, and retained only a skeleton staff in
operations and administration. While the web site is still up and functional the
company is not pursuing any expansion of this business at this time. The
company, since the reorganization, is operating in a positive cash flow position
while the Investment Bankers continue to review the opportunities available to
the Company.
In the event that the Company executes a definitive agreement to merge or sell
the Company, the Board has authorized the issuance of options to purchase 50,000
shares to each of Jay Raubvogel and David Walke, both directors of the Company,
at an exercise price of the closing price of the Company's stock on the date of
execution and a lump sum payment of $100,000 to Randall K. Davis, another of the
Company's directors. In addition, upon the effective date of a merger, the Board
has agreed to authorize the settlement of the employment agreement of Richard
Kandel, Chairman of the Board of the Company, for a lump sum payment of $400,000
or a lump sum payment of the remaining amount of total compensation left on the
employment agreement at the effective date of the merger, whichever is less, in
exchange for Mr. Kandel's execution of a general release of the Company's
obligations under the employment agreement.
Basis of Presentation
The financial statements 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 such rules and
regulations, although the Company's management believe that the disclosures are
adequate to make the information presented not misleading.
These statements reflect all adjustments, which, in the opinion of management,
are necessary for fair presentation of the information contained herein. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the period from June 28, 1999 (Inception) to
December 31, 1999 included in the Company's Registration Statement on Form SB-
2MEF (No. 333-30376), which was declared effective by the Securities and
Exchange Commission on February 14, 2000. The Company follows the same
accounting policies in the preparation of its interim reports.
Results of operations for the interim periods may not be indicative of annual
results.
Reclassifications
H-7
<PAGE>
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
Cash and Cash Equivalents
The Company invests certain of its excess cash in debt instruments of the US
Government, municipalities and their agencies, money market accounts, and of
high quality corporate issuers and 99% of the balances are held at one broker.
All highly liquid instruments with an original maturity of three months or less
are considered cash equivalents.
Marketable Securities
The Company considers all highly liquid investments with original maturities
of 90 days or less to be cash equivalents; those with an original maturity
greater than 90 days are considered marketable securities. At September 30,
2000, short-term investments consist of investments in high-quality corporate
issuers and have been classified as held to maturity. Unrealized gains and
losses for the period ending September 30, 2000 were not significant. All short-
term investments and 99% of cash equivalents are held at one broker.
Accordingly, the Company is subject to credit risk if the broker is unable to
repay the balance in the account or deliver the Company's securities. The
Company manages this credit risk by only investing in high-quality money market
instruments, municipal securities, and corporate issuers. These funds, all held
at one broker, are insured by Travelers Insurance Group.
Revenue Recognition
To date, the Company has generated nominal revenues from product sales.
The Company has recognized its revenues according to:
. The structure of the contract negotiated with the individual vendor,
and
. The substantive nature of the risks of ownership we incur in
connection with the sale and shipment of the product.
For product sales involving substantive risk of ownership, the Company will
generally recognize revenue at the gross transaction value.
Currently, policy-setting groups of the Emerging Issues Task Force and the
Financial Accounting Standards Board are reviewing the guidelines under which
revenue is recognized on a gross basis versus a net basis. As the Company
currently recognizes certain of its revenue on a gross basis, there is a risk
that future guidelines may require the Company to change, retroactively, its
revenue recognition policy. This could cause the Company to report markedly
lower revenues than currently anticipated. Although such a change would cause
the Company to report markedly lower revenues and costs of products, it would
not change the Company's reporting with respect to other expenses, net revenue
or earnings before and after tax.
The Company will allow customers to return merchandise in certain
circumstances; accordingly, the Company will not recognize revenue from the sale
of those products covered by the return policy until the return policy period
has expired or the customer's right of return has expired. The Company will
recognize the sales amount as deferred revenue upon verification of
H-8
<PAGE>
the credit card transaction authorization and shipment of the merchandise, until
such time that the Company is able to estimate returns.
The company does not anticipate recording any material sales, of product from
it web site in the future, as a result of its reorganization.
Property and Equipment
Property and equipment, net consists of the following:
September 30, 2000
------------------
Capitalized software development costs $628,066
Computer equipment 108,930
Furniture and equipment 8764
Leasehold improvements 3400
--------
749,160
Less: Accumulated depreciation and amortization 537,550
--------
Property and equipment $211,610
--------
Depreciation expense for the three and nine months ended September 30, 2000 was
$203,842 and $522,733 respectively.
As part of the Company's announced reorganization, many of the company's assets,
which were no longer necessary to operations, were sold. The sales of these
assets are reflected in a loss of $50,579, as shown in loss on sale of assets
for the quarter. An asset impairment charge of approximately $1.9 million was
recorded to write-down, to net realizable value, the remainder of the Company's
fixed assets as a result of the reorganization and the Company's determination
that the book value of those assets would not be recoverable under any currently
identifiable business direction.
Capitalized Software Development Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs.
The Company had capitalized certain of these software development costs in the
amount of approximately $ 2.0 million in connection with its online services.
The majority of these costs were in connection with purchasing the perpetual,
non-revocable license to the software technology used for the e- commerce
platform from Netgateway upon which the Company has built its e- commerce
portal. As part of this transaction, the Company no longer has any future
obligations to Netgateway. The costs associated with research and development of
such technology was expensed as incurred. Software development costs incurred
subsequent to establishing technological feasibility have been capitalized.
Technological feasibility is established upon the completion of a detailed
program design (in the absence of any high risk issues or uncertainties).
Capitalized software costs are being amortized over a period of two years.
Maintenance costs incurred in connection with the software are being expensed as
incurred.
During the quarter ended September 30, 2000 the Company announced a strategic
reorganization to bring its operations inline with probable new business
opportunities; this reorganization included the elimination of its software
development department. Subsequent to
H-9
<PAGE>
the quarter end the company negotiated an exclusive license for use of this
software. As a result of these events, the Company has determined that the book
value of these assets would not be recoverable under any currently identifiable
business direction and has therefore taken an asset impairment charge, writing
the assets down to what it feels can reasonably be recaptured over the assets 2
year remaining life.
Stockholders' Equity
On February 15, 2000, the Company completed its initial public offering
("IPO") of 4,000,000 shares of its common stock at $8.00 per share. Net proceeds
to the Company aggregated approximately $27.8 million (net of underwriters'
commission and offering expenses of $4.2 million). Additionally, on March 29,
2000, the over-allotment option on the common stock offering was exercised in
full, resulting in an additional issuance of 600,000 shares of common stock with
net proceeds of approximately $4.3 million to the Company (net of underwriters'
commission and offering expenses of $500,000).
The Company used approximately $1.4 million of the net proceeds of the IPO to
repay in full the principal and interest due on a loan made by Enviro-Clean of
America Inc., a principal stockholder of the Company.
The Company issued warrants to purchase up to 400,000 shares of common stock
to the underwriter representatives in connection with the IPO.
The Company granted 1,000,000 options to officers of the Company in connection
with their initial employment by the Company.
During the third quarter there were 76,382 performance options granted to
employees relating to the second quarter bonuses.
1999 Performance Equity Plan
The Company has a Performance Equity Plan that authorizes the granting of up
to 2,000,000 shares of common stock to key employees, officers, directors and
consultants. Awards consist of stock options (both nonqualified options and
options intended to qualify as "Incentive" stock options under Section 422 of
the Internal Revenue Code of 1986, as amended), registered stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards,
as described in the plan. As of September 30, 2000, 1,285,882 options were
granted under the plan to employees and directors.
Loss Per Share
Basic loss per share is based only on the weighted average number of common
shares outstanding for the period. Diluted loss per share is similar to basic
loss per share except that the weighted average number of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if dilutive potential common shares, such as options
and warrants, had been issued. Dilutive potential common shares are excluded
from the computation if their effect is antidilutive.
