As filed with the Securities and Exchange Commission on August 12, 1998. Registration No. 333-43443 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ AMENDMENT NO. 3 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NETVALUE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 7319 (Primary Standard Industrial Classification Number) 23-2855659 (I.R.S. Employer Identification Number) 1960 Bronson Road, Building No. 2 Fairfield, Connecticut 06430 (203) 319-7000 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) R. Scott Wills, President 1960 Bronson Road, Building No. 2 Fairfield, Connecticut 06430 (203) 319-7000 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) Copies to: Michael C. Forman, Esquire Steven Wasserman, Esquire Klehr, Harrison, Harvey, Branzburg & Ellers LLP Berlack, Israels & Liberman LLP 1401 Walnut Street 120 West 45th Street Philadelphia, Pennsylvania 19102 New York, New York 10036 (215) 568-6060 (212) 704-0100 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. ----------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. NETVALUE, INC. CROSS-REFERENCE TABLE Pursuant to Item 501(b) of Regulation S-K Item No. Form S-1 Caption Prospectus Caption - -------- ---------------- ------------------ Item 1 Forepart of the Registration Facing Page of Registration Statement; Statement and Outside Front Cover Cross Reference Sheet; Outside Front Page of Prospectus Cover Page of Prospectus Item 2 Inside Front and Outside Back Inside Front and Outside Back Cover Cover Pages of Prospectus Pages of Prospectus; Available Information Item 3 Summary Information, Risk Factors Prospectus Summary; Risk Factors and Ratio of Earnings to Fixed Charges Item 4 Use of Proceeds Prospectus Summary: Use of Proceeds Item 5 Determination of Offering Price Risk Factors; Underwriting Item 6 Dilution Dilution Item 7 Selling Security Holders Not Applicable Item 8 Plan of Distribution Underwriting Item 9 Description of Securities to be Outside Front Cover Page of Registered Prospectus; Prospectus Summary; Market Price of and Dividends on the Common Stock and Related Shareholder Matters; Description of Capital Stock Item 10 Interests of Named Experts and Legal Matters; Experts Counsel Item 11 Information with Respect to the Prospectus Summary; Risk Factors; Registrant Market Price of and Dividends on Common Stock and Related Shareholder Matters; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Capital Stock Item 12 Disclosure of Commission Position Not Applicable on Indemnification for Securities Act Liabilities Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED AUGUST 12, 1998 PROSPECTUS 3,600,000 SHARES NETVALUE, INC. COMMON STOCK netValue, Inc. ("netValue" or the "Company") hereby offers 3,600,000 shares of common stock, $.001 par value per share ("Common Stock"). It is currently anticipated that the initial public offering price will be $5.00 per share. See "Underwriting" for factors to be considered in determining the initial public offering price. Prior to this offering of Common Stock (the "Offering"), there has been no public market for the Common Stock, and there can be no assurance that an active market for the Common Stock will develop after completion of the Offering. The Company has applied for quotation of the Common Stock on The NASDAQ SmallCap (the "SmallCap") Market. There is no assurance that NASDAQ will approve the Company's initial listing application or, if the application is approved, that the Company's listing will be maintained on NASDAQ. AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF FOR A DISCUSSION OF CERTAIN MATTERS THAT PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================================================ Underwriting Discounts Price to Public and Commissions(1) Proceeds to Company(2) - -------------------------------------------------------------------------------------------------------------------------------- Per Share . . . . . . . . . . . . . . . - -------------------------------------------------------------------------------------------------------------------------------- Total(3) . . . . . . . . . . . . . . . ================================================================================================================================ (1) Does not include additional compensation to be paid to J.B. Sutton Group, LLC (the "Underwriter") in the form of (i) a nonaccountable expense allowance of $540,000 ($621,000 if the over-allotment option referred to in footnote 3 is exercised in full), or (ii) the value of an option entitling the Underwriter to purchase up to 360,000 shares of Common Stock at a price equal to 165% of the offering price per share, exercisable for a period of four years commencing one year after to the date of this Prospectus. The Company has agreed to indemnify the Underwriter against certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses payable by the Company, estimated to be $500,000, not including the Underwriter's nonaccountable expense allowance and investment banking fees described in footnote 1 above. (3) The Company has granted the Underwriter an option, exercisable within 30 days after the date of this Prospectus, to purchase up to 540,000 additional shares on the same terms and conditions as set forth above solely to cover over-allotments, if any. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $_____________, $____________ and $________________, respectively. See "Underwriting." The shares of Common Stock are being offered by the Underwriter on a firm commitment basis, subject to a declaration by the Securities and Exchange Commission (the "Commission") that the registration is effective, as specified herein, and subject to receipt and acceptance by the Underwriter and its right to reject any order in whole or part and to prior sale, withdrawal or cancellation of the offer without notice. It is expected that delivery of the shares of Common Stock will be made at the offices of J.B. Sutton Group, LLC in Great Neck, New York, on or about __________, 1998. -------------- J.B. Sutton Group, LLC 1010 Northern Boulevard, Suite 214 Great Neck, New York 11021 (516) 498-2100 (Telephone) (516) 498-2198 (Facsimile) The date of this Prospectus is AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-1 (such registration statement, as the same may be amended and together with all exhibits and schedules thereto, the "Registration Statement") with the Commission under the Securities Act with respect to the securities offered hereby. As permitted by the rules and regulations of the Commission, this prospectus (the "Prospectus") does not contain all of the information contained in the Registration Statement. For further information regarding both the Company and the securities offered hereby, reference is made to the Registration Statement, which may be inspected without charge at the public reference facilities of the Commission's Washington, D.C. office, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and its regional office located at 7 World Trade Center, Suite 1300, New York, NY 10048. Copies may be obtained from the Washington D.C. office public reference library upon request and payment of the prescribed fee. Such reports and other information can be reviewed through the Commission's Electronic Data Gathering Analysis and Retrieval System, which is publicly available through the Commission's web site (http://www.sec.gov). The Company will furnish to its stockholders annual reports containing audited financial statements and quarterly reports containing unaudited financial statements for the first three quarters of each year. The Company is not currently subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. -2- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the financial statements and notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all information contained in this Prospectus, including share and per share data, assumes (i) no exercise of the Underwriter's over-allotment option or any other options or warrants outstanding as of the date hereof and (ii) no conversion of any preferred stock outstanding as of the date hereof. See "Description of Capital Stock." The Company netValue, Inc. (the "Company") is a development stage company whose products incentivize consumers to purchase products and services sold across all categories of trade. The Company has developed a patent-pending process to deliver coupons, discounts and other promotional incentives to Internet users. The netValue system utilizes various sophisticated and unique targeting engines to deliver these purchase incentives. The Company has also developed a technology to address coupon industry concerns regarding fraudulent coupon redemption. The Company's revenues will be generated by pursuing a combination of two business plan strategies. One strategy follows a wholesale software-licensing model. The other strategy follows a direct to consumer branded web site model. For the wholesale service, the Company plans to generate revenues through a combination of licensing fees and transaction fees. For its own branded web site, the Company plans to generate revenues through transaction fees and advertising fees. The Company provides software and backend systems that allow its wholesale business partners to market their own uniquely branded promotional commerce service. Potential business partners of the Company include manufacturers, service providers, national retailers, local merchants, wholesale distributors, traditional web site publishers and Internet Service Providers (the "Business Partners"). The Company currently has developed and plans to initially market three separate products to meet the needs of its Business Partners and various consumer segments. These products are Coupons OnlineSM, PromoCache SM and i-ValueSM. The Company's Coupons OnlineSM product allows manufacturers and service providers to deliver targeted, secure coupons and other incentives to consumers from any Internet web site. Consumers use the Company's web browser plug-in software to access and print coupon offers and other promotions from the web sites of manufacturers and marketers desiring to feature single product promotional offers. The Company's systems provide online targeting and validation for each consumer as well as delivery and validation of coupons and other targeted offers. The Company's PromoCache SM product is wholesaled to a broader range of manufacturers, retailers and distributors as well as more traditional web site publishers and Internet Service Providers. PromoCache SM creates themed promotional offers, in short time spans, from any web site. It automatically aggregates national and local offers from multiple databases using a series of simultaneous targeting engines and criteria. Consumers then view their own unique offer site, the equivalent of a personalized discount catalog. The Company's i-ValueSM product creates a desktop channel on the personal computers of consumers who subscribe to this service. It allows retailers, manufacturers and web site publishers to deliver targeted, secure coupons and other incentives to these consumers. Consumers subscribe to the service and receive electronic coupons and promotional incentives which are updated on a regular basis. Promotional offers can be individually tailored to meet each consumer's product category and brand shopping preferences. -3- The Company began generating revenues during the first half of 1998. The Company generated over $70,000 from several major consumer package good manufacturers who began utilizing and marketing the Company's products. Separately, the Company has also entered into a licensing agreement with IQ Value, LLC ("IQ") and is scheduled to receive $3,000,000 in licensing fees. As of June 30, 1998, the Company had earned $1,250,000 of this fee. Accordingly, the Company has generated total revenues through June 30, 1998 of approximately $1,300,000. The Company has also signed major national retailers to contracts and is in negotiation with several other manufacturers and retailers. The Company was incorporated as a Delaware corporation on July 16, 1996 and is the successor by merger (the "Merger") to Coupons Online, L.L.C. ("COL"), a New Jersey limited liability company formed in December 1994 ("COL"). See "Certain Transactions - The Merger." All references in this Prospectus to the "Company" with respect to periods prior to July 16, 1996 are to COL. The Company's address is 1960 Bronson Road, Building No. 2, Fairfield, Connecticut 06430. Its phone number is (203) 319-7000. The Company's web site is located at www.netvalueinc.com. The Offering Common Stock offered by the Company............................ 3,600,000 shares Common Stock outstanding before the Offering(1)................ 11,868,756 shares Common Stock to be outstanding after the Offering(1)........... 15,468,756 shares Use of proceeds by the Company................................. The Company plans to use the net proceeds from this Offering, estimated to be $15,385,000, in the following approximate amounts: $4,634,000 to repay short term notes payable including interest, $870,000 to pay outstanding accounts payable due, $183,500 to settle litigation in which the Company is a defendant and $9,697,500 to provide funds for working capital and general corporate purposes. See "Use Of Proceeds." - ----------------------- (1) Does not include 540,000 shares of Common Stock issuable upon the exercise of the Underwriter's over-allotment option, 4,029,750 shares of Common Stock issuable upon the exercise of outstanding options and warrants, 2,733,750 of Common Stock issuable to Rozel International Holdings Limited ("Rozel") upon the conversion of 218,700 shares of Series A Preferred Stock, and 10,000 shares of Common Stock issuable to Golden Eagle Partners, a creditor of the Company. -4- Summary of Selected Financial Data The following summary of selected financial data should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein. Year Ended December 31, ----------------------- December 16, 1994 Three Months Ended (inception) through March 31, (Unaudited) March 31, 1998 1997 1998 (Unaudited) 1995 1996 1997 ---- ---- ---- Statement of Operations Data (1) Revenues $ 0 $ 0 $ 0 $ 0 $ 72,000 $ 72,000 Operating expenses 746,945 3,316,522 9,364,898 3,822,153 2,158,681 15,604,188 Loss from operations (746,945) (3,316,522) (9,364,898) (3,822,153) (2,086,681) (15,532,188) Other income (expense) (615) 2,428 (1,870,339) (225,836) (791,384) (2,659,910) Net loss $(747,560) $(3,314,094) $(11,235,237) $(4,047,989) $(2,878,065) $(18,192,098) March 31, 1998 (Unaudited) -------------------------- Actual Pro Forma As Adjusted ---------- Transactions (4) Transactions (3) (5)(6) ---------------- ----------------------- Balance Sheet Data Working capital (deficit) $ (5,925,693) $2,323,535 $ 9,726,590 Total assets 1,406,730 2,492,000 13,332,057 Total liabilities 6,216,911 168,465 2,845,846 Notes payable and accrued interest (2) 3,251,065 (581,535) 0 Stockholders' equity (deficit) $ (4,810,181) $2,323,535 $10,486,211 (1) The historical financial data for the period from January 1, 1996 to September 18, 1996 and for the years prior to 1996 represents historical financial data for COL (predecessor to the Company). See Notes 1 and 2 of Notes to Financial Statements. (2) Notes payable and accrued interest amounts are included in the Total liabilities line item. (3) "As Adjusted" reflects the actual balances as of March 31, 1998 (unaudited) for each captioned item included under Balance Sheet Data, plus the sum of the Pro Forma Transactions and "As Adjusted" Transactions. (4) Includes 1998 proceeds from the sale of preferred stock and the proceeds from the Distribution and Licensing Agreement which the Company entered into with IQ Value, L.L.C. (the "IQ Agreement"). See Pro Forma Transaction table below. (5) Adjusted to reflect repayment of certain notes payable, accrued interest and other liabilities arising from the sale of the shares of Common Stock offered hereby and the application of the net proceeds thereof as described under "Use of Proceeds." See "As Adjusted" Transactions table below. (6) Does not include 540,000 shares of Common Stock issuable upon the exercise of the Underwriter's over-allotment option, 4,029,750 shares of Common Stock issuable upon the exercise of outstanding options and warrants, 2,733,750 shares of Common Stock issuable to Rozel International Holdings Limited ("Rozel") upon the conversion of 218,700 shares of Series A Preferred Stock, and 10,000 shares of Common Stock issuable to Golden Eagle Partners, a creditor of the Company. See "Use of Proceeds," "Capitalization" and "Underwriting." -5- Pro Forma Transactions (a) (b) (c) (d) Total ----- ----- ----- ----- ----- Working capital (deficit) $2,492,000 $ 0 $ 13,750 $(182,215) $2,323,535 Total assets 2,492,000 750,000 (750,000) 2,492,000 Total liabilities 750,000 (763,750) 182,215 168,465 Notes payable and accrued interest (763,750) 182,215 (581,535) Stockholders' equity (deficit) $2,492,000 $ 0 $ 13,750 $(182,215) $2,323,535 (a) Subsequent to March 31, 1998, the Company issued an aggregate of 249,200 shares of Series A Preferred Stock to Rozel and received aggregate proceeds of $2,492,000. Rozel subsequently converted 80,000 shares of Series A Preferred Stock to 1,000,000 shares of Common Stock. At the option of either the Company or Rozel, all shares of Series A Preferred Stock are convertible at any time into 12.5 shares of Common Stock. See "Description of Capital Stock - Preferred Stock." The Company sold shares of Series A Preferred Stock to raise additional funds needed to satisfy its working capital needs from January 1, 1998 through June 30, 1998. (b) Proceeds received from the IQ Agreement pursuant to which the Company received $500,000 in March 1998 (which was recorded as deferred revenue at March 31, 1998) and $750,000 upon the execution of the agreement in April 1998 (which the Company intends to record as deferred revenue). The Company intends to recognize license fee revenue from the IQ Agreement when the product is delivered to IQ. See "Business - Marketing and Sales Strategy - Distribution and Licensing Agreement with IQ Value, L.L.C." (c) In April 1998, the Company satisfied its loan obligation to Lancer Partners, L.P. by paying $750,000 out of the proceeds from the IQ Agreement and issuing 2,750 shares of Common Stock with an ascribed value of $5.00 per share to pay accrued interest of $13,750. (d) Accrued interest on notes payable from April 1, 1998 through August 31, 1998, the anticipated effective date of the Offering. -6- "As Adjusted" Transactions Total Actual at March 31, 1998 (Unaudited) Plus Pro Forma Transactions (a) (b) (c) (d) (e) Total ------------ ----- ----- ----- ----- ----- ----- Working capital (deficit) $(3,602,158) $15,385,000 $(1,964,241) $(92,011) $ 0 $ 0 $ 9,726,590 Total assets 3,898,730 15,385,000 (4,633,771) (92,011) (355,891) (870,000) 13,332,057 Total liabilities 6,385,376 (2,669,530) (870,000) 2,845,846 Notes payable and accrued interest 2,669,530 (2,669,530) Stockholders' equity (deficit) $(2,486,646) $15,385,000 $(1,964,241) $(92,011) $(355,891) $ 0 $10,486,211 (a) Receipt of gross proceeds from the sale of 3,600,000 shares of Common Stock offered by the Company at an assumed offering price of $5.00 per share less receipt of offering costs of $2,615,000 (See "Use of Proceeds"). (b) Repayment of notes payable and accrued interest at the anticipated effective date of the Offering, including amortization of the balance of the discount on the Short Term Promissory Notes in the amount of $1,964,241 (See "Use of Proceeds"). (c) Includes amortization expense for the prepaid financing fees at March 31, 1998 upon the assumed repayment of certain notes payable at the expected date of repayment. (d) Reclassification of deferred Offering costs at March 31, 1998 to equity upon the completion of the Offering. (e) Payment of delinquent vendor payables at August 31, 1998 (See "Use of Proceeds"). -7- FORWARD-LOOKING STATEMENTS This Prospectus contains "forward-looking" statements regarding potential future events and developments affecting the business of the Company. Such statements relate to, among other things, (i) competition for customers for its products and services; (ii) the uncertainty of developing or obtaining rights to new products that will be accepted by the market and the timing of the introduction of new products into the market; and (iii) other statements about the Company's role in the Internet industry. Such forward-looking statements include those preceded by, followed by or that include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions. The Company's ability to predict the results or the effect of any pending events on the Company's operating results is inherently subject to various risks and uncertainties, including: (i) competition for users of the Company's products and services; (ii) the risks of doing business via the Internet; (iii) the uncertainty of developing or obtaining rights to new products and services that will be accepted by the market; and (iv) the effects of government regulations on the Company's business. Actual results in all likelihood will differ from those projected in the forward-looking statements included in this Prospectus, and such differences may be material. RISK FACTORS The Common Stock offered hereby involves a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. The following risk factors should be considered carefully, in addition to the other information contained in this Prospectus, in evaluating the Company and its business prospects and an investment in the Common Stock. RISKS RELATED TO THE COMPANY Development Stage Company With Limited Operating History The Company was formed on July 16, 1996 and is the successor by merger (the "Merger") to Coupons Online, L.L.C. ("COL") which was formed in December 1994. See "Certain Transactions - The Merger." Since its formation, the Company has been in the development stage and its activities have been primarily limited to developing and promoting Coupons Online(sm), PromoCache(sm) and i-Value(sm), its online targeted discount and other incentive distribution products. For a more complete description of the products, see "Business." Accordingly, the Company has an extremely limited operating history upon which an evaluation of the Company's prospects can be made. Therefore, the Company's prospects must be considered in light of the risks, expenses and difficulties encountered by a development stage company. There is currently no basis upon which to assume that the Company's products and services will prove financially profitable or generate more than nominal operating revenues. Until sufficient cash flow is generated from operations, the Company will have to utilize its capital resources or external sources of funding, if available, to satisfy its working capital needs and/or to make the required payments on the Company's outstanding indebtedness. See "Need for Additional Financing." There can be no assurance that the Company will be able to continue to sell additional equity securities or enter into additional debt financings. If the Company fails to generate increased revenues and/or fails to sell additional securities, investors may lose all or a substantial portion of their investment. Significant Cumulative Operating Losses From inception through the date hereof, the Company has generated funds primarily through the sale of its equity securities and debt financing transactions. Since its inception, the Company has generated revenues from operations of approximately $1,300,000. For the years ended December 31, 1995, December 31, 1996 and December 31, 1997, and the quarter ended March 31, 1998, the Company incurred net losses of $747,560, $3,314,094, $11,335,763, and $3,159,010 (unaudited) respectively. From its inception on December 16, 1994 through March 31, 1998, the Company has incurred cumulative losses of $18,192,098 (unaudited) and has incurred a total accumulated deficit of $20,790,848. Approximately $7,890,400 of this accumulated deficit is due to preferred stock dividends and noncash compensation expenses related to the issuance of the Company's securities at below market prices. Operating losses are anticipated -8- to continue through at least December 31, 1998. See "Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Need for Additional Financing In addition to the proceeds of this Offering, the Company anticipates that it will need significant additional financing to support its operations and satisfy its working capital needs. As of March 31, 1998, the Company had a working capital deficit of ($6,307,164) (unaudited). The amount of additional financing required to fund the Company's operations and working capital needs will depend upon the timing of the Company's expenditures to develop, test and introduce new products and the availability of cash flow from the Company's operations. Such financing may involve the issuance of debt or equity securities, or a combination thereof. Any additional equity financing may cause substantial dilution to the Company's book value per share and the ownership percentage of the Company's current stockholders. There can be no assurance that additional financing will be available to the Company at the times or on terms desirable to the Company, or at all. The failure of the Company to obtain such additional debt or equity financing would require the Company to modify its business plan and could require the Company to cease operations and liquidate its assets. It is likely that a liquidation by the Company would result in a total loss to the Company's stockholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Changes in Financial Position, Liquidity and Capital Resources." No Assurance of Protection of Patents and Proprietary Technology The Company's success may depend in part on its ability to obtain patent protection for its technology, to preserve its trade secrets and to operate without infringing on the proprietary rights of third parties. While none of the Company's products are patented, the Company has applied for a patent entitled "Method and System for Electronic Distribution of Product Redemption Coupons." In April 1998, the Company filed a second application with the United States Patent and Trademark Office (the "USPTO") on the same subject matter, as well as an international patent application under the Patent Cooperation Treaty. The Company is using the technology that is the subject of these patent applications to develop and operate its products. See "Business - Patent and Trademark Protection." Pursuant to the advice of the Company's patent counsel, the Company is in the process of filing additional patent applications. There can be no assurance that the patent applications filed by the Company will be reviewed timely, that any patents will issue or that any patents issued will afford meaningful protection against competitors with similar technology or that any patents issued will not be challenged by third parties. The Company cannot be certain that others will not independently develop similar technologies, duplicate the Company's technologies or design products or methods around the Company's technologies, whether or not patented. At any point in time, the Company may not have sufficient resources to maintain a patent infringement lawsuit should anyone be found or believed to be infringing upon its patents, if any. There also can be no assurance that the technology ultimately used by the Company will be covered by any patent issued from its pending patent application or other patent applications which it may file. Many patents exist and patent applications may have been filed by third parties with respect to online technology. The Company is unaware of any instances in which its technology infringes on the patent rights of third parties. However, there can be no assurance that certain aspects of the Company's technology will not be challenged by the holders of such patents or that the Company will not be required to license or otherwise acquire from third parties the right to use certain technology. The failure to overcome such challenges or obtain such licenses or rights on acceptable terms could have a material adverse effect on the Company. Many of the processes and much of the know-how important to the Company's technology are dependent upon the skills, knowledge and experience of its technical personnel, consultants and advisors and such skills, knowledge and experience are not patentable. To help protect its rights, the Company usually requires employees, significant consultants, advisors, licensees and Business Partners with access to confidential and proprietary information to enter into confidentiality or nondisclosure agreements with the Company. There can be no assurance, however, that these agreements will provide adequate protection for the Company's trade secrets, know-how or proprietary information in the event of any unauthorized use or disclosure. -9- Competition The Company faces significant competition from many promotion and advertising companies as well as on-line publishers which compete, directly or indirectly, for consumer advertising and promotion business from advertisers and for consumers' time and attention. Many of these companies have longer operating histories, greater market presence, and substantially greater financial and other resources than the Company. Many of these companies, including Catalina Marketing Corporation, Money Mailer, Val-Pak Direct Marketing Systems, Interactive Coupon Network, Valassis Communications, Inc. and News America Holdings Incorporated have initiated or are planning to initiate programs and services involving the Internet. Additionally, the Internet is a relatively new format through which retailers and consumers conduct business. As the Internet evolves and consumers gain greater confidence in the Internet and other means of electronic commerce, it is likely that competition will increase. Accordingly, there can be no assurance that competition will not increase from existing competitors, that established or new companies will not enter the market, that competitors will not offer comparable products and services at lower prices than the Company, or that the Company will be able to compete successfully with such existing or new competitors. See "Business" -- "General." Significant Indebtedness To Be Repaid From The Net Proceeds Of This Offering The Company currently has significant indebtedness in the aggregate principal amount of approximately $5,687,500, approximately $4,634,000 of which will constitute short-term notes and accrued interest thereon, approximately $183,500 of which will be paid in settlement of litigation in which the Company has been named a defendant, and approximately $870,000 of which will consist past due accounts payable as of August 31, 1998. Thus, the Company is highly leveraged and plans to use approximately $5,687,500 or 37% of the net proceeds from this Offering to repay all such indebtedness. See "Use of Proceeds." Reliance on Key Personnel The Company is dependent upon the services of certain personnel, particularly R. Scott Wills, its President and Chief Executive Officer, and certain other key employees. The Company is also dependent upon certain other individuals who possess specialized knowledge and experience relating to the Company's technology, markets and sales. The Company does not presently maintain or intend to obtain key-man insurance on any of its executive officers. In June 1998, Michael A. Clark, the former Chairman of the Company's Board of Directors and the former President and Chief Executive Officer of the Company, resigned from his positions as an officer and director of the Company. Simultaneous with the resignation of Mr. Clark, Mr. Wills joined the Company. Mr. Wills entered into an employment agreement with the Company pursuant to which he agreed to serve as Chairman of the Board of Directors, President and Chief Executive Officer of the Company. See "Business-Employment/Consulting Agreements." The Company was fortunate to locate and hire a replacement for Mr. Clark that has significant marketing, sales and Internet industry experience. Although the Company has entered into an employment agreement with Mr. Wills, there can be no assurance that he will continue to work for the Company. In the event that Mr. Wills terminates his relationship with the Company or otherwise ceases to be affiliated with the Company and an acceptable replacement is not identified on a timely basis, there could be a material adverse effect on the Company's business and prospects. See "Business Executive Compensation - Employment Agreements and Other Matters." Additionally, there can be no assurance that a suitable replacement could be hired without the Company incurring substantial additional costs, or at all. The success of the Company is also dependent upon its ability to attract and retain highly qualified technical, managerial, sales and marketing personnel. The Company faces competition for such personnel from other entities, many of which have significantly greater resources than the Company. There can be no assurances that the Company will be able to recruit and retain such personnel. Dependence on DMR Consulting Group, Inc. to Provide Essential Services to the Company In November 1996, the Company entered into an agreement with DMR Consulting Group, Inc. (formerly d/b/a DMR Trecom, Inc., "DMR") to develop core software for the Company and perform the Company's initial systems -10- integration. The development and integration of the Company's core software and operating systems, among other things, are crucial to the success of the Company's products and, therefore, to the financial viability of the Company. DMR is still developing programs and has delivered some operational programs to the Company. The Company is currently using these programs to develop and operate products. However, DMR has not delivered the source code for these programs to the Company and will not do so until the Company satisfies past due payable amounts relating to services rendered to the Company in mid-1997 during Mr. Clark's tenure. The Company has entered into an agreement with DMR establishing a payment schedule for these past due payable amounts. For services provided under the agreement, DMR has billed the Company approximately $3,450,000 and the Company has paid DMR approximately $2,705,000. As of July 31, 1998, the Company owed DMR approximately $745,000 including accrued interest of approximately $54,000. In the future, the Company may continue to be dependent on DMR and, possibly, other unaffiliated service providers to carry out its business plan. Currently, the Company is in the process of converting full time consultants into employees of the Company, thereby reducing the Company's dependence on unaffiliated third party service providers. The Company's dependence on unaffiliated third party service providers creates a risk that factors outside of the Company's control could have an adverse effect on the businesses of such service providers, thus causing a delay or failure in the delivery of services to the Company. See "Financial Statements; Business - General." Rapid Technological Changes The Internet Industry is subject to rapid and significant changes in technology. Such changes could lead to new products and services that compete with Coupons Online SM, PromoCache(sm) and i-Value SM or other products proposed to be offered by the Company or could lower the cost of current competing products and services to the point where the Company's products and services could become non-competitive. In response to these changes, the Company could be required to reduce the prices of its products or to increase its research and development expenses in an effort to develop technological advances in its own products so that they remain competitive in the marketplace. The effect of technological changes on the business of the Company cannot be predicted. In the event that the Company is unable to continue to upgrade its products and services, it will be unable to provide the types of products and services demanded by consumers of online services and the Company's Business Partners. See "Business -General." Composition of the Board of Directors In May 1998, Gary R. Blau was appointed to the Board of Directors. In June 1998, Mr. Clark resigned from his position as the Chairman of the Board of Directors and was replaced by Mr. Wills. In July 1998, David Brandkamp resigned from the Board of Directors. In July 1998, a majority of the shareholders of the Company voted to remove Richard F. Davey from the Board of Directors. The Company's Board of Directors currently consists of five members. Only two members of the Company's Board of Directors are independent, nonemployee directors. These two members joined the Board of Directors in December 1997. Prior to this date, the Company did not have independent nonemployee directors. Accordingly, certain transactions which the Company has completed with related parties were not approved by disinterested independent directors. See "Certain Transactions." Limitation on Monetary Liability of Board of Directors to Stockholders of the Company The Company's Amended and Restated Certificate of Incorporation eliminates the liability of directors of the Company for monetary damages for breach of their fiduciary duty as directors, other than the liability of a director (i) for a breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions by the director