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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-25831
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NetWolves Corporation
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(Exact name of registrant as specified in its charter)
New York 11-2208052
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(State or other jurisdiction of (I.R.S. Employer Identification No.
incorporation or organization
200 Broadhollow Road, Melville, New York 11747
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (631) 393-5016
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0033 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
29, 2000 as reported on the Nasdaq, was approximately $49,076,000. Shares of
Common Stock held by each executive officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliates status
is not necessarily a conclusive determination for other purposes.
As of September 29, 2000, the Registrant had outstanding 8,742,613 shares of
Common Stock.
Documents incorporated by reference: None
NETWOLVES CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999 AND FOR THE PERIOD
FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
PART I
ITEM 1 Business ...................................................... 1
ITEM 2 Properties .................................................... 10
ITEM 3 Legal Proceedings ............................................. 11
ITEM 4 Submission of Matters to a Vote of Security Holders ........... 11
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters ...................................................... 12
ITEM 6 Selected Consolidated Financial Data .......................... 13
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 14
ITEM 7a Quantitative and Qualitative Disclosure About Market Risk ..... 18
ITEM 8 Financial Statements and Supplementary Data ................... 18
ITEM 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure ......................................... 18
PART III
ITEM 10 Directors and Executive Officers of the Registrant ............ 19
ITEM 11 Executive Compensation ........................................ 20
ITEM 12 Security Ownership of Certain Beneficial Owners and Management. 22
ITEM 13 Certain Relationships and Related Transactions ................ 22
PART IV
ITEM 14 Exhibits, Financial Statements Schedules, and Reports on Form
8-K .......................................................... 23
SIGNATURES .............................................................. 24
ITEM 1. BUSINESS
This Annual Report on Form 10-K, the exhibits hereto and the information
incorporated by reference herein contain "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such forward looking statements involve risks
and uncertainties. When used in this report, the word "expects", "anticipates"
and "estimates" and similar expressions are intended to identify forward looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include those discussed below and those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" or
incorporated by reference herein. NetWolves Corporation undertakes no obligation
to publicly release any revisions to these forward looking statements to reflect
events or circumstances after the date this Report is filed with the Securities
and Exchange Commission or to reflect the occurrence of unanticipated events.
Overview
NetWolves Corporation ("NetWolves" or the "Company") designs, develops,
manufactures and sells Internet infrastructure security products designed to
provide secure, manageable Internet access. The Company was founded to introduce
a new innovative Internet security and access device called the "FoxBox-TM".
NetWolves' state-of-the-art enabling technology for the Internet connects people
and computer networks securely to the Internet. NetWolves designs Internet
solutions that provide the services that companies desire without confusion,
complication, limitation and the exorbitant cost associated with traditional
offerings.
NetWolves' multi-services internet communications gateway products are
designed to meet all business needs packaged together, (e-mail, firewall
security, router, Web hosting, Intranet, FTP, etc.), complete with advanced
integrated hardware and software, a simple to use interface, and room for
expansion. As companies combine data and communications to reduce costs,
NetWolves' value-added expansion technologies such as Virtual Private Networking
("VPN"), a process for encrypting data for secure transmission over public
networks, will provide significant cost-efficient services in an all-in-one,
enterprise-wide gateway solution.
NetWolves differentiates itself from its competitors through its
proprietary patent pending technology which provides a centralized, remote
network monitoring, managing and security software ("Mother"). Mother allows the
secure, remote management and monitoring of multiple all-in-one gateway servers
located worldwide. This monitoring can be performed in real-time, and from one
or numerous central sites. This advanced new technology also allows a network
administrator to create a configuration template with all the configuration
information and changes required for all-in-one units. This template can be
applied to each unit, all via a secure configuration mechanism from the central
monitoring location, without compromising network security. It is this Mother
system which forms the basis of the Company's recent agreement with the General
Electric Company.
NetWolves products are designed for our partners' present and future needs.
The Company's initial target markets are the end users in the small and
mid-sized businesses and large organizations with satellite offices. Larger end
users to whom the product is intended to be marketed are companies with
multi-state locations, government agencies and educational markets. NetWolves
products are designed to service numerous markets, including the financial,
medical, legal, travel, hospitality, entertainment, hotel and auto and petroleum
industries.