Basic and diluted losses per share are the same because the options are
antidilutive in accordance with SFAS 128.
H-10
<PAGE>
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Under the intrinsic value based
method, compensation cost is the excess, if any, of the fair market value of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock.
During the nine months ended September 30, 2000, the Company charged to
operations approximately $885,478 relating to officers' options granted in
connection with the IPO, and vested through the first three quarters of the
year, and approximately $120,000 relating to officers' options granted in
connection with the IPO and vesting over the next 12 months for officers who
left the company's employment during the September quarter, but have 12 months
to exercise their options.
Income Taxes
The company has not generated any taxable income to date and therefore has
not paid any federal or state income taxes since inception. The Company has
provided a full valuation allowance on the deferred tax asset created from these
taxable losses due to the uncertainty of future income streams and limitation
provisions created by the completion of the IPO.
Item 2. Management's Discussions and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to our
future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained
under Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. These factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations;
changes in technology and the development of new technology; foreign currency
fluctuations; reductions in sales to any significant customers; changes in sales
mix; industry capacity; competition; disruptions of established supply channels;
manufacturing capacity constraints; and the availability, terms and deployment
of capital. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected.
In June 2000, as a result of several months of turmoil in the financial markets
surrounding the Dot Com industry, the Company hired the investment banking firm
of Houlihan Lokey Howard &
H-11
<PAGE>
Zukin to help it review and identify its strategic business alternatives. In
July the Company's CEO, Mr. Woojin Kim resigned, and in August the Company
announced a reorganization of its existing business. The original strategy of
creating a Business-2-Business branded site through the use of advertising
mediums to create market awareness of the b2bstores.com name was determined to
not be feasible in light of the changed market conditions. The effect of the
reorganization was the resignation or lay-off of approximately 50 people,
termination of operational contracts and the sale of most of the Company's
operating assets. The Company eliminated its Sales & Marketing and Development
departments completely, and retained only a skeleton staff in operations and
administration. While the web site is still up and functional the Company is not
pursuing any expansion of this business at this time. The Company, since the
reorganization, is operating in a positive cash flow position while the
Investment bankers continue to review the opportunities available to the
Company.
We do not undertake to update our forward-looking statements to reflect future
events or circumstances.
Overview
b2bstores.com Inc. is a development stage company which was formed in June
1999 and assembled a core set of operating assets during the remainder of 1999.
These assets include a management team, a technology infrastructure, financing
and our basic web site, www.b2bstores.com, which first became available in
September 1999. In February 2000, we completed our Initial Public Offering
("IPO").
Since the introduction of our site, our web site has provided our customers
with the ability to purchase online business products and supplies in a growing
number of categories. Through our reorganization we have retained the ability to
business on our site, however as a significant part of our reorganization we
have reduced our headcount to a maintenance crew; virtually eliminating our
marketing, fulfillment and technology departments. We have more than enough cash
to fund operations for the next twelve months. Currently we are not expecting
any major capital expenditures.
In a letter to the Board of Directors dated July 10, 2000, Woo Jin Kim, Chief
Executive Officer of the Company, submitted notice of his intent to terminate
his employment. The Board accepted this resignation of employment and notice of
the Board's decision was delivered to Mr. Kim. Chief Financial Officer Mark
Voorhis has replaced Mr. Kim on an interim basis. Subsequent to his resignation
of employment, Mr. Kim's resignation from the Board of Directors was deemed
effective. In addition, on July 12, 2000, Garrick Hileman submitted a letter of
resignation from the Board of Directors, which was accepted by the Board.
During the third quarter of 2000, we have reorganized the companies operations
to conserve its resources. As part of the reorganization the company accepted
resignations or terminated approximately 50 employees, retaining a staff of six
(6). We have also terminated all major operational contracts, licenses and/or
agreements, sold off all excess equipment, licensed our technology and adjusted
the carry value of our prepaids and fixed assets to reflect their current market
value. The company does not anticipate any material business being transacted
through our web site while operating in this mode.
Presently, the Company has focused its main attention to its reorganization
and strategic business alternatives while maintaining minimal business
activities and is actively considering proposals presented to the Board of
Directors.
H-12
<PAGE>
Sources of Revenue
We believe that any revenues we derive will come from product sales for the
foreseeable future.
We will recognize revenues according to:
. The structure of the contract negotiated with the individual vendor,
and
. The substantive nature of the risks of ownership we incur in
connection with the sale and shipment of the product.
For product sales involving substantive risk of ownership, we will
generally recognize revenue at the gross transaction value.
To date, our current revenues are derived from product sales.
Seasonality
Given our current operating structure, we do not see seasonal fluctuations
as having a material impact on our revenues.
Results of Operations
We incurred a net loss of approximately $4.0 million for the three month
and $7.7 million for the nine-month period ended September 30, 2000. At
September 30, 2000 we had an accumulated deficit of $10.6 million. The net
losses and accumulated deficit resulted from our lack of substantial revenues,
while incurring development and operational costs and stock based compensation
expense in the first six months and losses on the sale of assets and market
value asset adjustments in the last 3 months as part of our reorganization.
Because of our reorganization during the current quarter this past performance
should not be considered indicative of future performance. We may never achieve
significant revenues or profitability or if we achieve significant revenues, it
may not be in our current line of business.
Revenues. Revenues were nominal for the three months and nine months ending
September 30, 2000, totaling approximately $48,000 and $120,000, respectively.
Due to the company's reorganization, we do not see continued sales growth in
this business line. We continue to operate as a development stage company.
Costs and Expenses. Any specific comparisons of the company's overhead
costs for the three month and year to date periods would be misleading as the
company initiated a reorganization mid way through the 3/rd/ quarter ended
September 30, 2000. This reorganization had significant impact on the company's
operating overhead costs. The major costs and components of overhead included in
our 3rd quarter operating loss were: costs of the products or services sold,
which were approximately $72,000, approximately $586,000 in payroll, $204,000 in
depreciation and amortization, $70,000 in insurance, $125,000 in Marketing &
Promotions, and $132,000 in professional fees for approximately $1,189,000 in
operational
H-13
<PAGE>
costs, and additional costs of approximately $185,000 in severance, $184,000 in
contract termination fees, and approximately $400,000 for costs related to the
strategic review of the business opportunities for an additional amount of
approximately $769,000 in other costs.
In addition to the above costs and expenses the company incurred approximately
$270,000 and $1,005,478 for the three months and nine months ended September 30,
2000 respectively in stock based compensation. This consists of expense relating
to officers options vested in connection with the IPO, and $120,000 for options
to vest within the next 12 months for those officers who left the company during
the last quarter. There are additional options that were granted in connection
with the IPO that will vest over the next two years and create compensation
charges of approximately $190,000.
Other expenses. During the quarter ended September 30, 2000 and in
conjunction with its reorganization the company sold off a portion of its
computer assets for a loss of approximately $50,000, and took an asset
impairment charge against the remainder of its assets. This reorganization
included the elimination of its software development department. Subsequent to
the quarter end the company concluded negotiations on an exclusive license for
use of their software platform. As a result of these events the company has re-
evaluated the value of its capitalized software and taken an asset impairment
charge, writing its value down to what we feel can reasonable be recaptured over
the assets 2 year remaining life. This resulting asset impairment charge was
approximately $1,900,000. The company does not anticipate having to take any
further asset impairment charges as a result of the reorganization.
As a result of all of the above, the net loss to shareholders for the three
months and nine months ended September 30, 2000 was $4.00 and $7.68 million
respectively. On a basic and diluted per share basis, the net loss to common
shareholders for the three months and nine months ended September 30, 2000 was
$(.46) and $ (.99) per share respectively.