not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for a willful or negligent declaration of an unlawful dividend, stock purchase or redemption or (iv) for transactions from which the director derived an improper personal benefit. These provisions are consistent with applicable Delaware law. Accordingly, unless the directors commit one of the acts enumerated above, stockholders will not be able to recover any loss of their investments from members of the Board of Directors. See "Management - Liability and Indemnification of Officers and Directors." -11- Government Regulation The Company's operations are subject to various federal, state and local laws and the supervision of various regulatory authorities, including the Federal Trade Commission, with respect to the Company's advertising and promotion services, and the Federal Communications Commission and individual state utility commissions, with respect to those elements of the Company's operations which involve telecommunications. Based on current laws and regulations, the Company does not believe there are any legal or regulatory impediments to the Company's operations as presently contemplated. However, applicable legal and regulatory environments are subject to change and there can be no assurance that future federal, state and local laws and/or regulations will not be enacted which would have a material adverse effect on the Company's business. Year 2000 Issues The efficient operation of the Company's business will be dependent in part on its computer hardware, software programs and operating systems (collectively, "Programs and Systems"). These Programs and Systems will be used in all key areas of the Company's business, including the design of customers' offers and promotions, the delivery of these offers and promotions to subscribers to the Company's services, recording and reporting of these transactions, financial reporting and various administrative functions. The Company has been evaluating its Programs and Systems to identify potential Year 2000 compliance issues. These actions are necessary to ensure that the Programs and Systems will recognize and process the Year 2000 and beyond. The Company believes that its Programs and Systems are Year 2000 compliant. The Company is also communicating with its suppliers, financial institutions and other third parties to coordinate Year 2000 compliance. Based on present information, the Company believes that there will be no significant costs associated with achieving Year 2000 compliance. However, no assurance can be given that the Company will not determine that significant expenditures are required to achieve Year 2000 compliance. RISKS RELATED TO THE OFFERING Broad Discretion Over Use of Proceeds Approximately $5,687,000 or 37%, of the estimated net proceeds of this Offering will be used to repay short term promissory notes, including the interest accrued thereon, to make a payment in settlement of litigation in which the Company has been named a defendant, and to pay commercial accounts payable. The remaining $9,697,500 or 63% of the estimated net proceeds of this Offering will be used for working capital purposes. The Company has provided an estimate of its expected needs and anticipated uses of the proceeds based upon its current plans and certain assumptions. If these plans or assumptions change, the Company may be required to modify or reallocate its use of these proceeds. Accordingly, the Company will have broad discretion as to the application of such proceeds. See "Use of Proceeds." Immediate Substantial Dilution Investors who purchase shares of Common Stock in this Offering will experience an immediate and substantial dilution in the net tangible book value per share of the Common Stock of $4.62 per share, approximately a 92.4% decrease from the assumed public offering price of $5.00 per share. See "Dilution." Control by Stockholders As of the date of this Prospectus, executive officers and directors of the Company own approximately 9.1% of the issued and outstanding shares of Common Stock and other significant stockholders own approximately 53.6% of the issued and outstanding shares of Common Stock for a total of approximately 62.7% of the issued and outstanding shares of Common Stock. Following the consummation of this Offering, executive officers and directors of the Company will own approximately 7.2% of the issued and outstanding -12- shares of Common Stock and other significant stockholders will own approximately 42.8% of the issued and outstanding shares of Common Stock for a total of approximately 50.0% of the issued and outstanding shares of Common Stock. Accordingly, these persons, if they act together, will be able to exert significant influence over the Board of Directors and the direction of the affairs of the Company. See "Security Ownership of Principal Stockholders and Management." Arbitrary Determination of Offering Price The offering price of the Common Stock has been determined solely by negotiation between the Company and the Underwriter. In determining the offering price, the Company and Underwriter considered, among other things, estimates of the business potential of the Company and the relative capabilities of the management of the Company. The offering price does not necessarily bear any relationship to assets, book value, net worth or earnings history of the Company or other investment criteria. The offering price of the Common Stock should not necessarily be considered an indication of the actual value of the Company's securities. See "Underwriting." Inexperience of Underwriter The Underwriter has engaged in only limited underwriting activities and has not previously been a lead underwriter in any public offerings. Accordingly, there can be no assurance that the Underwriter's lack of public offering experience will not affect the proposed public offering of the Company's Common Stock or the subsequent development of a trading market for the Company's securities. Therefore, purchasers of the securities offered hereby may suffer a lack of liquidity in their investment or a material diminution of the value of their investments. See "Underwriting." Lack of Public Market; Possible Volatility of Stock Price Prior to this Offering there has been no public market for the Common Stock of the Company and there can be no assurance that an active trading market will develop or be sustained after this Offering. See "Underwriting." The market prices of securities of emerging growth companies have historically been highly volatile. Factors having a significant effect on the market price of the Common Stock include fluctuation in the Company's operating results, announcement of technical innovations or new commercial products by the Company or its competitors, governmental regulation, developments in patent or other proprietary rights, developments in the Company's relationships with current or future collaborative partners and general market conditions. See "Description of Capital Stock - Listing and Trading of Common Stock." No Assurance that Listing on NASDAQ SmallCap will be Approved or Maintained The Company has applied to have the Common Stock approved for quotation on the SmallCap. NASDAQ has recently increased the requirements for both initial and continued listing on the SmallCap. Accordingly, there can be no assurance that NASDAQ will approve the Company's application for initial listing or that the Company will meet the requirements to maintain its listing on the SmallCap. In either of these situations, the development of a public market for the Company's Common Stock will be greatly delayed as its only alternatives will be to either complete an application for listing on another stock exchange or to initiate quotations of the Company's Common Stock in the OTC Bulletin Board Service, the NQB Pink Sheets, or another comparable quotation medium. See "Description of Capital Stock - Listing and Trading of Common Stock." Penny Stock Regulations The Commission has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." These regulations define a penny stock to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. These requirements may have the effect of reducing the level of trading activity in the secondary markets for a stock that becomes subject to the penny stock rules. If the Company's Common Stock becomes subject to the penny stock rules, investors may find it -13- more difficult to sell their Common Stock and such rules may have the effect of reducing the price of the Company's securities. Dividends No assurance can be given that the proposed operations of the Company will be profitable. No dividends have been paid by the Company since inception and the payment of dividends on the Common Stock is not contemplated in the foreseeable future. The payment of future dividends will be directly dependent upon the earnings of the Company, its financial needs and other similarly unpredictable factors. Earnings, if any, are expected to be retained to finance and develop the Company's business. See "Market Price and Dividends on the Common Stock and Related Stockholder Matters." Anti-Takeover Effect of Bylaws The Company's Bylaws contain certain provisions which may be deemed to have an anti-takeover effect and may discourage takeover attempts not first approved by the Board of Directors (including takeovers which some stockholders may deem to be in their best interests). These provisions could delay or frustrate the removal of incumbent directors or the assumption of control by an acquirer, even if such removal or assumption of control would be beneficial to stockholders. These provisions also could discourage or make it more difficult to consummate a merger, tender offer or proxy contest, even if such events would be beneficial, in the short term, to the interest of stockholders. These provisions include a classified Board of Directors serving staggered three-year terms and the ability of the Board of Directors to issue and determine the terms of preferred stock. See "Management - Board of Directions." Shares Eligible for Future Sale Sales of substantial amounts of Common Stock in the public market, if any, or the prospect of such sales, could materially adversely affect the market price of the Common Stock, depending on the timing of such sales. Additionally, sales of shares of Common Stock issuable upon conversion or exercise of securities convertible into or exercisable for Common Stock may effect a dilution of the book value per share of Common Stock. For a description of the Company's shares of Common Stock eligible for future sale, see "Shares Eligible for Future Sale." Possible Negative Effects of Preferred Stock The Company's Amended and Restated Certificate of Incorporation authorizes the issuance of Preferred Stock in one or more series and grants the Company's Board of Directors broad authority to determine the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of such series to the fullest extent permitted by the laws of the State of Delaware. Upon the completion of this Offering, 218,700 shares of Series A Convertible Preferred Stock will be issued and outstanding and 700,000 shares of Preferred Stock will remain authorized, undesignated and unissued. The issued and outstanding Series A Convertible Preferred stock is convertible into 2,733,750 shares of Common Stock at the option of the holder or the Company. In June 1998, Rozel converted 80,000 shares of Series A Preferred Stock into 1,000,000 shares of Common Stock. See "Certain Transactions - Rozel Preferred Stock Purchase Agreement." Accordingly, the Company's Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of Common Stock. Although there is no present intention to issue any additional series of the Company's Preferred Stock, there can be no assurance that the Company will not do so in the future. See "Description of Capital Stock - Preferred Stock." -14- USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,600,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $5.00 per share, and after deducting underwriting discounts, commissions and expenses of $2,115,000, and other expenses of the Offering in the amount of $500,000, are estimated to be approximately $15,385,000 ($17,767,750 if the Underwriter's over-allotment option is exercised in full). At this time, the Company plans to use the net proceeds of this Offering as follows: Repayment of Short Term Promissory Notes, including interest..................................$ 4,634,000 (30.1%) Repayment of Commercial Accounts Payable......................................................$ 870,000 (5.7%) Settlement of Litigation with Guild Concepts Limited..........................................$ 183,500 (1.2%) Working Capital Purposes:.....................................................................$ 9,697,500 (63.0%) TOTAL.........................................................................................$15,385,000 (100%) The Company plans to use the net proceeds of this Offering allocated to Working Capital Purposes for a variety of research and development, sales and marketing, systems and operations and general and administrative activities. Pending its use for the foregoing purposes, the Company intends to invest the net proceeds of the Offering in investment grade short-term, interest-bearing obligations. The allocation of net proceeds set forth in the table above represents the Company's current estimates of its anticipated needs and is based upon its current plans and certain assumptions. If any of these factors or assumptions change, the Company reserves the right to reallocate some or all of the proceeds within the above-listed categories or use all or portions thereof for other purposes. See "Risk Factors - Broad Discretion in Application of Proceeds." For example, the Company has assumed that it will receive the proceeds of this Offering at such time that will allow it to repay the short-term promissory notes, including interest, and the commercial accounts payable on or before August 31, 1998. If the Company does not receive the proceeds of the Offering on or before August 31, 1998, it will be required to use a larger portion of the proceeds of the Offering for this purpose, thus reducing the amount of proceeds available to be used for working capital purposes. The Company has also assumed that it will receive all of its current funding needs through August 31, 1998 through various short term loans from third parties. If the Company is unable to procure such financing, then the Company will be required to use a larger portion of the proceeds to repay accounts payable. In addition, due to the fact that the Company operates in an emerging industry that involves extremely rapid technological advancement, opportunities may arise that will require the Company to adjust its business plan and modify its product development. In such instances, the Company will reallocate the use of the proceeds of this Offering within the working capital categories to increase, for example, the amount used for research and development or capital expenditures and to reduce the amount of proceeds used for sales and marketing activities. The proposed repayment of short-term promissory notes relates to the following: 1. Promissory notes (the "Notes") in the aggregate principal amount of $4,025,000 that were sold in two separate debt/equity financing transactions which the Company completed in October and early December 1997. The Notes are unsecured subordinated obligations of the Company which accrue interest at the rate of 10% per annum (upon the occurrence of an event of default, the interest rate increases to 15%). All principal and accrued interest due and payable on the Notes is payable in full on the earlier of (i) the one year anniversary of their date of issuance and (ii) five days after the consummation by the Company of any of the following transactions which provide gross proceeds to the Company of at least $3,000,000: (a) the Offering, (b) an offering of the Company's capital stock, (c) the sale of all, or a portion, of the Company's assets or (d) the licensing of all, or a portion, of the Company's intellectual property rights to a third party. The proceeds of these financings were used to repay short term notes payable, to pay past due accounts payable and to satisfy other working capital requirements. None of the investors in the Notes are officers, directors or affiliated parties of the Company. 2. A promissory note in the principal amount of $250,000 that relates to a senior secured loan made by Golden Eagle Partners ("Golden Eagle") to the Company on June 17, 1997. The promissory note accrues interest at the rate of 10% per annum (upon the occurrence of an event of default, the interest rate increases to 15%). All principal and accrued interest due and payable on the promissory note is payable in full within five business days of the -15- Company's receipt of proceeds from this Offering. In exchange for Golden Eagle's agreement to release any conversion and registration rights it had under the loan and security agreement it signed with the Company, the Company has agreed to issue 10,000 shares of its Common Stock to Golden Eagle at the time it repays the principal amount and accrued interest due under the promissory note. Golden Eagle is not an affiliated party of the Company and none of its partners are officers, directors or affiliated parties of the Company. MARKET PRICE AND DIVIDENDS ON THE COMMON STOCK AND RELATED STOCKHOLDER MATTERS There currently is no trading market for the Common Stock. As of July 31, 1998, there were approximately 250 record holders of the Common Stock. The Company is not currently a party to any contracts containing provisions that limit its ability to declare cash dividends on its Common Stock. However, the Company has never paid any dividends on the Common Stock and anticipates that, for the foreseeable future, all earnings, if any, will be retained for the operation and expansion of its business. As of March 31, 1998, the Company had current liabilities of $6,216,911 (unaudited) and had generated nominal revenues. The Company intends to repay these current liabilities prior to paying any cash dividends on its Common Stock. Accordingly, the Company does not anticipate paying any cash dividends in the foreseeable future. See "Risk Factors-Risks Related to the Offering-Dividends." -16- CAPITALIZATION The following table sets forth the total capitalization of the Company at March 31, 1998 and as adjusted for certain pro-forma transactions and to give effect to this Offering and the application of the net proceeds as described under "Use of Proceeds." Actual Pro Forma As Adjusted (Unaudited) Transactions (1) Transactions (2) ------------ ---------------- ---------------- Notes payable and accrued interest $3,251,065 $ (581,535) $ 0 Stockholders' equity (deficit) Preferred stock 50 169 219 Common Stock 10,686 1,003 15,289 Additional paid-in capital 16,638,255 15,587,578 47,251,342 Deferred compensation (668,324) 0 (668,324) Deficit accumulated during the development stage (20,790,848) (13,265,215) (36,112,315) Total stockholders' equity (deficit) (4,810,181) 2,323,535 10,486,211 Total capitalization $(1,559,116) $ 1,742,000 $10,486,211 (1) Includes proceeds from the sale of preferred stock and the proceeds from the IQ Agreement, collectively used to fund operating losses as part of Deficits accumulated during the development stage (a component of stockholders' equity (deficit)) and the payment of the Company's existing obligations. See Pro Forma Transactions table below. (2) Adjusted to reflect the repayment of certain notes payable and accrued interest arising from the sale of shares of Common Stock offered hereby and the application of the net proceeds thereof as described under "Use of Proceeds." See "As Adjusted Transactions" table below. -17- Pro Forma Transactions (a) (b) (c) Total Notes payable and accrued interest $ 0 $ (763,750) $ 182,215 $(581,535) Stockholders' equity (deficit) Preferred Stock 169 169 Common Stock 1,000 3 1003 Additional paid-in capital 15,573,831 13,747 15,587,578 Deferred compensation 0 Deficit accumulated during the (13,083,000) 0 (182,215) (13,265,215) development stage Total Stockholders' equity (deficit) 2,492,000 13,750 (182,215) 2,323,535 Total Capitalization $ 2,492,000 $ (750,000) $ 0 $1,742,000 (a) In April, May and June 1998, the Company issued an aggregate of 249,200 shares of Series A Preferred Stock to Rozel and received aggregate proceeds of $2,492,000. At the option of either the Company or Rozel, all shares of Series A Preferred Stock are convertible at any time into 12.5 shares of Common Stock. In June 1998, Rozel converted 80,000 shares of Series A Preferred Stock into 1,000,000 shares of Common Stock. See "Description of Capital Stock - Preferred Stock." The issuance of the 249,200 shares of Series A Preferred Stock will result in a preferred dividend of $13,083,000 as a result of the beneficial conversion feature of the Series A Preferred Stock (see Note 11 to the Company's Financial Statements for the Three Years Ended December 31, 1997). The Company sold shares of Series A Preferred Stock to raise additional funds needed to satisfy its working capital needs from January 1, 1998 through June 30, 1998. (b) In April 1998, the Company satisfied its loan obligation to Lancer Partners, L.P. by paying $750,000 out of the proceeds from the IQ Agreement and issuing 2,750 shares of Common Stock with an ascribed value of $5.00 per share to pay accrued interest of $13,750. (c) Accrued interest on notes payable from April 1, 1998 through August 31, 1998, the anticipated effective date of the Offering. -18- "As Adjusted Transactions" (2) Total Actual (Unaudited) Plus Pro Forma Amounts (a) (b) (c) (d) Total Notes payable and accrued interest $2,669,530 $ 0 $(2,669,530) $ 0 $ 0 $ 0 Stockholders' equity (deficit) Preferred Stock 219 219 Common Stock 11,689 3,600 15,289 Additional paid-in capital 32,225,833 15,381,400 (355,891) 47,251,342 Deferred compensation (668,324) (668,324) Deficit accumulated during the development stage (34,056,063) (1,964,241) (92,011) 0 (36,112,315) Total stockholders' equity (deficit) (2,486,646) 15,385,000 (1,964,241) (92,011) (355,891) 10,486,211 Total capitalization $ 182,884 15,385,000 (4,633,771) (92,011) (355,891) 10,486,211 (a) Receipt of gross proceeds from the sale of 3,600,000 shares of Common Stock offered by the Company at an assumed offering price of $5.00 per share less of offering costs of $2,615,000 (See "Use of Proceeds"). (b) Repayment of notes payable and accrued interest at the anticipated effective date of the Offering, including amortization of the balance of the discount on the Short Term Promissory Notes in the amount of $1,964,241 (See "Use of Proceeds"). (c) Includes amortization expense for the prepaid financing fees at March 31, 1998 upon the assumed repayment of certain notes payable at the expected date of repayment which approximates the date of the completion of the Offering. (d) Reclassification of deferred Offering costs at March 31, 1998 to equity resulting from the completion of the Offering. Does not include 540,000 shares of Common Stock issuable upon the exercise of the Underwriter's over-allotment option, 4,029,750 shares of Common Stock issuable upon the exercise of outstanding options and warrants, 2,733,750 shares of Common Stock issuable to Rozel upon the conversion of 218,700 shares of Series A Preferred Stock, and 10,000 shares of Common Stock issuable to Golden Eagle Partners, a creditor of the Company. DILUTION The net tangible book value (deficit) of the Company at March 31, 1998 was ($5,756,325), or ($.54) per share of Common Stock. Net tangible book value per share is determined by subtracting total liabilities and the Preferred Stock liquidation value of $495,000 ($10 per share) from total assets less intangible assets of $3,242, prepaid expenses and registration costs in the aggregate amount of $447,902, divided by the number of outstanding shares of Common Stock. Assuming (i) the repayment of an aggregate of $5,311,000 of notes payable (Gross of Discount) including accrued interest thereon, and (ii) the sale of 3,600,000 shares of Common Stock offered hereby at the initial public offering price of $5.00 per share, the net tangible book value of the Company at that date, as reflected in the following table, (after deducting estimated Underwriter's discounts and commissions and other offering expenses of $2,615,000) will be $5,003,445 or $.38 per share. -19- Net Tangible Net Worth Balance March 31, 1998 (unaudited) $(5,756,325) Gross Offering proceeds 18,000,000 Offering costs (2,615,000) Liquidation Value on Additional Preferred Stock Issuance (1,692,000) Issuance of Common Stock in 1998, prior to the Offering 13,750 Amortization of Discount on Notes Payable (1,964,768) Interest on notes payable prior to Offering (182,212) -------- $5,803,445 This represents an immediate increase in net tangible book value per share of $.92 or 270% to the existing common stockholders and an immediate dilution of $4.62 per share or 92.4% to the new investors as illustrated in the following table: Assumed public offering price per share $5.00 Net tangible book value (deficit) per share before Offering(1) ($.54) Increase per share attributable to new investors .92 ------ Pro forma net tangible book value per share after Offering .38 ------- Immediate dilution to new investors $4.62 (1) Does not include 540,000 shares of Common Stock issuable upon the exercise of the Underwriter's over-allotment option, 4,029,750 shares of Common Stock issuable upon the exercise of outstanding options and warrants, 2,733,750 shares of Common Stock issuable to Rozel upon the conversion of 218,700 shares of Series A Preferred Stock, and 10,000 shares of Common Stock issuable to Golden Eagle Partners, a creditor of the Company. (2) Also does not include 150,000 shares of Common Stock issuable to Rozel International Holdings Limited upon the satisfaction of an obligation to purchase 300,000 shares of Preferred Stock. The following table summarizes on a pro forma basis as of March 31, 1998, the number of shares of Common Stock issued or issuable by the Company to officers, directors or affiliates, the total consideration received, including compensatory costs, by the Company and the average price per share paid by existing stockholders and to be paid by purchasers of the Common Stock offered hereby (before deducting offering expenses and underwriting discounts and commissions) at an assumed offering price of $5.00 per share. Shares Purchased Total Consideration Average Price Per Share Number Percent Amount Percent Existing common stockholders 11,394,994 76.0% $27,243,667 60.2% 2.39 New investors 3,600,000 24.0% 18,000,000 39.8 $5.00 ----------- ----- ----------- ----- ------ Total 14,994,994 100% $45,243,667 100% $ 3.02 ========== ===== =========== ===== ====== -20- SELECTED FINANCIAL DATA The selected financial data presented below for each of the three year periods ended December 31, 1997 have been derived from the Company's audited financial statements. The financial data for the periods ended March 31, 1998 and 1997 have been derived from financial statements which have not been audited, but which, in the opinion of management, include all adjustments necessary for a fair presentation of such data. The results of operations for the three months ended March 31, 1998 (unaudited) are not necessarily indicative of the results for the full year. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements." Three Months December 16, Ended 1994 Year Ended Year Ended Year Ended March 31, (inception) December 31 December 31 December 31 (unaudited) through 1995 1996 1997 1997 1998 March 31, 1998 ---- ---- ---- ---- ---- ------------- (unaudited) Statement of Operations Data: Revenues $ 0 $ 0 $ 0$ 0 $72,000 $72,000 Operating Expenses Compensation and related expenses 131,174 742,545 3,589,616 773,754 761,130 5,224,465 Professional fees 38,436 399,356 405,193 121,077 69,249 912,234 Advertising 236,775 219,760 832,340 603,619 114,251 1,403,126 Consulting 9,492 869,693 984,590 633,502 102,822 1,966,597 Research and development expenses 142,224 809,491 2,588,748 1,434,094 834,971 4,375,434 Depreciation and amortization 7,570 13,148 179,304 28,198 55,500 255,522 Other general and administrative 181,274 262,529 785,107 227,909 220,758 1,466,810 --------- ---------- ---------- ---------- ---------- ----------- Total Operating Expenses 746,945 3,316,522 9,364,898 3,822,153 2,158,681 15,604,188 --------- --------- --------- --------- --------- ---------- Loss from Operations (746,945) (3,316,522) (9,364,898) (3,822,153) (2,086,681) (15,532,188) Other Income (Expense) Interest Income 1,405 4,953 5,627 0 4,712 16,697 Interest Expense (2,020) (2,525) (1,805,470) (225,836) (642,684) (2,452,699) Financing Fees 0 0 (70,496) 0 (153,412) (223,908) --------- --------- --------- --------- --------- ---------- Total Other Income (Expense) (615) (2,428) (1,870,339) (225,836) (791,384) (2,659,910) --------- --------- --------- --------- --------- ---------- Net Loss $(747,560) $(3,314,094) (11,235,237) (4,047,989) (2,878,065) $18,192,098 ========= =========== =========== Preferred Stock Dividend (1,181,250) (1,417,500) ------------------------------------- Net loss to common stockholders $(12,416,487) ($4,047,989) $(4,295,565) ============= ============ ============ Basic and diluted net loss per common share $ (1.72) $ (0.63) $ (0.40) ============= ============ ============ Basic and diluted weighted average number of common shares outstanding 7,218,801 6,432,513 10,686,006 ============= ============ ============ Pro forma Information (Unaudited) Net Loss (747,560) (3,314,094) Pro forma Tax Provision 0 0 ----------- ----------- Pro forma Net Loss (747,560) (3,314,094) =========== =========== Net Loss Per Share Data Basic and diluted net loss per common share ($0.24) ($0.89) =========== =========== Basic and diluted weighted average number of common shares outstanding 3,074,000 3,739,236 December 31,1996 December 31, 1997 March 31, 1998 ---------------- ----------------- -------------- (unaudited) Balance Sheet Data Cash and cash equivalents $ 299,351 $ 671,508 $ 158,847 Working capital (deficit) (792,841) (3,427,635) (5,925,693) Total assets 794,592 1,800,402 1,406,730 Total liabilities 1,099,684 4,227,058 6,216,911 Notes payable and accrued interest 0 1,882,591 3,251,065 Stockholders' deficit $ (305,092) $(2,426,656) $(4,810,181) -21- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the financial statements, including the notes thereto, of the Company contained elsewhere in this Prospectus. The Company was formed on July 16, 1996 for the purposes of merging with COL and developing and marketing online coupons. See "Certain Transactions - Organization of the Company." The business and assets of COL were acquired by the Company through merger on September 19, 1996. See "Certain Transactions - The Merger." The Company is in the development stage. See "Business." COL was the accounting acquirer in the merger and, as a result, the information provided in this section through the date of the merger is for COL. Twelve Months Ended December 31, 1996 Compared to the Twelve Months Ended December 31, 1995. The Company did not generate any revenues in 1996 or 1995. The Company was operated as a limited liability company until its restructuring as a Delaware corporation in September 1996. The Company's principal focus in 1995 was business concept development and activities associated with raising capital. The Company continued to focus on these principal activities in 1996 until the restructuring and infusion of capital in September 1996. Subsequent to the restructuring, the Company commenced business planning, market research, product development, sales and marketing, and operational infrastructure building activities. The Company incurred a net loss of $3,314,094 in 1996 compared to a net loss of $747,560 in 1995. This $2,566,534 increase in net loss was primarily attributable to the costs associated with the restructuring and the commencement of product and market development activities. Ninety-seven percent of the total increase in net loss can be accounted for by increases in four categories of operating expenses, as follows: Compensation and related expenses increased from $131,174 in 1995 to $742,545 in 1996, representing additional payroll costs related to the implementation of a management team and an operational infrastructure. Professional fees increased from $38,436 in 1995 to $399,356 in 1996, primarily due to the restructuring and related capital raising activities. Consulting expenses increased from $9,492 in 1995 to $869,693 in 1996, primarily reflecting implementation of the Company's strategy of outsourcing certain marketing functions in order to focus internal efforts on product development and to reduce initial infrastructure requirements. Research and development expenses increased from $142,224 in 1995 to $809,491 in 1996 due to the commencement of product development activities. Twelve Months Ended December 31, 1997 Compared to the Twelve Months Ended December 31, 1996. The Company did not generate any revenues in 1997 or 1996. The Company started to build its infrastructure in October 1996 when operations were established in Connecticut. Comparisons of operating results for the twelve months ended December 31, 1997 and 1996 can be misleading given the Company's limited operating activities prior to October 1996. The Company incurred a net loss of $11,235,237 in 1997, compared to a net loss of $3,314,094 in 1996 (an increase of $7,921,143). Approximately $1,300,000 of this increase was due to additional non-cash compensation expense in 1997 due to grants of stock options that carry exercise prices which were less than the fair value of the common stock at the date of grant. Approximately $1,900,000 of this increase was due to additional interest expense in 1997. The remaining approximate $4,700,000 increase reflects primarily the change in focus from concept development to actual product and business development. See "Business - Program Development." In addition, during 1997 the Company granted a preferred stock dividend of $1,181,250. This was a noncash dividend that resulted from the issuance of shares of Series A Convertible Preferred Stock bearing a conversion price which was below the fair -22- market value of the Common Stock at the date of issuance. (See Note 9 of the Company's Financial Statements for the Three Years Ended December 31, 1997). Compensation and related expenses increased from $742,545 in 1996 to $3,589,616 in 1997 (an increase of $2,847,071). Approximately $1,262,000 of this increase was due to a non-cash charge resulting from grants of stock options that carry exercise prices which were less than the fair value of the common stock at the date of grant. The remainder of this increase was due to the hiring of additional employees in anticipation of commencing commercial operations and the payment of a full year of compensation to employees hired during the fourth quarter of 1996. The Company began hiring additional full-time employees in October 1996, primarily to commence product development, as well as marketing and sales activities, and had 17 full-time employees at December 31, 1996. As of December 31, 1997 the Company had 24 full-time employees, representing 7 new hires during 1997, primarily in the areas of sales and marketing. Advertising expenses increased from $219,760 in 1996 to $832,340 in 1997 (an increase of $612,580). This increase was due to the development of sales collateral and the initiation of advertising and promotional campaigns to support the introduction of the Company's products. Consulting expenses were $869,693 in 1996 and $984,590 in 1997. The increase of $114,897 was primarily attributable to a $265,000 expense related to the settlement of a consulting agreement between the Company and Promunicom, Inc. (See "Business - Marketing and Sales Strategy - Distribution and License Agreement with IQ Value, LLC), offset by the Company's conversion of consultants to full-time employees to manage the day-to-day operations, sales and marketing activities of the Company. Research and development expenses increased from $809,491 in 1996 to $2,588,748 in 1997 (an increase of $1,779,257). This increase was due to increased development activities related to the Company's Coupons OnlineSM, PromoCache(sm) and i-Value(sm) products and an approximate $240,000 use tax expense related to the Company's retention of consultants located outside of the State of Connecticut to perform development activities for the Company. The Company's use tax obligation related to the procurement of such services was immaterial in 1996. Accordingly, no use tax expense was recorded in 1996. The Company intends to continue to devote significant resources to research and development activities and believes that incurring these expenses will be necessary in order for the Company's products and services to successfully compete in its markets, each of which is characterized by rapid technological change. Depreciation and amortization expenses increased from $13,148 in 1996 to $179,304 in 1997. The increase of $166,156 was attributable to the increased capital equipment base consisting primarily of computer equipment. Other general and administrative expenses increased from $262,529 in 1996 to $785,107 in 1997 (an increase of $522,578). The increase was attributable to higher operating costs such as travel, rent, telephone and other costs required to support the Company's growth. Interest expense was $2,525 in 1996 and $1,805,470 in 1997. The increase of $1,802,945 was attributable to interest expense related to various debt obligations incurred by the Company throughout 1997. The Company will ultimately pay approximately $92,508 of this expense in cash. The remaining $992,962 of this expense represents noncash charges resulting from amortization of debt discounts and interest remunerated with stock issuances. Financing fees increased by $70,496 in 1997. The fees were primarily expenses associated with the issuance of common stock as additional consideration pursuant to a financing agreement (See Note 8(b) of the Company's Financial Statements for the Three Years Ended December 31, 1997). Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31, 1997. As the Company is in the early stage of commercial operations with respect to its products, management does not believe it is possible to draw conclusions form these results regarding future revenue potential of its products. See "Business." During the three months ended March 31, 1998, the Company recognized revenues of $72,000 related to the commercial operation -23- of its Coupons OnlineSM service. Revenues were derived from five national manufacturers promoting a total of nine brands using the Coupons OnlineSM service. No revenues were recognized during the three months ended March 31, 1997. The Company incurred net losses of $2,878,065 and $4,047,989 in the three months ended March 31, 1998 and the three months ended March 31, 1997, respectively (a decrease of $1,169,924). This decrease is due to the Company's recognition of $72,000 in revenues during the three months ended March 31, 1998, offset by an aggregate decrease of approximately $1,664,000 in operating expenses such as advertising, consulting and professional fees. Also, approximately $600,000 of this decrease was due to substantial decreases in software development costs related to the Coupons OnlineSM and PromoCache(sm) products. These decreases were offset by a $570,000 increase in interest expense and financing fees during the three months ended March 31, 1998. In addition, during the three months ended March 31, 1998, the Company granted a preferred stock dividend of $1,417,500. This was a noncash dividend that resulted from the issuance of shares of Series A Convertible Preferred Stock bearing a conversion price which was below the fair market value of the Common Stock at the date of issuance. (See note 9 of the Company's Financial Statements for the Three Years Ended December 31, 1997). Compensation and related expenses decreased to $761,130 during the three months ended March 31, 1998 from $773,754 during the three months ended March 31, 1997. This decrease of $12,624 was due to additional compensation expense incurred of approximately $223,000 related to the hiring of additional personnel, primarily in the sales and operations areas, offset by a decrease of approximately $236,000 in non-cash compensation charges related to the issuance of stock options at exercise prices which were less than the fair value of the Common Stock at the date of grant. As of March 31, 1998 and 1997, the Company had 26 and 20 full-time employees, respectively. Professional fees were $69,249 during the three months ended March 31, 1998 and $121,077 during the three months ended March 31, 1997 (a decrease of $51,828). The Company had incurred additional fees during the three months ended March 31, 1997 related to aborted restructuring and capital raising activities. Advertising expenses decreased to $114,251 during the three months ended March 31, 1998 from $603,619 during the three months ended March 31, 1997 (a decrease of $489,368). During the three months ended March 31, 1997, the Company had incurred significant costs in connection with hiring an outside marketing firm to develop and initiate advertising and promotional campaigns to support the introduction of Coupons OnlineSM and PromoCache(sm). Consulting expenses decreased to $102,822 during the three months ended March 31, 1998 from $633,502 during the three months ended March 31, 1997. The decrease of $530,680 was primarily attributable to non-cash consulting cost of approximately $554,000 in 1997 related to the issuance of the Company's common stock pursuant to an agreement whereby AML provided investment banking services in exchange for shares of the Company's Common Stock. (See Note 9 of the Company's Financial Statements for the Three Years December 31, 1997). Research and development expenses decreased to $834,971 during the three months ended March 31, 1998 from $1,434,094 during the three months ended March 31, 1997. This decrease of $599,123 is primarily attributable to additional development costs incurred in the 1997 period related to Coupons OnlineSM and PromoCache(sm). Depreciation and amortization expenses increased to $55,500 during the three months ended March 31, 1998 from $28,198 during the three months ended March 31, 1997. The increase was attributable to the increased base of computer equipment required to support the growth of the Company's operations. Other general administrative expenses remained consistent at $220,758 during the three months ended March 31, 1998 and $227,909 during the three months ended March 31, 1997. -24- Interest expense increased to $642,684 during the three months ended March 31, 1998 from $225,836 during the three months ended March 31, 1997. The increase of $416,848 was attributable to non-cash amortization of debt discount and interest remunerated with stock issuances of $498,849 during the three months ended March 31, 1998 as compared to $225,836 during the three months ended March 31, 1997. The remaining $131,085 of interest expense incurred during the three months ended March 31, 1998 was a cash expense to the Company. Financing fees increased by $153,412 during the three months ended March 31, 1998. This increase was due to the amortization of prepaid financing fees related to financing agreements which the Company entered into during the fourth quarter of 1997 and shares of the Company's Common Stock issued pursuant to the terms of an intercreditor agreement. See note 8(b) of the Company's Financial Statements for the Three Years Ended December 31, 1997. As of March 31, 1998, the Company had incurred cumulative losses of $18,192,098. The Company believes approximately $12,299,000 of this amount will be available to offset future taxable income, if any. See Note 5 to the Company's financial statements included herein. The Company anticipates that it will continue to incur significant net operating losses through 1998. Coupons Online L.L.C. COL was formed on December 16, 1994 and ceased operations on September 19, 1996 upon its merger into the Company. COL's objective was to develop and commercialize an approach to delivering coupons via various online networks. COL did not generate any revenues during that period and incurred net losses of $1,749,138, principally from activities associated with testing its concept, defining its business development requirements and plans and seeking capital. When it ceased operations on September 19, 1996, COL had an accumulated deficit of $1,749,138. This accumulated deficit is included in the financial statements presented in this prospectus. See "Financial Statements." Changes in Financial Position, Liquidity and Capital Resources The funds utilized to sustain the Company's developmental activities and initial commercial operations have been obtained principally through the sale of the Company's securities, as well as related and third-party debt transactions. During the period from January 1, 1997 through December 31, 1997, the Company received an aggregate of $590,000 in gross proceeds through the sale of 295,000 shares of Common Stock in private offerings. During the period from January 1, 1997 through December 31, 1997, the Company received $4,051,000 in loans from various related and independent parties. In November 1997, the Company converted an aggregate of $2,578,301 in notes payable and accrued interest into an aggregate of 3,222,877 shares of Common Stock. The notes payable were scheduled to mature in January 1998 and, at the time the conversion was negotiated, the Company believed it was advantageous to convert this debt to an equity position on the balance sheet in order to enhance the marketability of the Company's securities in an initial public offering. In October, November and December 1997, the Company received gross proceeds of $4,025,000 in two separate debt/equity financing transactions that resulted in the issuance of an aggregate of 402,500 shares of Common Stock, the issuance of an aggregate of 402,500 Common Stock Purchase Warrants and the issuance of promissory notes in the aggregate principal amount of $4,025,000. See "Description of Capital Stock - Common Stock Purchase Warrants." The promissory notes are unsecured subordinated obligations of the Company which accrue interest at the rate of 10% per annum (upon the occurrence of an event of default, the interest rate increases to 15%). All principal and accrued interest due and payable on the Notes is payable in full on the earlier of (i) the one year anniversary of their date of issuance and (ii) five days after the consummation by the Company of any of the following transactions which provide gross proceeds to the Company of at least $3,000,000: (a) the Offering, (b) an offering of the Company's capital stock, (c) the sale of all, or a portion, of the Company's assets or (d) the licensing of all, or a portion, of the Company's intellectual property rights to a third party. The Company used these funds to repay short term notes payable, pay commercial accounts payable due and to fund -25- continuing operations. See "Use of Proceeds." As of March 31, 1998, the promissory notes in the principal amount of $4,025,000, a short-term note in the principal amount of $250,000 and accrued interest on all of these notes remained outstanding. The Company intends to use a portion of the net proceeds of this Offering to repay these notes and to satisfy its commercial accounts payable. In February 1998, the Company received a loan in the principal amount of $750,000 from Lancer Partners, L.P., ("Lancer") an independent party. This loan accrued interest at the rate of 10% per annum and was scheduled to mature on the earlier of August 2, 1998 or the date on which IQ provided funds to the Company totaling $750,000 pursuant to a distribution and license agreement. See "Business - Marketing and Sales Strategy - Distribution and License Agreement with IQ Value, L.L.C." SPH Equities, Inc. ("SPH"), an investment banking firm, received a fee of $50,000 for assisting the Company in obtaining this loan. SPH and a related entity own approximately 130,000 shares or approximately 1.1% of the current outstanding shares of the Company's common stock. In April 1998, the Company repaid the principal balance of this loan and issued 2,750 shares of its Common Stock to Lancer as payment of accrued interest of $13,750 related to the loan. In order to satisfy its short term financing needs during the period from December 1997 through June 1998, the Company sold 298,700 shares of its Series A Preferred Stock to Rozel International Holdings, Limited ("Rozel"), as follows: Date Number of Shares Gross Proceeds ---- ---------------- -------------- December 1997 22,500 $ 225,000 March 1998 27,000 270,000 April 1998 91,000 910,000 May 1998 77,400 774,000 June 1998 80,800 808,000 ------ -------- TOTAL 298,700 $2,987,000 ======= ========= All shares of Series A Preferred Stock are convertible at the option of the Company or Rozel into 12.5 shares of Common Stock. In June 1998, Rozel converted 80,000 shares of Series A Preferred Stock into 1,000,000 shares of Common Stock. In March and April 1998, the Company received licensing fees in the aggregate amount $1,250,000 from IQ pursuant to the terms of the IQ Agreement. See "Business - Marketing Strategy - Distribution and License Agreement With IQ Value, L.L.C." In order to satisfy its short term financing needs during July and August 1998, the Company has received short term loans in the principal amount of $868,000 from various third parties. As of March 31, 1998, the Company had cash of $158,847 available for operating expenses and capital equipment purchases; however, at that date, the Company had accounts payable of $2,141,638, short-term debt of $3,060,759 and accrued expenses of $505,814. On August 7, 1998, the Company had cash of approximately $250,000 available for operating expenses and capital equipment purchases, short term debt of $4,275,000 and accounts payable of approximately $1,600,000. The Company anticipates that it will spend approximately $4,800,000 during the remainder of 1998 in order to complete its systems development, perform its market research and to launch its products in accordance with the business plan developed under the tenure of Mr. Clark. Of the approximately $15,385,000 the Company expects to receive as net proceeds from this Offering, management expects that approximately $5,687,500 (37%) will be used to repay short term notes payable and to pay commercial accounts payable due and a payment in settlement of litigation in which the Company has been named -26- a defendant. Management intends to use the remaining net proceeds of approximately $9,695,500 (63%) for working capital purposes, including research and development, sales and marketing, systems and operations and general and administrative activities. Management has estimated that the net proceeds of this Offering, when combined with other financial commitments and projected cash flow from operations will be sufficient to meet the Company's cash requirements through at least July 31, 1999. However, operating revenues may fall short of, and expenses may exceed, the Company's projections. If the Company's results of operations during the remainder 1998 are less than projected, then the Company may be required to seek additional financing sooner than expected. Because of the lack of an annualized revenue history on which to base projections, the unproven demand for the Company's products and services, and the volatile nature of the markets in which the Company is operating, the Company's projections are likely to be inaccurate. Due to the limited operating history of the Company, it is impossible to predict with any degree of certainty the extent to which the Company must expand its operations in order to become profitable. There can be no assurance that the Company will be able to sustain or expand its operations, that needed financing will be available on acceptable terms or at all, that the Company will not require further financing to sustain or expand its operations, or that the Company will become profitable in the future. See "Risk Factors - Risks Related to the Company - Development Stage Company; Limited Operating History; Significant Cumulative Operating Losses; Auditor Report Modification for Going Concern,""Risk Factors - Risks Related to the Company - Need for Additional Financing," "Use of Proceeds" and "Business." Commitments As of July 31, 1998, the Company owes DMR approximately $745,000 for consulting services performed in connection with the initial systems integration of its Coupons OnlineSM, PromoCache(sm) and i-ValueSM products. DMR has delivered the operational programs to the Company and the Company is currently using the programs to develop and operate its products. However, DMR has not delivered the source code for these programs to the Company and will not do so until the Company satisfies past due payable amounts relating to services rendered to the Company in mid- 1997 during Mr. Clark's tenure. The Company has entered into an agreement with DMR establishing a payment schedule for these past due payable amounts. Under the terms of this agreement, DMR agreed to grant a license to the Company in order to allow the Company to grant a sublicense of the Coupons OnlineSM, PromoCache(sm) and i-ValueSM products to IQ in exchange for a security interest in the Company's proceeds from the IQ Agreement. See "Business Marketing and Sales Strategy - Distribution and License Agreement with IQ Value, L.L.C." In 1998, the Company discovered that it had not paid use taxes of approximately $240,000 to the State of Connecticut due to the failure of DMR, as an out-of-state consultant providing services to the Company, to submit bills to the Company related to these taxes and to collect and remit these taxes to the State of Connecticut. Immediately upon making this discovery, the Company voluntarily notified the appropriate taxing authorities of the delinquency. The Company has included an accrual for these unpaid use taxes in the March 31, 1998 financial statements. On May 1, 1998, the Company entered into an agreement with the State of Connecticut, Department of Revenue Services (the "Department"), whereby the Company will pay the past due use taxes and all accrued interest thereon pursuant to a payment schedule which requires the Company to pay the Department $5,000 per week until the Company receives the proceeds of this Offering. Upon the earlier of August 15, 1998 or the Company's receipt of the proceeds of this Offering, the Company is required to pay the entire remaining balance due to the Department. Through July 31, 1998, the Company has paid $83,725 of this tax liability, has incurred additional tax and interest liabilities in 1998 of approximately $47,745 and has a remaining obligation to pay $204,000. See "Business - Regulatory Matters." As a result of expenses incurred and not paid by the Company under the tenure of Mr. Clark, the Company is currently named as a defendant in litigation filed by Guild Concepts, Limited d/b/a The Guild Group ("Guild"). In this lawsuit, Guild alleges breach of contract and other claims related to services rendered by Guild to the Company in connection with the development of the Company's marketing plans and strategy. Guild seeks damages in the amount of approximately $245,000 from the Company for services allegedly provided. In June 1998, -27- the Company entered into a stipulation and order of settlement whereby it agreed to pay Guild the aggregate amount of $183,538 upon the earlier of (i) 10 days after the Company's receipt of the proceeds of the Offering or (ii) August 31, 1998. As of the date hereof, the Company has paid Guild $50,000 of the amount due and, therefore, has a commitment to pay Guild $183,538. As of March 31, 1998 the Company has included this amount in accounts payable. See "Risk Factors - Pending Legal Proceedings," and "Business - Legal Proceedings." In 1998 and since the departure of Mr. Clark, the Company has continued to meet is financial commitments for expenditures incurred and has continued to make payments for all work that has been properly completed and delivered to the Company. Effect of Inflation and Changing Prices The Company's limited operating history provides no experience regarding the impact of inflation on the conduct of its business. At present, the Company does not have long-term commitments for maintenance of its core software and systems nor does the Company have long-term contracts with customers for the use of its products and services. Accordingly, the Company's costs and projected revenues may fluctuate due to general inflation or changes in the specific competitive environments in which the Company operates. Additionally, the Internet industry is generally characterized by rapid and significant changes in technology and does not have a long history which would enable reliable prediction of trends. The Company cannot predict its ability to pass along future development costs or operating cost increases to its customers. -28- BUSINESS General The Company is a development stage company whose products incentivize consumers to purchase products and services sold across all categories of trade. The Company has developed a patent-pending process to deliver coupons, discounts and other promotional incentives to Internet users. The netValue system utilizes various sophisticated and unique targeting engines to deliver these purchase incentives. The Company has also developed a technology to address coupon industry concerns regarding fraudulent coupon redemption. The Company's revenues will be generated by pursuing a combination of two business plan strategies. One strategy follows a wholesale software-licensing model. The other strategy follows a direct to consumer branded web site model. For the wholesale service, the Company plans to generate revenues through a combination of licensing fees and transaction fees. For its own branded web site, the Company plans to generate revenues through transaction fees and advertising fees. The Company provides software and backend systems that allow its wholesale business partners to market their own uniquely branded promotional commerce service. Potential business partners of the Company include manufacturers, service providers, national retailers, local merchants, wholesale distributors, traditional web site publishers and Internet Service Providers (the "Business Partners"). The Company currently has developed and plans to initially market three separate products to meet the needs of its Business Partners and various consumer segments. These products are Coupons OnlineSM, PromoCache SM and i-ValueSM. The Company's Coupons OnlineSM product allows manufacturers and service providers to deliver targeted, secure coupons and other incentives to consumers from any Internet web site. Consumers use the Company's web browser plug-in software to access and print coupon offers and other promotions from the web sites of manufacturers and marketers desiring to feature single product promotional offers. The Company's systems provide Online targeting and validation for each consumer as well as delivery and validation of coupons and other targeted offers. The Company's PromoCache SM product is wholesaled to a broader range of manufacturers, retailers and distributors as well as more traditional web site publishers and Internet Service Providers. PromoCache SM creates themed promotional offers, in short time spans, from any web site. It automatically aggregates national and local offers from multiple databases using a series of simultaneous targeting engines and criteria. Consumers then view their own unique offer site, the equivalent of a personalized discount catalog. The Company's i-ValueSM product creates a desktop channel on the personal computers of consumers who subscribe to this service. It allows retailers, manufacturers and web site publishers to deliver targeted, secure coupons and other incentives to these consumers. Consumers subscribe to the service and receive electronic coupons and promotional incentives which are updated on a regular basis. Promotional offers can be individually tailored to meet each consumer's product category and brand shopping preferences. The Company began generating revenues during the first half of 1998. The Company generated over $70,000 from several major consumer package good manufacturers who began utilizing and marketing the Company's products. Separately, the Company has also entered into a licensing agreement with IQ and is scheduled to receive $3,000,000 in licensing fees. As of June 30, 1998, the Company had earned $1,250,000 of this fee. Accordingly, the Company has generated total revenues through June 30, 1998 of approximately $1,300,000. The Company has also signed major national retailers to contracts and is in negotiation with several other manufacturers and retailers. -29- The Company expects its principal customers and sources of revenue to be national, regional and local retailers, manufacturers of consumer products, consumer service providers, online web publishers and Internet service providers. The Company plans to generate revenues through a combination of software licensing, advertising and transaction fees charged to its Business Partners. To date, sales of the Company's Programs have been accomplished mostly through the Company's direct sales force; in the future, the Company expects to expand its direct selling efforts, create a business development group and increase its selling efforts through third party resellers. In developing its products, the Company has obtained input from major retailers, product manufacturers, coupon clearing agents and online publishers. The Company believes that its products and services provide a convenient and meaningful consumer experience by targeting more relevant offers than traditional alternatives (such as freestanding inserts and coupon mailers) for online consumers to receive on the Internet. The Company also believes that the system it has conceived and its products provide a more cost-effective and secure means for marketers to distribute and track targeted coupons, discounts and other promotional incentives. Program Development Background. The Company was incorporated in Delaware on July 16, 1996 and is the successor by merger to COL. For a more detailed description of the merger of COL into the Company (the "Merger"), see "Certain Transactions - The Merger." COL was formed in December 1994 for the purpose of developing and commercializing an approach to delivering coupons via various online networks. The Company has since expanded its efforts and products to extend beyond the delivery of coupons. Prior to the Merger, all of COL's resources were principally utilized for research and development activities including (i) conducting interviews with retailers, advertisers and coupon clearing companies in order to understand the market environment and product service attributes which might be attractive to potential customers, (ii) developing product and service specifications and initial prototypes, (iii) developing its business plans and models and (iv) seeking additional development capital. Market Based upon its research of the most recent information available from industry sources, the Company believes that in 1997, media spending on coupon and price discount delivery totaled $25.8 billion. One segment alone, consumer package goods manufacturers, issued approximately 250 billion coupons directly to U.S. consumers in 1997. This segment of manufacturers accounted for less than 20% of the total spending in this coupon and price discount category. Despite the large number of coupons issued to consumers, redemption rates for consumer packaged goods manufacturer coupons have fallen to approximately 2%. The Company believes that redemption rates have fallen due to the inefficiencies of traditional mass media delivery vehicles. Conversely, the Company believes that the more targeted coupon delivery vehicles available to the market today are not cost effective for many marketers. Similarly, the Company believes that the relative effectiveness of other forms of traditional mass media have also declined in recent years as the growth of new, more targeted media (e.g. cable, in-store) have continued to fragment consumer audiences into even narrower communities of interest. One new consumer communications medium which has demonstrated significant growth over the past several years is the Internet and the World Wide Web, in which consumers use personal computers and, most recently, televisions to access multimedia information and transact business. The Company believes that the base of consumers reportedly using the Internet has grown from 2 million in 1994 to over 50 million today. Given this potential of the Internet to effect highly targeted, one-on-one communications with individual consumers, numerous consumer marketers have been testing a variety of Web-based programs to advertise and promote their products and services. The Company has determined that Internet advertising spending conservatively totaled approximately $544.8 million in 1997 and the Company expects Internet advertising spending to grow to approximately $5 billion annually by the year -30- 2000. Additionally, Online consumer spending by United States and European consumers is projected to exceed $5.1 billion in 1998. Products and Services The Company has developed and is focusing on commercialization of three products in response to what the Company believes are three distinct market needs relating to online consumer promotion. Although each of the Company's products seeks to address security and targeting issues associated with electronic delivery of consumer promotions, each product presents a different solution: (i) Coupons Online SM provides an online marketing solution that meets the needs of manufacturers who want to promote a single product at one time. Coupons Online(sm) allows consumers who have registered with the Company and have installed the plug-in to browse participating websites and access the promotional offers they view; (ii) PromoCache(sm) allows a broader range of Business Partners to utilize the Company's technology to create themed promotional content areas that display multiple promotional offers at a time; and (iii) i-Value SM provides a marketing solution in which consumers register their product and service preferences and corresponding promotional offers are automatically delivered to them via the Internet - i.e. the product and service offer finds the consumer. Coupons Online SM and PromoCache(sm) allow consumer marketers to deliver secure, targeted promotions to consumers from Internet web sites. To receive promotional offers from the Company's Business Partners, consumers first register online, then download and install the netValue SM Plug-In. Once the consumer's computer is so enabled, the role of the Plug-In for ongoing offer request and delivery is relatively transparent to the consumer. In the registration process, consumers are required to supply their zip code and e-mail address. The registration process has been designed so that other forms of information may also be obtained from consumers during the registration process. The netValueSM Plug-In is a compact software application which is designed to work with the consumer's Web browser. Each Plug-In is encoded with a unique serial number which, when interacting with the Company's systems, provides the security, control, targeting, display, and printing features and functions. The netValue(sm) Plug-In currently supports consumers using Microsoft's Internet Explorer or Netscape Navigator web browsers (release 3.0 or higher) in a Windows 98 or Windows NT operating system environment. Program security is provided on a number of levels including, but not limited to: (i) the unique serial number associated with each consumer can be printed on each offer; and (ii) the printable offer is assembled by the plug-in responding to a print command and never appears on the consumer's computer screen. Business Partners control offer distribution by setting both individual caps (e.g. limit one per customer) and promotion caps (e.g. program instruction to cease issuance after distribution of a preset number of offers). These products currently feature three primary methods of targeting offers: (i) zip code-based targeting can be used by Business Partners to deliver different offers to consumers based on geographic, demographic, lifestyle and cultural marketing criteria; (ii) source-based targeting can be used by Business Partners to distinguish offers delivered to each consumer based on which Web site the consumer was visiting when they requested an offer; and (iii) behavioral targeting can be used by Business Partners to program a series of different offers to be delivered to consumers over time or based on the results of prior interaction. Other unique and proprietary targeting engines have also been developed for this system. Business Partners license the Company's Coupons Online(sm) and PromoCache(sm) technology and systems and contract with the Company to perform the online targeting, control and delivery functions. Generally, the Company charges a licensing fee and a transaction fee for each offer delivered online to a consumer, which fee varies based on whether the offer is universal or targeted. -31- The i-Value(sm) Program provides a service whereby consumers are able to install a free software program through which "electronic packages" of promotional offers for a broad array of products and services are periodically delivered to consumers via the Internet. A profiling feature enables consumers to customize the product so that they only receive offers for products and services in which they are interested. In addition to allowing consumers to control the type and numbers of offers they receive, the profiling process creates a database of individual product category and brand shopping preferences which can be used by the Company's Business Partners to target their promotional offers more effectively and efficiently. Similar to the Company's Coupons Online(sm) and PromoCache(sm) products: (i) consumers register to use the i-Value(sm) product; (ii) the software program for each consumer is encoded with a unique serial number providing consumer identification and tracking capabilities; and (iii) the Company provides consumer and Business Partner software, and targeting, control, validation and reporting services. The i-Value(sm) product allows consumers to store, sort, review and print offers off-line. To access i-Value(sm) product offers, consumers use a graphic interface based on the familiar physical analog of a daily organizer, complete with subject "tabs" which separate offers into major categories such as grocery, mass merchandise, drug, apparel, specialty retail, local merchant, etc. Within each tab, offers are further broken down into specific product or service categories similar to the way in which aisle signs in a retail store tell the consumer where various types of products are located. As the Company has designed i-Value(sm), initially both product content of promotional offers and consumer enrollment (i.e. consumer awareness, software distribution and registration) will be accomplished through cooperative marketing partnerships. To incentivize retailer participation, the Company is offering its Business Partners, among other things: (i) co-branding of the product whereby each participating retailer can distribute a customized version of the i-Value(sm) product to his customers, which distribution can be accomplished either via download from the Internet or through the physical distribution of CD's; and (ii) competitive advantage - participating retailers can have their own unique "tab" in their version of the product providing the retailer with a level of distinction from competitors among his customers. The i-Value(sm) has been developed for initial consumer testing with a retail Business Partner. Marketing and Sales Strategy Product Development and Management. The Company has developed its initial products and services to reflect both the current state and direction of Internet advertising, promotion and commerce. Therefore, the Company has developed Coupons Online SM and PromoCache(sm) to reflect the market's need for a "pull" distribution promotion solution in which the consumer is visiting Web sites, sees an item of interest from a Client and wishes to receive and print a promotional offer. The Company has developed i-Value(sm) to address the current trend of "push" distribution solutions in which the consumer subscribes to a service which regularly delivers personalized content. The Company believes that its success will be directly related to (i) consumer willingness to use the Company's products to access promotions of its Business Partners; (ii) the Company's ability to attract and maintain Business Partners using its products; and (iii) the Company's ability to adapt quickly and appropriately to continuing advancements in Internet technologies and trends. Therefore, the Company intends to commit a significant portion of its resources to ongoing product and service development, as well as market research and product testing. The Company's Privacy Policy. The Company believes that consumer control over the privacy of personal information and the security of transactions conducted via computers and networks is, and will continue to be, an important and highly visible public issue and area of sensitivity for large numbers of consumers, particularly in respect of data based products and services. Therefore, the Company has established a privacy policy whereby it will not give individual consumer information to any commercial third parties. The Company believes that its privacy policy is an important point of market differentiation and will likely play a prominent role in the positioning of the Company's products and services to Business Partners and consumers. -32- Customer Positioning and Sales Strategies. The Company has structured its product development and management efforts to reflect five primary market segments of potential Business Partners: (i) retailers - including grocery, drug, mass merchandise and specialty retailers; (ii) product and service marketers - including consumer package goods manufacturers, durable goods manufacturers, entertainment and other service providers; (iii) local area merchants - independent retail and consumer service providers operating within a limited trading area; (iv) online website publishers and Internet services providers; and (v) licensees, newspaper groups and industry consortiums. The Company believes that the benefits of its products and services, while largely applicable to each of these five segments, will require different approaches in order to maximize the Company's sales opportunities. Distribution and License