The Company's strategy is to establish the FoxBox as the standard for
enterprise-wide network connectivity worldwide. To achieve its objectives
worldwide, NetWolves seeks to form relationships with leading companies in their
respective areas to deliver application-specific Internet solutions to
organizations worldwide.
1
In January 1999, the Company entered into an agreement with Sales &
Management Consulting, Inc. (d/b/a The Sullivan Group), a leading consulting
organization serving the needs of the automobile aftermarket, convenience stores
and oil industry. It maintains an extensive library of training modules
available to its client base of Amoco Oil, British Petroleum, ExxonMobil, Tosco
and Unocal. Pursuant to its agreement, The Sullivan Group appointed NetWolves as
its exclusive provider in the United States of a delivery system whereby The
Sullivan Group intends to sell its proprietary training programs that enhance
profitability to retail locations throughout the United States. NetWolves is
customizing an Internet solution specifically to deliver distance learning to
these locations utilizing its FoxBox technology. In July 1999, the Company
acquired The Sullivan Group and the five principal officers and employees of The
Sullivan Group were retained under long-term employment contracts.
In February 2000, and in exchange for 1,775,000 restricted shares of the
Company's common stock, NetWolves acquired ComputerCOP Corp., whose assets
included ComputerCOP technology, inventory and $20.5 million in cash intended to
fund future growth. The shares issued by the Company in connection acquisition
are subject to a Voting Trust Agreement, wherein the Company's chief executive
officer has been granted the right to vote all Trust Shares for two years,
subject to earlier termination on the sale of the shares based on certain
parameters.
Agreement with General Electric
On June 29, 2000, NetWolves and General Electric Company ("GE") entered
into a six year agreement for the master purchase, license and support services
of NetWolves' security, remote monitoring and configuration management system.
GE, after extensive due diligence in looking for the all-in-one small office
solution for network management, interconnectivity and security management,
chose the FoxBox for deployment throughout their enterprise. In addition to
agreeing to sell the FoxBox to GE, NetWolves will receive (a) a one-time
installation fee for each FoxBox unit installed and (b) a monthly service and
maintenance fee for which GE pays NetWolves upon installation for the first
twelve months. GE will be using the FoxBox for interconnectivity of worldwide
offices. The FoxBox will enable GE's offices to interact with each other,
utilizing NetWolves advanced firewall security. NetWolves believes that this
agreement further validates the Company's technology and innovations within the
firewall and network security markets. Network security is one of the most
formidable challenges facing Fortune 500 companies, and with its new "Mother
System," NetWolves can offer the appropriate solutions.
In connection with the Company entering into the agreement, the Company
issued GE a warrant to purchase 500,000 shares of common stock that may be
exercised ratably upon the Company receiving orders (as defined in the
agreement) of an amount equal to or in excess of, in the aggregate, $2,000,000,
$3,000,000, $4,000,000 and $5,000,000.
The Company issued 200,000 shares of common stock to GE in June 2000.
Industry background
Small to medium sized enterprises, branch offices of large corporations,
government offices, telecommuters, education market businesses and consumers are
increasingly accessing the Internet for a wide variety of uses. These include
data, video and voice communications, information gathering and commerce.
Because it is an affordable means of achieving global reach and brand awareness,
the Internet is a particularly attractive vehicle for small and medium size
businesses as they endeavor to access and share information with a large number
of geographically dispersed customers, employees and business partners.
According to International Data Corporation's ("IDC") 1999 U.S. Small Business
Survey, of the 87.4 million devices estimated by IDC to have Internet access in
1998, approximately 60% were used by small businesses and home offices. IDC
estimates that the proportion of small businesses, those with less than 100
people, accessing the Internet in the United States will increase from
approximately 50% in 1998 to approximately 65% by 2001, to a total of 4.7
million businesses.
Many branch offices, mobile workers, and telecommuters, all of whom connect
electronically to the corporation and each other, characterize today's large
business enterprise. Because of the confidential nature of business
communications and data, these connections must be secure. Virtual private
networks provide secure Internet connections between the business enterprise and
employees and their business partners. Communicating using the Internet and
virtual private networks offer significant cost savings over alternative
solutions such as private leased lines or frame relay networks. TeleChoice Inc.,
an independent market researcher, estimates that virtual private networks can
cut telecommunication costs by as much as 90% over private leased line networks,
and, for this reason, their use is expected to grow rapidly.