Liquidity and Capital Resources
For the nine months ended September 30, 2000, cash provided by financing
activities of $31.6 million was primarily due to our initial public offering of
4,000,000 shares of its common stock at $8.00 per share and sale of an
additional 600,000 shares pursuant to the over-allotment option granted to the
underwriters in the IPO. Net proceeds to us from the IPO (and the over-allotment
option) aggregated approximately $32.1 million (net of underwriters' commission
and offering expenses of approximately $4.7 million). This amount should satisfy
our cash requirements for the next 12 months.
In connection with the IPO, bonuses in the aggregate amount of $105,000
were paid.
We used approximately $1.4 million of the net proceeds of the IPO to repay
in full the principal and interest due on a loan made by Enviro-Clean of America
Inc., a principal stockholder of the Company.
As of September 30, 2000, our primary source of liquidity consisted of cash
and cash equivalents derived from the IPO. At September 30, 2000, the Company
had cash and cash equivalents of approximately $16,500,000.
For the nine months ended September 30, 2000, cash used in operating
activities was $4,056,295. Cash used in operating activities consisted mostly of
net operating losses and increases in accounts payable and accrued expenses
offset by prepaid expenses and other
H-14
<PAGE>
current assets. We expect this amount to significantly reduce in the future as a
result of our reorganization.
Net cash used in investing activities was $11,043,452 million for the nine
months ended September 30, 2000. Our investing activities were for investing in
marketable securities and for capital expenditures, which included the purchase
of the perpetual non-revocable license to the software technology used for the
e-commerce platform from Netgateway on which the Company has built its e-
commerce portal. As a part of this transaction, the Company no longer has any
future obligations to Netgateway.
Risks relating to our financial condition
In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects:
Because we have a very short operating history, there is no track record to
indicate that we will successfully manage our business or achieve profitability.
Our business prospects are subject to all the risks, expenses and uncertainties
encountered by any new company.
As a result of our reorganization our operating expenses should not exceed
our revenue and interest income for the near term. We have generated only
nominal revenues for the nine months ended September 30, 2000 and have incurred
a net loss of $7.68 million, and, since inception, have incurred a net loss of
$10.6 million. However, since our reorganization, our monthly operating expenses
do not exceed our monthly interest income, therefore allowing us significant
time to evaluate our business opportunities.
We have more than enough cash to fund operations for the next twelve months.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
On August 25, 2000, Woojin Kim, the former CEO of the Company, filed suit
against the Company in the Superior Court of the State of California, County of
Los Angeles, for unspecified damages alleging violation of public policy, breach
of contract and breach of the implied covenant of good faith and fair dealing in
regard to the Company's acceptance of Mr. Kim's resignation of employment. The
suit was subsequently dismissed, without prejudice, due to a forum selection
clause in Mr. Kim's employment contract.
Item 2 Changes in Securities
(d). Use of Proceeds
On February 14, 2000, the Company's Registration Statement on Form SB-2MEF
covering the Offering of 4,000,000 shares of the Company's Common Stock,
Commission file number 333-30376 was declared effective. The net proceeds of the
offering to the Company (after deducting expenses) were $27,815,090. On March
29, 2000, the over-allotment option was also exercised and declared effective,
resulting in the proceeds (after deducting expenses) of $4,320,000, which were
received upon settlement on April 3, 2000. During the first two quarters, the
net proceeds have been used for the following purposes in the approximate
amounts listed:
Repayment of indebtedness and related interest..................... $ 1,423,000
Development costs.................................................. 1,610,000
Purchases of machinery and equipment............................... 695,000
H-15
<PAGE>
Working capital.................................................... 3,009,000
Other purposes including:
investments, including commercial paper,
short-term municipal securities,
and money markets funds............................................ 25,398,090
----------
$32,135,090
Item 3 Defaults Upon Senior Securities
There have been no material defaults with respect to any indebtedness of
the Company to be disclosed pursuant to this item.
Item 4 Submissions of Matters to a vote of Security Holders
There have been no matters submitted to a vote of security holders during
the quarter ended September 30, 2000.
Item 5. Other Information
. Resignation of the Chief Executive Officer
In a letter to the Board of Directors dated July 10, 2000, Woo Jin Kim,
Chief Executive Officer of the Company, submitted notice of his intent to
terminate his employment. The Board accepted this resignation of employment and
notice of the Board's decision was delivered to Mr. Kim. Chief Financial Officer
Mark Voorhis has replaced Mr. Kim on an interim basis. Subsequent to his
resignation of employment, Mr. Kim's resignation from the Board of Directors was
deemed effective. In addition, on July 12, 2000, Garrick Hileman submitted a
letter of resignation from the Board of Directors, which was accepted by the
Board.
. Hiring of Investment Banking Firm
In June, upon authorization of the Board of Directors, the Company hired
the investment banking firm of Houlihan Lokey Howard & Zukin to review strategic
alternatives available to the company and its shareholders. Among the
alternatives that Houlihan Lokey will research will be acquisitions, mergers and
other alliances that will help the company execute its growth strategy. The
investment bankers have continued their review of strategic alternatives through
the third quarter of 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------
3.1 Certificate of Incorporation (incorporated by reference to the
exhibits of the Company's Registration Statement on Form SB-2 (Reg.
No. 333-30376) dated October 6, 1999).
3.1(a) Amendment to Certificate of Incorporation (incorporated by reference
to the exhibits of the Company's Registration Statement on Form SB-2
(Reg. No. 333-30376) dated October 6, 1999).
H-16
<PAGE>
3.2 By-Laws (incorporated by reference to the exhibits of the Company's
Registration Statement on Form SB-2 (Reg. No. 333-30376) dated
October 6, 1999).
3.2(a) Amended Bylaws (incorporated by reference to the exhibits of the
Company's Registration Statement on Form SB-2/A (Reg. No. 333-30376)
dated December 2, 1999).
4.1 Specimen Common Stock Certificate (incorporated by reference to the
exhibits of the Company's Registration Statement on Form SB-2 (Reg.
No. 333-30376) dated October 6, 1999).
4.2 Form of Representatives' Warrant Agreement, including form of
Representatives' Warrant (incorporated by reference to the exhibits
of the Company's Registration Statement on Form SB-2 (Reg. No. 333-
30376) dated October 6, 1999).
4.2(a) Amended Form of Representatives' Warrant Agreement (incorporated by
reference to the exhibits of the Company's Registration Statement on
Form SB-2 (Reg. No. 333-30376) dated January 1, 2000).
27.1 Financial Data Schedule at June 30, 2000.*
*filed herewith
(b) Reports on 8-K:
The Company had no reports during the quarter on Form 8-K.
H-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.
Date: November 14, 2000 b2bstores.com Inc.
(Registrant)
/s/ Richard Kandel
------------------------
Richard Kandel
Chairman of the Board
/s/ Mark Voorhis
------------------------
Mark Voorhis
Chief Financial Officer
H-18
<PAGE>
ANNEX I
-------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To The Board of Directors and
Stockholder of IVAX Diagnostics, Inc.:
We have audited the accompanying consolidated balance sheets of IVAX
Diagnostics, Inc. (a Florida corporation and wholly owned subsidiary of IVAX
Corporation) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IVAX Diagnostic,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Miami, Florida,
November 17, 2000, except with respect to the matter discussed in the
second paragraph of Note 3, as to which the date is January 10, 2001.
I-1
<PAGE>
IVAX DIAGNOSTICS, INC.