Agreement with IQ Value, L.L.C. On April 7, 1998, the Company entered into a Distribution and License Agreement (the "IQ Agreement") with IQ whereby IQ has received an exclusive right to distribute the Company's Coupons OnlineSM and PromoCache(sm) products for use in electronically delivering coupons promoting the products and services of Local Merchants, and the nonexclusive right to distribute the Company's Coupons OnlineSM, PromoCache(sm) and i-Value(sm) products for use in electronically delivering coupons promoting the products and services of consumer marketers globally. In exchange for these rights to distribute the Company's products, IQ will pay a $3,000,000 fee to the Company over an expected period of approximately twelve months. The Company has received $1,250,000 of this fee from IQ and has granted to IQ a security interest in the Company's assets securing the Company's performance under the IQ Agreement. In addition to this fee, the Company will receive certain transaction fees for transactions processed using the Company's products. In order for IQ to maintain an exclusive right to distribute Coupons OnlineSM and PromoCache(sm) with respect to Local Merchants, IQ must meet annual minimum transaction fees. Pursuant to the IQ Agreement, the Company is obligated to relocate the Company's Data Center to a facility approved by IQ. The Data Center contains all of the hardware and operating systems used in the data side processing of transactions through the Coupons OnlineSM and PromoCache(sm) systems. Pursuant to the terms of the IQ Agreement, the relocated facility must have the capability to operate 24 hours a day, seven days a week. The Company retains the right to operate mirror facilities in its sole discretion. Pursuant to the terms of the IQ Agreement, the Company is obligated to provide its customers with the same level of customer support that the Company provides to its direct customers. The Company is also obligated to generate and provide periodic sales and operational reports to IQ regarding the volume of IQ customers' offers and promotions delivered to consumers using the Company's Coupons OnlineSM, PromoCache(sm) and i-Value(sm) products. However, the Company has no obligation to provide invoices or perform any billing, collection or other accounts receivable functions on behalf of IQ or its customers. Pursuant to the terms of the IQ Agreement, the Company is obligated to maintain its website for access by IQ customers and to allow IQ to use the website for purposes of marketing the Coupons Online(SM), PromoCache(sm) and i-Value(sm) products. Pursuant to the terms of the IQ Agreement, the Company is obligated, upon delivery of such items to the Company by DMR, to deposit in escrow one copy of the software, hardware designs, operating documentation and manuals related to the Coupons OnlineSM, PromoCache(sm) and i-Value(sm) products. -33- American Maple Leaf Financial Corporation ("AML") received an investment banking fee of $30,000 as compensation for its efforts in identifying IQ and assisting in the negotiations which resulted in the parties entering into the Letter of Intent. The Company also entered into an agreement with Promunicom, Inc., Gary R. Blau, and any other entities with which Mr. Blau is affiliated. Pursuant to this Agreement, the Company and Mr. Blau agreed to terminate a consulting agreement between the Company and Promunicom, Inc. dated May 1, 1997 (the "Consulting Agreement") effective January 15, 1998. The Company agreed to pay Mr. Blau the aggregate amount of $100,000 and to issue to Mr. Blau 30,000 shares of the Company's Common Stock in connection with the execution of the IQ Agreement. The Company has paid Mr. Blau $62,500 and has issued 30,000 shares of the Company's Common Stock to Mr. Blau. The remaining $37,500 payment was originally scheduled to be paid to Mr. Blau upon the earlier of July 6, 1998 or the Company's receipt of the proceeds of this Offering, but the parties have agreed to extend this payment date to the earlier of August 20, 1998 or the Company's receipt of the proceeds of this Offering. Mr. Blau is currently the Manager of IQ and, prior to attaining this status, played an instrumental role in the negotiations which resulted in the parties entering into the IQ Agreement. Mr. Blau is also a member of the Company's Board of Directors. See "Certain Transactions - Transactions with Promunicom, Inc. and IQ." Competition The Company faces significant competition from many consumer promotion and advertising companies which compete, directly or indirectly, for consumer advertising and promotion business from advertisers and for consumers' attention acceptance of promotional offers. Many of such advertising and promotion companies have longer operating histories, greater market presence, and substantially greater financial and other resources than the Company. Many of these companies, including Catalina Marketing Corporation, Money Mailer, Val-Pak Direct Marketing Systems, Interactive Coupon Network, Valassis Communications, Inc. and News America Holdings Incorporated have initiated or are planning to initiate programs and services involving the Internet. There can be no assurance that competition will not increase from existing competitors, that established or new companies will not enter the market, that pricing policies will not be undertaken by more established companies so as to erode the benefits of the Company's products and services, or that the Company will be able to compete successfully with such existing or new competitors. Patent and Trademark Protection The Company has applied for a patent entitled "Method and System for Electronic Distribution of Product Redemption Coupons," which describes what the Company believes to be a proprietary process for executing its products and services. In April 1998, the Company filed a second application with the USPTO on the same subject matter. In April 1998, the Company also filed an international patent application under the Patent Cooperation Treaty. The Company does not believe that either of the pending patents will provide material commercial value to the Company or that their denial will have a material impact on the achievement of the Company's business plan. Additionally, the Company has applied for federal registration of its trademarks and/or service marks COUPONS ONLINE, I-VALUE, NETVALUE and the NETVALUE logo, and INTERNET MARKETING AND RESEARCH INSTITUTE. There can be no assurance that the patent, servicemark or trademark registrations applied for will be reviewed on a timely basis, that any patents, service marks, or trademarks will be granted and issued, that any patents, service marks or trademarks issued will afford meaningful protection against competitors with similar names, technology or services, or that any patents, service marks or trademarks issued will not be challenged by third parties. The Company believes it is the only company currently using its approach to the secure distribution of targeted, scannable incentives and that the service marks and trademarks applied for are currently unencumbered and available to the Company. See "Risk Factors - No Assurance of Protection of Important Patents and Proprietary Technology." -34- Employees As of August 4, 1998, the Company employed 17 full-time employees. These employees include 11 operations and software development staff, three marketing and sales staff and three finance and administration staff. None of the Company's employees is covered by collective bargaining agreements and the Company considers its relations with its employees to be satisfactory. Facilities In November 1997, the Company signed a lease for its executive offices located at 1960 Bronson Road, Building No. 2, Fairfield, Connecticut. The offices consist of approximately 8,800 square feet. Pursuant to the terms of lease, the Company is required to pay rent of $13,284 per month plus utilities, general liability insurance premiums for up to $5,000,000 of coverage, and the amount of any increases in operating expenses and real estate taxes up to 5% over the amounts paid for these expenses during the year ended June 30, 1998. The Company assumed possession of the new office space and its obligation to pay rent under the lease commenced on January 1, 1998. The lease expires on December 31, 2000. Legal Proceedings Under the tenure of Mr. Clark, in November 1997, Guild filed an action against the Company in the United States District Court for the Southern District of New York alleging breach of contract and other claims related to services rendered by Guild to the Company in connection with the development of the Company's marketing plans and strategy. Guild seeks damages in the amount of $243,538 from the Company for the services allegedly provided. On June 19, 1998, the Company entered into a Stipulation and Order of Settlement (the "Settlement Order") with Guild resolving the claims asserted in the litigation. Pursuant to the Settlement Order, the Company has agreed to pay Guild the aggregate amount of $233,538 (the "Settlement Amount") as full and final satisfaction of all claims asserted by Guild upon the earlier of (i) ten days after the Company's receipt of the proceeds of the Offering or (ii) August 31, 1998. The Company paid Guild $30,000 on the date it entered into the Settlement Order and made interim payments of $10,000 on each of July 1, 1998 and August 1, 1998. If the Company fails to pay the Settlement Amount, Guild may enter the Stipulated Judgment against the Company without further notice for the full unpaid Settlement Amount plus interest thereon at the rate of nine percent per annum calculated from June 1, 1998. See "Risk Factors - Risks Related to Company - Pending Legal Proceedings." Regulatory Matters In 1998, the Company discovered that it had not paid use taxes of approximately $240,000 to the State of Connecticut due to the failure of DMR, as an out-of-state consultant providing services to the Company, to submit bills to the Company related to these taxes and collect and remit these taxes to the State of Connecticut. Immediately upon making this discovery, the Company voluntarily notified the appropriate taxing authorities of the delinquency and began attempting to arrange for a payment program with the State of Connecticut. The Company has included an accrual for these unpaid use taxes in the December 31, 1997 financial statements. On May 1, 1998, the Company entered into an agreement with the Department, whereby the Company will pay the past due use taxes and all accrued interest thereon pursuant to a payment schedule which requires the Company to pay the Department $5,000 per week until the Company receives the proceeds of this Offering. Under the initial terms of the Agreement, the Company was required to pay the entire remaining balance due to the Department upon the earlier of June 30, 1998 or the Company's receipt of the proceeds of this Offering The Company has reached an agreement with the Department whereby the remaining balance is due to the Department upon the earlier of August 15, 1998 or the Company's receipt of the proceeds of this offering. Through July 31, 1998, the Company has paid $83,725 of this tax liability, has incurred additional tax and interest liabilities in 1998 of approximately $47,745 and has a remaining obligation to pay approximately $204,000. -35- Independent Accountants In September 1997, the Company selected LJ Soldinger Associates ("LJSA") to serve as its independent accountant. The Company believes that LJSA is better suited and more willing to devote the appropriate level of resources to meet the needs of a development stage company than a "Big-Six" public accounting firm. LJSA has completed the audit of the financial statements for the years ended December 31, 1995 and December 31, 1996. In January 1998, the Audit Committee of the Board of Directors recommended that LJSA be engaged to complete the audit of the financial statements for the year ended December 31, 1997. The Board of Directors accepted this recommendation and LJSA has completed the audit of the Company's financial statements for the year ended December 31, 1997. See "Financial Statements." In September 1997, Ernst & Young, LLP ("E&Y") resigned its position as the Company's independent accounting firm. E&Y has confirmed that, prior to E&Y's resignation there were no disputes or disagreements between the Company and E&Y regarding the Company's accounting principles or practices, financial statement disclosure or auditing scope or procedures. -36- MANAGEMENT Directors and Executive Officers The following table sets forth the name, age and position of each present executive officer and director of the Company. Name Age Position - ---- --- -------- R. Scott Wills 45 President and Chief Executive Officer, Assistant Secretary and Chairman of the Board of Directors Michael Cirillo 50 Director Steven B. Rosner 47 Director Andrew P. Panzo 34 Director, Secretary Gary R. Blau 53 Director R. Scott Wills has served as President, Chief Executive Officer and Chairman of the Board of Directors since June 1998. In April 1996, Mr. Wills joined Netcom On-Line Communications, Inc. ("Netcom"), a large global Internet Service Provider based in San Jose, California. While at Netcom, Mr. Wills held multiple positions. His most recent responsibilities were as Senior Vice-President of Strategic Planning and Business Development. He also started and led Netcom's advertising/e-commerce sales effort. Mr. Wills also actively participated in merger negotiations, resulting in the sale of Netcom to ICG Communications, Inc. Prior to joining Netcom, Mr. Wills held positions on both the advertising agency and client side of the business. In January 1983, he founded his own advertising agency, Wills and Evans, in New York City, New York. Wills and Evans specialized in developing strategic business plans and executing integrated, multi-level marketing programs for a select group of Fortune 1000 and blue chip media companies. Mr. Wills operated Wills and Evans for over ten years and then sold the agency in June 1993. In March 1994, Mr. Wills joined Zing Systems, LLC ("Zing Systems"), a pioneering interactive television company based in Englewood, Colorado, and a former client of Wills and Evans. Mr. Wills served as Senior Vice President of Zing Systems. Mr. Wills presently serves on the Board of Advisers of Ram Works, a web site development firm based in Jacksonville, Florida. Michael Cirillo was elected a Director of the Company in December 1997. Mr. Cirillo has been a director of Aviation, Inc. since May 1997, has been the President of D.A.R. Group, Inc., a New York based investment banking firm, since 1995, and has been President of CBM Consultants, Inc., a New York based marketing and consulting firm since 1995. From 1987 to 1995, Mr. Cirillo was an officer and director of Flex Resources, a temporary and permanent employment firm based in New Jersey, which was a major contractor of employment services for the Resolution Trust Corporation and Fidelity National Bank. Steven B. Rosner was elected a Director of the Company in December 1997. Mr. Rosner is the sole shareholder of SLD Capital Corporation, which specializes in providing consulting and investment banking services. Previously, Mr. Rosner served as President of Centaur Financial Corporation an investment banking firm, from 1984 to 1996. He also serves as a director of several privately held corporations including Tradewinds, Inc. and Informatix, Inc. Mr. Rosner also served as President and Director of Pacific Rim Entertainment from December 1996 to December 1997. Andrew P. Panzo was elected a Director of the Company in January 1998. Mr. Panzo is President of AML which is an investment banking firm in Philadelphia, Pennsylvania specializing in emerging growth companies. AML is a principal stockholder of the Company. Mr. Panzo is also a director of The Eastwind Group, and is the President -37- and sole director of APP Investments, Inc. Prior to his employment with AML, Mr. Panzo was a student at Temple University School of Business in Philadelphia where he received a Masters Degree in international business and finance. Gary R. Blau was elected a Director of the Company in May 1998. Mr. Blau has served as the Managing Member of IQ since its formation in April 1998. IQ is a strategic sales and marketing organization based in New York, New York which provides clients with global Internet promotional solutions. IQ presently licenses the Company's products and distributes them for use in electronically delivering coupons promoting the products and services of IQ's clients. Since its inception in 1992, Mr. Blau has also served as President of Promunicom, Inc., a management consulting firm based in New York City, New York. During the last five years, none of the Company's executive officers, directors, promoters or control persons has: (i) had any bankruptcy petition filed by or against any business of which such person was a general partner either at the time of the bankruptcy or within two years prior to that time; (ii) been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, commodities or banking activities; or (iv) been found by a court of competent jurisdiction (in a civil action), the Commission, or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, which judgment has not been reversed, suspended, or vacated. Executive Compensation The following table sets forth certain information with respect to compensation paid or accrued by the Company during the years ended December 31, 1997 and 1996 to the Company's former Chief Executive Officer, the Company's Chief Technology Officer and one other highly compensated employee of the Company (the "Named Executive Officers"). Long-Term Annual Compensation Compensation Awards Name and Principal Position Year Salary Bonus Number of Options ------------------ ---- ------ ----- ----------------- Michael A. Clark, Former President and 1996 $ 62,598(2) 0 350,000(3) Chief Executive Officer(1) 1997 $ 150,577 0 790,000(3) Richard F. Davey, Vice President, Chief 1996 $ 52,022(5) 0 60,000(6) Technology Officer, and Secretary 1997 $ 134,231 0 137,000(6) Bruce Malinowski, Vice President 1996 $ 175,879(7) 0 0 1997 $ 115,000 0 48,000 (1) On June 1, 1998, the Company entered into a Separation Agreement with Mr. Clark. See "Business--Employment/Consulting Agreements." (2) Includes $6,636 that was paid to Mr. Clark in his capacity as a consultant to COL prior to September 19, 1996, the date on which his employment agreement with the Company commenced. (3) On September 19, 1996, Mr. Clark was granted options to purchase an aggregate of 350,000 shares of Common Stock. In December 1997, in connection with the amendment of Mr. Clark's employment agreement, the exercise price of 240,000 of such options was reduced, Mr. Clark was granted options to purchase an additional 550,000 shares of Common Stock (i.e. Mr. Clark received 790,000 options in 1997), and Mr. Clark's annual salary was increased to $165,000 effective September 19, 1997. See "Employment/Consulting Agreements". All information contained in this Prospectus relating to Mr. Clark's options reflects such amendment. Accordingly, Mr. Clark currently owns options to purchase a total of 900,000 shares of Common Stock. Pursuant to the terms of the Separation Agreement which -38- the Company entered into with Mr. Clark on June 1, 1998, all of Mr. Clark's options have vested. Such options are exercisable as follows: Number of Shares Exercise Price Per Share ---------------- ------------------------ 110,000 $.63 158,000 .80 158,000 4.00 158,000 5.00 158,000 6.00 158,000 7.00 (4) On July 16, 1998, Mr. Davey was terminated from his position as the Company's Chief Technology Officer. Effective July 28, 1998, the Board of Directors revoked Mr. Davey's appointment as the Secretary of the Company and a majority of the Company's shareholders voted to remove him from the Board of Directors. (5) Includes $11,060 that was paid to Mr. Davey in his capacity as a consultant to COL prior to September 19, 1996, the date on which his employment agreement with the Company commenced. (6) On September 19, 1996, Mr. Davey was granted options to purchase an aggregate of 60,000 shares of Common Stock. In December 1997, in connection with the amendment of Mr. Davey's employment agreement, the exercise price of 45,000 of such options was reduced, Mr. Davey was granted options to purchase an additional 92,000 shares of Common Stock (i.e. Mr. Davey received 137,000 options in 1997), and Mr. Davey's annual salary was increased to $140,000 effective September 19, 1997. See "Employment/Consulting Agreements". All information contained in this Prospectus relating to Mr. Davey's options reflects such amendment. Also, in January 1998, Mr. Davey was granted options to purchase an additional 50,000 shares of Common Stock. Accordingly, Mr. Davey currently owns options to purchase a total of 202,000 shares of Common Stock. Of such options, 38,000 have vested and are exercisable at a price of $.80 per share, and 58,000 will vest and become exercisable during each of 1998 and 1999 at prices of $4.00 and $5.00 per share, respectively, and 48,000 will vest and become exercisable during 2000 at a price of $6.00 per share. (7) Includes $144,918 that was earned by Mr. Malinowski prior to the formation of the Company. Of this amount, $130,819 has been paid to Mr. Malinowski and $14,099 remains unpaid and is recorded in accounts payable as of the date of this Offering. -39- The following table contains information concerning the grant of stock options during Fiscal 1997 to the Named Executive Officers. Option Grants in Last Fiscal Year Potential Realizable Value % of Total at Assumed Annual Rates Number of Options Granted of Stock Price Appreciation Options to Employees in Exercise or for Option Term (1) ------------------------ Name Granted Fiscal Year Base Price Expiration Date 5% 10% ---- ------- ------------ ---------- --------------- ------- ---------- Michael A. Clark 158,000 10.1% $ .80 September 18, 2002 $933,780 $1,275,060 Michael A. Clark 158,000 10.1% $4.00 September 18, 2003 $481,189 $ 909,606 Michael A. Clark 158,000 10.1% $5.00 September 18, 2004 $378,849 $ 906,288 Michael A. Clark 158,000 10.1% $6.00 September 18, 2005 $279,791 $ 918,612 Michael A. Clark 158,000 10.1% $7.00 September 18, 2006 $182,655 $ 946,578 Richard F. Davey 38,000 2.4% $ .80 September 18, 2002 $224,580 $ 306,660 Richard F. Davey 38,000 2.4% $4.00 September 18, 2003 $115,900 $ 218,880 Richard F. Davey 38,000 2.4% $5.00 September 18, 2004 $ 91,200 $ 218,120 Richard F. Davey 23,000 1.5% $6.00 September 18, 2005 $ 40,710 $ 38,000 Bruce Malinowski 12,000 .8% $ .80 September 18, 2002 $ 70,920 $ 96,840 Bruce Malinowski 12,000 .8% $4.00 September 18, 2003 $ 36,600 $ 69,120 Bruce Malinowski 12,000 .8% $5.00 September 18, 2004 $ 28,800 $ 68,880 Bruce Malinowski 12,000 .8% $6.00 September 18, 2005 $ 21,240 $ 69,720 (1) Based upon the assumed public offering price of $5.00 per share for the Common Stock. The following table sets forth information regarding the number and value of options held as of the date hereof by the Named Executive Officers. The Named Executive Officers did not exercise any options during Fiscal 1997. Fiscal Year End Option Values Value of Unexercised Number of Unexercised Options In-the-Money Options at Fiscal Year End at Fiscal Year End (1) ------------------ ---------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Michael A. Clark 268,000 632,000 $1,144,300 $158,000 Richard F. Davey 38,000 114,000 $ 159,600 $ 38,000 Bruce Malinowski 12,000 36,000 $ 50,400 $ 12,000 (1) Based on the assumed public offering price of $5.00 per share for the Common Stock. -40- Board of Directors The Company's Bylaws currently provide that the authorized number of directors of the Company will be a variable number ranging from one to nine with the exact number to be fixed by the Board of Directors. In May 1998, Mr. Blau was appointed to the Board of Directors. In June 1998, Mr. Clark resigned from his position as Chairman of the Board of Directors and Mr. Wills was appointed as his replacement. In July 1998, David Brandkamp resigned from his position on the Board of Directors. Effective July 28, 1998, the majority of the Company's shareholders voted to remove Mr. Davey from the Board of Directors. The Board of Directors currently consists of five members. Members of the Board of Directors hold office for a period of three years. The terms of the current directors are staggered as follows: Class of 2000: R. Scott Wills, Andrew Panzo Class of 1999: Michael Cirillo Class of 1998: Steven B. Rosner, Gary R. Blau Each director holds office until his successor has been elected and qualified at the Annual Meeting of Stockholders held during the year in which his term expires. The Audit Committee of the Board of Directors consists of Andrew P. Panzo, Steven B. Rosner and Michael Cirillo. The Compensation Committee of the Board of Directors consists of R. Scott Wills, Steven B. Rosner and Michael Cirillo. The Pricing Committee consists of R. Scott Wills. Directors of the Company who are also officers, employees or principal shareholders of the Company do not currently receive additional compensation for their services to the Board of Directors. The Company's independent directors are permitted to participate in the Company's Non-Qualified Stock Option Plan. In April 1998, the Company granted options to purchase 30,000 shares of the Company's Common Stock to each of Michael Cirillo and Steven B. Rosner, the Company's independent directors. Employment/Consulting Agreements The Company has entered into the following employment agreements and consulting arrangements: In September 1997, Mr. Clark entered into an employment agreement pursuant to which he had agreed to serve as the Company's President and Chief Executive Officer through September, 2002. Pursuant to the terms of the agreement, Mr. Clark was paid an annual base salary of $165,000 and was eligible to receive bonuses and increases to his base salary at the discretion of the Board of Directors. In addition, Mr. Clark was granted options to purchase an aggregate of 900,000 shares of Common Stock, which are exercisable as follows: Number of Shares Exercise Price Per Share ---------------- ------------------------ 110,000 $.63 158,000 .80 158,000 4.00 158,000 5.00 158,000 6.00 158,000 7.00 -41- On June 1, 1998, Mr. Clark resigned from all of his positions, as an officer and director of the Company and entered into a Separation Agreement with the Company (the "Separation Agreement"). Under the terms of the Separation Agreement, the Company agreed to pay deferred compensation and severance benefits to Mr. Clark and all of his options to purchase the Company's common stock became vested immediately. In June 1998, the Company made certain deferred compensation and severance payments to Mr. Clark and, in accordance with the Separation Agreement, he released all of his rights under his lien and security interests in certain of the Company's assets. Additional severance compensation payments are to be paid to Mr. Clark in monthly installments through October 1999. On June 1, 1998, Mr. Wills entered into an employment agreement with the Company pursuant to which he has agreed to serve as Chairman of the Board of Directors, and President and Chief Executive Officer of the Company. Pursuant to the terms of the agreement, Mr. Wills is paid an annual base salary and is eligible to receive an annual bonus based on the attainment of specific performance goals established by the Board of Directors. Any bonus may be allocated between awards of cash and shares of Common Stock. Mr. Davey entered into an agreement pursuant to which he agreed to serve as the Company's Vice President and Chief Technology Officer until September 19, 1998. Under the agreement, Mr. Davey is paid an annual base salary of $140,000 and is eligible to receive bonuses and increases to his base salary at the discretion of the Board. In addition, Mr. Davey was granted options to purchase 152,000 shares of Common Stock. Of such options, (1) 38,000 vested and became exercisable on September 19, 1997 at an exercise price of $.80 per shares and (ii) 38,000 will vest and become exercisable on each of September 19, 1998, 1999 and 2000 at exercise prices of $4.00, $5.00 and $6.00 per share, respectively. In addition to the terms of this Agreement, Mr. Davey was subsequently granted options to purchase an additional 50,000 shares of Common Stock at exercise prices ranging from $4.00 to $6.00 per share. See "Management - - Executive Compensation." On July 16, 1998, Mr. Davey was terminated from his position as the Company's Chief Technology Officer and his employment agreement was terminated. Each of Craig W. Barnett and Mark D. Braunstein, co-founders of COL, entered into a consulting agreement pursuant to which he agreed to serve as a consultant to the Company until September 19, 1999. Pursuant to their consulting agreements, they were each entitled to be paid $84,000 per year as consideration for their services. In addition, in connection with the Merger, each of Messrs. Barnett and Braunstein was granted 300,000 shares of Common Stock (collectively, the "Consulting Shares") which were to vest upon the earlier of (i) a Change of Control of the Company or (ii) the commencement of beta testing in a test market for the Company's Online targeted incentive program. In July 1997, the beta testing for the Company's Online targeted incentive program was completed and the consulting shares were issued to Messrs. Barnett and Braunstein in December 1997. In December 1997, the consulting agreements with Messrs. Barnett and Braunstein were cancelled and Messrs. Barnett and Braunstein each entered into employment agreements with the Company. Mr. Barnett entered into an agreement pursuant to which he agreed to serve as the Company's Vice President of Local Market Administration. Mr. Braunstein entered into an agreement pursuant to which he agreed to serve as the Company's Vice President of Local Market Development. Under the agreements, which were effective October 1, 1997, Messrs. Barnett and Braunstein are each paid a base salary of $85,000 and a draw of $15,000 against commissions earned through September 30, 1998. Thereafter, Messrs. Barnett and Braunstein will each be compensated solely on a commission basis. They will each receive an annual draw against commissions of $85,000 and will receive the balance of earned commissions, if any, on a quarterly basis commencing on June 30, 1998. In addition, Messrs. Barnett and Braunstein were each -42- granted options to purchase an aggregate of 60,000 shares of Common Stock. These options were scheduled to vest and become exercisable on each of July 1, 1997, 1998, 1999 and 2000 at prices of $.80, $4.00, $5.00 and $6.00 per share, respectively. On February 11, 1998, the Company and Messrs. Barnett and Braunstein signed a mutual release from their respective obligations under the employment agreements. IQ believed that by hiring Messrs. Barnett and Braunstein, it would be able to take advantage of their relationships with potential Customers and thus enhance IQ's performance under the IQ Agreement. Since the Company earns transactions fees based on IQ's performance, the Company was willing to release Messrs. Barnett and Braunstein from their employment agreements so that IQ could hire each of them. See "Business - Marketing and Sales Strategy - Distribution and License Agreement With IQ Value, L.L.C." Under the terms of these mutual releases, each of Messrs. Barnett and Braunstein will continue to receive their salaries and commission draws until September 30, 1998, they will each receive cash payments of $20,000, and they will each receive options to purchase 75,000 shares of the Company's Common Stock at the per share price of this Offering. The mutual releases became effective on April 7, 1998, concurrent with the execution of the IQ Agreement. The Company has paid each of Messrs. Barnett and Braunstein $10,000 and has issued options to purchase 75,000 shares of the Company's Common Stock to each of Messrs. Barnett and Braunstein. The remaining $10,000 payable to each of Messrs. Barnett and Braunstein is due upon the earlier of August 20, 1998 or the Company's receipt of the proceeds of this Offering. Each of Messrs. Clark, Wills, Davey, Barnett and Braunstein is bound by his respective agreement, to treat confidentially all proprietary information learned by him during the course of his employment with the Company or COL for the term of the agreement and at all times thereafter. They have each also agreed to refrain from (i) competing with the Company or any of its affiliates and (ii) soliciting the Corporation's employees or officers, during the term of such agreement and for a period of one year thereafter. 