2
The market for Internet security products includes a variety of
applications to address these issues, such as firewall, web site access
filtering and Internet Protocol, including proxy servers, intrusion detection,
virus detection, address management and VPN. According to IDC, the market for
Internet security products increased over 45% in 1998 to $3.2 billion and is
expected to grow at a compounded annual growth rate of 21% to $8.3 billion by
2003.
NetWolves' FoxBox product line provides significant additional
functionality over existing server applications, including VPN and web site
access filtering for content. The product offers full functionality that is
administered through a simple, web-based interface. The FoxBox provides
integrated Internet applications with scalability and flexibility that overcomes
concerns about costly product upgrades and replacement as the Internet changes.
Historically, to create an Internet presence, an organization needed access
to complex network technologies and one or more costly general-purpose servers,
which often require a technically skilled staff to maintain. The expense and
technical complexity of these network technologies and general purpose servers
often discourage their adoption by small- to medium-sized organizations, due to
their limited budgets and technology skills. NetWolves' FoxBox "server
appliance" is a new category of low-cost servers that work with other network
devices to provide services to network users. Server appliances are a type of
network infrastructure device that is designed to facilitate the exchange of
information over a computing network. Server appliances differ from
general-purpose servers because they are specifically designed and tailored to
deliver one or more network-based applications, as opposed to general-purpose
servers. Dataquest Incorporated, an independent research firm, expects the
server appliance market to grow from $2.2 billion in 1999 to approximately $15.8
billion in 2003, representing a 64% compound annual growth rate.
Participation in the emerging global Internet-based economy and realization
of the benefits and efficiencies facilitated by new Internet-enabled business
applications are becoming increasingly important for the small office market.
The small office market includes small businesses, remote and branch offices of
large corporations, and home offices.
The FoxBox server appliances and FoxOS software product line enable small
office business organizations to establish a presence on the Internet, and do so
in an easy, cost-effective manner. As the number of Internet users and
businesses increases, the Company believes the demand for server appliances will
continue to grow.
Products and Services
The FoxBox offers a combined Internet access and firewall security solution
for small to medium sized businesses. The FoxBox costs substantially less than
purchasing its functionality in separate products. In addition, the FoxBox's
"all-in-one" solution significantly reduces costly network administration
overhead, since there are less divergent components to administer in the FoxBox.
Each of the features in the FoxBox is designed to work together using integrated
hardware and software with a common interface. This facilitates expansion and
support of the converging voice and data industries.
The FoxBox is configured using its web-based graphical user interface
("GUI"). The FoxBox is designed for basic network connectivity, although it is
often customized to handle large-scale applications for vertical market
solutions. NetWolves develops custom software applications that are fully
integrated with commodity off-the-shelf hardware components ("COTS") in the
FoxBox products. NetWolves outsources the manufacturing function that enables
NetWolves to maximize its research and development efforts.
3
Standard FoxBox Features
The FoxBox offers the following features:
-- It can securely connect any number of users in a small geographic area
(LAN) simultaneous to the Internet through a single dial-up or
dedicated connection.
-- Up to eight users at one time can connect to the Web/Internet on
non-dedicated connections.
-- Hierarchical caching, which are rules that tell a computer to look for
the data stored on a series of a computer before accessing the
internet for data, gives the FoxBox more efficient web viewing and
greater ability to transfer data from one file to another.
-- Any number of users can send and receive e-mail individually, while
sharing one internet service provider account.
-- A firewall protects the LAN from Internet-borne attacks.
-- An advanced network address translation module allows the creation of
powerful address translation rules for greater firewall flexibility.
-- Files that store events for review at a later date ensure appropriate
use of internet resources.
-- Scalability allows internet usage to grow as a company expands.
-- A network file server centrally stores programs and data for
accessability to multiple users simultaneously and share data and
programs from a central location.
-- It can be used as a stand-alone firewall to protect the resources of a
private network from users outside on a public network.
-- It allows a company to publish and host a web site.
Optional FoxBox Features
The FoxBox also offers the following optional features:
-- High speed tape backup/restore module (SCSI) allows all stored data on
the FoxBox to be backed up onto a DAT tape, which is a standardized
tape for file back up.
-- Fast SCSI hard drive provides extra storage for shared files and Web
data at faster access speeds.