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
September 30, December 31, December 31,
2000 1999 1998
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,712,377 $ 4,217,956 $ 2,153,942
Accounts receivable, net of allowance for doubtful accounts
of $2,381,394 (unaudited), $2,361,532 and $2,314,713,
respectively 4,354,770 4,231,682 5,775,418
Inventories 2,290,772 2,427,576 2,004,457
Income tax receivable - - 672,757
Deferred income taxes 666,990 666,990 625,000
Other current assets 110,434 104,773 131,517
----------- ----------- -----------
Total current assets 9,135,343 11,648,977 11,363,091
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 352,957 352,957 352,957
Buildings and improvements 2,238,961 2,185,850 2,173,570
Machinery and equipment 1,548,208 1,546,985 1,488,421
Furniture and fixtures 1,169,312 1,195,267 1,202,139
----------- ----------- -----------
5,309,438 5,281,059 5,217,087
Less - Accumulated depreciation (3,730,654) (3,541,379) (3,193,356)
----------- ----------- -----------
1,578,784 1,739,680 2,023,731
----------- ----------- -----------
OTHER ASSETS:
Goodwill, net 7,199,798 7,330,307 7,507,406
Equipment on lease, net 624,461 670,411 737,093
Deferred income taxes 67,425 67,425 263,615
Other 175,527 204,958 225,288
----------- ----------- -----------
8,067,211 8,273,101 8,733,402
----------- ----------- -----------
Total assets $18,781,338 $21,661,758 $22,120,224
=========== =========== ===========
</TABLE>
(Continued)
I-2
<PAGE>
IVAX DIAGNOSTICS, INC.
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Continued)
<TABLE>
<CAPTION>
September 30, December 31, December 31,
2000 1999 1998
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 693,900 $ 720,100 $ 588,089
Accrued expenses 2,307,549 2,234,599 2,598,719
Income taxes payable 871,817 94,078 -
----------- ----------- -----------
Total current liabilities 3,873,266 3,048,777 3,186,808
DUE TO PARENT 6,405,313 8,664,725 4,942,949
OTHER LONG-TERM LIABILITIES 244,370 286,066 538,564
----------- ----------- -----------
Total liabilities 10,522,949 11,999,568 8,668,321
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 8)
STOCKHOLDER'S EQUITY:
Common stock, par value $0.01 per share,
authorized 30,000,000 shares, issued and
outstanding 14,600,000 shares 146,000 146,000 146,000
Additional paid-in capital 11,312,251 11,312,251 11,312,251
Retained earnings (accumulated deficit) (646,279) (232,325) 2,233,879
Accumulated other comprehensive loss (2,553,583) (1,563,736) (240,227)
----------- ----------- -----------
Total stockholder's equity 8,258,389 9,662,190 13,451,903
----------- ----------- -----------
Total liabilities and stockholder's equity $18,781,338 $21,661,758 $22,120,224
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
I-3
<PAGE>
IVAX DIAGNOSTICS, INC.
----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
--------------------------- --------------------------------------------
2000 1999 1999 1998 1997
----------- ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET REVENUE $9,839,346 $ 8,341,246 $11,104,870 $ 9,565,307 $ 9,289,177
COST OF SALES 4,288,382 3,871,045 5,162,796 4,653,234 4,804,884
---------- ----------- ----------- ----------- -----------
Gross profit 5,550,964 4,470,201 5,942,074 4,912,073 4,484,293
---------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling 1,945,813 2,283,441 2,971,442 2,670,230 2,966,591
General and administrative (Note 8) 1,500,444 2,296,084 2,938,217 3,831,551 5,008,254
Research and development 968,055 885,094 1,216,040 1,653,752 1,498,539
Goodwill amortization 191,758 193,446 257,770 258,603 258,973
---------- ----------- ----------- ----------- -----------
Total operating expenses 4,606,070 5,658,065 7,383,469 8,414,136 9,732,357
---------- ----------- ----------- ----------- -----------
Income (loss) from operations 944,894 (1,187,864) (1,441,395) (3,502,063) (5,248,064)
---------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 112,494 260,072 320,210 267,195 52,979
Interest expense - - - (6,243) (2,004)
Interest expense - Parent (432,382) (348,099) (506,741) (429,658) (85,041)
Other income (expense), net 1,094 35,511 22,938 (93,247) 31,118
---------- ----------- ----------- ----------- -----------
Total other expense (318,794) (52,516) (163,593) (261,953) (2,948)
---------- ----------- ----------- ----------- -----------
Income (loss) before provision
(benefit) for income taxes 626,100 (1,240,380) (1,604,988) (3,764,016) (5,251,012)
PROVISION (BENEFIT) FOR INCOME TAXES 1,040,054 626,007 861,216 (181,834) (389,256)
---------- ----------- ----------- ----------- -----------
Net loss $ (413,954) $(1,866,387) $(2,466,204) $(3,582,182) $(4,861,756)
========== =========== =========== =========== ===========
Basic and diluted net loss per share $(.03) $(.13) $(.17) $(.25) $(.33)
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
I-4
<PAGE>
IVAX DIAGNOSTICS, INC
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
-----------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) AND
------------------------------------------------------------
THE THREE YEARS ENDED DECEMBER 31, 1999
---------------------------------------
<TABLE>
<CAPTION>
Accumulated
Retained Other
Additional Earnings Comprehensive Total
Common Paid-in (Accumulated Income Stockholder's
Stock Capital Deficit) (Loss) Equity
-------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 $146,000 $10,812,251 $10,677,817 $ 354,257 $21,990,325
Net loss - - (4,861,756) - (4,861,756)
Translation adjustment - - - (1,139,010) (1,139,010)
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 146,000 10,812,251 5,816,061 (784,753) 15,989,559
Net loss - - (3,582,182) - (3,582,182)
Translation adjustment - - - 544,526 544,526
Capital contribution from Parent - 500,000 - - 500,000
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 146,000 11,312,251 2,233,879 (240,227) 13,451,903
Net loss - - (2,466,204) - (2,466,204)
Translation adjustment - - - (1,323,509) (1,323,509)
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1999 146,000 11,312,251 (232,325) (1,563,736) 9,662,190
Net loss (unaudited) - - (413,954) - (413,954)
Translation adjustment (unaudited) - - - (989,847) (989,847)
--------- ----------- ----------- ----------- -----------
BALANCE, September 30, 2000 (unaudited) $146,000 $11,312,251 $ (646,279) $(2,553,583) $ 8,258,389
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
I-5
<PAGE>
IVAX DIAGNOSTICS, INC.
----------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
------------------------ -------------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (413,954) $(1,866,387) $(2,466,204) $(3,582,182) $(4,861,756)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities-
Depreciation and amortization 755,828 810,366 1,079,038 1,098,359 922,330
Provision for losses on accounts receivable 34,195 50,701 68,385 64,520 35,162
Loss on asset sale - - - 33,660 -
Deferred income tax provision (benefit) - - 134,997 33,192 (472,035)
Changes in operating assets and liabilities:
Accounts receivable (634,252) 650,494 783,920 (267,158) 1,620,533
Inventories (3,865) (362,479) (557,040) 263,802 434,790
Income tax receivable - 617,066 611,647 (640,083) -
Other current assets (16,870) (13,529) 10,381 (2,128) 117,243
Other assets 22,132 12,715 9,728 9,424 (8,489)
Accounts payable and accrued expenses 1,098,197 87,014 76,493 456,759 (1,213,892)
Other long-term liabilities (406) (194,526) (181,913) 65,456 79,810
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 841,005 (208,565) (430,568) (2,466,379) (3,346,304)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (110,872) (80,627) (118,539) (217,988) (93,575)
Cash proceeds from sale of property and equipment - - - 8,044 -
Acquisition of equipment on lease (298,880) (302,037) (445,181) (458,354) (423,979)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (409,752) (382,664) (563,720) (668,298) (517,554)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from Parent - - - 500,000 -
Change in due to Parent (1,797,134) 3,707,599 4,596,714 2,637,147 5,007,073
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (1,797,134) 3,707,599 4,596,714 3,137,147 5,007,073
----------- ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,139,698) (905,103) (1,538,412) 597,468 (1,290,796)
AND CASH EQUIVALENTS ----------- ----------- ----------- ----------- -----------
</TABLE>
(Continued)
I-6
<PAGE>
IVAX DIAGNOSTICS, INC.