1996 Non-Qualified Stock Option Plan General The netValue, Inc. 1996 Non-Qualified Stock Option Plan (as amended, the "Plan") authorizes the Board or a committee which the Board may appoint from among its members (the "Compensation Committee") to grant options ("Options") to purchase up to 4,000,000 shares of Common Stock. None of the Options will be "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Option Grants to Date As of the date hereof, the Company has granted Options to purchase 3,127,250 shares of Common Stock. Purpose The general purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to officers, directors, employees, consultants and independent contractors and to promote the success of the Company's business. Administration The Plan may be administered by the Board or the Compensation Committee. Subject to the other provisions of the Plan, the Board or the Compensation Committee has the authority to (i) award Options; (ii) determine the exercise price of any Options to be awarded; (iii) determine the eligible participants to whom, and the time or times at which, Options shall be awarded, and the number of shares to be subject to each Option; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) determine the terms and provisions of each Option awarded under the Plan, each option agreement and, with the consent of the optionee, to modify or amend an outstanding Option or option -43- agreement; (vi) accelerate the vesting or exercise date of any Option; (vii) determine whether any Optionee will be required to execute any agreement as a condition to the exercise of an Option, and to determine the terms and provisions of any such agreement and, with the consent of the Optionee, to amend any such agreement; (viii) interpret the Plan or any agreement entered into with respect to the Award or exercise of Options; (ix) authorize any person to execute on behalf of the Company any instrument required to effectuate the Award of an Option previously awarded or to take such other actions as may be necessary or appropriate with respect to the Company's rights pursuant to Options or agreements relating to the Award or exercise thereof; and (x) make such other determinations and establish such other procedures as it deems necessary or advisable for the administration of the Plan. Eligibility The Plan provides that Options may be granted to the Company's officers, directors and employees and to any consultants or independent contractors engaged by the Company. Terms and Conditions of Options Each Option to be granted under the Plan will be evidenced by a written award agreement between the optionee and the Company and is subject to the following terms and conditions: (a) Exercise Price. The Board or the Compensation Committee is responsible for determining the exercise price of Options at the time such Options are granted. (b) Form of Consideration. The means of payment for shares of Common Stock issued upon exercise of an Option is specified in each award agreement and generally may be made by cash, check, promissory note or shares of Series A Preferred Stock having a Stated Value on the date of surrender equal to the aggregate exercise price of the options. (c) Exercise of the Option. Each Option agreement will specify the terms of the Option and the date when the Option is to become exercisable. However, in no event shall an Option granted under the Plan be exercised more than ten years after the date of grant. (d) Termination of Employment. If an optionee's employment terminates for any reason (other than death or permanent disability), then all Options held by such Optionee under the Plan expire upon the earlier of (i) one year from the date of such termination and (ii) the expiration date of the Option, unless otherwise provided for in the Option Agreement related to such Option. (e) Permanent Disability, Death. If an Optionee dies while employed by the Company or is unable to continue employment with the Company as a result of permanent and total disability (as defined in the Code), his or her Option shall expire upon the earlier of (i) twelve months after the Optionee's death or disability or (ii) the expiration date of the Option. The executor or other legal representative of the Optionee may exercise all or part of the Option at any time before such expiration to the extent that such Option was exercisable at the time of death or permanent disability of the Optionee. (f) Termination of Options. Each award agreement will specify the expiration date of the Option. No Option may be exercised by any person after the expiration of its term. (g) Nontransferability of Options. During the lifetime of the Optionee, his or her Option(s) shall be exercisable only by the Optionee and shall not be transferable other than by will or laws of descent and distribution. Adjustment Upon Changes in Capitalization, Corporate Transactions -44- In the event that the capital stock of the Company is changed by reason of any stock split, reverse stock split, stock dividend, recapitalization or other change in the capital structure of the Company, appropriate proportional adjustments shall be made in the number and class of shares of Common Stock subject to the Plan, the number and class of shares of Common Stock subject to any Option outstanding under the Plan, and the exercise price of any such outstanding Option. Any such adjustment shall be made upon approval of the Board and, if required, the stockholders of the Company, whose determination shall be conclusive. In the event of a Change of Control of the Company, the Board shall have the right to accelerate the vesting of all unmatured Options. In addition, in the event of a Change of Control of the Company by reason of a merger, consolidation or tax free reorganization or sale of all or substantially all of the assets of the Company (other than in the ordinary course of business), the Board shall have right to terminate and to (a) exchange all Options for options to purchase common stock in the successor corporation or (b) distribute to each optionee cash and/or other property in an amount equal to and in the same form as the optionee would have received from the successor corporation if the optionee had owned the shares of Common Stock subject to the Option rather than the Option at the time of the Change of Control. The form of payment or distribution to the optionee pursuant to this section shall be determined by the Board. Amendment, Suspensions and Termination of the Plan The Board may amend, suspend or terminate the Plan at any time, subject to any restrictions imposed by applicable law. Federal Tax Information Options granted under the Plan are not "incentive stock options," as defined in Section 422 of the Code. The Company will be entitled to a tax deduction in the same amount as the ordinary income recognized by the optionee with respect to shares of Common Stock acquired upon exercise of an Option. Liability and Indemnification of Officers and Directors The Company's Amended and Restated Certificate of Incorporation provides that Directors of the Company will not be liable for monetary damages for breach of their fiduciary duty as directors, other than the liability of a director (i) for a breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions by the director not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for a willful or negligent declaration of an unlawful dividend, stock purchase or redemption or (iv) for transactions from which the director derived an improper personal benefit. These provisions are consistent with applicable Delaware law. The Company's Amended and Restated Certificate of Incorporation provides that the Company shall, to the full extent permitted by Section 145 of the Delaware General Corporation Law, indemnify all persons whom it may indemnify pursuant thereto. In addition, the Company's Bylaws include provisions to indemnify its officers and directors and other persons against expenses, judgments, fines and amounts incurred or paid in settlement in connection with civil or criminal claims, actions, suits or proceedings against such persons by reason of serving or having served as officers, directors, or in other capacities, if such person acted in good faith, and in a manner such person reasonably believed to be in or not opposed to the best interest of the Company and, in a criminal action or proceeding, if he had no reasonable cause to believe that his/her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or that he or she had reasonable cause to believe his or her conduct was unlawful. Indemnification as provided in the Bylaws shall be made only as authorized in a specific case and upon a determination that the person met the applicable standards of conduct. Insofar as the limitation of, or indemnification for, liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the Company pursuant -45- to the foregoing, or otherwise, the Company has been advised that, in the opinion of the Commission, such limitation or indemnification is against public policy as expressed in the Securities Act, and is therefore, unenforceable. -46- SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership (as calculated pursuant to Rule 13d-3(d)(1) promulgated under the Exchange Act) of Common Stock owned, as off July 31, 1998, by (i) the holders of more than 5% of the Common Stock, (ii) each director of the Company, (iii) the Named Executive Officers and (iv) all directors and executive officers of the Company as a group. Prior to this Offering, as of July 31, 1998, an aggregate of 11,868,756 shares of Common Stock were issued and outstanding. Assuming the consummation of this Offering, as of July 31, 1998, an aggregate of 14,868,756 shares of Common Stock were issued and outstanding. For purposes of computing the percentages under this table, it is assumed that all options and warrants to acquire Common Stock which have been issued to the directors, executive officers and the holders of more than 5% of the Common Stock and are fully vested or will become fully vested within 60 days of the date of this Prospectus have been exercised by these individuals and the appropriate number of shares of Common Stock have been issued to these individuals, and that all shares of Series A Convertible Preferred Stock which have been issued to the directors, executive officers and the holders of more than 5% of the Common Stock have been converted into shares of Common Stock and the appropriate number of shares of Common Stock have been issued to these individuals. Shares of Common Stock Beneficially Owned Name and Address Number Percent of Class - ---------------- ------ ---------------- Before Offering After Offering --------------- -------------- American Maple Leaf 1,291,850 (1) 10.4 8.4 Financial Corporation Two Penn Center Plaza, Suite 605 Philadelphia, PA 19102 APP Investments, Inc. 1,291,850 (2) 10.4 8.4 Two Penn Center Plaza, Suite 605 Philadelphia, PA 19102 Craig W. Barnett 827,000 (3) 6.9 5.5 300 E. 71st Street, #3E New York, NY 10021 Gary R. Blau 30,000 * * 171 East 62nd Street New York, NY 10021 Mark D. Braunstein 732,000 (4) 6.1 4.9 405 E. 54th Street, #11H New York, NY 10022 Michael Cirillo 40,000 (5) * * 55 Eastwood Blvd. Manalopan, NJ 07726 -47- Shares of Common Stock Beneficially Owned Name and Address Number Percent of Class - ---------------- ------ ---------------- Before Offering After Offering Andrew P. Panzo 1,291,850 (6) 10.4 8.4 c/o American Maple Leaf Financial Corporation Two Penn Center Plaza, Suite 605 Philadelphia, PA 19102 Steven B. Rosner 232,500 (7) 1.9 1.5 1220 Mirabeau Lane Gladwyne, PA 19035 Rozel International Holdings Limited 7,717,127 (8) 52.8 43.9 c/o Whitehill House Newby Road-Industrial Estate Stratford Chesire, United Kingdom R. Scott Wills 466,666 (9) 3.8 3.0 1960 Branson Road, Building Two Fairfield, Connecticut 06430 All directors and executive officers 2,061,016 16.0 13.0 as a group (5 people) - ---------------- * Less than 1% (1) Consists of 791,850 shares of Common Stock and the 500,000 APP Warrant Shares (as defined under "Certain Transactions - Organization of the Company") issuable to APP Investments, Inc. ("APP"). Andrew P. Panzo is the controlling shareholder, President and a director of both AML and APP and as a result thereof, the 500,000 APP Warrant Shares issuable to APP upon the exercise of the APP Warrant (as defined under "Certain Transactions - Organization of the Company") may be deemed to be beneficially owned by AML. (2) Consists of 500,000 APP Warrant Shares and the 791,850 shares of Common Stock owned by AML. Andrew P. Panzo is the controlling shareholder, President and a director of both APP and AML and as a result thereof, the 791,850 Common Shares owned by AML may be deemed to be beneficially owned by APP. (3) Includes 15,000 shares of Common Stock issuable upon the exercise of certain outstanding options held by Mr. Barnett which are currently exercisable at a price of $.80 per share and 75,000 shares of Common Stock issuable upon the exercise of certain outstanding options held by Mr. Barnett which are currently exercisable at $5.00 per share. Does not include 47,500 shares of Common Stock owned by Mr. Barnett's brother, Larry Barnett. Mr. Barnett disclaims beneficial ownership of such shares. (4) Includes 15,000 shares of Common Stock issuable upon the exercise of certain outstanding options held by Mr. Braunstein which are currently exercisable at a price of $.80 per share and 75,000 shares of Common Stock issuable upon the exercise of certain outstanding options held by Mr. Braunstein which are currently exercisable at $5.00 per share. -48- (5) Consists of 30,000 shares of Common Stock owned by the DAR Group, Inc. Michael Cirillo is the President of the DAR Group, Inc. ("DAR"). As a result thereof, the 30,000 shares of Common Stock owned by DAR may be deemed to be owned by Michael Cirillo. Includes 10,000 shares of Common Stock issuable upon the exercise of certain outstanding options held by Mr. Cirillo which are exercisable at any time after December 31, 1998 at a price of $4.00 per share. (6) Consists of 500,000 APP Warrant Shares and the 791,850 shares of Common Stock owned by AML. Andrew P. Panzo is the controlling shareholder, President and a director of both APP and AML and as a result thereof, the 791,850 Common Shares owned by AML and the 500,000 Warrant Shares issuable to APP may be deemed to be beneficially owned by Andrew P. Panzo. (7) Includes 32,500 shares of Common Stock owned by the Steven B. Rosner Money Purchase Pension Plan of which Mr. Rosner is a trustee. Includes 10,000 shares of Common Stock issuable upon the exercise of certain outstanding options held by Mr. Rosner which are exercisable at any time after December 31, 1998 at a price of $4.00 per share. (8) Includes 2,733,750 shares of Common Stock issuable upon the conversion of 218,700 shares of Series A Convertible Preferred Stock currently owned by Rozel International Holdings Limited. Includes 10,500 shares owned by HPC Corp. Services. Harold P. Chaffe, the President of Rozel, is also the President of HPC Corp. Services. (9) Consists of 466,666 shares of Common Stock issuable upon the exercise of certain outstanding options held by Mr. Wills which are currently exercisable at a price of $1.60 per share. -49- CERTAIN TRANSACTIONS Organization of the Company On July 16, 1996, the Company was formed solely for the purpose of merging with COL. In exchange for an aggregate purchase price of $1,090, the Company's founders, including AML, received an aggregate of 1,090,000 shares of Common Stock. In addition, in connection with the Company's formation, APP Investments, Inc. ("APP"), an affiliate of AML, was issued a warrant to acquire 500,000 shares of Common Stock (the "APP Warrant Shares") at an exercise price of $6.00 per share (the "APP Warrant"). None of the APP Warrant Shares issuable upon the exercise of the APP Warrant may be sold, transferred or otherwise disposed of prior to September 19, 1998 without the prior written approval of AML. The Merger On September 18, 1996, the Merger was consummated and COL was merged with and into the Company. In connection with the Merger, the Company issued an aggregate of 3,074,000 shares of Common Stock to the members of COL (the "COL Shares") in exchange for (i) all of the issued and outstanding membership interests of COL, (ii) the termination of all agreements among COL and certain of its members and other affiliated parties (collectively, the "COL Holders") and (iii) the waiver of all pre-existing rights, claims, causes of action and suits which COL Holders have or may have against COL, except for the Surviving Claims (as defined below). In connection with the Merger, the Company agreed to pay an aggregate of $292,966 to certain of the COL Holders in satisfaction of certain (i) loans advanced to COL by the officers of COL and (ii) compensation owed by COL to such COL Holders (the "Surviving Claims"). In satisfaction of certain of the Surviving Claims, Mr. Barnett was paid an aggregate of $88,669. Also in connection with the Merger, the Company (i) reserved an aggregate of 600,000 shares of Common Stock for issuance to Messrs. Barnett and Braunstein (which were subsequently issued in December 1997), (ii) entered into an agreement with Muzak Limited Partnership ("Muzak"), whereby Muzak was appointed the Company's exclusive sales agent for a three-year period (which agreement was mutually terminated on April 3, 1997, and the termination of this relationship has not had a material adverse effect on the Company), and (iii) adopted the Plan. Except for an aggregate of 866,000 of COL Shares, none of the COL shares may be sold or transferred prior to September 19, 1998 without the prior written consent of AML. Transactions with AML On September 18, 1996, the Company entered into a six-month consulting agreement with AML pursuant to which AML agreed to provide investment banking services to the Company in exchange for 350,000 shares of Common Stock. As AML has satisfied all of its obligations under such agreement, all of such shares have been issued to AML. During 1997, AML advanced $1,001,000 in short-term bridge financing to the Company. As of October 31, 1997, the Company had repaid $976,000 of this amount. In December 1997, the Company issued 190,200 shares of Common Stock to AML as consideration for the advance of the financings and the consensual forbearance by AML from collecting the amounts due during the term of the financings. In December 1997 the Company repaid the remaining $25,000 due under the short-term bridge financing. In March 1998, the Company paid AML an investment banking fee of $30,000 as compensation for its efforts in locating IQ and assisting in the negotiations which resulted in the Company entering into a letter of intent with IQ. See "Business - Marketing and Sales Strategy - Letter Agreement with IQ Value, L.L.C." Employment/Consulting Agreements On September 18, 1996, the Company entered into Employment Agreements with each of Messrs. Clark and Davey and Consulting Agreements with each of Messrs. Barnett and Braunstein. The Employment Agreements with -50- Messrs. Clark and Davey were amended in December 1997 effective retroactive to September 19, 1997. In December 1997, the consulting agreements with each of Messrs. Barnett and Braunstein were canceled and the Company entered into employment agreements with each of them. Also in December 1997, the Company issued 300,000 shares of Common Stock to each of Messrs. Barnett and Braunstein in accordance with the terms of each of their respective consulting agreements. In February 1998, the Company and each of Messrs. Barnett and Braunstein signed a mutual release from their respective obligations under the employment agreements. These mutual releases became effective on April 7, 1998 concurrent with the execution of the IQ Agreement. On June 1, 1998, Mr. Clark resigned all of his positions as an officer and director of the Company and entered into a separation agreement with the Company. On June 1, 1998, the Company entered into an Employment Agreement with Mr. Wills. See "Management -Employment/Consulting Agreements" for a complete description of such agreements and releases. Transactions With VDC Corporation Ltd. On September 6, 1996, the Company issued and sold 650,000 shares of Common Stock to VDC Corporation Ltd. ("VDC") for an aggregate purchase price of $650,000. On April 22, 1997, the Company entered into an agreement with VDC pursuant to which VDC proposed to acquire the Company through a statutory merger or similar business combination (the "VDC Agreement"). On August 26, 1997, the Company and VDC mutually agreed to terminate the VDC Agreement in order to allow the Company to proceed with other financing alternatives. In connection with the VDC Agreement, VDC provided the Company with bridge financing in the principal amount of $2,500,000 (the "Bridge Financing") and a senior secured loan in the principal amount of $100,000 (the "Loan"). The Bridge Financing and the Loan were secured by a lien on all of the Company's tangible and intangible assets (the "VDC Lien"). In consideration for the receipt of the Bridge Financing and the Loan, the Company issued 100,000 shares of Common Stock to VDC. In December 1997, $2,400,000 principal amount of the Bridge Financing and interest accrued on the Bridge Financing and the Loan through November 14, 1997 was canceled and converted into 3,222,877 shares of Common Stock. In December 1997, the Company repaid the remaining $200,000 principal amount outstanding on the Bridge Financing and the Loan. On December 18, 1997, VDC sold all of its shares of the Company's Common Stock to Rozel International Holdings Limited ("Rozel"). Accordingly, VDC is no longer a principal shareholder of the Company. Rozel Preferred Stock Purchase Agreement In December 1997, Rozel purchased 3,972,877 shares of the Company's Common Stock from VDC. In connection with a Preferred Stock Purchase Agreement (the "Rozel Agreement") that the Company entered into with Rozel, the Board of Directors designated a Series A Convertible Preferred Stock consisting of 300,000 shares ("Series A Shares"). The Rozel Agreement provides that the Company may request that Rozel purchase up to an aggregate of 300,000 shares at an aggregate purchase price of $3,000,000. As of the date of this Prospectus, Rozel has purchased 298,700 shares for $2,987,000. In July 1998, the Company informed Rozel that it did not intend to request that Rozel purchase the remaining shares available under the Rozel Agreement. In July 1998, pursuant to the terms of the Rozel Agreement, the Company issued 150,000 shares of Common Stock to Rozel as additional consideration for meeting all of the Company's requests under the Rozel Agreement. Each Series A Share is convertible at any time at the option of either Rozel or the Company into 12.5 shares of the Company's Common Stock. Upon any conversion of Series A Shares by either Rozel or the Company, Rozel shall turn over its certificates representing the Series A Shares and the Company shall issue a certificate for that number of shares of Common Stock into which the Series A Shares are convertible. The Series A Shares will be canceled and will no longer be issued and outstanding. As of the date of this Prospectus, Rozel has converted 80,000 shares of Series A Preferred Stock into 1,000,000 shares of Common Stock. See "Description of Capital Stock - Preferred Stock." -51- In June 1998, Rozel entered into a Guarantee Agreement with Mr. Wills whereby it agreed to guarantee payment of all amounts which become payable to Mr. Wills by the Company upon the termination of Mr. Wills' Employment Agreement. Transactions with Promunicom, Inc. and IQ On May 1, 1997, the Company entered into a consulting agreement with Promunicom (the "Consulting Agreement") whereby the Company agreed to pay Promunicom a retainer fee of $10,000 per month in exchange for receiving the services of Mr. Blau, President of Promunicom, for a minimum of five days per month. During the period from May 1, 1997 through December 31, 1997, the Company paid Promunicom $15,000. On March 13, 1998, the Company entered into an agreement with Promunicom, Mr. Blau and any other entities with which Mr. Blau is affiliated. Pursuant to this agreement, the Company and Mr. Blau agreed to terminate the Consulting Agreement effective January 15, 1998. The Company agreed to pay Mr. Blau the aggregate amount of $100,000 and to issue to Mr. Blau 30,000 shares of the Company's Common Stock in connection with the execution of the IQ Agreement. The Company has paid Mr. Blau $62,500 and has issued 30,000 shares of the Company's Common Stock to Mr. Blau. The remaining $37,500 payment was originally scheduled to be paid to Mr. Blau upon the earlier of July 6, 1998 or the Company's receipt of the proceeds of this Offering, but the parties have agreed to extend this payment date to the earlier of August 20, 1998 or the Company's receipt of the proceeds of this Offering. On April 7, 1998, the Company entered into the IQ Agreement. See "Business - Marketing and Sales Strategy Distribution and License Agreement With IQ Value, L.L.C." Through June 30, 1998, substantially all of the Company's revenues have been generated pursuant to the IQ Agreement. Mr. Blau is currently the Manager of IQ and, prior to attaining this status, played an instrumental role in the negotiations which resulted in the parties entering into the IQ Agreement. Mr. Blau was appointed to the Board of Directors in May 1998. Transactions with Ram Works The Company has paid Ram Works approximately $125,000 for (i) web development consulting services related to redesigning and reengineering of the Company's netValue(sm) product; and (ii) providing personnel to perform services equal to that of an interim chief technology officer. Mr. Wills presently serves on the Board of Advisers of Ram Works and receives a stipend of $2,000 per month. In exchange for these services, Mr. Wills is entitled to receive a finder's fee equal to 10% of the gross billings for all business which Mr. Wills refers to Ram Works. In June and July 1998, when Ram Works provided these services to the Company, Mr. Wills has not requested payment of this stipend and has permanently waived any finder's fee related to any services provided to the Company by Ram Works. Approval of Transactions By Independent Directors Each of the Company's two independent, nonemployee directors joined the Board of Directors in December 1997. Prior to this date, the Company did not have any independent, nonemployee directors. Accordingly, none of the closed or ongoing transactions described above was approved by independent, nonemployee directors who did not have an interest in the transactions. All future material transactions and loans completed by the Company will be made or entered into on terms that are no less favorable to the Company than those that can be obtained from unaffiliated third parties. Any future forgiveness of loans by the Company must be approved by a majority of the Company's independent directors who do not have an interest in the transactions and who have access at the Company's expense to the Company's legal counsel. -52- DESCRIPTION OF CAPITAL STOCK Authorized Shares Under the Company's Amended and Restated Certificate of Incorporation, the authorized capital stock of the Company consists of 24,000,000 shares of Common Stock, par value $.001 per share, and 1,000,000 shares of preferred stock, $.001 par value per share ("Preferred Stock"). The Company's shareholders recently approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock to 49,000,000. As of the date of this Prospectus, (i) 11,868,756 shares of Common Stock were issued and outstanding, (ii) 4,000,000 shares of Common Stock were reserved for issuance pursuant to Plan, (iii) 902,500 shares of Common Stock were reserved for issuance upon the exercise of outstanding warrants (including the APP warrant) and (iv) 2,733,750 shares of Common Stock were reserved for issuance upon the conversion of the Series A Preferred Stock. As of the date of this Prospectus, 218,700 shares of Preferred Stock are issued and outstanding. Common Stock Holders of Common Stock are entitled to one vote for each share on all matters voted on by stockholders and are not entitled to cumulative voting. The first annual meeting of stockholders is expected to be held during 1998. All shares of Common Stock to be distributed will be fully paid and nonassessable. Holders of Common Stock do not have any subscription, redemption or conversion privileges. Holders of Common Stock are entitled to participate ratably in dividends on the Common Stock as declared by the Board of Directors. Holders of Common Stock are entitled to share ratably in all assets available for distribution to stockholders in the event of liquidation or dissolution of the Company. Preferred Stock The shares of Preferred Stock may be issued in one or more classes and in one or more series within a class with such designations, powers, preferences, rights, qualifications, limitations and restrictions as may be established from time to time by resolution of the Board of Directors at or prior to the time of issuance of shares of such class or series. In connection with the Rozel Agreement, the Board of Directors designated a Series A Convertible Preferred Stock consisting of 300,000 shares ("Series A Shares"). See "Certain Transactions - Rozel Preferred Stock Purchase Agreement." Each Series A Share is convertible at any time at the option of either Rozel or the Company into 12.5 shares of the Company's Common Stock. Upon any conversion of Series A Shares by either Rozel or the Company, Rozel shall turn over its certificates representing the Series A Shares and the Company shall issue a certificate for that number of shares of Common Stock into which the Series A Shares are convertible. The Series A Shares will be cancelled and will no longer be issued and outstanding. As of the date of this Prospectus, Rozel has converted 80,000 Series A Shares into 1,000,000 shares of Common Stock. The Series A Shares do not have any voting rights or any registration rights. Upon any liquidation or dissolution of the Company, the Series A Shares shall have a preference over any subsequent series of Preferred Stock issues by the Company. All remaining authorized shares of Preferred Stock currently are undesignated. Although it has no current intention to do so, the Board of Directors may authorize and issue series of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. In addition, the issuance of Preferred Stock may have the effect of deterring or preventing a change in control of the Company. See "Risk Factors - Risks Related to the Offering - Possible Negative Effects of Preferred Stock." -53- Common Stock Purchase Warrants As of the date of this Prospectus, the Company has issued 902,500 Common Stock Purchase Warrants. In connection with the formation of the Company, the Company issued to APP or its registered assigns 500,000 Common Stock Purchase Warrants (the "APP Warrants"). The APP Warrants have an exercise price of $6.00 per share and are exercisable at any time prior to August 2, 2001. During the period commencing on the date on which the Company's Common Stock has been traded for five consecutive days on a public exchange, over-the-counter market or other public trading system or market, and ending 10 days thereafter, the Company may, in its sole discretion, require the exercise of all of the APP Warrants (the "Mandatory Exercise"). If APP fails to exercise any of the APP Warrants within 30 days after receiving notice of the Company's election of the Mandatory Exercise, then all rights granted to APP related to the unexercised APP Warrants shall be terminated. In connection with private offerings of its securities which the Company completed in October and December 1997, the Company issued an aggregate of 402,500 Common Stock Purchase Warrants (the "1997 Warrants"). The 1997 Warrants have an exercise price equal to the lower of (i) $4.00 and (ii) the price per share at which the Common Stock is offered to the public in the initial public offering of the Company's Common Stock. The 1997 Warrants are exercisable for a period of five years commencing on the date the Common Stock is first registered with the Securities and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934. Preemptive Rights No holder of any capital stock of the Company has any preemptive right to subscribe for or purchase any securities of any class or kind of the Company. Listing and Trading of Common Stock The Company has made an application to have the Common Stock approved for listing on the NASDAQ SmallCap Market. There can be no assurance that NASDAQ will approve the Company's initial listing application or that, if the Company's initial listing is approved by NASDAQ, that the Company will be able to maintain its listing. See "Risk Factors - Risks Related to the Offering - Lack of Public Market; Possible Volatility of Stock Price; No Assurance that Listing on NASDAQ SmallCap will be Approved or Maintained." There is currently no public market for the Common Stock. Until the Common Stock is fully distributed and an orderly market develops, the prices at which trading in such stock occurs may fluctuate significantly. The prices at which the Common Stock trades will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for the Common Stock, investor perception of the Company and its industry and general economic and market conditions. Registration Rights The Company has granted certain demand and incidental registration rights under the Securities Act to stockholders an aggregate of 3,510,929 shares of the Company's Common Stock. The Company has agreed to pay certain of the expenses of certain of such registrations, other than brokers' commissions and fees. See "Shares Eligible for Future Sale" and "Underwriting." Transfer Agent and Registrar The Transfer Agent and Registrar for the Common Stock is StockTrans, Inc. located in Ardmore, Pennsylvania. -54- SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 14,868,756 shares of Common Stock outstanding (15,318,756 shares if the over-allotment option is exercised in full). Pursuant to the terms of the Underwriting Agreement, none of the issued and outstanding shares of the Company's Common Stock may be sold or otherwise transferred, except for certain familial transfers, for a period of 12 months from the date of this Prospectus. The Company is in the process of requiring its shareholders to sign agreements to abide by these transfer restrictions (the "Lock-ups"). See "Underwriting." In addition, under the terms of the subscription agreements of previous private placements of the Company's Common Stock, 4,826,929 outstanding shares of Common Stock may not be sold or otherwise transferred, without the prior written consent of the Company or AML, except for certain familial transfers, until the date set forth below: Number of Shares Restrictions in Subject to Restriction Effect Through ---------------------- -.------------- 4,129,429 September 19, 1998 20,000 October 7, 1998 97,500 October 17, 1998 182,500 October 31, 1998 102,500 December 11, 1998 155,000 February 19, 1999 37,500 March 24, 1999 102,500 May 31, 1999 Holders of an aggregate of 3,660,929 shares of Common Stock (the "Registrable Shares") have certain registration rights with respect to the registration of the resale of such shares under the Securities Act and will, upon the effectiveness of a registration statement filed by the Company on behalf of such holders, be freely tradeable under the Securities Act, subject to the transfer restrictions described above. The Company intends to file a registration statement with the Commission covering the resale of such shares of Common Stock following the expiration of the Lock-ups. All of the 3,600,000 shares (4,140,000 shares if the over-allotment option is exercised in full) sold in this Offering will be freely transferable by persons other than "affiliates" of the Company (as that term is defined under the Securities Act), without restriction or further registration under the Securities Act. Following this Offering, approximately 79.8% of the Company's outstanding shares of Common Stock (including the 3,510,929 Registrable Shares until the resale of such shares is registered as described above) will be "restricted securities" and may, subject to the transfer restrictions described above, in the future be sold in compliance with Rule 144 adopted under the Securities Act ("Rule 144"). Rule 144 generally provides that beneficial owners of Common Stock who have held such Common Stock for one year may sell within a three-month period a number of shares not exceeding the greater of (i) 1% of the total outstanding shares or (ii) the average weekly trading volume of the shares during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner of sale limitations, notice requirements and the availability of current public information about the Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and who has beneficially owned shares for at least two years is entitled to sell such shares at any time under Rule 144 without regard to the limitations described above. Prior to this Offering, 6,240,429 shares of the Company's Common Stock have been issued and outstanding for over 1 year and may be sold in compliance with Rule 144. Future sales of restricted Common Stock under Rule 144 or otherwise or of the Registrable Shares pursuant to a registration statement could negatively impact the market price of the Common Stock. -55- In addition to the outstanding shares of Common Stock described above, as of the date of this Prospectus, the Company has 4,000,000 shares of Common Stock reserved for issuance upon the exercise of outstanding options under the Plan, 2,733,750 shares of Common Stock reserved for issuance upon the conversion of the 218,700 shares of Series A Preferred Stock issued and outstanding, and 902,500 shares of Common Stock are reserved for issuance upon the exercise of outstanding warrants. All of these securities and the shares of Common Stock underlying each of these securities are restricted securities. The transfer of these restricted securities is subject to both the Underwriter's lock-up and the requirements of Rule 144, as discussed above. The Company is unable to estimate the number of shares that may be sold in the future by its existing stockholders or the effect, if any, that sales of shares by such stockholders will have on the market price of Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock by existing stockholders could adversely affect prevailing market prices. UNDERWRITING The Underwriter has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the 3,600,000 shares of Common Stock offered hereby at the initial offering price less the underwriting discount set fourth on the cover page of the Prospectus. The Underwriter is committed to purchase all of such shares, if any are purchased. The Company has been advised by the Underwriter that the Underwriter proposes to offer the shares to the public at the public offering price set forth on the cover page of this Prospectus, and to certain securities dealers at such price less a concession of not more than $_____ per share, and that the Underwriter and such dealers may reallot to other dealers, including the Underwriter, a discount not in excess of $______ per share. After this Offering, the public offering price and concessions and discounts may be changed by the Underwriter. No reduction in such terms will change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company has granted an option to the Underwriter, exercisable for a period of 30 days after the date of this Prospectus, to purchase up to an additional 540,000 shares of Common Stock from the Company at the public offering price set forth on the cover page of this Prospectus less the underwriting discounts and commissions. The Underwriter may exercise this option only for the purpose of covering over-allotments, if any. In addition to receiving its commission equal to 8.75% of the gross proceeds of this Offering, the Underwriter is entitled to receive a non-accountable expense allowance equal to 3% of the gross proceeds of this Offering. The Underwriter has the right to conduct any transactions for the account of any of the Company's officers, directors or beneficial shareholders of 5% or more of the Company's Common Stock regarding any of the Company's securities sold pursuant to Rule 144. The Company has granted the Underwriter an option to purchase up to 10% of the number of shares sold to the public in the Offering exercisable for a period of 4 years commencing one year subsequent to the date of this Prospectus at an exercise price equal to 165% of the public offering price set forth on the cover page of this Prospectus. The Company has granted the Underwriter the right to appoint a financial advisor to the Company's Board of Directors for a term of 18 months commencing upon the completion of this Offering. The Underwriting Agreement provides that the Company will indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act, or will contribute to payments the Underwriter may be required to make in respect thereof. -56- Pursuant to the terms of the Underwriting Agreement, the Underwriter has required that all shares of the Common Stock owned by all shareholders may not be sold or otherwise transferred, except for certain transfers to family members, family trusts or other family entities, for a period of 12 months from the date of this Prospectus. In order to enforce this provision, the Underwriter has required that the Company obtain Lock-ups from every shareholder of the Company. All of the 3,600,000 shares (4,140,000 shares if the over-allotment option is exercised in full) sold in this Offering will be freely transferrable by persons other than "affiliates" of the Company, without restriction or further registration under the Securities Act. The term "affiliate" means any person or entity that controls, is controlled by, or is under common control with the Company. The offering price of the Common Stock has been determined solely by negotiation between the Company and the Underwriter. In determining the offering price, the Company and Underwriter considered, among other things, estimates of the business potential