-- Extra 10.2 GB EIDE hard drive provides extra storage for shared files
and Web data.
-- E-Mail Archive module allows all inbound and outbound e-mail to be
saved for archival/compliance purposes.
-- Advanced access control module allows control over who can access the
web and the sites to which they have access.
-- Virtual Private Networking (VPN) module provides a process for
encrypting data for secure transmission over public networks.
Firewall and Security Functions
NetWolves believes that security is an essential element of any Internet
connectivity solution. For this reason, the FoxBox includes high-end firewall
security protection, without requiring the purchase of additional components.
4
The FoxBox is designed to protect a company's private data and systems from
outside intruders with its firewall security system, incorporating three
separate firewall technologies:
-- Stateful packet filters verify that all incoming data packets coming
from the Internet have been requested by an authorized user on the
LAN.
-- Proxy applications prevent unauthorized Internet applications from
accessing the LAN.
-- Network Address Translation ("NAT"), which are conversions of public
addresses to and from private addresses, makes the network invisible
to outside Internet users by hiding the internal network's addresses
of each sender or reveiver of information.
All packets of data entering the FoxBox from the Internet are first checked
for validity against a series of stateful packet filters. Data is then forwarded
to proxy applications that further inspect the contents of the packets for
potential security violations. If the data is determined to be valid by both the
stateful packet filters and proxy applications, it is allowed to enter the
secure LAN.
The FoxBox DDR and FoxBox Pro I dial-on-demand units come with a
preconfigured firewall and network address translation rules that allow these
products to securely connect the LAN to the Internet. The FoxBox 56K, FoxBox T1
and FoxBox Pro Plus are designed with fully configurable firewalls and network
address translation rules that give the network administrator greater
flexibility in allowing or denying incoming and outgoing data.
E-Mail Services
A key feature of the FoxBox is its advanced and powerful management of
electronic mail. With only one Internet account, an unlimited number of users
can send and receive e-mail. In addition, the FoxBox supports Internet e-mail
standards. For e-mail between a FoxBox and the Internet, NetWolves uses the
standard simple mail transfer protocol (SMTP) protocol, which is the standard
for e-mail transmission on the Internet. For LAN users, the FoxBox supports a
number of different protocols. If the FoxBox is used as the LAN's e-mail server,
two common client-server e-mail protocol standards are supported:
-- POP-3 - a process for retrieving e-mail from its stored location to
the viewer.
-- IMAP - a method of viewing electronic mail at its stored location.
The FoxBox supports several e-mail clients, including:
-- Microsoft Exchange-TM
-- Microsoft Internet Mail-TM
-- Netscape Navigator Mail-TM
-- Eudora-TM
-- Pegasus-TM
The FoxBox supports several e-mail gateways, including:
-- Microsoft Exchange Server-TM
-- Lotus cc:Mail-TM
-- GroupWise Mail-TM
-- Others with SMTP gateways
5
Web Based Administrative Interface ("AI")
A Web-based Administrative Interface allows the network administrator to
configure the various subsystems of the FoxBox. The FoxBox is completely
transparent to the Internet user. Likewise, because the FoxBox is easy to setup,
it will feel transparent to the administrator. This is especially true should
changes be required following initial installation. Since all administration of
the FoxBox is performed through a Web browser, the administrator can be on any
workstation on the LAN.
NetWolves' Distance Learning Solution
NetWolves is committed to the evolution of our core product, the FoxBox, as
well as new solutions for emerging markets in the new millennium. NetWolves'
distance learning solution, which delivers cost-effective, interactive training
programs through the FoxBox Intranet delivery system, is part of the evolution.
This system sets the standard for delivery of training and education in many
vertical market industries such as oil and petroleum, health care, retail, and
auto dealerships.
NetWolves Web Site Monitoring Software: ComputerCop Software
A national study commissioned by Congress that details the online
victimization of America's children has shown that 1 in 5 children online have
been invited to engage in cybersex, and 1 in 4 have been exposed to pornography.
Despite parental concerns, only one third of families were using filtering,
monitoring and blocking software, including technology offered by Internet
service providers. This statistic is understandable, since most blocking,
monitoring and filtering software is laborious to install, and some parents are
not aware that it is available.