----------------------
STATEMENTS OF CASH FLOWS
------------------------
(Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
-------------------------- -------------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ------------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,505,579) 2,211,267 2,064,014 599,938 (147,581)
CASH AND CASH EQUIVALENTS, beginning of period 4,217,956 2,153,942 2,153,942 1,554,004 1,701,585
----------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,712,377 $4,365,209 $4,217,956 $2,153,942 $1,554,004
=========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ - $ - $ - $ 6,243 $ 2,004
=========== ========== ========== ========== ==========
Taxes paid $ 207,805 $ 12,000 $ 204,430 $ 59,746 $ 176,128
=========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
I-7
<PAGE>
IVAX DIAGNOSTICS, INC.
----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. ORGANIZATION AND OPERATIONS
---------------------------
IVAX Diagnostics, Inc. ("Diagnostic" or the "Company") is a Delaware corporation
and a wholly owned subsidiary of IVAX Corporation ("IVAX" or the "Parent"). The
Company is engaged in developing, manufacturing and marketing diagnostic test
kits, reagents and instruments for use in hospital and reference laboratories
and doctors' offices. For the years ended December 31, 1999, 1998 and 1997 the
Company generated net losses and required net cash advances from IVAX to fund
its operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Interim Financial Statements
----------------------------
In management's opinion, the accompanying unaudited interim consolidated
financial statements of the Company contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position of the Company as of September 30, 2000, and the results of
its operations and cash flows for the nine months ended September 30, 2000 and
1999. The results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the results of operations or cash flows which
may be reported for the remainder of 2000.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
On September 28, 1998, IVAX, the then owner of 100% of the common stock of
Immunovision, Inc. and Diamedix Corporation contributed its ownership of these
companies to the Company. As the transfer was between companies under common
control, it has been accounted for at historical cost in a manner similar to a
pooling of interests. Accordingly, the financial statements of the Company have
been retroactively restated to include the results of Immunovision, Inc. and
Diamedix Corporation for all periods presented.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
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. The Company's actual results in subsequent periods may differ
from the estimates and assumptions used in the preparation of the accompanying
consolidated financial statements. Significant estimates include accounts
receivable allowances, inventory reserves, litigation accruals, customer
returns, discounts and allowances, warranty accruals and deferred tax
allowances.
Recently Issued Accounting Standards
------------------------------------
In December 1999, Securities and Exchange Commission Staff Accounting Bulletin
("SAB") No. 101 regarding revenue recognition was issued. SAB No. 101 clarifies
issues relating to revenue recognition in financial statements including income
statement presentation and disclosure. SAB No. 101 is effective for fiscal
quarters beginning after September 15, 2000. The Company does not believe the
adoption of SAB No. 101 will have a material effect on its financial position or
results of operations.
I-8
<PAGE>
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS Nos. 137 and 138, in the first quarter of 2001. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Management believes that the adoption of SFAS
No. 133, as amended, did not have a material impact on the Company's
consolidated financial statements.
In May 2000, the Emerging Issues Task Force ("EITF") reached consensus on Issue
No. 00-14, "Accounting for Coupons, Rebates and Discounts," which prescribes the
accounting for and classification of sales rebates and discounts. At its July
19-20 meeting, the EITF delayed the transition date to correspond with
implementation of SAB No. 101. Implementation of EITF No. 00-14 is not expected
to have a significant impact on the Company's financial position or results of
operations.
Cash and Cash Equivalents
-------------------------
The Company considers all investments with a maturity of three months or less as
of the date of purchase to be cash equivalents.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventory cost include materials, labor and manufacturing
overhead. In evaluating whether inventory is stated at the lower of cost or
market, management considers such factors as the amount of inventory on hand,
estimated time required to sell such inventory, remaining shelf life and current
market conditions. Reserves are provided as appropriate to reduce excess or
obsolete inventories to the lower cost or market. Inventories consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
------------ ---------------------------------
2000 1999 1998
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Raw materials $1,024,237 $1,028,508 $ 771,000
Work-in-process 494,627 418,758 378,909
Finished goods 771,908 980,310 854,548
---------- ---------- ----------
Total $2,290,772 $2,427,576 $2,004,457
========== ========== ==========
</TABLE>
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are carried at cost, less accumulated
depreciation. Deprecation is computed on the straight-line basis over the
estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Years
-----------
<S> <C>
Buildings and improvements 5-20
Machinery and equipment 3-10
Furniture and fixtures 3-10
</TABLE>
Costs of major additions and improvements are capitalized and expenditures for
maintenance and repairs which do not extend the life of the assets are expensed.
Upon sale or disposition of property, plant and equipment, the cost and related
accumulated depreciation is eliminated from the accounts and any resulting gain
or loss is credited or charged to operations.
Depreciation expense related to property, plant and equipment was $264,565
(unaudited) and $305,230 (unaudited) for the nine months ended September 30,
2000 and 1999, respectively, and $393,800, $402,253 and $403,243 for the years
ended December 31, 1999, 1998 and 1997, respectively.
I-9
<PAGE>
Goodwill
--------
Cost in excess of net assets of acquired companies (goodwill) is amortized using
the straight-line method over 40 years. Goodwill is reported net of accumulated
amortization and consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -----------------------------------
2000 1999 1998
------------- ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Goodwill $ 9,146,094 $ 9,083,157 $ 9,002,486
Less - Accumulated amortization (1,946,296) (1,752,850) (1,495,080)
----------- ----------- -----------
$ 7,199,798 $ 7,330,307 $ 7,507,406
=========== =========== ===========
</TABLE>
Amortization expense related to goodwill was $191,758 (unaudited) and $193,446
(unaudited) for the nine months ended September 30, 2000 and 1999, respectively,
and $257,770, $258,603 and $258,973 for the years ended December 31, 1999, 1998
and 1997, respectively.
Equipment on Lease, net
-----------------------
The cost of the Company's owned instruments, which are placed under reagent
rental programs at customer facilities for testing and usage of the Company's
products (see Note 2 - Revenue Recognition) less accumulated amortization
consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -----------------------------------
2000 1999 1998
------------- ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Equipment on lease at cost $ 2,060,610 $ 1,970,735 $ 3,001,915
Less - Accumulated amortization (1,436,149) (1,300,323) (2,264,822)
----------- ----------- -----------
$ 624,461 $ 670,412 $ 737,093
=========== =========== ===========
</TABLE>
Equipment on lease are depreciated over three years. Depreciation expense
related to equipment on lease was $299,505 (unaudited) and $311,690 (unaudited)
for the nine months ended September 30, 2000 and 1999, respectively, and
$427,468, $437,659 and $260,114 for the years ended December 31, 1999, 1998 and
1997, respectively.
Review for Impairment
---------------------
Following any acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate that the remaining balance
of long-lived assets may not be recoverable. When factors indicate that long-
lived assets may be impaired, the Company uses various methods to estimate the
asset's future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, an impairment loss is recognized
based on the excess of the carrying amount over the estimated fair value of the
asset. Any impairment amount is charged to operations.
Foreign Currencies
------------------
The Company's operations include operations that are located in Italy. Assets
and liabilities as stated in the local reporting currency are translated at the
rate of exchange prevailing at the balance sheet date. The gains or losses that
result from this process are shown in the accumulated other comprehensive income
(loss) caption in the stockholders' equity section of the accompanying
consolidated balance sheets. Amounts in the statements of operations are
translated at the average rates for the period.
The Company is exposed to the risk of currency fluctuation, as a significant
portion of its operations occur in Italy. The Company does not use financial
derivatives to hedge either exchange rates or interest rate fluctuations.
I-10
<PAGE>
Financial Instruments
---------------------
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the short-term maturity of the
instruments and reserves for potential losses, as applicable. The Company does
not speculate in the foreign exchange market.