of the Company and the relative capabilities of management of the Company. The offering price does not necessarily bear any relationship to assets, book value, net worth or earnings history of the Company or other investment criteria. The offering price of the Common Stock should not necessarily be considered an indication of the actual value of the Company's securities. The underwriter has been actively engaged in the securities brokerage and investment banking business since November 1995. However, the Underwriter has engaged in only limited underwriting activities, and the Underwriter has not previously been a lead underwriter in any public offerings. Accordingly, there can be no assurance that the Underwriter's lack of public offering experience will not affect the proposed public offering of the Company's Common Stock or the subsequent development of a trading market for the Company's securities. Therefore, purchasers of the securities offered hereby may suffer a lack of liquidity in their investment or a material diminution of the value of their investments. See "Risk Factors - Risks Related to the Offering - Underwriter's Limited Underwriting Experience." Two principals of the Underwriter each own 5,000 shares of the Company's Common Stock. All of these shares were purchased in September 1996 at $3.50 per share. These shares are subject to the Lock-Ups and may be sold pursuant to Rule 144 subsequent to the expiration of the Lock-Ups. See "Shares Eligible for Future Sale." LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia, Pennsylvania. Legal matters for the Underwriter will be passed upon by Berlack, Israels & Liberman LLP, New York, New York. EXPERTS The financial statements of the Company as of December 31, 1997 and 1996 and for each of the years in the three year period ended December 31, 1997, and for the period from December 1994 (inception) through December 31, 1997 included herein and elsewhere in the Registration Statement have been included herein and in the Registration Statement in reliance upon the report (which includes a modification that indicates that the Company's existence may be dependent on its ability to continue to raise capital and generate sufficient working capital from operations) of LJ Soldinger Associates, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. LJ Soldinger Associates has consented to the use of its report herein and in the Registration Statement. -57- netValue, Inc. (A Development Stage Entity) INDEX TO THE FINANCIAL STATEMENTS Page ---- Independent Auditors' Report F2 Balance Sheets F3 Statements of Operations F4 Statements of Stockholders' Deficit F5 Statements of Cash Flows F7 Notes to Financial Statements F9 - F1 - INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of netValue, Inc. We have audited the accompanying balance sheets of netValue, Inc. (a development stage entity) (the "Company") as of December 31, 1996 and 1997, and the related statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of netValue, Inc. as of December 31, 1996 and 1997, and the results of its operations, stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 3 to the financial statements, the Company's negative working capital position, substantial losses incurred since inception and dependence on outside financing, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plans concerning these matters are described in Note 3. L J SOLDINGER ASSOCIATES Arlington Heights, Illinois March 30, 1998 (except for Note 3, paragraph two, Note 8(a) and Note 11, paragraphs one, two, and three, as to which the date is April 15, 1998, and Note 11, paragraphs four, five, six, seven and eight, as to which the date is May 26, 1998) - F2 - netValue, Inc. (A Development Stage Entity) Balance Sheets ASSETS December 31, March 31, ---------------------------- ------------ 1996 1997 1998 ------------ ------------ ------------ (Unaudited) Current Assets Cash and cash equivalents $ 299,351 $ 671,508 $ 158,847 Accounts receivable -- -- 350 Prepaid financing fees, net -- 120,423 92,011 Other 7,492 7,492 40,010 ------------ ------------ ------------ Total Current Assets 306,843 799,423 291,218 Property and Equipment, Net 432,049 684,174 660,873 Intangibles (Net of accumulated amortization of $3,508 in 1996, $5,321 in 1997 and $5,821 in 1998) 5,555 3,742 3,242 Deferred Registration Costs -- 218,773 355,891 Deposits 50,145 94,290 95,506 ------------ ------------ ------------ $ 794,592 $ 1,800,402 $ 1,406,730 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Notes payable, net of discounts $ -- $ 1,811,910 $ 3,060,759 Accounts payable 885,052 2,071,948 2,141,638 Accrued salaries and other expenses 156,299 343,200 505,814 Accrued expenses - related parties 58,333 -- -- Deferred revenue -- -- ------------ ------------ ------------ 508,700 Total Current Liabilities 1,099,684 4,227,058 6,216,911 ------------ ------------ ------------ Commitments and Contingencies Stockholders' Deficit Preferred stock, $.001 par value per share. At December 31, 1996 1,000,000 shares authorized; none outstanding. At December 31, 1997, 1,000,000 shares authorized; 22,500 shares issued and outstanding; $225,000 liquidation preference. At March 31, 1998, 1,000,000 shares authorized; 49,500 shares issued and outstanding; $495,000 liquidation preference -- 22 50 Common stock, $.001 par value per share. At December 31, 1996, 24,000,000 shares authorized; 6,270,430 shares issued and outstanding. At December 31, 1997 and March 31,1998, 24,000,000 shares authorized; 10,686,006 shares issued and outstanding 6,270 10,686 10,686 Additional paid-in-capital 3,767,434 14,555,669 16,638,255 Deferred compensation -- (497,750) (668,324) Deficit accumulated during the development stage (4,078,796) (16,495,283) (20,790,848) ------------ ------------ ------------ Total Stockholders' Deficit (305,092) (2,426,656) (4,810,181) ------------ ------------ ------------ $ 794,592 $ 1,800,402 $ 1,406,730 ============ ============ ============ The accompanying notes are an integral part of the financial statements. - F3 - netValue, Inc. (A Development Stage Entity) Statements of Operations Three Months Ended Year Ended December 31, March 31, December 16, 1994 -------------------------------------- ------------------------ (Inception) through 1995 1996 1997 1997 1998 March 31, 1998 ----------- ----------- ------------ ----------- ----------- ------------------ (Unaudited) (Unaudited) (Unaudited) Revenues $ -- $ -- $ -- $ -- $ 72,000 $ 72,000 Operating Expenses Compensation and related expenses 131,174 742,545 3,589,616 773,754 761,130 5,224,465 Professional fees 38,436 399,356 405,193 121,077 69,249 912,234 Advertising 236,775 219,760 832,340 603,619 114,251 1,403,126 Consulting 9,492 869,693 984,590 633,502 102,822 1,966,597 Research and development expenses 142,224 809,491 2,588,748 1,434,094 834,971 4,375,434 Depreciation and amortization 7,570 13,148 179,304 28,198 55,500 255,522 Other general and administrative 181,274 262,529 785,107 227,909 220,758 1,466,810 ----------- ----------- ------------ ----------- ----------- ------------ Total Operating Expenses 746,945 3,316,522 9,364,898 3,822,153 2,158,681 15,604,188 ----------- ----------- ------------ ----------- ----------- ------------ Loss From Operations (746,945) (3,316,522) (9,364,898) (3,822,153) (2,086,681) (15,532,188) Other Income (Expense) Interest income 1,405 4,953 5,627 -- 4,712 16,697 Interest expense (2,020) (2,525) (1,805,470) (225,836) (642,684) (2,452,699) Financing fees -- -- (70,496) -- (153,412) (223,908) ----------- ----------- ------------ ----------- ----------- ------------ Total Other Income (Expense) (615) 2,428 (1,870,339) (225,836) (791,384) (2,659,910) ----------- ----------- ------------ ----------- ----------- ------------ Net Loss $ (747,560) $(3,314,094) (11,235,237) (4,047,989) (2,878,065) $(18,192,098) =========== =========== ============ Preferred stock dividend (1,181,250) -- (1,417,500) ------------ ----------- ----------- Net loss to common stockholders $(12,416,487) $(4,047,989) $(4,295,565) ============ =========== =========== Basic and diluted net loss per common share $ (1.72) $ (.63) $ (.40) ============ =========== =========== Basic and diluted weighted average number of common shares outstanding 7,218,801 6,432,513 10,686,006 ============ =========== =========== Pro forma Information (Unaudited): Net loss (747,560) (3,314,094) Pro forma tax provision -- -- ----------- ----------- Pro forma net loss (747,560) (3,314,094) =========== =========== Net Loss Per Share Data: Basic and diluted net loss per common share $ (.24) $ (.89) =========== =========== Basic and diluted weighted average number of common shares outstanding 3,074,000 3,739,236 =========== =========== The accompanying notes are an integral part of the financial statements. - F4 - netValue, Inc. (A Development Stage Entity) Statements of Stockholders' Deficit Deficit Common Stock Accumulated Par Value $0.001 Additional During the Preferred -------------------------- Paid-In Members' Deferred Development Stock Shares Amount Capital Capital Compensation Stage ----------- ----------- ----------- ----------- ------------ ------------- ----------- December 16, 1994 (Date of Inception) $ -- -- $ -- $ -- $ -- $ -- $ -- Net loss -- -- -- -- -- -- (17,142) ----------- ----------- ----------- ----------- ----------- ------------- ----------- Balance at December 31, 1994 -- -- -- -- -- -- (17,142) Capital contribution -- -- -- -- 485,000 -- -- Net loss -- -- -- -- -- -- (747,560) ----------- ----------- ----------- ----------- ----------- ------------- ----------- Balance at December 31, 1995 -- -- -- -- 485,000 -- (764,702) Capital contribution -- -- -- -- 15,000 -- -- Founders' stock; issued -- 1,090,000 1,090 -- -- -- -- Founders' common stock warrants issued -- -- -- 2,000 -- -- -- Common stock; issued in private placements (net of offering costs of $189,090) -- 1,931,429 1,931 2,483,979 -- -- -- Common stock; issued and issuable to former members -- 3,074,000 3,074 496,926 (500,000) -- -- Compensatory common stock options issued -- -- -- 172,200 -- -- -- Common stock granted for consulting services -- 350,000 350 962,152 -- -- -- Unearned consulting services -- (174,999) (175) (349,823) -- -- -- Net loss -- -- -- -- -- -- (3,314,094) ----------- ----------- ----------- ----------- ----------- ------------- ----------- Balances at December 31, 1996, carry forward $ -- 6,270,430 $ 6,270 $ 3,767,434 $ -- $ -- $(4,078,796) =========== =========== =========== =========== =========== ============= =========== The accompanying notes are an integral part of the financial statements. - F5 - netValue, Inc. (A Development Stage Entity) Statements of Stockholders' Deficit Deficit Common Stock Accumulated Par Value $0.001 Additional During the Preferred ----------------------- Paid-In Members' Deferred Development Stock Shares Amount Capital Capital Compensation Stage ----------- ----------- ---------- ----------- --------- ------------- ----------- Balance at December 31, 1996, brought forward $ -- 6,270,430 $ 6,270 $ 3,767,434 $ -- $ -- $ (4,078,796) Common stock granted for consulting services -- 174,999 175 612,322 -- -- -- Compensatory common stock options issued -- -- -- 1,932,150 -- (1,932,150) -- Amortization of deferred compensation -- -- -- -- -- 1,434,400 -- Common stock; issued in private placements (net of offering costs of $38,167) -- 295,000 295 551,538 -- -- -- Common stock; issued as consideration for notes and loans payable -- 320,200 320 1,300,680 -- -- -- Common stock and warrants; issued in connection with short-term bridge financing (net of offering costs of $286,109) -- 402,500 403 2,410,239 -- -- -- Common stock; issued in connection with conversion of note and accrued interest -- 3,222,877 3,223 2,575,078 -- -- -- Issuance of preferred stock 22 -- -- 224,978 -- -- -- Preferred stock dividend -- -- -- 1,181,250 -- -- (1,181,250) Net loss for period -- -- -- -- -- -- (11,235,237) -------- ------------ -------- ----------- --------- ---------- ------------ Balances at December 31, 1997 $ 22 10,686,006 $ 10,686 $14,555,669 $ -- $ (497,750) $(16,495,283) ======== ============ ======== =========== ========= ========== ============ Issuance of preferred stock 28 -- -- 269,971 -- -- -- Compensatory common stock options issued -- -- -- 320,115 -- (320,115) -- Amortization of deferred compensation -- -- -- -- -- 149,541 -- Financing fee -- -- -- 75,000 -- -- -- Preferred stock dividend -- -- -- 1,417,500 -- -- (1,417,500) Net loss for period -- -- -- -- -- -- (2,878,065) -------- ------------ -------- ----------- --------- ---------- ------------ Balances at March 31, 1998 (Unaudited) $ 50 10,686,006 $ 10,686 $16,638,255 $ -- $ (668,324) $(20,790,848) ======== ============ ======== =========== ========= ========== ============ The accompanying notes are an integral part of the financial statements. - F6 - netValue, Inc. (A Development Stage Entity) Statements of Cash Flows Three Months Ended Year Ended December 31, March 31, December 16, 1994 -------------------------------------- ------------------------ (Inception) through 1995 1996 1997 1997 1998 March 31, 1998 ----------- ----------- ------------ ----------- ----------- ------------------ (Unaudited) (Unaudited) (Unaudited) Operating Activities Net Loss $ (747,560) $ (3,314,094) $(11,235,237) $(4,047,989) $(2,878,065) $(18,192,098) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,570 13,148 179,304 28,198 55,500 255,522 Amortization of financing fees -- -- 70,496 -- 153,412 223,908 Amortization of note payable discount -- -- 583,660 200,000 498,849 1,082,509 Interest expense paid with stock issuance -- -- 1,129,301 -- -- 1,129,301 Compensatory common stock, options and warrants issued and issuable -- 786,704 2,046,896 971,096 149,541 2,983,141 Increase in assets and liabilities Increase in accounts receivable -- -- -- -- (350) (350) Increase (decrease) in other current assets and deposits (358) (57,279) (44,145) 1,278 (33,734) (135,516) Increase in accounts payable and accrued expenses 248,691 671,806 1,344,949 549,892 189,037 2,454,483 Increase in deferred revenue -- -- -- -- 508,700 508,700 Increase (decrease) in accrued expenses - related parties -- 58,333 (58,333) (58,333) -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net Cash Used in Operating Activities (491,657) (1,841,382) (5,983,109) (2,355,858) (1,357,110) (9,690,400) ----------- ----------- ----------- ----------- ----------- ----------- Investing Activities Payments for organization costs (9,063) -- -- -- -- (9,063) Purchase of furniture and equipment (19,509) (308,896) (544,618) (433,963) (31,699) (904,722) ----------- ----------- ----------- ----------- ----------- ----------- Net Cash Used in Investing Activities (28,572) (308,896) (544,618) (433,963) (31,699) (913,785) ----------- ----------- ----------- ----------- ----------- ----------- Financing Activities Proceeds from member loans 37,636 26,045 -- -- -- 80,823 Repayment of member loans -- (80,823) -- -- -- (80,823) Proceeds from bridge loan -- 245,000 -- -- -- 245,000 Repayment of bridge loan -- (245,000) -- -- -- (245,000) Proceeds from notes and loans payable - related parties -- -- 3,601,000 2,400,000 -- 3,601,000 Proceeds from notes payable -- -- 1,728,250 -- 750,000 2,478,250 Repayments of notes and loans payable - related parties -- -- (1,501,000) -- -- (1,501,000) Proceeds from member capital contributions 485,000 15,000 -- -- -- 500,000 Proceeds from private placements and Founders' Stock, net of offering costs -- 2,487,000 551,833 344,046 -- 3,038,833 Net proceeds from issuance of stock and warrants -- -- 2,560,641 -- -- 2,560,641 Proceeds from purchase of preferred stock -- -- 225,000 -- 270,000 495,000 Payment of financing fees -- -- (140,919) -- (50,000) (190,919) Registration costs -- -- (124,921) -- (93,852) (218,773) ----------- ----------- ----------- ----------- ----------- ----------- Net Cash Provided by Financing Activities 522,636 2,447,222 6,899,884 2,744,046 876,148 10,763,032 ----------- ----------- ----------- ----------- ----------- ----------- The accompanying notes are an integral part of the financial statements. - F7 - netValue, Inc. (A Development Stage Entity) Statements of Cash Flows Three Months Ended Year Ended December 31, March 31, December 16, 1994 -------------------------------------- ------------------------ (Inception) through 1995 1996 1997 1997 1998 March 31, 1998 ----------- ----------- ------------ ----------- ----------- ------------------ (Unaudited) (Unaudited) (Unaudited) Net Increase (Decrease) in Cash and Cash Equivalents $ 2,407 $ 296,944 $ 372,157 $ (45,775) $ (512,661) $ 158,847 Cash and Cash Equivalents at Beginning of Period -- 2,407 299,351 299,351 671,508 -- --------- --------- --------- ---------- --------- ---------- Cash and Cash Equivalents at End of Period $ 2,407 $ 299,351 $ 671,508 $ 253,576 $ 158,847 $ 158,847 ========= ========= ========= ========== ========= ========== Cash and Cash Equivalents Paid for Interest and Taxes $ -- $ -- $ 3,200 $ 394 $ 2,605 $ 5,805 ========= ========= ========= ========== ========= ========== The accompanying notes are an integral part of the financial statements. - F8 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 1 - DESCRIPTION OF THE BUSINESS netValue, Inc. (formerly named Vsquared, Inc. which was formerly named COL Acquisition Corp.) ("netValue") was formed on July 16, 1996 and subsequently merged on September 18, 1996 with Coupons Online, LLC (the "LLC"), a limited liability company formed on December 16, 1994 (collectively, the "Company"). The business combination (the "Merger") was treated as a purchase in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations" ("APB 16"), whereby the members of the LLC exchanged their membership interests in the LLC for common stock in netValue, the surviving entity, in proportion to their former interests in the LLC. Additional parties also received shares of common stock in netValue in exchange for their cancellation of certain agreements and pre-existing rights and the waiver of certain obligations of the LLC. The Merger resulted in the LLC being the accounting acquirer in accordance with APB 16, since the former members of the combining company retained the larger portion of the voting rights pursuant to the terms of the Merger agreement. The Merger has therefore been treated as a reverse acquisition since netValue, as the surviving entity, was both the legal acquirer and the accounting acquiree pursuant to the requirements of APB 16 [see Note 9(g) for additional discussions regarding the Merger]. The Company is a Development Stage Enterprise, as defined in Statement of Financial Accounting Standards No. 7 "Accounting and Reporting for Development Stage Enterprises," which is developing Internet software products intended to provide fee-based targeted marketing services to both retailers and advertisers of consumer products and services through the electronic transmission of coupon incentives to be delivered to specific consumer segments. Since inception, the Company has been in the process of developing two products. Product testing was successfully completed on its initial product, Coupons Online ("COL"), in 1997. The Company has since contracted to provide services to at least five clients. An updated version of COL has successfully completed product testing and was made available for sale commercially in March 1998. The second product, i-Value, which management anticipates will be the Company's principal revenue-producing product, has incurred the majority of the Company's software development costs to date. i-Value is in the process of product testing and is expected to begin commercial operations in the third quarter of 1998. The Company has obtained a trademark for COL and has applied for, but not yet obtained, a trademark for i-Value. The Company has also applied for, but not yet obtained, patents relating to the Company's products. The Company is currently using the technology that is the subject of this patent application to operate its products. The Company had previously received an indication from the United States Patent and Trademark Office ("USPTO") that certain of the claims for its patent application were allowable; however, in February 1998, the Company received a reversal of the allowable indication. The Company is currently intending to refile its patent application in April 1998 with modifications of certain previously defined claims (see Note 11). The Company's financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles, and have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business (see Note 3). In order to commence operations for i-Value, additional capital investments will be required to complete the development and marketing of the product. No assurance can be given that the Company will be able to complete the product testing of i-Value or achieve market acceptance of its products. In addition, there can be no assurance that the Company's patents will be approved by the USPTO on a timely basis or that any patents issued will provide protection against competitors with similar technologies. Further, there can be no assurance that the Company will have adequate resources to maintain a patent infringement lawsuit should such action be deemed necessary by management. The impact on the Company's future operations for the uncertainties relating to the Company's patent applications and future patents is presently indeterminable. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. - F9 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Research and Development Costs Through March 31, 1998, the Company has expensed its research and development costs in accordance with Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). The Company intends to continue expensing such costs until software feasibility is established which is expected to take place in 1998. Thereafter, the Company will capitalize the direct costs and allocated overhead associated with the development of software products. Under SFAS 86, maintenance costs incurred subsequent to the product feasibility are to be charged to operations. Revenue Recognition The Company generates revenue in the form of license fees, transaction fees and setup fees. Revenue from license fees is recognized when the license agreement is in effect, delivery of the product has occurred, the license fee is fixed or determinable and collectibility is reasonably assured. Revenue representing transaction fees is recognized as manufacturer promotions are requested for viewing on the Internet. Setup fees are recognized as revenue when manufacturer promotions are loaded into the Company's coupon distribution system. Certain customers pay the Company in advance for license, setup, and transaction fees, and these amounts are being recorded as deferred revenue until earned. Intangibles Intangibles consist of costs incurred in connection with the organization of netValue, and are being amortized ratably over five years. Amortization expense for 1995, 1996, 1997 and for the three month periods ended March 31, 1997 and 1998 was $1,812, $1,696, $1,813, $291 and $500, respectively. Property and Equipment Property and equipment are stated at cost. The Company's policy is to depreciate these assets over their estimated useful lives, as indicated in the following table, using straight-line methods. The Company's policy is to amortize leasehold improvements over the shorter of their useful lives or the remaining periods of the related leases. Years ----- Leasehold Improvements 3 Computer Hardware 5 Office Furniture and Equipment 7 Advertising Expenses The Company expenses advertising costs as incurred. During 1995, 1996, 1997 and for the three month periods ended March 31, 1997 and 1998, the Company incurred advertising expenses of $236,775, $219,760, $832,340, $603,619 and $79,251, respectively. - F10 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) Loss Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), which requires companies to present basic earnings per share and diluted earnings per share (as defined in SFAS 128), instead of primary earnings per share and fully diluted earnings per share as formerly required under Accounting Principles Board No. 15 "Earnings Per Share" ("APB 15"). Both presentations under SFAS 128 require the use of the weighted average number of shares outstanding for each period presented in the computation of earnings per share, however the computation of diluted earnings per share under SFAS 128 increases the weighted average number of shares, giving rise to the dilutive effects of options and warrants issued. SFAS 128 is required to be adopted by all public companies for reporting periods ending after December 15, 1997 and requires restatement of earnings per share for all prior periods being presented. Accordingly, in 1997 the Company adopted SFAS 128 for all applicable periods presented in the accompanying financial statements. Loss per share under SFAS 128 does not differ from prior period presentations under APB 15. Under SFAS 128, diluted loss per share does not differ from basic loss per share, since options and warrants increase the weighted average number of shares under the diluted loss per share presentation and are therefore anti-dilutive. The Company formerly presented loss per share in accordance with Staff Accounting Bulletin No. 83 "Earnings Per Share Computations in an Initial Public Offering" ("SAB 83"). SAB 83 required that the presentation of common stock and common stock subject to options and warrants issued during the twelve months preceding the initial filing of the registration statement at prices less than the contemplated initial public offering price be presented as outstanding for all periods presented. Staff Accounting Bulletin No. 98 "Earnings Per Share Computations in an Initial Public Offering" ("SAB 98"), issued in February 1998, amended SAB 83 to require that historical earnings per share be presented in accordance with SFAS 128. The Company has therefore followed the requirements of SFAS 128 for all applicable periods presented in these financial statements (see Note 9). Prepaid Expenses Prepaid expenses consist of prepaid financing fees, which include commissions and professional fees incurred by the Company on borrowings received during 1997 and 1998. These prepaid expenses are being charged to expense over the remaining term of the outstanding borrowings (see Note 8). Interim Financial Information The balance sheets as of March 31, 1998 and the related statements of operations, stockholders' deficit and cash flows for the three month periods ended March 31, 1997 and 1998 and for the period from December 16, 1994 (inception) through March 31, 1998, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. Deferred Registration Costs Deferred registration costs consist of professional fees, commissions, filing fees and other costs incurred by the Company in connection with the filing of its registration statement with the Securities and Exchange Commission ("SEC") for an initial public offering ("IPO") and are reflected on the balance sheet as non-current assets. Fair Value of Financial Instruments The carrying value of the Company's cash and cash equivalents, notes payable, accounts payable and accrued expenses approximates the fair market value due to the relatively short maturity of these instruments. - F11 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) Segment Information The Company conducts its business within one industry. Income Taxes Income taxes are recorded in the period in which the related transactions are recognized in the financial statements, net of the valuation allowances which have been recorded against deferred tax assets. Deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the tax basis and financial reporting basis of assets and liabilities. At December 31, 1996 and 1997 and at March 31, 1998, net deferred tax assets and liabilities, relating primarily to federal and state net operating loss carryforwards, stock-based compensation, financing costs associated with stock issuances, and depreciation differences that have been deferred for tax purposes have been offset by a valuation reserve because the future utilization of these assets and liabilities cannot be determined. Pursuant to the terms of the Internal Revenue Code, no provision or benefit for federal income taxes has been reflected in the accompanying financial statements for the LLC, since all tax losses flowed directly to the members. See proforma financial information below. Compensatory Stock-Based Arrangements Management has utilized the guidelines of Accounting Principles Board Opinion No. 25 to account for the value of stock-based compensation arrangements that the Company entered into in exchange for services performed by employees (see Notes 7 and 9). Deferred compensation represents the intrinsic value of the options to purchase common stock that were granted to employees for future services that are to be provided to the Company by such employees. Concentrations Concentrations not disclosed elsewhere in the financial statements are as follows: As discussed in Note 1, the Company has only one product which was offered to the public commercially in 1997, and only one other product which is expected to be initially offered to the public in the third quarter of 1998. Both products are to be offered through the same medium. Lack of product development or customer interest could have a material adverse effect on the Company. Further, significant changes in technology could lead to new products or services that compete with the products to be offered by the Company. These changes could materially affect the price of the Company's products and services or render them obsolete. Credit Risk The Company has maintained cash balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to a maximum of $100,000. The Company had uninsured cash balances of $229,975, $732,756 and $123,034 as of December 31, 1996 and 1997 and March 31, 1998, respectively. Pro Forma Financial Information As discussed in Note 1, netValue, which consisted primarily of cash at the date of the Merger, is a successor to the LLC whose former members, subsequent to the reverse acquisition, retained the larger portion of the voting rights pursuant to the terms of the Merger agreement. Since netValue was deemed a predecessor business, no pro forma information has been included in the financial statements relating to netValue prior to its being acquired by the LLC through the reverse acquisition (see Note 1). - F12 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued) Pro Forma Financial Information (Continued) As further discussed in Note 1, the LLC was originally organized in the form of a limited liability company. Upon the Merger, its capital structure changed to that of a corporation. The change resulted in the Company retaining the tax benefit for subsequent net operating losses whereas the previous losses were passed through to the LLC members. A pro forma income statement has been presented which reflects the impact of the Company's change in capital structure as if it had occurred December 16, 1994 (the Company's inception). This presentation reflects the Company generating a tax benefit for the net operating losses which were incurred by the LLC during 1995 and 1996 prior to the LLC's termination (see Note 5). Recent Accounting Pronouncements The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS 130"). SFAS 130 established standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company adopted SFAS No. 130 in 1998. The Company has determined that it has no additional reporting requirements as a result of its adoption of SFAS 130. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports. The Company has adopted SFAS No. 131 in fiscal 1998. The Company has determined that it currently does not have any additional reporting requirements as a result of its adoption of SFAS 131. NOTE 3 - CONTINGENCY - GOING CONCERN At December 31, 1996 and 1997 and March 30, 1998, the Company is in arrears in its obligations to a significant number of its key vendors. Further, management anticipates the Company will need to expend an aggregate of approximately $4.3 million in 1998 in order to complete its systems development, perform its market research and tests and build an appropriate infrastructure to support its planned commercial venture. The Company does not expect that existing stockholders will provide the Company with adequate future financing to meet its requirements and therefore intends to obtain additional financing from an IPO. The Company filed its registration statement for an IPO with the SEC on December 30, 1997, filed an amended registration statement on April 15, 1998 and currently intends to file an additional amended registration statement. There can be no assurance that the SEC will approve the Company's registration statement, such that an IPO may occur, or that the Company will successfully raise the required financing on terms desirable to the Company. Management expects to utilize the proceeds from (i) its distribution and licensing agreement with IQ Value, LLC (see Note 11) and (ii) a preferred stock purchase agreement (see Note 9) to continue the implementation of its business plan, repay certain vendor obligations and fund development stage cash requirements until obtaining the necessary funding for the Company from the expected proceeds of the contemplated IPO. The failure of the Company to obtain such additional financing or successfully complete an IPO would require the Company to adjust its business plan, or may require the Company to cease operations and liquidate. Further, no assurance can be given that the Company will be able to complete the product testing of i-Value or achieve market acceptance of its products. As a result of the foregoing, there is substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. - F13 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following: December 31, March 31, ------------------------- ----------- 1996 1997 1998 --------- ---------- ---------- (Unaudited) Leasehold Improvements $ -- $ 6,066 $ 6,066 Computer Equipment 327,878 748,723 776,644 Office Equipment 46,087 48,792 48,792 Office Furniture 75,294 75,294 79,073 --------- --------- --------- 449,259 878,875 910,575 Less Accumulated Depreciation (17,210) (194,701) (249,702) --------- --------- --------- $ 432,049 $ 684,174 $ 660,873 ========= ========= ========= Depreciation expense for 1995, 1996, 1997 and for the three month periods ended March 31, 1997 and 1998 was $5,758, $11,452, $177,491, $27,907 and $55,000, respectively. NOTE 5 - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts used for income tax purposes. The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets and liabilities recognized at December 31, 1996 and 1997 and March 31, 1998 are presented below: December 31, March 31, ---------------------------- ----------- 1996 1997 1998 ----------- ----------- ----------- (Unaudited) Deferred tax assets (liabilities): Temporary differences: Vesting of non-qualified stock options $ 69,000 $ 72,000 $ 83,000 Accrued salaries and compensation to related parties 30,000 -- -- Amortization of debt discount -- 21,000 53,000 Common stock warrants issued 1,000 1,000 1,000 Depreciation -- (27,000) (33,000) ----------- ----------- ----------- Total temporary differences $ 100,000 $ 67,000 $ 104,000 Federal and state deferred tax benefits arising from net operating loss carryforwards 667,000 4,043,000 4,920,000 Research and development credit -- 168,000 222,000 ----------- ----------- ----------- $ 767,000 $ 4,278,000 5,246,000 Less valuation allowance (767,000) (4,278,000) (5,246,000) ----------- ----------- ----------- Net deferred tax asset $ -- $ -- $ -- =========== =========== =========== In accordance with federal income tax regulations, the net loss incurred by the LLC from inception to the date of the Merger has been excluded from the benefits of the net operating loss carryforwards reflected above. - F14 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 5 - INCOME TAXES (Continued) The following table presents the principal reasons for the difference between the income tax benefit using the Company's effective tax rates and the United States federal statutory income tax rate of 35%: Years Ended Three Months Ended Pro Forma December 31, March 31, December 31, ----------------------------- --------------------------- --------------------------- 1996 1997 1997 1998 1995 1996 ------------- --------------- ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) Federal income tax benefit at statutory rate $ 1,160,000 $ 3,932,000 $ 1,417,000 $ 1,007,000 $ 262,000 $ 1,160,000 State and local income tax benefits, net of effect of federal income tax benefit 166,000 561,000 202,000 145,000 37,000 166,000 Research and development credit, net of effect of asset basis reduction -- 101,000 56,000 32,000 -- -- Nondeductible research and development costs (342,000) -- -- -- (57,000) (354,000) Nondeductible stock-based compensation and interest -- (1,083,000) (143,000) (216,000) -- -- Net loss for LLC in 1996 prior to date of Merger passed through to the LLC members (see below) (217,000) -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- 767,000 3,511,000 1,532,000 968,000 242,000 972,000 Valuation allowance for deferred income tax benefit (767,000) (3,511,000) (1,532,000) (968,000) (242,000) (972,000) ----------- ----------- ----------- ----------- ----------- ----------- Income tax benefit $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 =========== =========== =========== =========== =========== =========== Effective income tax rate 0% 0% 0% 0% 0% 0% =========== =========== =========== =========== =========== =========== Prior to September 18, 1996, the Company was a limited liability company and, accordingly, losses were passed through to its members. For the period from September 18, 1996 through March 31, 1998, the Company had losses which resulted in net operating loss carryforwards for income tax purposes amounting to approximately $12,299,000, which expire in 2011 through 2013. However, this carryforward may be significantly limited due to changes in the ownership of the Company as a result of future equity offerings. The Company has also generated research and development credits approximating $222,000 that expire in 2012 and 2013. The pro forma presentation reflects the effect on the Company had the change in capital structure to a corporation been effective as of December 16, 1994 (the Company's inception) (see Note 2). Recognition of the benefits of the net deferred tax assets and liabilities will require that the Company generate future taxable income. There can be no assurance that the Company will generate any earnings or any specific level of earnings in future years. Therefore, the Company has established valuation allowances for deferred tax assets (net of liabilities) of approximately $767,000, $4,278,000 and $5,246,000 as of December 31, 1996 and 1997 and March 31, 1998, respectively. NOTE 6 - OPERATING LEASES The Company conducted its primary operations from a facility located in Stamford, Connecticut until December 1997. The facility was subleased under a sixteen-month lease agreement that commenced October 1996 and was scheduled to expire January 1998. Monthly rent under the lease agreement amounted to $11,062. In July 1997 the Company became delinquent on its monthly rental obligations. In October 1997, in complete settlement of the existing lease agreement, the landlord agreed to apply $35,671 of the Company's security deposit to the rental arrearage and accept payment of $30,713 for the remaining term of the lease. - F15 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 6 - OPERATING LEASES (Continued) In November 1997, the Company executed an operating lease agreement for a facility located in Fairfield, Connecticut where it currently conducts its primary operations. The agreement commenced December 1997 and expires December 2000. Monthly rent under this lease agreement amounts to $13,284 plus additional rent for the Company's pro rata portion of certain property expenses. A security deposit of $79,704 was paid pursuant to the terms of the lease agreement. The Company previously conducted its operations in a facility located in New York City under a lease agreement with monthly lease payments of $1,512 which commenced June 1995 and expired June 1997. In February 1998, the Company executed an operating lease agreement for computer equipment. The lease agreement calls for 36 monthly payments of $4,285. At the end of the lease term, the Company has the option to purchase the equipment at an amount approximating $35,000. Total rental expense amounted to $10,584, $29,300, $145,682, $35,249 and $41,002 in 1995, 1996, 1997 and for the three month periods ended March 31, 1997 and 1998, respectively. Future minimum payments required under the terms of the Company's lease agreements are as follows: December 31, March 31, 1997 1998 ------------- ------------ (Unaudited) 1998 $ 159,408 $ 162,406 1999 159,408 210,828 2000 159,408 210,828 2001 - 8,570 ------------ ------------ $ 478,224 $ 592,632 ============ ============ NOTE 7 - COMMITMENTS AND CONTINGENCIES Commitments and contingencies not disclosed elsewhere in the financial statements are as follows: The Company entered into a five-year employment agreement with its Chief Executive Officer ("CEO") and a one-year employment agreement with its Chief Technology Officer ("CTO") on September 19, 1996. These agreements were subsequently amended and restated on December 19, 1997 to be effective as of September 19, 1997 (collectively the "Compensation Agreements"). The Compensation Agreements call for the issuance of stock options (see Note 9), annual salaries at specified amounts, and bonuses and salary increases to be given at the discretion of the Company's Board of Directors. The Compensation Agreements also require the deferral of specified salary amounts which approximated $17,700 and $10,000 at December 31, 1996 and March 31, 1998, respectively. No deferred salary existed at December 31, 1997. In addition, the CEO's employment agreement provides that in the event severance payments become due, such payments are to be secured by a lien and security interest in certain of the Company's intangible assets. In March 1998, the CEO entered into an intercreditor agreement subordinating this lien and security interest to IQ Value, LLC (see Note 11). During 1996, the Company entered into an agreement with DMR Consulting Group, Inc. ("DMR") ("the DMR Agreement") pursuant to which DMR agreed to develop the material portion of the core software for the Company (the "Software") and perform the Company's initial systems integration for its two products. As described in Note 1, Management has completed development of its initial product, COL, and is currently undergoing product testing of an updated version. Management is also in the process of product testing i-Value, which is anticipated to be the Company's principal product. Pursuant to the DMR Agreement, DMR was granted title to the portion of the Software that it was retained to develop, and such title is being maintained by DMR until such time that all amounts due pursuant to the DMR Agreement are paid in full. DMR's title to the Software will revert to the Company upon the Company satisfying all of its obligations to DMR under the DMR Agreement. The Company is required to - F16 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued) obtain a license from DMR for all intended usage of the Software for commercial purposes until such time that all of the Company's obligations under the DMR Agreement are satisfied. At December 31, 1996 and 1997 and at March 31, 1998, the Company owed DMR $300,000, $818,368 and $752,793, respectively, net of agreed upon prepayments and accrued interest. These amounts have been included in accounts payable. As of March 30, 1998, the Company had paid DMR, under the DMR Agreement, approximately $2,350,000 of the $3,100,000 incurred on the project. Failure by DMR to complete the Software, release the Software, or complete the Company's initial systems integration of the products on a timely basis could have a material adverse effect on the Company. In June 1997, the Company owed DMR approximately $1.2 million in delinquent obligations. The delinquency resulted in DMR discontinuing providing its services to the Company. On September 26, 1997, the Company and DMR entered into a letter agreement to address repayment of the Company's delinquent balance ("Letter Agreement"), pursuant to which the Company paid $600,000 to DMR in October 1997, of which $300,000 represented payment for future services and the remaining $300,000 was applied to the delinquent balance due DMR. The remaining $900,000 of past due balances were to be paid to DMR by February 1, 1998. In accordance with the Letter Agreement, DMR resumed its services upon receipt of the $600,000 October 1997 payment. On March 9, 1998, the Company and DMR amended the Letter Agreement ("Amendment"), renegotiating the payment terms of the previously due $900,000 balance. Under the terms of the Amendment, DMR agreed to grant a license to the Company in order to allow the Company to grant a sublicense for the Company's software to IQ Value, LLC (formerly I.Q. Card, Inc.) ("IQ") (see Note 11). DMR received a security interest in the Company's future proceeds to be derived under the sublicense agreement granted to IQ (see Note 11) in exchange for granting the license to the Company. The Amendment provides for a disbursing arrangement pursuant to which the balance due to DMR is paid out of the proceeds of the earlier of the sublicense agreement payment received by the Company or two days subsequent to the closing of the Company's contemplated IPO. The Amendment requires that all other terms of the DMR Agreement remain in full force and effect. Simple interest on the unpaid balance at the prime rate accrues from October 1, 1997 until the obligation is paid. Interest expense for 1997 and for the three month period ended March 31, 1998 on the DMR obligation amounted to $18,503 and $36,028, respectively, and has been included in the accompanying statements of operations. In October 1997, the Company began contracting with Task Management, Inc. ("Task") for Task to provide consultants to perform programming services for the development the Company's products. The Company incurred $262,782 and $374,369 of software development expenses with Task in 1997 and for the three month period ended March 31, 1998, respectively. As of December 31, 1997 and March 31, 1998 the Company owed Task $66,108 and $134,621, respectively. In February of 1998 the Company discovered a past due obligation to the State of Connecticut for use taxes and interest thereon related to out-of-state consulting services which had been incurred by the Company. The Company voluntarily notified the appropriate taxing authorities of the delinquency and is currently attempting to arrange for a payment program with the State of Connecticut (see Note 11). As of December 31, 1997 and March 31, 1998, the Company owed the State of Connecticut approximately $240,000 and $265,000, respectively, which has been included in accounts payable. Expense of approximately $240,000, $135,000 and $25,000 was recorded in 1997 and the three month periods ended March 31, 1997 and 1998, respectively, and included as research and development expenses in the accompanying statements of operations. During 1996, the Company entered into a series of agreements with Media Circus to develop consumer interface software and other products for the Company. As of December 31, 1996, $97,250 of expense had been incurred and paid in connection with these agreements. The Company has since discontinued its relationship with Media Circus and is currently disputing outstanding invoices totaling $32,250 which has been included in accrued expenses at December 31, 1996, 1997 and March 31, 1998. During 1996, the Company reached an agreement with Guild Concepts, Ltd. ("Guild") pursuant to which Guild agreed to provide the Company with certain marketing and creative services in connection with the promotion of the Company's products. As of December 31, 1996 and 1997, approximately $60,000 and $527,000, respectively, had been incurred in connection with this agreement. In November 1997, Guild filed a lawsuit against the Company alleging nonpayment of $243,538. Management is currently working to resolve this lawsuit in a manner favorable to the Company. As of December 31, 1997 and March 31, 1998, the balance due Guild has been included in accounts payable. - F17 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued) During 1997, the Company became a defendant in three lawsuits with claims aggregating approximately $95,000. The plaintiffs are vendors that allege nonpayment of obligations which were incurred in 1997. Management is currently working to resolve these lawsuits in a manner favorable to the Company. These obligations are included in accounts payable at December 31, 1997 and March 31, 1998 (see Note 11). On May 1, 1997, the Company entered into a professional services agreement with Promunicom, Inc. ("PI") ("PI Agreement"). Pursuant to the PI Agreement, PI was to perform marketing services for the Company in exchange for a monthly fee of $10,000 and an unspecified equity interest in the Company. The initial term of the Agreement was six months with automatic six-month renewal periods unless terminated thirty days prior to the completion of the initial term and ninety days prior to the completion of each six-month renewal period. In March 1998, the Company and PI agreed to terminate the PI Agreement effective January 15, 1998 (the "Termination Agreement"). Under the terms of the Termination Agreement, the Company is obligated in the amount of $115,000 and 30,000 shares of common stock to PI for 1997 consulting services. $15,000 of this expense was paid in 1997, $25,000 was paid in March 1998, $75,000 is to be paid by July 1998 and 30,000 shares of common stock, with an ascribed value of $5.00 per share, are to be issued by July 1998 in complete settlement of the balance due. At December 31, 1997 and March 31, 1998, $250,000 and $225,000, respectively, has been included in accounts payable and accrued expenses relating to the PI Agreement. In December 1997, the Company signed a letter of intent with J.B. Sutton Group, LLC ("Underwriter") to underwrite the Company's initial public offering of 2,400,000 shares at an offering price of $5.00 per share, with aggregate offering proceeds totaling $12,000,000 less related offering costs ("Letter of Intent"). The Letter of Intent calls for the Underwriter to receive a commission of 10%, an expense allowance of 3% of the IPO's gross proceeds and an option to purchase 300,000 shares of the common stock at 120% of the price per share to be realized in the Company's contemplated IPO. The option to purchase common stock is exercisable for an eighteen-month period commencing on the effective date of the Company's IPO (see Note 11). The Letter of Intent also requires all of the Company's shareholders of record prior to the IPO to agree not to transfer, sell or dispose of their shares ("Underwriter's Lockup Agreement") for an eighteen-month period. Under the Letter of Intent, the Company agreed at or prior to the closing of the IPO to enter into a consulting agreement with the Underwriter for an eighteen-month period at a fee of $10,000 per month. In March 1998, the Letter of Intent was amended ("Amended Letter of Intent") and the number of shares being offered in the IPO was increased from 2,400,000 to 3,000,000 with aggregate offering proceeds increasing from $12,000,000 to $15,000,000. The term of the Underwriter's Lockup Agreement was reduced from eighteen months to twelve months under the Amended Letter of Intent. NOTE 8 - NOTES PAYABLE Notes payable consisted of the following: December 31, March 31, 1997 1998 ------------ ----------- (Unaudited) Lancer Partners (a) $ -- $ 750,000 Golden Eagle Partners (b) 250,000 250,000 Bridge Offerings (c) 4,025,000 4,025,000 ----------- ----------- 4,275,000 5,025,000 Less discount on notes payable (2,463,090) (1,964,241) ----------- ----------- $ 1,811,910 $ 3,060,759 =========== =========== There were no outstanding notes or loans payable at December 31, 1996. - F18 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 8 - NOTES PAYABLE (Continued) (a) In February 1998, the Company obtained $750,000 in financing from an independent party and correspondingly issued a promissory note with an interest rate of 10% per annum. The Company paid $50,000 of investment banking fees, relating to this financing, to a shareholder owning approximately 1% of the Company's outstanding common stock at December 31, 1997. Expense related to this financing fee is being recognized over the term of the note. Financing fee expense of $43,182 was recorded in the three month period ended March 31, 1998 with the unexpired portion of $6,818 reflected as a prepaid financing fee at March 31, 1998. Upon repayment of the note, the lender agreed to accept 2,750 shares of common stock as payment in full for $13,750 of interest expense which has been included in accrued expenses at March 31, 1998. The note was repaid on April 9, 1997. (b) On June 17, 1997, the Company obtained $250,000 in financing from Golden Eagle Partners ("Golden Eagle") and executed a Loan and Security Agreement ("Golden Eagle Agreement"). Under the Golden Eagle Agreement, Golden Eagle was granted certain conversion and registration rights. In consideration for the financing, the Company issued a convertible promissory note which accrued interest at the rate of 10% per annum with all principal and accrued interest becoming due September 15, 1997. The maturity date for the note was subsequently extended until June 17, 1998 providing that the Company continued to proceed towards the consummation of an IPO. Pursuant to the terms of the Golden Eagle Agreement, the Company executed an assignment of patents and trademarks for the benefit of Golden Eagle (the "Golden Eagle Lien"). Further, VDC Corporation, Ltd. ("VDC") and Golden Eagle entered into an intercreditor agreement, which provided Golden Eagle a priority lien over VDC and all subsequent lenders on all of the Company's tangible and intangible assets. The intercreditor agreement required VDC's approval for all subsequent financings transacted by the Company. On December 1, 1997 the Company and Golden Eagle agreed to modify the Golden Eagle Agreement. The modification requires the Company to pay the outstanding balance of the loan plus the balance of accrued interest to Golden Eagle within five days of the Company's receipt of proceeds from an IPO and to issue 10,000 shares of common stock as additional consideration at the time of the repayment. In return, Golden Eagle agreed to the cancellation of its registration and conversion rights under the Golden Eagle Agreement and the cancellation of its intercreditor agreement with VDC, thereby allowing the Company to repay its obligations to VDC prior to the repayment of Golden Eagle's obligation. $50,000 of financing fee expense related to the Company's future stock issuance under this modification was incurred in 1997, is a noncash transaction, and is reflected in accrued expenses at December 31, 1997 and March 31, 1998. On March 11, 1998, the Company, IQ, Golden Eagle and the CEO entered into an intercreditor agreement (the "Intercreditor Agreement"). The Intercreditor Agreement provides IQ with a priority interest over the Golden Eagle Lien, and the CEO's liens pursuant to the terms of the Compensation Agreements (see Note 7). As a result of the Intercreditor Agreement, IQ was granted a priority security interest in all of the Company's assets, subordinate only to the DMR Lien. Subsequent to the execution of the Intercreditor Agreement, AML transferred 15,000 shares of its common stock to Golden Eagle in consideration for Golden Eagle's participation in the Intercreditor Agreement. This consideration amounting to $75,000 (based upon an ascribed value of $5.00 per share) has been reflected as financing fee expense in the three month period ended March 31, 1998. (c) In October 1997, the Company completed a $3,000,000 private placement offering aggregating 120 units ("Units") at $25,000 per Unit. In December 1997, the Company completed a $1,025,000 private placement offering aggregating 41 Units at $25,000 per Unit (collectively the "Bridge Offerings"). Each Unit in the Bridge Offerings consisted of a promissory note in the principal amount of $25,000 ("Note"), 2,500 shares of common stock, and a warrant to purchase 2,500 shares of common stock (collectively "Equity Instruments") [see Note 9(l)]. The Notes are unsecured subordinated obligations of the Company which accrue interest at the rate of 10% per annum. All principal and accrued interest due and payable on the Notes is payable in full on the earlier of the one year anniversary of their date of issuance or that date which is five days after the consummation by the Company of certain equity or licensing transactions which provide gross proceeds to the Company of at least $3,000,000. All of the Units and the Notes, warrants and shares of common stock issuable as part of the Units or upon exercise of the warrants, are restricted from sale, transfer and disposal until the one-year anniversary of the date of the issuance of the Units, unless the prior written consent of American Maple Leaf Financial Corporation ("AML"), a related party, is obtained [see Note 9 (f)]. - F19 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 8 - NOTES PAYABLE (Continued) Proceeds of $2,696,750 were allocated to the Equity Instruments based upon the relative fair market values of the Notes and Equity Instruments. Of these proceeds, $2,012,500 has been allocated to common stock, based upon an ascribed value of $5.00 per share, and $684,250 has been allocated to the warrants based upon a value of $1.70 per warrant, as determined by an independent valuation company (see Note 9). The remaining proceeds from the Bridge Offerings amounting to $1,328,250 from the sale of the Units were recorded as notes payable, reflecting an aggregate discount of $2,696,750 at the date of issuance. The discount on the Notes is being amortized as interest expense over the term of the Notes. Amortization of the discount for 1997 and for the three month period ended March 31, 1998 amounted to $233,660 and $498,849, respectively, and is reflected as interest expense in the accompanying statements of operations. At December 31, 1997 and March 31, 1998, the unexpired portion of the discount amounting to $2,463,090 and $1,964,241, respectively, has been reflected as a reduction in notes payable. Financing fees, consisting of commissions and legal fees, amounting to $427,028 were incurred in connection with the Bridge Offerings. $286,109 of the financing fees are related to the Company's issuance of Equity Instruments and has been determined by an allocation of the fair market values of the Notes and Equity Instruments. These financing fees have been recorded as an increase to stockholder's deficit in 1997. The remaining portion of the financing fees incurred in the Bridge Offerings amounted to $140,919 and has been recorded as prepaid financing costs related to the Notes. The unexpired portion of these financing fees amounting to $120,423 and $85,193 at December 31, 1997 and March 31, 1998, respectively, have been reflected as prepaid financing fees. Financing fee expense in 1997 and for the three month period ended March 31, 1998 amounted to $20,496 and $35,230, respectively. In addition to the above, the following transactions occurred in 1997: In January 1997 and August 1997, VDC provided the Company with bridge financing in the principal amount of $2,500,000 (the "Bridge Financing") and a senior secured convertible loan in the amount of $100,000 (the "VDC Loan"), respectively. The financing was made in anticipation of a statutory merger between the Company and VDC. The Bridge Financing and the VDC Loan were secured by a lien on all of the Company's tangible and intangible assets. In consideration for the receipt of the Bridge Financing, the Company issued 100,000 shares of common stock to VDC, a non-cash transaction, which was recorded as interest expense of $200,000 in 1997. Both the Bridge Financing and the VDC Loan accrued interest at 10% per annum and were subordinate to the Golden Eagle note prior to the modification of the Golden Eagle Agreement discussed above. On April 22, 1997, the Company entered into an agreement with VDC pursuant to which VDC proposed to acquire the Company through a statutory merger or similar business combination (the "VDC Agreement"). On August 26, 1997, the Company and VDC mutually agreed to terminate the VDC Agreement in order to allow the Company to proceed with other financing alternatives. In December 1997, $2,400,000 of Bridge Financing principal and accrued interest of $178,301 due to VDC was canceled and converted into 3,222,877 shares of common stock. On December 18, 1997, all of the Company's common stock and debt obligations owned by VDC were acquired by Rozel International Holdings Limited ("Rozel") [see Note 9(d) and (o)]. Subsequently in December 1997, the Company repaid the remaining $200,000 of principal outstanding on Bridge Financing and the VDC Loan which had been acquired by Rozel, a related party. As a result, the intercreditor agreement between VDC and Golden Eagle was canceled. In 1997, the Company received and repaid $1,001,000 in unsecured advances from AML, a related party. The Company also issued 190,200 shares of common stock to AML in a noncash transaction as consideration to AML for the issuance of the unsecured advances. The consideration amounting to $951,000 (based on an ascribed value of $5.00 per share) has been recorded as interest expense in 1997. On September 5, 1997, the Company obtained $300,000 in an unsecured 30-day loan at an interest rate of 10% from a private investor. As additional consideration for such financings in 1997, the Company issued 30,000 shares of common stock to the investor in a noncash transaction resulting in $150,000 of interest expense, based on an ascribed value of $5.00 per share. On October 5, 1997, the note was acquired by another private investor, who extended its maturity date to November 5, 1997. The Company retired the note in October 1997 with the proceeds received from the Bridge Offerings. - F20 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 9 - CAPITAL STOCK ACTIVITY Common stock activity for the years ended December 31, 1996 and 1997 and the three month period ended March 31, 1998 (unaudited) was as follows: Common Stock Issued and Issuable - -------------------------------- Purchase Price Consulting Cost --------------------- -------------------- Shares Date Per Share Total Per Share Total --------------- ---- --------- ----------- --------- ----- 1,090,000 (a) 8/96 $ .001 $ 1,090 $ -- $ -- 581,429 (b) 9/96 $ .17 100,000 -- -- 250,000 (c) 9/96 $ 1.40 350,000 -- -- 650,000 (d) 9/96 $ 1.00 650,000 -- -- 3,074,000 (g) 9/96 $ -- -- -- -- 450,000 (h) 9/96 $ 3.50 1,575,000 -- -- 175,001 (f) various 3.50 612,504 Costs of issuance (189,090) ---------- ----------- 1996 Net Proceeds $ 2,487,000 =========== Balance December 31, 1996 6,270,430 ---------- Purchase Price Consulting Cost --------------------- -------------------- Shares Date Per Share Total Per Share Total --------------- ---- --------- ----------- --------- ----- 174,999 (f) various $ -- $ -- $ 3.50 $ 612,496 192,500 (i) 3/97 $ 2.00 385,000 -- -- 102,500 (j) 5/97 $ 2.00 205,000 -- -- 130,000 (k) various $ -- -- -- -- 402,500 (l) various $ -- -- -- -- 3,222,877 (m) 11/97 $ -- -- -- -- 190,200 (n) 12/97 $ -- -- -- -- -- Costs of issuance (38,167) ---------- ----------- 1997 Net Proceeds $ 551,833 =========== Balances December 31, 1997 and March 31, 1998 (Unaudited) 10,686,006 ========== (a) On July 16, 1996, netValue was formed solely for the purpose of merging with the LLC. On August 2, 1996, in exchange for $1,090, the initial stockholders ("the Founders") received an aggregate of 1,090,000 shares of common stock (the "Founders' Shares"). In connection with the Company's formation, APP Investments, Inc., an affiliate of AML, a related party and one of the Founders, was issued warrants to acquire 500,000 shares of common stock at an exercise price of $6.00 per share. The warrants (and the underlying shares) and the Founders' Shares, except for 450,000 shares issued to AML, are restricted from sale, transfer or disposal ("Lockup Agreement") until September 1998 without the prior written consent of AML. The warrants are currently exercisable and expire in August 2001. (b) On September 6, 1996 the Company sold an aggregate of 581,429 shares of common stock to a group of Accredited Investors [as defined under Regulation D of the Securities Act of 1933, as amended ("Accredited Investors")] for an aggregate price of $100,000 ($.17 per share). This accredited investor group consisted of certain Founders and a group of other initial investors. These funds were utilized to fund operating and formation costs. These shares are subject to a Lockup Agreement until September 18, 1998 without the prior written consent of the Company. - F21 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 9 - CAPITAL STOCK ACTIVITY (Continued) (c) On September 6, 1996 the Company sold an aggregate of 250,000 shares of common stock to a group of Accredited Investors for an aggregate price of $350,000 ($1.40 per share). The share price was negotiated between the Company and a group of investors. These shares are subject to a Lockup Agreement until September 18, 1998 without the prior written consent of the Company. (d) On September 6, 1996 the Company sold 650,000 shares of common stock to VDC for an aggregate purchase price of $650,000 ($1.00 per share) (see Notes 8 and 10). At the time of the sale, VDC was a strategic investor that the Company was considering for a business combination. All shares held by VDC were sold to Rozel, a related party, on December 18, 1997 (see Note 8). (e) On September 12, 1996, the LLC entered into an agreement with Muzak Limited Partnership ("Muzak") (the "Muzak Agreement") whereby Muzak was appointed as the exclusive sales agent for a three-year period to sell and solicit orders for various targeted coupons, rebates, special offers and incentives offered by the Company via the Internet. In connection with the Muzak Agreement and the Merger [see Notes 1 and 9(g)], Muzak, in its capacity as a member of the LLC, received 474,000 shares of common stock in the Merger, an option to purchase 439,634 shares of common stock at an exercise price of $3.50 per share pursuant to certain anti-dilutive protections (the "Muzak Option"), and an option to purchase 16,334 shares of common stock at $6.00 per share pursuant to such anti-dilutive protections. On April 3, 1997, the Company and Muzak mutually agreed to terminate the Muzak Agreement. Upon the termination of the Muzak Agreement, Muzak retained the 474,000 shares of common stock, however all options granted to Muzak automatically expired and were canceled. (f) On September 18, 1996, the Company entered into an agreement with AML, a related party, pursuant to which AML agreed to provide investment banking services to the Company for the six-month period commencing September 18, 1996 in exchange for 350,000 shares of common stock valued at $1,225,000. Such shares were issuable to AML in six equal installments over the term of the agreement which commenced on October 17, 1996 and ended on March 17, 1997. During 1996, the Company recorded consulting expense of approximately $671,000, in a noncash transaction representing the cost of 175,001 shares issued to AML as of December 31, 1996, and by accruing approximately $58,000 of additional expense. Unearned shares not yet issued at December 31, 1996 were deducted from equity on the balance sheet. During 1997, the remaining 174,999 shares of common stock were issued, resulting in consulting expense of approximately $554,000 in 1997. (g) In connection with the Merger, the members of the LLC exchanged all of their issued and outstanding membership interests, representing cumulative capital contributions of $500,000, plus the termination and waiver of all related party agreements, pre-existing rights, claims and causes of action (except for some predetermined surviving claims) for 3,074,000 shares of common stock of netValue. The Merger was a reverse acquisition, whereby the legal acquiree, the LLC, was the accounting acquirer in the transaction (see Note 1). 600,000 of these shares (the "Holdback Shares") were issuable pending verification of certain representations and warranties made by two former executives of the LLC, who are also significant shareholders of the Company ("Co-Founders"), which was accomplished in July 1997. Holders of 532,000 shares of common stock entered into Lockup Agreements subject to the prior written consent of AML, until September 18, 1997 with respect to 25% of such shares, March 18, 1998 with respect to 25% of such shares and September 18, 1998 with respect to the balance of such shares. The Holdback Shares were not subject to a Lockup Agreement, and the remaining 1,942,000 shares are subject to a Lockup Agreement until September 18, 1998 unless prior written consent of AML is obtained. (h) On September 19, 1996, after the Merger and subsequent to the first three private offerings, the Company sold an aggregate of 450,000 shares of common stock to a group of unrelated Accredited Investors for an aggregate amount of $1,575,000 ($3.50 per share). These shares are subject to a Lockup Agreement until September 19, 1998 unless the prior written consent of AML is obtained. (i) During the first quarter of 1997, the Company sold an aggregate of 192,500 shares of common stock to a group of Accredited Investors for an aggregate purchase price of $385,000 ($2.00 per share) less approximately $18,852 in commissions paid. Such shares are subject to a Lockup Agreement for two years from the date of issuance unless prior written consent of AML is obtained. - F22 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 9 - CAPITAL STOCK ACTIVITY (Continued) (j) On May 31, 1997, the Company sold an aggregate of 102,500 shares of common stock to a group of Accredited Investors for an aggregate purchase price of $205,000 ($2.00 per share). Such shares are subject to a Lockup Agreement for two years from the date of issuance unless prior written consent of AML is obtained. Commissions of $4,500 were paid on this offering. (k) During 1997, the Company issued 100,000 shares of common stock to VDC and 30,000 shares to a private investor in connection with the requirements of each of their respective loan agreements (see Note 8). (l) In accordance with the terms of the Bridge Offerings, the Company issued 402,500 shares of common stock and 402,500 warrants to a group of Accredited Investors [see Note 8(c)]. The warrants have an exercise price equal to the lower of $4.00 per share or the IPO price per share. The warrants are exercisable for a period of five years commencing on the date the common stock issued in connection with the Bridge Offerings is first registered with the SEC. (m) On November 14, 1997, in a noncash transaction, the Company and VDC agreed to convert the outstanding Bridge Financing principal and accrued interest due VDC amounting to $2,578,301 into 3,222,877 shares of the Company's common stock (see Note 8). (n) On December 15, 1997, in a noncash transaction, the Company issued 190,200 shares of common stock to AML as consideration to AML for the issuance of unsecured advances to the Company (see Note 8). (o) On December 18, 1997, Rozel acquired all 3,972,877 shares of the Company's common stock which had been owned by VDC (see Note 8). Costs of issuance relating to the above transactions amounted to $189,090 in 1996 and $38,167 in 1997 of which AML, a related party, received $31,150 and $23,352, respectively. As discussed in Note 3, the Company filed a registration statement for its contemplated IPO, incurring related professional and filing fees during 1997 amounting to $218,773, of which approximately $94,000 has been included in accounts payable at December 31, 1997. As of March 31, 1998, such fees amounted to $355,891, of which $137,118 is included in accounts payable. Options and Warrants A summary of stock warrants as of December 31, 1996 and 1997 and March 31, 1998 (unaudited) is as follows: Grant Date Exercise Price Expiration Warrants Granted and Outstanding Shares Date Exercisable per Share Date - -------------------------------- ------ ----- ----------- -------------- ----------- Granted (a) 500,000 8/96 8/98 $ 6.00 8/01 ----------- Balance at December 31, 1996 500,000 Granted (l) 402,500 10/97-12/97 IPO Date $ 4.00 Five Years from IPO ----------- Balance at December 31, 1997 and March 31, 1998 (Unaudited) 902,500 =========== - F23 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 9 - CAPITAL STOCK ACTIVITY (Continued) A summary of the Company's Stock Option Plan as of December 31 is as follows: 1996 1997 ----------------------------- ------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------- ------------- ------------- -------------- Outstanding at beginning of year -- $ -- 515,968 $ 3.25 Granted 515,968 3.25 1,614,000 4.15 Canceled -- -- (455,968) (3.59) ------------- ------------- ------------- ------------- Outstanding at end of year 515,968 $ 3.25 1,674,000 $ 4.02 ============= ============= ============= ============= Options exercisable at end of year 60,000 407,500 ============= ============= Shares available for grant 684,032 826,000 ============= ============= Weighted average fair value of options granted during the year as determined by an independent valuation company $ 0.01 $ 2.10 ============= ============= The following table summarizes information about fixed stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable --------------------------------- --------------------------- Weighted Average Weighted Weighted Number of Remaining Average Number of Average Outstanding Contractual Exercise Outstanding Exercise Options Life Price Options Price ------------- ----------- -------- ------------- ----------- From $.063 to $.080 461,500 4.68 $ 0.76 407,500 $ 0.75 From $4.00 to $5.00 703,000 6.34 4.50 -- -- From $6.00 to $7.00 509,500 8.11 6.31 -- -- ------------- ------------- ----------- From $.063 to $7.00 1,674,000 6.42 $ 4.02 407,500 $ 0.75 ============= ============= A summary of stock options as of March 31, 1998 (unaudited) is as follows: Exercised/ Outstanding Other Exercisable ------------- ------------- ------------- From $.063 to $.080 461,500 -- 407,500 From $4.00 to $5.00 876,500 -- -- From $6.00 to $7.00 630,000 -- -- ------------- ------------- ------------- 1,968,000 -- 407,500 ============= ============= ============= Shares authorized for grant 2,500,000 ============= Shares available for grant 532,000 ============= - F24 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 