The result is a CD that a parent can just put in the computer without any
installation or detection. Within a matter of minutes ComputerCOP scans the hard
drive for offensive images and inappropriate words to show parents what their
children have been exposed to online. This software has been approved by the
NCMEC, Pedowatch.org and has been featured on the television show, America's
Most Wanted.
Remote Monitoring and Configuration Management Product - "Mother"
The "Mother System" technology offers many innovations. First, it allows
the secure, remote management and monitoring of multiple all-in-one gateway
servers that may be located worldwide. This monitoring can be done in real-time
and from one or numerous central sites. Additionally, this new technology allows
a network administrator to create a configuration template with all the
configuration information and changes required for all- in-one units. This
template can be applied to each unit, all via a secure configuration mechanism
from the central monitoring location, without compromising network security.
The "Mother System" technology combined with the Company's core product,
the FoxBox, and a centralized monitoring office makes available to network
administrators and organizations what the Company believes to be the complete
solution to managing, monitoring and securing their networks.
6
Engineering and Development
The Internet and the computer hardware and software industry are
characterized by rapid technological change, which requires ongoing development
and maintenance of products. It is customary for modifications to be made to
products as experience with its use grows or changes in manufacturer's hardware
and software so require.
NetWolves' engineering and development group is comprised of a core team of
engineers who specialize in different areas of product development. NetWolves
engineering team has experience in a variety of industries, including
information security, designing networking protocols, building interfaces,
designing databases, and computer telephony. Their expertise is used in the
design of the FoxBox and seeking improved methods for the FoxBox to meet
customer needs. We have engineering staff in two sites. Our main development
activities are based in Tampa, Florida, and are responsible for hardware design
and development, key architecture and software development, documentation and
quality assurance. We have an additional engineering and development facility in
Melville, New York, with responsibilities encompassing software research and
development as well as a new product development. As of September 30, 2000, the
Company's engineering and development group consists of 30 employees. The
Company seeks to recruit highly qualified employees and its ability to attract
and retain such employees will be a principal factor in its success in achieving
and maintaining a leading technological position.
Engineering and development expenses were approximately $1,334,000,
exclusive of capitalized software development costs of approximately $170,000,
for the year ended June 30, 2000. The Company intends to increase its investment
in product development and believes that its future product offerings will
depend, in part, on its ability to develop, manufacture and market new products
and enhancements to existing products on a cost-effective and timely basis.
Manufacturing and Testing
The manufacturer currently used by the Company in the production of
FoxBoxes is Haller Industries, Inc. ("Haller"), a hardware assembly and
engineering firm located in Tampa, Florida. In July of 2000, Netwolves
negotiated the foundations for the development of a strategic alliance with
Haller. The formation of this alliance is based primarily on Haller providing
quality products and services to Netwolves based on a predetermined production
schedule providing rapid response to special modifications of our core product
as required by our customers and the normal evolutionary software enhancements
created by Netwolves.
While the Company has no long-term agreement with Haller, it believes that
alternative manufacturers are available in the event the Company seeks to change
or expand upon manufacturers of its products.
Production Process
The process used to produce NetWolves products begins with hardware
configuration, installing the appropriate version of FoxBox software,
configuring client-specific software components, followed by a 24-hour "burn-in"
process. Raw/prefabricated materials, components, and subassemblies required for
production include mother boards, CPU's, cases, Ethernet cards, network
communication cards, hard drives, memory, CPU fans and power supplies. The
Company believes that these materials are available from several companies and
that alternative sources of supply are currently available.
Testing
A majority of testing is performed as part of the manufacturing process. In
addition, NetWolves performs quality testing via the Internet on a periodic
basis to verify that the assembled products meet all production quality
criteria. Also, randomly chosen FoxBox units are shipped from the production
assembly facility back to NetWolves for additional testing.
7
In addition to testing the product on a regular basis, NetWolves researches
the status of existing components used in the FoxBox to determine if they are
being phased out or prices have changed. If it concludes that a certain
component must be substituted, trial testing is performed on a new component to
determine if it meets product component criteria. If it meets this criterion,
which includes cost effectiveness, longer life expectancy and product
efficiency, a plan to develop and use the component is implemented.