Revenue Recognition
-------------------
The Company owns instruments, which it places under reagent rental programs
common to the industry for periods of time at customer facilities for testing
and usage of the Company's products ("equipment on lease"). The instrument
system, utilized by customers to expedite the performance of certain tests, are
paid for over an agreed upon contract period by the purchase of test kits.
Revenue and the related cost of sales on sales of test kits and instrumentation
are recognized at the time of shipment. Net revenues are comprised of gross
revenues less provisions for expected customer returns, allowances and
discounts. These provisions and discounts totaled $11,124 (unaudited) and
$2,871 (unaudited) for the nine months ended September 30, 2000 and 1999
respectively, and $34,968, $7,611 and $9,684 in the years ended December 31,
1999, 1998 and 1997, respectively.
Provision for estimated warranty claims are established by the Company
concurrently with the recognition of revenue. Provisions are established in
accordance with generally accepted accounting principles based upon
consideration of a variety of factors, including actual experience for products
during the past several years by product type, the market for the product,
estimated customer inventory levels by product and projected economic
conditions. Actual customer returns, allowances and discounts and warranty
claims incurred are, however, dependent upon future events. The Company
continually monitors the factors that influence customer returns, allowances and
discounts and warranty claims and makes adjustments to these provisions when
management believes that actual amounts may differ from established reserves.
Research and Development Costs
------------------------------
Company sponsored research and development costs related to future products are
expensed currently.
Stock-Based Compensation Plans
------------------------------
The employees of the Company are eligible to participate in the stock option
plans of IVAX. As permissible under statement of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation," the Company accounts for all
stock-based compensation arrangements using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and discloses pro forma net earnings and earnings per
share amounts as if the fair value method had been adopted.
Comprehensive Loss
------------------
Comprehensive loss, consisting of the sum of net loss and translation
adjustment, was $1,403,801 (unaudited) and $2,660,307 (unaudited) for the nine
months ended September 30, 2000 and 1999, respectively, and $3,789,713,
$3,037,656 and $6,000,766 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Earnings per Share
------------------
Loss per share is computed by dividing net loss by the weighted average number
of common and common equivalent shares outstanding during the period. The
dilutive effect of all outstanding stock options is considered common stock
equivalents and is calculated using the treasury stock method. Basic and
diluted net loss per share are the same for all periods presented.
I-11
<PAGE>
3. CONCENTRATION OF CREDIT RISK
----------------------------
The Company performs periodic credit evaluations of its customers' financial
conditions and provides allowances for doubtful accounts as required. One
customer accounted for 40% (unaudited), 9.8% and 15.3% of the Company's net
accounts receivable as of September 30, 2000, December 31, 1999 and 1998,
respectively. The same customer accounted for 46.2% (unaudited) and 26.5%
(unaudited) for the nine months ended September 30, 2000 and 1999, respectively,
and 28.1%, 14.3% and 0% of the Company's net revenues for the years ended
December 31, 1999, 1998 and 1997, respectively. The customer and the Company
entered into a contract in April 1999, pursuant to which the customer agreed to
purchase minimum levels of the Company's products during the three-year period
beginning May 1, 1999.
Twice during 2000, the Company's largest customer suspended its purchases of the
Company's products for several months while representatives of the Company and
the customer resolved certain product issues. On January 10, 2001, shipments to
the Company's largest customer recommenced. There can be no assurance that the
customer will make additional purchases at the anticipated levels or within the
anticipated time frame. The failure of the customer to do so would have a
material adverse effect on the Company's business, prospects, operating results
and financial condition.
4. INCOME TAXES
------------
The Company reports its income taxes as part of a consolidated group with the
Parent. For financial statement purposes, the Company accounts for income taxes
on a stand-alone basis as though the Company had filed its own income tax
returns.
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets or
liabilities are computed based upon the difference between the financial
statement and income tax basis of assets and liabilities using the enacted
marginal tax rate applicable when the related asset or liability is expected to
be realized or settled. Deferred income tax expenses or benefits are based on
the changes in the asset or liability from period to period. If available
evidence suggest that it is more likely than not that some portion or all of the
deferred tax assets will not be realized, a valuation allowance is required to
reduce the deferred tax assets to the amount that is more likely than not to be
realized. Future changes in such valuation allowance would be included in the
provision for deferred income taxes in the period of change. At December 31,
1999 and 1998, the Company has provided full valuation reserves against its net
domestic deferred tax assets.
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
--------------------------- ------------------------------------
2000 1999 1999 1998 1997
------------ ----------- --------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Foreign $1,040,054 $626,007 $726,219 $(215,026) $ 82,779
Deferred:
Foreign - - 134,997 33,192 (472,035)
---------- -------- -------- --------- ---------
Total $1,040,054 $626,007 $861,216 $(181,834) $(389,256)
========== ======== ======== ========= =========
</TABLE>
I-12
<PAGE>
A detail of the significant components of the foreign net deferred income tax
balances follows:
<TABLE>
<CAPTION>
As of
December 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts receivable allowances $626,265 $595,250
Reserves and accruals 40,726 29,750
Book/tax depreciation differences on
property, plant and equipment 65,790 123,434
Net operating loss carryforward - 137,688
Other 1,634 2,493
-------- --------
$734,415 $888,615
======== ========
</TABLE>
As discussed above, the Company has established a full valuation allowance of
approximately $3.4 million and $2.6 million on its net domestic deferred tax
assets, which are primarily comprised of net operating loss carryforwards of
approximately $2.6 million and $2.4 million at December 31, 1999 and 1998,
respectively. These domestic net operating loss carryforwards are available for
use by the Parent. On a separate return basis, no recognition of that
utilization is reflected in the accompanying consolidated financial statements.
These domestic net operating loss carryforwards begin to expire in 2012.
The Company's income tax provisions for the nine months ended September 30, 2000
and 1999 and the years ended December 31, 1999, 1998, 1997 were different from
the amount computed on the loss before provision for income taxes at the
statutory rate of 35% primarily due to the nonrecognition of the benefits of
domestic losses of $1,631,240 (unaudited), $2,248,133 (unaudited), $1,406,765,
$2,794,739 and $3,770,994, respectively.
United States income taxes have not been provided on undistributed earnings of
foreign subsidiaries, as such earnings are being retained indefinitely by such
subsidiaries for reinvestment. The distribution of these earnings would first
reduce the domestic valuation allowance before resulting in additional United
States income taxes.
5. EMPLOYEE BENEFIT PLAN
---------------------
The Company's employees within the United States are eligible to participate in
IVAX' 401(k) retirement plan, which permits pre-tax employee payroll
contributions (subject to certain limitations) and discretionary employer
matching contributions. Total matching contributions for the years ended
December 31, 1999, 1998 and 1997 were $59,569, $45,520 and $48,125,
respectively.
6. ACCRUED EXPENSES
----------------
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------------
2000 1999 1998
------------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Accrued payroll costs $ 584,332 $ 344,453 $ 364,165
Other accrued taxes 1,139,351 1,508,940 1,439,276
Professional fees 230,108 112,227 262,869
Other 353,758 268,979 532,409
---------- ---------- ----------
$2,307,549 $2,234,599 $2,598,719
========== ========== ==========
</TABLE>
I-13
<PAGE>
7. STOCKHOLDER'S EQUITY
--------------------
Employee Stock Purchase Program
-------------------------------
On June 17, 1999, IVAX' 1999 Employee Stock Purchase Plan ("ESPP") was approved
at the Annual Meeting of IVAX' Stockholders. IVAX' Board of Directors also
approved the purchase of common stock in the open market, as needed, for the
ESPP. The ESPP became effective January 1, 2000 for employees based in the
United States and Puerto Rico and allows them to purchase IVAX common stock at
85% of the fair market value on the enrollment date or exercise date, whichever
is lower. The maximum amount of stock an employee may purchase in a year is
$25,000 and subsequent resale is restricted as stated in the ESPP. IVAX
believes this qualifies as a noncompensatory plan under guidelines of APB 25,
and as such no compensation is recorded.