9 - CAPITAL STOCK ACTIVITY (Continued) Under the Company's 1996 Stock Option Plan (the "Plan"), stock options to purchase shares of the Company's common stock may be granted to officers, directors, employees, consultants and independent contractors. Accordingly, the Company, as of December 31, 1996, had reserved a total of 1,200,000 shares of the Company's common stock for issuance upon the exercise of options granted pursuant to the Plan. Options granted under the Plan generally expire five years following the date of vesting and are subject to limitations on transfer. During 1997, the Board of Directors approved an amendment to and a restatement of the Plan and authorized the issuance of an additional 1,300,000 shares of common stock resulting in 2,500,000 shares of common stock available for issuance over the term of the Plan. Option grants under the Plan are subject to various vesting provisions. The exercise price of options granted under the Plan are determined by the Board of Directors. The Board may amend, suspend or terminate the Plan at any time, subject to restrictions imposed by applicable law. On September 19, 1996, options to acquire 350,000 shares of common stock were granted to the CEO in connection with his employment agreement in effect at that time. In December 1997, 290,000 of these options were canceled and reissued with new exercise prices. On September 19, 1997, options to acquire an additional 550,000 shares of common stock were granted to the CEO and 152,000 options were granted to the CTO in connection with their amended and restated employment agreements. Such shares are subject to a Lockup Agreement until September 19, 1998 unless the prior written consent of the Company is obtained. In addition to the options granted to the CEO and CTO in 1997, the Company granted compensatory options to acquire 622,000 shares of common stock to employees and other directors of the Company, including the Co-Founders (see Note 10). In January 1998, the Company granted additional options to acquire 294,000 shares of common stock to certain directors, officers, employees and consultants. In February 1998, the Company entered into an agreement to cancel options to acquire 90,000 shares of common stock originally granted to the Co-Founders and grant additional options to acquire 150,000 shares of common stock with an exercise price equivalent to the price per share to be ultimately realized in the Company's contemplated IPO (see Notes 10 and 11). Of the outstanding options as of December 31, 1996, 1997 and March 31, 1998 that had been granted by the Company to acquire 515,968, 1,674,000 and 1,968,000 shares of common stock, respectively, options to acquire 60,000, 407,500 and 407,500 shares of common stock, respectively, were exercisable. Certain options that carry exercise prices that were less than the fair value of the common stock at the date of grant resulted in compensation and consulting expense of $172,200, $1,434,400, $358,600 and $149,541 in the years ended December 31, 1996 and 1997, and the three month periods ended March 31, 1997 and 1998, respectively. Preferred Stock On October 16, 1996, the Company authorized 1,000,000 shares of preferred stock having a par value of $.001 per share. Dividends, voting rights and other terms, rights and preferences of the preferred stock may be so designated by the Company's Board of Directors from time to time. On December 15, 1997, the Company entered into a preferred stock purchase agreement with Rozel (the "Preferred Stock Agreement"). Pursuant to the terms of the Preferred Stock Agreement, the Company's Board of Directors designated a Series A Convertible Preferred Stock consisting of 300,000 shares at a $10.00 stated value with no voting or registration rights ("Series A Shares"). The Series A Shares bear no dividends, and the preferred shareholders are to receive the stated value of their shares as a priority over common stock shareholders in the event of a liquidation of the Company. Each Series A Share may be converted into 12.5 shares of common stock at the option of the Company or Rozel. These conversion rights provide the Series A shareholders with a beneficial conversion feature upon issuance, valued at $52.50 per Series A Share, or $4.20 per each converted common share, based upon the ascribed value of $5.00 per share of common stock. This beneficial conversion feature results in a preferred dividend upon the issuance of Series A Shares in accordance with Emerging Issues Task Force D-60 "Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable Conversion Feature" ("EITF D-60"). - F25 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 9 - CAPITAL STOCK ACTIVITY (Continued) The Preferred Stock Agreement permits the Company to request that Rozel periodically purchase up to an aggregate of 300,000 shares at an aggregate purchase price of $3,000,000. The terms of the Preferred Stock Agreement provide that the Company may require Rozel to purchase the Series A Shares as follows: Date Purchase Shares Price -------------------- --------------- ----------- 12/15/97 22,500 $ 225,000 Subsequent to 2/1/98 70,000 $ 700,000 Subsequent to 3/1/98 70,000 $ 700,000 Subsequent to 4/1/98 50,000 $ 500,000 Subsequent to 5/1/98 50,000 $ 500,000 Subsequent to 6/1/98 37,500 $ 375,000 In exchange for the satisfaction of Rozel's funding obligations under the terms of the Preferred Stock Agreement, the Company has agreed to issue 150,000 shares of common stock to Rozel. These shares of common stock will have registration rights for the purpose of public resale and will be subject to a Lockup Agreement solely as required by the Underwriter and commencing on the effective date of the Company's contemplated IPO. In accordance with the Preferred Stock Agreement, Rozel purchased 22,500 shares of Series A Shares for $225,000 in December 1997. In March 1998 Rozel purchased an additional 27,000 shares of Series A Shares which resulted in the Company receiving $270,000 of aggregate proceeds. 250,500 Series A Shares remained reserved for issuance at March 31, 1998 (see Note 11). Pursuant to the requirements of EITF D-60, the issuance of the Series A Shares resulted in preferred stock dividends of $1,181,250 and $1,417,500 in 1997 and in the three month period ended March 31, 1998, respectively. 700,000 shares of authorized and unissued Preferred Stock remained undesignated at March 31, 1998. Stock-Based Compensation During 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (" SFAS 123".) As permitted under SFAS 123, the Company has continued to follow Accounting Principles Board No. 25 "Accounting for Stock-Based Compensation" ("APB 25") in accounting for its stock-based compensation. SFAS 123 recognizes compensation expense using the fair market value of stock options, warrants and common stock issuances as of the grant date. APB 25 recognizes the intrinsic value of the instruments issued by the Company as of the measurement date, which is generally the date at which both the number of shares that an individual is entitled to receive and the purchase price are known. Had compensation expense for 1996, 1997 and the three month period ended March 31, 1998 been determined under the fair value provisions of SFAS 123, the Company's net loss and net loss per share would have differed as follows: Three Months Ended December 31, 1996 December 31, 1997 March 31, 1998 ------------------------- ------------------------- ------------------------ Pro Forma (Unaudited) Net Loss Per Share Net Loss Per Share Net Loss Per Share ------------ ----------- ------------- --------- ----------- ---------- (Unaudited) As Reported Under APB 25 $ (3,314,094) $ (.89) $ (11,235,237) $ (1.72) $ 2,878,065 $ (.27) ============ =========== ============= ======== =========== ========= Pro Forma Under SFAS 123 $ (3,149,487) $ (.84) $ (12,854,814) $ (1.78) $ 2,899,932 $ (.27) ============ =========== ============= ======== =========== ========= The fair market value of the options and warrants used in the above computation were determined by an independent valuation company, using a simulation model which simulates many potential outcomes for the value of the Company's stock over the period during which the options or warrants may be exercised. Because of the expected high volatility of the value of the Company's stock and the long-term nature of some of the options and warrants, standard models were not deemed appropriate by the independent valuation company. The independent valuation company determined the potential stock price outcomes using a log-normal distribution with expected returns of between 20% (after the Company's stock price had reached $5.00 per share) and 29% (prior to that), a standard deviation of 30% to 100%, and a risk-free interest rate of 5%. The independent valuation company determined that there was also a 50% likelihood that the value of the stock would drop to zero in any one year before reaching a $5.00 per share level. - F26 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 9 - CAPITAL STOCK ACTIVITY (Continued) No such differences between the application of APB 25 and SFAS 123 existed for 1995. Loss Per Share As discussed in Note 2, the Company adopted SFAS 128 in 1997, and has followed the guidelines of SFAS 128 in the presentation of loss per share for all periods presented in the financial statements. Options and warrants to purchase common stock and convertible preferred stock are not included in the computation of diluted loss per share because the effect of these instruments would be antidilutive for all periods presented. The common shares potentially issuable arising from these instruments which were outstanding during the periods presented in the financial statements are as follows: December 31, March 31, Exercise ---------------------------------------------- -------------------------- Price 1995 1996 1997 1997 1998 ----------- ------------- ------------- ------------- ------------- ----------- (Unaudited) (Unaudited) Options $0.63-$5.00 -- -- 973,250 60,000 1,146,750 Convertible preferred stock $0.80 -- -- 281,250 -- 281,250 Warrants $4.00 -- -- 402,500 -- 402,500 ------------- ------------- ------------- ----------- ------------ Total common shares potentially issuable -- -- 1,657,000 60,000 1,830,500 ============= ============= ============= =========== ============ NOTE 10 - RELATED PARTIES Related party transactions not disclosed elsewhere in the financial statements and notes are as follows: In 1994, the former president of the LLC, who is one of the Co-Founders, loaned the Company $17,142 to fund operations. During 1995, certain members of the LLC advanced funds to the Company amounting to $37,636. Such amounts were non-interest bearing and were payable when funds became available. These advances from the members were repaid in full during 1996. In 1996, an additional $26,045 was advanced to the Company by certain shareholders. The advance was repaid in full during 1996. AML is a significant shareholder of the Company and was also an employer of a former director of the Company until September 1997. In January 1998, the president of AML and APP Investments, Inc. became a director of the Company. On June 14, 1996, the Company entered into a $245,000 bridge loan agreement with VDC, a former significant shareholder. The loan was paid in full in September 1996 in conjunction with a stock purchase by VDC [see Note 9(d)]. On September 18, 1996, the Company entered into three-year consulting agreements with the Co-Founders providing for compensation in the aggregate of $168,000 annually. The aggregate amount paid on these agreements was $46,480 and $183,225 in 1996 and 1997, respectively. In December 1997, the consulting agreements were canceled and replaced with employment agreements providing each of the Co-Founders with an annual salary of $85,000 plus commissions for the first year of the contract, and with compensation, solely on a commission basis, thereafter. The employment agreements also granted the Co-Founders options to acquire 120,000 shares of common stock (see Note 9). In February 1998, the Company and the Co-Founders agreed to terminate the Co-Founders' employment agreements (see Note 9). These terminations, which became effective upon the execution of the IQ agreement, provide that the Co-Founders receive compensation of $40,000 of which $20,000 was paid upon the execution of the IQ agreement and $20,000 is required to be paid - F27 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 10 - RELATED PARTIES (Continued) within the earlier of the receipt of the contemplated IPO proceeds or in July 1998. The Co-Founders are continuing to receive their annual salaries through September 30, 1998 and their options to acquire shares of common stock have been renegotiated (see Note 9). NOTE 11 - SUBSEQUENT EVENTS On April 7, 1998, the Company entered into a distribution and license agreement with IQ (see Note 7) to use the Company's products and services to provide fee-based marketing services to its customers (the " IQ Agreement"), whereby IQ was granted the exclusive right to the use of COL in providing services to local merchants, as defined in the IQ Agreement, and the nonexclusive right to use COL and i-Value elsewhere. The IQ Agreement requires the Company to provide and manage a data center facility to be used to service IQ's customers. The Company anticipates operating costs of the facility to include a one time non-recurring cost of approximately $250,000 in 1998 in order to relocate the facility, and monthly maintenance fees thereafter of approximately $25,000. The Company has also estimated capital expenditures of approximately $400,000 to be required for operating the facility. The Company also agreed to provide IQ with one seat on its Board of Directors during the term of the IQ Agreement or until such time that IQ no longer retains any exclusivity under the IQ Agreement. The Company is to receive a minimum licensing fee in the amount of $3,000,000, of which $1,250,000 had been received as of April 15, 1998. Of this amount, $500,000 was received in March 1998 and has been reflected as deferred revenue at March 31, 1998. $750,000 was collected upon the execution of the IQ Agreement in April of 1998. The balance is due in three quarterly installments of $500,000 each, commencing in July 1998 with a final payment of $250,000 due in April 1999. In addition to the minimum licensing fee, the Company is to receive a fee for each transaction processed under the IQ Agreement. In order to maintain the exclusivity of the license for COL, IQ will be required to meet minimum annual levels of transaction fees. Proceeds received from IQ under the IQ Agreement are subject to a disbursing arrangement with DMR. The Company has agreed to grant DMR a first priority security interest in all of the Company's right, title and interest in the IQ Agreement and the Company's right to receive the proceeds thereon. Such security interest is to remain in force until such time that DMR is paid in full on all contractual obligations under the DMR Agreement (see Note 7). In April 1998 the Company paid PI $37,500 and issued 30,000 shares of common stock to PI pursuant to the Termination Agreement (see Note 7). On April 1, 1998, the Company received written notice from an unnamed party that the process used by the Company's products to distribute coupons may infringe upon the unnamed party's existing patent. Management, along with the Company's patent attorneys, believes that the Company does not infringe on the unnamed party's patent, and that the claim is without merit. On April 28, 1998, the Company and the State of Connecticut agreed upon a schedule to pay the Company's use tax obligation (see Note 7). The schedule requires the Company to make monthly payments of $5,000 commencing May 1, 1998. The unpaid balance of the use tax obligation will become immediately due upon the Company's receipt of proceeds from its contemplated IPO. On April 30, 1998, the Company refiled its patent application with modifications to its previously defined claims with the USPTO, (see Note 1). The Company also filed an application for an international patent application on April 24, 1998. For the period from April 1, 1998 through May 26, 1998, the Company received an aggregate of $1,684,000 in proceeds from the issuance of 168,400 Series A Shares. The issuance resulted in a preferred dividend of $8,841,000 pursuant to the requirements of EITF D-60 (see Note 9) and resulted in an additional 2,105,000 dilutive shares of common stock pursuant to SFAS 128. On May 26, 1998, 82,100 Series A Shares remained unissued and reserved for issuance. - F28 - netValue, Inc. (A Development Stage Entity) Notes to Financial Statements (Information as of March 31, 1998 and for the Three Month Periods Ended March 31, 1997 and 1998 is Unaudited) NOTE 11 - SUBSEQUENT EVENTS (Continued) In April and May 1998, the Company settled outstanding lawsuits aggregating approximately $85,000 in claims against the Company. As of May 26, 1998, the Company was in compliance with the terms of these settlement agreements (see Note 7). In May 1998, the Underwriter notified the Company of its intention to amend the Letter of Intent by (i) reducing its commissions to 8.75% of the gross proceeds from the contemplated IPO, (ii) waiving the $10,000 per month fee previously required by the Underwriter's proposed consulting agreement, (iii) increasing the exercise price of the Underwriter's option to purchase 300,000 shares of common stock from a price of 120% of the contemplated IPO price to 165% of such price and (iv) increasing the maximum exercise period from eighteen months to four years from the effective date of the contemplated IPO. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS REPORT On June 1, 1998, the Company and the CEO entered into a separation agreement pursuant to which the CEO's employment agreement was terminated (see Note 7), and the CEO agreed to immediately resign from all of his positions as an officer and director of the Company. Under the terms of the agreement, the Company agreed to pay deferred compensation and severance benefits to the CEO, and all of the CEO's options to purchase the Company's common stock became vested immediately. In June 1998, the Company made certain deferred compensation and severance payments to the former CEO and, in accordance with the terms of the separation agreement, the former CEO released all of his rights under his lien and security interests in certain of the Company's assets. Additional severance compensation payments are to be paid to the former CEO in monthly installments through October 1999. Effective June 1, 1998, the Company entered into a three-year employment agreement with a new chief executive officer ("New CEO"), pursuant to which the New CEO will also assume the positions of Chairman of the Company's Board of Directors and President ("Employment Agreement"). Pursuant to the Employment Agreement, the New CEO is paid an annual base salary and is eligible to receive an annual bonus based upon the attainment of specific performance goals established by the Board of Directors. Any bonus may be allocated between awards of cash and shares of common stock. In addition, the Employment Agreement requires the Company to grant the New CEO options to purchase a specified number of shares of the Company's common stock, that will vest over a specified period, pursuant to the Company's nonqualified stock option plan. In July 1998, the Company terminated the CTO's employment agreement with the Company, effective from that date, the Company's Board of Directors removed the CTO from his position as Secretary of the Corporation, and a majority of the stockholders of the Company voted to remove the CTO from the Board of Directors. The Company has determined that its product I-value will not be released in the third quarter of 1998 as previously planned. A launch date for this product has not been established. - F29 - ================================================================================ No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company or that information contained herein is correct as of any time subsequent to the date hereof. ------------------- TABLE OF CONTENTS ------------------- Page Available Information.................................................2 Prospectus Summary....................................................3 Forward-Looking Statements............................................8 Risk Factors .........................................................8 Use of Proceeds......................................................14 Market Price of and Dividends on Common Stock and Related Shareholder Matters..............................15 Capitalization.......................................................16 Dilution.............................................................19 Selected Financial Data..............................................21 Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................................22 Business.............................................................28 Management ..........................................................35 Security Ownership of Principal Stockholders and Management.....................................................44 Certain Transactions ................................................47 Description of Capital Stock.........................................50 Shares Eligible for Future Sale......................................52 Underwriting.........................................................53 Legal Matters........................................................54 Experts..............................................................54 Index to Financial Statements........................................F1 ================================================================================ ================================================================================ NETVALUE, INC. 3,600,000 SHARES OF COMMON STOCK ------------- PROSPECTUS -------------- August _____, 1998 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the estimated expenses to be incurred in connection with the Offering. All amounts are estimates except the Commission Registration Fee. Commission Registration Fee......................... $5,089.00 NASD Filing Fee..................................... 1,880.00 NASDAQ SmallCap Fee................................. 11,760.00 EDGAR and Printing Expenses......................... 25,000.00 Legal Fees and Expenses............................. 200,000.00 Accounting Fees and Expenses........................ 200,000.00 Blue Sky Fees and Expenses.......................... 40,000.00 Transfer Agent's Fees and Expenses.................. 15,000.00 Miscellaneous Expenses.............................. 1,271.00 --------- Total*..................................... $500,000.00 =========== * All expenses other than the Commission Registration Fee, NASD Filing Fee, NASDAQ SmallCap Fee and the Blue Sky Fees and Expenses are estimated. Item 14. Indemnification of Directors and Officers. The Company's Amended and Restated Certificate of Incorporation eliminates the liability of directors of the Company for monetary damages for breach of their fiduciary duty as directors, other than the liability of a director (i) for a breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions by the director not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for a willful or negligent declaration of an unlawful dividend, stock purchase or redemption or (iv) for transactions from which the director derived an improper personal benefit. These provisions are consistent with applicable Delaware law. In addition, the Company's Bylaws include provisions to indemnify its officers and directors and other persons against expenses, judgments, fines and amounts incurred or paid in settlement in connection with civil or criminal claims, actions, suits or proceedings against such persons by reason of serving or having served as officers, directors, or in other capacities, if such person acted in good faith, and in a manner such person reasonably believed to be in or not opposed to the best interest of the Company and, in a criminal action or proceeding, if he had no reasonable cause to believe that his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, or conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or that he or she had reasonable cause to believe his or her conduct was unlawful. Indemnification as provided in the Bylaws shall be made only as authorized in a specific case and upon a determination that the person met the applicable standards of conduct. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the issuer pursuant to the foregoing provisions, or otherwise, the issuer has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the issuer of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-1 Item 15. Recent Sales of Unregistered Securities. The following sets forth all sales of the Company's securities during the past three years. None of such securities were registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on exemptions from registration under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The purchasers in these transactions acquired the securities for investment purposes only and the stock certificates representing the shares issued in connection with such exemptions bear restrictive legends indicating that the shares may not be freely transferred. On July 16, 1996, the Company was formed solely for the purpose of merging with Coupons Online, L.L.C. ("COL") through a merger or similar transaction. In exchange for an aggregate purchase price of $1,090, the founders, including American Maple Leaf Financial Corporation ("AML"), received an aggregate of 1,090,000 shares of the Company's common stock, $.001 par value per share (the "Common Stock"). In addition, in connection with the Company's formation, APP Investments, Inc., an affiliate of AML, was issued a five-year warrant to acquire 500,000 shares of Common Stock at an exercise price of $6.00 per share. On September 6, 1996, the Company offered, sold and issued an aggregate of 581,429 shares of Common Stock pursuant to Section 4(2) of the Securities Act to a group of five "accredited investors" (as defined in Rule 501(a) of Regulation D promulgated under the Securities Act) for an aggregate purchase price of $100,000 ($.17 per share of Common Stock). The Company sold these securities directly to this group of accredited investors, consisting of two individuals and three corporations, and did not use a registered broker-dealer in connection with this transaction. On September 6, 1996, the Company offered, sold and issued an aggregate of 250,000 shares of Common Stock pursuant to Section 4(2) of the Securities Act to a group of nine accredited investors for an aggregate purchase price of $350,000 ($1.40 per share of Common Stock). The Company sold these securities directly to this group of accredited investors, consisting of five individuals, three corporations and one limited liability company, and did not use a registered broker-dealer in connection with this transaction. On September 6, 1996, the Company offered, sold and issued 650,000 shares of Common Stock pursuant to Section 4(2) of the Securities Act to VDC for an aggregate purchase price of $650,000 ($1.00 per share of Common Stock). The Company sold these securities directly to VDC, a corporation, and did not use a registered broker-dealer in connection with this transaction. On September 18, 1996, the Company entered into a Consulting Agreement with AML pursuant to which AML agreed to provide investment banking services to the Company in exchange for 350,000 shares of Common Stock, all of which shares have been issued pursuant to Section 4(2) of the Securities Act. On September 18, 1996, Coupons Online, L.L.C., a New Jersey limited liability company (the "COL"), was merged (the "Merger") with and into the Company. In connection with the Merger, pursuant to Section 4(2) of the Securities Act, the Company issued an aggregate of 3,074,000 shares of Common Stock to the 20 members of COL (the "COL Shares") in exchange for (i) all of the issued and outstanding membership interests of COL, (ii) the termination of any and all agreements among COL and certain of its members and other affiliated parties (collectively, the "COL Holders") including the COL Operating Agreement and an Investors Agreement by and among COL and the Gordon Group; and (iii) the waiver of any and all pre-existing rights, claims, causes of action and suits which COL Holders have or may have against COL, except for certain surviving claims. Included in such shares were 600,000 shares which were issuable to the two co-founders of the COL pending verification of their certain representations and warranties. This was accomplished in July 1997 and the 600,000 shares were issued on December 15, 1997. The Operating Agreement was the corporate governance document for COL. The Investors Agreement controlled the amount of investment made by the Gordon Group, a group of members of COL, and controlled the timing and manner in which these funds could be released from escrow for use in funding COL operations. While there is no specific dollar value that can be attributed to the termination of these agreements, the termination of these agreements provided the Company with certainty that its operations would not be disrupted by legal disputes involving these agreements. Similarly, the waiver was a general waiver which provided the Company with certainty that its operations would not be disrupted by lawsuits against the Company brought by former members of COL regarding matters that did not involve the Company. II-2 On September 19, 1996, the Company issued and sold an aggregate of 450,000 shares of Common Stock to a group of fifty accredited investors pursuant to Section 4(2) of the Securities Act for an aggregate purchase price of approximately $1,575,000 ($3.50 per share of Common Stock). The Company paid an aggregate of $78,750 from the proceeds of such transaction as commissions to First Hanover Securities, Inc., a registered broker-dealer. On February 19, 1997 and March 24, 1997, the Company issued and sold an aggregate of 192,500 shares of Common Stock to accredited investors pursuant to Rule 506 for an aggregate purchase price of $385,000 ($2.00 per share of Common Stock). The Company paid an aggregate of $15,000 from the proceeds of such transaction as commissions to registered broker-dealers. On March 25, 1997, pursuant to Section 4(2) of the Securities Act, the Company issued 100,000 shares of Common Stock to an investor in connection with the provision of $2,500,000 in bridge financing (the "VDC Financing") by such investor to the Company. In November 1997, the VDC Financing and accrued interest thereon was canceled and converted into 3,222,877 shares of Common Stock. On May 31, 1997, the Company issued and sold an aggregate of 102,500 shares of Common Stock to a group of accredited investors pursuant to Rule 506 for an aggregate purchase price of $205,000 ($2.00 per share of Common Stock). The Company paid an aggregate of $4,500 from the proceeds of such transaction as commissions to registered broker-dealers. On September 5, 1997, pursuant to Section 4(2) of the Securities Act, the Company issued 30,000 shares of Common Stock to an accredited investor in connection with the provision of $300,000 in bridge financing by such investor to the Company. On October 7, October 17, 1997 and October 31, 1997, the Company issued and sold an aggregate of 120 Units, pursuant to Rule 506 of Regulation D promulgated under the Securities Act, to a group of accredited investors for an aggregate purchase price of $3,000,000. Each Unit consisted of a promissory note in the principal amount of $25,000, 2,500 shares of Common Stock, and a warrant to purchase 2,500 shares of Common Stock at an exercise price of the lower of (i) $4.00 and (ii) the price per share at which the Common Stock is offered in an initial public offering. The Company paid an aggregate of $300,000 from the proceeds of such transaction as commissions to registered broker-dealers, including $287,500 to First United Equities Corporation and $12,500 to J.P. Turner & Company, the Underwriters for this Offering. On December 11, 1997, the Company issued and sold an aggregate of 41 Units, pursuant to Rule 506 of Regulation D promulgated under the Securities Act, to a group of accredited investors for an aggregate purchase price of $1,025,000. Each Unit consisted of a promissory note in the principal amount of $25,000, 2,500 shares of Common Stock, and a warrant to purchase 2,500 shares of Common Stock at an exercise price of the lower of (i) $4.00 and (ii) the price per share at which the Common Stock is offered in an initial public offering. The Company paid $100,000 from the proceeds of this transaction as commissions to J.P. Turner & Company. In December 1997, pursuant to Section 4(2) of the Securities Act, the Company issued 190,200 shares of Common Stock to American Maple Leaf Financial Corporation ("AML") as consideration for the advance of short-term bridge financing and the consensual forbearance by AML relating thereto. In December 1997, pursuant to Section 4(2) of the Securities Act, the Company issued 300,000 shares of Common Stock to each of Messrs. Barnett and Braunstein in satisfaction of the terms of their respective consulting agreements with the Company. In December 1997, pursuant to Section 4(2) of the Securities Act, the Company issued and sold 22,500 shares of Preferred Stock to an accredited investor for a purchase price of $225,000. In March 1998, pursuant to Section 4(2) of the Securities Act, the Company issued and sold 27,000 shares of Preferred Stock to an accredited investor for a purchase price of $270,000. In April 1998, pursuant to Section 4(2) of the Securities Act, the Company issued and sold 91,000 shares of Preferred Stock to an accredited investor for an aggregate purchase price of $910,000. II-3 On April 8, 1998, pursuant to Section 4(2) of the Securities Act, the Company issued 30,000 shares of Common Stock to an accredited investor in satisfaction of the terms of his consulting agreement with the Company. In May 1998, pursuant to Section 4(2) of the Securities Act, the Company issued and sold 77,400 shares of Preferred Stock to an accredited investor for an aggregate purchase price of $774,000. In June 1998, pursuant to Section 4(2) of the Securities Act, the Company issued and sold 80,800 shares of Preferred Stock to an accredited investor for an aggregate purchase price of $808,000. Item 16. Financial Statements and Exhibits. (a) Financial Statements: (b) Exhibits: * 3.1 Amended and Restated Certificate of Incorporation * 3.2 Bylaws of the Company as amended to date * 4.1 Certificate of Designation of Series A Convertible Preferred Stock * 10.1 Registrant's Amended and Restated 1996 Non-Qualified Stock Option Plan * 10.2 Agreement and Plan of Merger and Reorganization between the Registrant and Coupons Online, L.L.C. dated as of September 12, 1996 * 10.3 Amended and Restated Employment Agreement between Michael A. Clark and the Registrant dated December 19, 1997 * 10.4 Amended Employment Agreement between Richard F. Davey and the Registrant dated December 19, 1997 * 10.5 Employment Agreement between Craig W. Barnett and the Registrant dated December 19, 1997 * 10.6 Employment Agreement between Mark D. Braunstein and the Registrant dated December 19, 1997 * 10.7 Conversion Agreement, dated as of November 14, 1997 between the Registrant and VDC Corporation Ltd. * 10.8 Letter Agreement, dated December 1, 1997, between the Registrant and American Maple Leaf Financial Corporation * 10.9 Letter Agreement dated December 1, 1997 between the Registrant and Golden Eagle Partners * 10.10 Letter Agreement between the Registrant, Mark D. Braunstein and Craig W. Barnett dated February 10, 1998 * 10.11 Systems Integration and Development Master Services Agreement, dated as of November 11, 1996, between the Registrant and DMR Trecom, Inc. (currently d/b/a DMR Consulting Group, Inc.) * 10.12 Letter Agreement dated June 19, 1997 between the Registrant and DMR Trecom (currently d/b/a DMR Consulting Group, Inc.) II-4 * 10.13 Letter Agreement dated March 9, 1998 between the Registrant and DMR Consulting Group, Inc. * 16 Letter from Ernst & Young, LLP dated April 2, 1998 - ------------------------------------ * Incorporated by reference to the Company's registration statement filed on Form S-1. Item 17. Undertakings. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To provide to the underwriter at the closing specified in the underwriting agreements certificates in such designations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Fairfield, Connecticut, on August 12, 1998. NETVALUE, INC. By: /s/ R. Scott Wills ---------------------- R. Scott Wills, President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Scott Wills his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on August 12, 1998. Signature Title - --------- ----- /s/ R. Scott Wills President, Chief Executive Officer, - ----------------------------------- Assistant Secretary and R. Scott Wills Director (Principal Executive, Financial and Accounting Officer) /s/ Andrew P. Panzo Director, Secretary - ----------------------------------- Andrew P. Panzo Director - ----------------------------------- Gary R. Blau /s/ Michael Cirillo Director - ----------------------------------- Michael Cirillo /s/ Steven B. Rosner Director - ----------------------------------- Steven B. Rosner II-6