Customer Service and Technical Support
The Company maintains an experienced staff of customer service personnel to
provide technical support to its customers. Each member of the customer service
staff is certified through an ongoing in-house training and testing program to
provide support for each individual product. The Company's customer service
staff provides product support via telephone and e-mail 24 hours per day, seven
days per week. The Company generally provides software and documentation
updates, including maintenance releases, operating system upgrades and major
functional upgrades, as part of its customer support services.
Sales and Marketing
The Company's marketing and sales strategy plan is for it to enter into
multi-national reseller agreements with value added resellers (ISP's, CLEC's,
ILEC's, systems integrators, interconnects) of internet access devices,
including: firewalls, caching servers, hosting servers, email servers, web
access filtering systems, and file servers with the intent of capturing end user
sales of its FoxBox security and internet access functionality systems. The
Company has also embarked on direct end user sales efforts to the Fortune 1000
and has placed 15 sales representatives and two regional sales managers in major
market areas across the United States while currently negotiating international
distribution with a number of Western European and Latin American companies. The
Company is also seeking to enter into agreements and partnerships with providers
of services, and software and hardware products in a variety of markets that
enhance the functionality of its core FoxBox product line. These markets include
education, financial, medical, legal, travel, hospitality, petroleum and the
auto industries. The Company intends to recruit sales representatives and sales
engineering consultants in two regional areas, Eastern and Western United
States, managed by regional managers in Atlanta and Denver. Regional managers
have recently been put in place and fifteen (15) sales representatives have been
recruited in the Atlanta, Chicago, Los Angeles, New York, San Antonio, Tampa,
and Washington D. C. areas. Sales engineers are being recruited with two
currently in place at this time. They will perform important functions including
systems analysis and customizing solutions for various end user and value added
reseller prospects.
The Company has implemented marketing initiatives to support the sales,
technical support, and distribution of its products and services, and to
communicate and promote corporate initiatives and direction. The Company's sales
and marketing management employees are responsible for collateral development,
lead generation, customer and technical support, systems analysis, and market
awareness of the Company and its products. Marketing programs include public
relations, seminars, industry conferences and trade shows, coop advertising,
telemarketing and direct mail. The Company's marketing employees also contribute
to both the product development direction and strategic planning processes by
providing product/market research and conducting surveys and focus groups.
Licensing and Intellectual Property
The Company considers certain features of its products, including its
methodology and technology to be proprietary. The Company relies on a
combination of trade secret, copyright and trademark laws, contractual
provisions and certain technology and security measures to protect its
proprietary intellectual property. We generally enter into confidentiality
agreements with our employees, consultants, business partners and major
customers. NetWolves owns numerous copyrighted works of authorship in computer
programs, including but not limited to portions of the FoxOS (operating system),
ESCN (distance learning), products related to FoxOS and ESCN, and various
proprietary enhancements to publicly available open source system software; as
well as traditional media, including, but not limited to, marketing materials,
8
documentation and white papers. Applications for registration of those
copyrights have been filed with respect to some of these works, and further
applications are expected to be filed in the near future.
On June 21, 2000, the Company filed a patent application with the U.S.
Patent and Trademark Office for technology that provides secure, centralized
remote management and monitoring of networks using the Internet. This "Mother
System" has enabled the Company to expand application of its FoxBox to Fortune
500 organizations with multiple worldwide locations such as General Electric.
Notwithstanding the efforts the Company takes to protect its proprietary
rights, existing trade secret, copyright, and trademark laws afford only limited
protection. Despite our efforts to protect our proprietary rights and other
intellectual property, unauthorized parties may attempt to copy aspects of our
products, obtain and use information that we regard as proprietary or
misappropriate our copyrights, trademarks, trade dress and similar proprietary
rights. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate. In addition,
our competitors might independently develop similar technology or duplicate our
products or circumvent any patents or our other intellectual property rights.
The Company does not intend to sell or transfer title of its products to
its clients, though this structure may change as the Company expands its
operations. The Company intends to license products pursuant to licensing and
maintenance agreements for which extended payment terms may be offered. In the
case of extended payment term agreements, the customer is contractually bound to
equal monthly fixed payments. In the case of extended payment term agreements,
maintenance may be bundled for the length of the payment term. Thereafter, in
both instances, the customer may purchase maintenance annually.