Common Stock
------------
Prior to June 29, 1999, the Company had 100 shares of common stock outstanding
with a par value of $1.00 per share.
On November 13, 1998, the Company amended its articles of incorporation to
increase the number of authorized shares of common stock to 30,000,000, par
value $1.00 per share.
In June of 1998, IVAX made a $500,000 capital contribution to the Company.
On June 29, 1999, the Board of Directors of the Company approved a 146,000 for
one stock split.
On November 17, 2000, the Company amended its articles of incorporation to
change the par value of its common shares to $0.01 per share.
The increase in authorized shares, the stock split and the change in par value
described above have been retroactively reflected throughout the accompanying
consolidated financial statements.
Stock Option Plan
-----------------
Employees of the Company are eligible to participate in the IVAX 1997 Employee
Stock Option Plan, as amended (the "1997 Plan"), which permits the issuance of
options to employees and consultants to purchase shares of IVAX common stock.
The 1997 Plan provides that the exercise price of the issued options shall be no
less than the fair market value of the common stock on the date of grant and
that the option terms shall not exceed ten years.
I-14
<PAGE>
The following summarizes outstanding stock options under the IVAX 1997 Plan for
employees of the Company:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997 316,123 $15.16
Granted 90,000 8.58
Terminated (33,265) 16.27
Exercised - -
--------
Outstanding at December 31, 1997 372,858 13.48
Granted 249,270 5.55
Terminated (365,109) 13.47
Exercised - -
--------
Outstanding at December 31, 1998 257,019 6.53
Granted - -
Terminated (6,649) 15.35
Exercised (40,702) 5.55
--------
Outstanding at December 31, 1999 209,668 6.44
Granted (unaudited) 30,000 18.29
Terminated (unaudited) - -
Exercised (unaudited) (107,907) 5.60
--------
Outstanding at September 30, 2000 (unaudited) 131,761 9.82
========
Options excercisable at September 30, 2000 (unaudited) 79,261 7.83
========
Options exercisable at December 31, 1999 155,038 6.44
========
</TABLE>
The Company's pro forma net loss and pro forma weighted average fair value of
options granted, with related assumptions, assuming the Company had adopted the
fair value method of accounting for all stock-based compensation arrangements
consistent with the provisions of SFAS No. 123, using the Black-Scholes option
pricing model, are indicated below for the nine months ended September 30, 2000
and 1999 and the years ended December 31, 1999, 1998, 1997.
<TABLE>
<CAPTION>
September 30, December 31,
--------------------------- --------------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ---------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss as reported $ (413,954) $(1,866,387) $(2,466,204) $(3,582,182) $(4,861,756)
Pro forma net loss (422,402) (1,904,476) (2,520,449) (3,626,549) (5,019,631)
Pro forma weighted
average fair value
of options granted $ 1.60 $ - $ - $ 1.53 $ 4.80
Expected life (years) 4.1 4.1 4.1 4.6 4.8
Risk-free interest rate 5.92%-6.20% 4.85%-6.05% 4.57%-6.08% 4.37%-5.65% 5.51%-6.75%
Expected volatility 27% 27% 27% 27% 28%
Dividend yield 0% 0% 0% 0% 0%
</TABLE>
I-15
<PAGE>
Effective June 29, 1999, the Board of Directors of the Company approved the
Company's 1999 Stock Option Plan (the "1999 Plan"). The 1999 Plan permits the
issuance of options to employees, non-employee directors and consultants of the
Company to purchase up to 1,460,000 shares of the 30,000,000 authorized shares
of the Company. In June and August of 1999 (as determined below), non-qualified
options of 835,700 shares of common stock were granted with an exercise price of
$1 per share, a vesting schedule of 50% at the end of year 2 and 25% at the end
of years 3 and 4 and expiration dates ranging from June to August of 2006. No
options have been exercised to date.
Under the 1999 Plan, prior to the consummation of an initial public offering
("IPO"), fair value shall be determined based on the book value per share of the
Company and its subsidiaries as reflected on the most recently prepared
financial statements of the Company, assuming that all options outstanding under
the 1999 Plan have been exercised (whether or not such options are exercisable
at the time the determination of value is made). Any capital contribution made
by the Parent will be excluded from the book value calculation.
Upon completion of an IPO, fair value shall be determined by reference to
available market quotations. The options are not exercisable until the date on
which an IPO is consummated. If, prior to the consummation of an initial public
offering, there shall be consummated (a) any consolidation or merger of the
Company in which the Company is not the surviving corporation (other than a
merger of the Company in which the holders of the Company's outstanding voting
securities immediately prior to the merger have the same proportionate ownership
of the surviving corporation immediately after the merger and other than a
merger or consolidation which itself would result in an initial public
offering), or (b) any sale, lease, exchange or other transfer of all, or
substantially all, of the assets of the Company to an entity which is not a
wholly-owned subsidiary of the Company (each of the foregoing a "Corporate
Transaction"), then the vesting and exercisability of each option outstanding
under the 1999 Plan will be automatically accelerated so that each such option
will, immediately prior to the specified effective date of such Corporate
Transaction, become fully exercisable with respect to the total number of shares
subject to such option and may be exercised for all or any portion of such
shares. Upon the consummation of such Corporate Transaction, all outstanding
options under the 1999 Plan will, to the extent not previously exercised,
terminate and cease to be outstanding.
If, following the Company's consummation of an IPO the shareholders of the
Company approve any Corporate Transaction then, to the extent such options are
not either assumed by the successor corporation or parent thereof or replaced
with a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof, the vesting and exercisability of each
option outstanding under the 1999 Plan will be automatically accelerated so that
each such option will, immediately prior to the specified effective date of such
Corporate Transaction, become fully exercisable with respect to the total number
of shares subject to such option and may be exercised for all or any portion of
such shares. Upon the consummation of such Corporate Transaction, all
outstanding options under the 1999 Plan will, to the extent not previously
exercised, assumed by the successor corporation or its parent or replaced with a
comparable option to purchase shares of the capital stock of the successor
corporation or parent thereof, terminate and cease to be outstanding.
If the Company has not consummated an IPO on or before the fourth anniversary of
the date on which the 1999 Plan is adopted by the Board of Directors (i.e., June
29, 2003) then at any time after the fourth anniversary, the employee may elect
to return any of such employee's vested options to the Company in exchange for a
cash payment from the Company equal to the excess of the share value as of the
date such employee exercises such right over the per share exercise price of
such option (multiplied by the number of share options to be exercised).
For the year ended December 31, 1999, no compensation expense had been recorded
related to the Company's 1999 Plan because there has not been an increase in the
book value per share above the $1 exercise price. See Note 10.
8. SEGMENT INFORMATION
-------------------
Diagnostics' management reviews financial information, allocates resources and
manages its business by geographic region. The Domestic region contains
Diagnostic's subsidiaries in the United States. The Italian region contains
subsidiaries located in Italy. The information provided is based on internal
reports and was developed and utilized by management for the sole purpose of
tracking trends and changes in the results of the regions. The information,
I-16
<PAGE>
including the allocations of expense and overhead, were calculated based on a
management approach and may not reflect the actual economic costs, contributions
or results of operations of the regions as stand alone businesses. If a
different basis of presentation or allocation were utilized, the relative
contributions of the regions might differ but the relative trends would, in
management's view, likely not be materially impacted. The table below sets
forth net revenue, income from operations and assets by region.
<TABLE>
<CAPTION>
Domestic Italian Eliminations Total
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
September 30, 2000 (unaudited):
External net sales $ 3,117,535 $ 6,721,811 $ - $ 9,839,346
Intercompany sales 473,762 260,865 (734,627) -
----------- ----------- ----------- -----------
Net revenue 3,591,297 6,982,676 (734,627) 9,839,346
Income (loss) from operations (1,591,799) 2,512,199 24,494 944,894
Assets 3,820,521 15,014,123 (53,306) 18,781,338
September 30, 1999 (unaudited):
External net sales 2,834,192 5,507,054 - 8,341,246
Intercompany sales 474,776 257,377 (732,153) -
----------- ----------- ----------- -----------
Net revenue 3,308,968 5,764,431 (732,153) 8,341,246
Income (loss) from operations (2,445,099) 1,303,816 (46,581) (1,187,864)
Assets 4,191,223 18,051,782 (68,977) 22,174,028
December 31, 1999:
External net sales 3,818,858 7,286,012 - 11,104,870
Intercompany sales 630,968 429,899 (1,060,867) -
----------- ----------- ----------- -----------
Net revenue 4,449,826 7,715,911 (1,060,867) 11,104,870
Income (loss) from operations (3,193,725) 1,807,734 (55,404) (1,441,395)
Assets 4,205,192 17,534,366 (77,800) 21,661,758
December 31, 1998:
External net sales 3,851,487 5,713,820 - 9,565,307
Intercompany sales 446,958 134,479 (581,437) -
----------- ----------- ----------- -----------
Net revenue 4,298,445 5,848,299 (581,437) 9,565,307
Income (loss) from operations (3,504,772) (8,761) 11,470 (3,502,063)
Assets 4,310,890 17,831,730 (22,396) 22,120,224
December 31, 1997:
External net sales 4,748,459 4,540,718 - 9,289,177
Intercompany sales 486,495 121,068 (607,563) -
----------- ----------- ----------- -----------
Net revenue 5,234,954 4,661,786 (607,563) 9,289,177
Loss from operations (4,510,056) (726,568) (11,438) (5,248,064)
Assets 5,367,202 15,909,259 (12,385) 21,264,076
</TABLE>
9. COMMITMENTS AND CONTIGENCIES
----------------------------
Leases
------
The Company leases office, plant and warehouse facilities under noncancellable
operating leases. Rent expense for the nine months ended September 30, 2000 and
1999 and the years ended December 31, 1999, 1998, 1997 totaled approximately
$140,000 (unaudited), $145,000 (unaudited), $202,000, $201,000 and $196,000,
respectively. The future minimum lease payments under noncancellable capital
leases and their related assets recorded at December 31, 1999 and 1998 were not
material. The future minimum lease payments under noncancellable operating
leases with initial or remaining terms of one year or more at December 31, 1999,
were as follows:
I-17
<PAGE>
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
2000 $178,000
2001 166,000
2002 57,000
--------
Total minimum lease payments $401,000
========
</TABLE>
Litigation, Claims and Assessments
----------------------------------
In June of 1995, a company filed a complaint against the Company alleging breach
of contract. The matter was settled in October 1997 for $500,000, which is
included in general and administrative expenses in the accompanying 1997
consolidated statement of operations for the year ended December 31, 1997.
In August of 1996, a company filed a declatory judgment action seeking to
invalidate certain patents licensed from the Company. A settlement was reached
in favor of the Company in 2000 for $500,000. This amount was received and
recorded by the Company in 2000 as a reduction of general and administrative
expenses in the accompanying unaudited consolidated statement of operations for
the nine months ended September 30, 2000.
The Company is involved in various other legal claims, regulatory matters,
trademark matters and other notices and demand proceedings arising in the
ordinary course of business. While it is not feasible to predict or determine
the outcome of these proceedings, in the opinion of management, based on a
review with legal counsel, any losses resulting from such legal proceedings will
not have a material adverse impact on the financial position, results of
operations or cash flows of the Company.
10. RELATED-PARTY TRANSACTIONS
--------------------------
Included in the accompanying consolidated balance sheets as due to Parent are
amounts due to IVAX as follows:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------
2000 1999 1998
------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Advances from IVAX, unsecured
and interest bearing $3,675,086 $6,424,812 $3,925,203
Advances from IVAX, unsecured
and noninterest bearing 2,730,227 2,239,913 1,017,746
---------- ---------- ----------
$6,405,313 $8,664,725 $4,942,949
========== ========== ==========
</TABLE>
IVAX charges interest on the interest bearing advances at prime plus 1%, which
ranged from 8.75% to 9.5% from 1997 to 1999.
At December 31, 1999 and 1998, accounts receivable in the amount of $660,324 and
$541,171, respectively, were sold at book value to an affiliate of the Company
and were repurchased for the same price on January 1, 2000 and 1999,
respectively.
IVAX administrates and funds health care claims on behalf of the Company and
charges the Company a fee reflective at the cost of service. Additionally, IVAX
provides certain legal, treasury, tax, insurance, payroll and human resource
service to the Company for which no fee is charged to the Company.
I-18
<PAGE>
11. SUBSEQUENT EVENT (Unaudited)
----------------------------
On November 21, 2000, the Company and b2bstores.com, Inc. entered into a merger
agreement, pursuant to which b2bstores.com, Inc. will issue 20,000,000 shares of
its common stock in exchange for all of the Company's common stock. The
consummation of the merger is subject to, among other things, approval by the
shareholders of b2bstores.com, Inc. There can be no assurances that the merger
will be consummated.
The principal asset of b2bstores.com, Inc. is $25.2 million in cash and
marketable securities as of September 30, 2000. If the merger is consummated,
management believes it will be accounted for as a reverse merger and reflected
as a capital transaction equivalent to the issuance of common stock by the
Company for b2bstores.com, Inc.'s net monetary assets, accompanied by a
recapitalization of the Company.
Pursuant to the terms of the 1999 Plan (Note 6), if the merger is consummated,
the difference between the $1 exercise price and the fair value of the 835,700
options outstanding will be recorded as compensation expense by the Company.
I-19
<PAGE>
B2BSTORES.COM, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 26, 2001
The undersigned hereby appoints Randall K. Davis and Richard Kandel, and
each of them, proxies, with the powers the undersigned would possess if
personally present, and with full power of substitution, to vote at the special
meeting and at any adjournment thereof, all shares of b2bstores.com, Inc. held
of record by the undersigned on the record date, upon all subjects that may
properly come before the special meeting, including the matters described in the
proxy statement furnished herewith, subject to any directions indicated on this
proxy ballot. IF NO DIRECTIONS ARE GIVEN AND THE SIGNED PROXY BALLOT IS
RETURNED, THE PROXIES WILL VOTE FOR EACH OF THE PROPOSALS AND, AT THEIR
DISCRETION, ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY ADJOURNMENT THEREOF.
MARK THE BOX AT THE RIGHT IF YOU PLAN TO ATTEND THE MEETING. [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE FOLLOWING PROPOSALS,
AS MORE FULLY DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT:
1. Approval of the Merger Agreement, dated November 21, 2000, by and among
IVAX Corporation, IVAX Diagnostics, Inc., and b2bstores.com, Inc., and the
merger of IVAX Diagnostics with and into b2bstores.com as contemplated by
such Merger Agreement.
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
2. Approval of the amendment to the b2bstores.com, Inc. Certificate of
Incorporation to increase the authorized number of shares of common stock
from 25 million shares to 50 million shares and change the name of the
corporation from b2bstores.com Inc. to IVAX Diagnostics, Inc.
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
The undersigned acknowledges receipt of the formal notice of such meeting and
the accompanying proxy statement.
Please sign exactly as name appears on the certificate. When shares are held by
joint tenants, both should sign. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person. When signing as attorney,
executor, administrator, trustee, guardian, officer or partner, please give full
title as such.
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY BALLOT PROMPTLY USING THE
ENCLOSED ENVELOPE.
_____________________________________
_____________________________________
SIGNATURE(S)
DATE: _______________________________