Competition
Current and potential competitors in our markets include, but are not
limited to, the following, all of whom sell world-wide or have a presence in
most of the major markets for such products: security appliance suppliers such
as Cobalt Networks, Inc. (to be acquired by Sun Microsystems, Inc.), Watchguard
Technologies, Inc., SonicWALL, Inc., enterprise firewall software vendors such
as Check Point Software and Axent Technologies; network equipment manufacturers
such as Cisco Systems, Lucent Technologies, Nortel Networks, 3COM and Nokia;
computer or network component manufacturers such as Intel Corporation; operating
system software vendors such as Microsoft Corporation, Novell, Inc. and Sun
Microsystems, Inc. The Company expects competition to intensify as more
companies enter the market and compete for market share. In addition, companies
currently in the server market may continue to change product offerings in order
to capture further market share. Many of these companies have substantially
greater financial and marketing resources, research and development staffs,
manufacturing and distribution facilities. There can be no assurance that the
Company's current and potential competitors will not develop products that may
or may not be perceived to be more effective or responsive to technological
change than that of the Company, or that current or future products will not be
rendered obsolete by such developments. Furthermore, increased competition could
result in price reductions, reduced margins or loss of market share, any of
which could have a material adverse effect on the Company's business operating
results and financial condition.
The Company believes that an important competitive factor in its market is
the cost effective integration of many services in a single unit. In this
regard, the Company believes that it compares favorably to its competitors in
the markets it serves in price and overall cost of ownership including
administrative and maintenance costs. However, equally important are other
factors, including but not limited to, product quality and scope of performance,
product reliability, availability, upgradability, and technical service and
support. The Company's ability to compete will depend upon, among other factors,
its ability to anticipate industry trends, invest in product research and
development, and effectively manage the introduction of new or upgraded products
into targeted markets.
9
Employees
As of September 30, 2000, the Company employed approximately 100 full-time
employees (12 of which are covered by employment agreements). Approximately 30
of these employees are involved in research and development, 39 in sales and
marketing, and 31 in finance and general administration. In addition, the
Company has retained independent contractors on a consulting basis who support
engineering and marketing functions. To date, the Company believes it has been
successful in attracting and retaining skilled and motivated individuals.
Competition for qualified management and technical employees is intense in the
computer industry. The Company's success will depend in large part upon its
continued ability to attract and retain qualified employees. The Company has
never experienced a work stoppage and its employees are not covered by a
collective bargaining agreement. The Company believes that it has good relations
with its employees.
ITEM 2. PROPERTIES
The Company currently maintains leased facilities in the locations listed
below.
CURRENT
ANNUAL
SQUARE TERM OF LEASE
FUNCTION LOCATION FEET LEASE COSTS
- -------- -------- ------ ------- -------
NetWolves 200 Broadhollow Road 600 11/30/00 $ 18,000
Corporation - Melville, NY 11747
Corporate
Headquarters
NetWolves 2502 Rocky Point Drive 6,341 06/30/02 $ 163,000
Technologies Tampa, FL 33607
Corporation
Corporate
Headquarters
NetWolves 6011 Benjamin Road 4,062 08/31/01 $ 18,000
Technologies Tampa, FL 33634
Corporation
Research Facility
ComputerCOP Corp. One Corporate Drive 4,318 06/30/05 $ 90,000
Corporate Bohemia, NY 11716
Headquarters
TSG Global 320 Soundview Road 1,800 12/31/04 $ 79,000
Education Web, Inc. Guilford, CT 06437
Corporate
Headquarters
In September 2000, the Company entered into a five year lease agreement in
Tampa, Florida covering approximately 20,000 sq. ft. of space at approximately
$390,000 annually to which it intends to relocate its corporate headquarters and
research and development facilities in Tampa in or about November 2000. The
Company believes that combining its Tampa operations into one facility will
increase efficiency of operations. The Company intends to sublease its other
facilities in Tampa, Florida.
10
The Company believes that its present facilities and its new facility in
Tampa are adequate to meet its current business requirements and that suitable
facilities for expansion will be available, if necessary, to accommodate further
physical expansion of corporate operations and for additional sales and support
offices.
ITEM 3. LEGAL PROCEEDINGS
On April 19, 2000, an action was commenced against the Company in the U.S.
District Court for the Northern District of Illinois by Anicom, Inc. The action
is based upon NetWolves' alleged failure to deliver approximately 74,842 shares
of its common stock to Anicom, Inc. ("Anicom"), upon exercise by Anicom of the
Company's warrants. The action seeks specific performance as well as any damages
that may result from a diminution in value of NetWolves common stock. Anicom has
moved for summary judgment in this action which has been opposed by the Company.
The parties are awaiting judicial decision. The Company intends to vigorously
defend itself against this action and believes it will be meritorous.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) On April 20, 2000, NetWolves' common stock commenced trading on the
NASDAQ SmalllCap market under the trading symbol "WOLV". From December 1998 to
April 20, 2000, NetWolves' common stock was traded on the OTC Bulletin Board
under the same symbol. Prior to the December 1998 name and symbol change, the
Company's stock traded under the symbol "WDGT", Watchdog Patrols, Inc. The
following table sets forth the high and low closing prices for the common stock
for the calendar quarters indicated:
High Low
---- ---
2000
Third Quarter (through September 29) $ 11.00 $ 4.625
Second Quarter (April 20 through June 30) 15.875 7.50
Second Quarter (April 3 through April 19) 16.75 10.00
First Quarter 23.125 17.00
1999
Fourth Quarter $ 25.25 $ 18.50
Third Quarter 31.50 16.50
Second Quarter 22.75 9.75
First Quarter 17.00 5.00
1998
Fourth Quarter $ 5.125 $ 3.00
Third Quarter 8.00 4.50
As of September 29, 2000, there were approximately 206 holders of record of
the common stock. On September 29, 2000, the closing sales price of NetWolves
common stock was $8.00 per share.
NetWolves has not paid any cash dividends on its Common Stock and does not
presently intend to do so. Future dividend policy will be determined by its
Board of Directors on the basis of NetWolves' earnings, capital requirements,
financial condition and other factors deemed relevant.
The transfer agent and registrar of NetWolves' Common Stock is American
Stock Transfer and Trust Co., 40 Wall Street, New York, New York 10005.
12
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
thereto. The selected consolidated statement of operations data for the years
ended June 30, 2000 and 1999 and for the period from February 13, 1998
(inception) to June 30, 1998 and the selected consolidated balance sheet data as
of June 30, 2000 and 1999 are derived from, and are qualified by reference to,
the audited consolidated financial statements included elsewhere in this annual
report on Form 10-K. The selected consolidated balance sheet data as of June 30,
1998 is derived from our audited consolidated financial statements that are not
included in this annual report on Form 10-K. The historical results presented
below are not necessarily indicative of future results.
Period from
February 13, 1998
Year ended June 30, (inception) to
2000 1999 June 30, 1998
---- ---- ------------------
Consolidated Statements of Operations Data:
Net sales $ 1,423,690 $ 1,789,144 $ 29,621
Cost of sales 959,039 582,724 5,681
------------ ----------- ----------
Gross profit 464,651 1,206,420 23,940
Operating expenses 25,446,357 8,666,381 149,510
------------ ----------- ----------
Loss before other income (expense) and
benefit from income taxes (24,981,706) (7,459,961) (125,570)
Investment income (expense), net 611,746 58,884 6,501
Other income (expense) 68,012 478,063 (345)
------------ ----------- ----------
Loss before income taxes (24,301,948) (6,923,014) (119,414)
(Provision for) benefit from income taxes (25,000) - 20,000
------------ ----------- ----------
Net loss $(24,326,948) $(6,923,014) $ (99,414)
============ =========== ==========
Basic and diluted net loss per share $ (3.46) $ (1.48) $ (0.04)
============ =========== ==========
Weighted average common shares
outstanding 7,034,994 4,691,651 2,810,102
============ =========== ==========
June 30,
------------------------------------
2000 1999 1998
---- ---- ----
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 20,204,309 $ 5,585,981 $1,118,416
Marketable securities, available for sale 99,500 606,000 1,063,828
Working capital 19,459,099 5,799,246 2,918,327
Total assets 25,543,130 12,811,934 2,959,451
Long-term debt, net of current maturities 418,102 266,537 -
Minority interest 305,761 704,500 -
Total shareholders' equity 22,807,629 11,099,802 2,928,003
13
Fourth Quarter Adjustment/Correction
The Company had estimated without independent appraisal a total purchase
price excluding cash payments of approximately $32,690,000 on the acquisition of
ComputerCOP Corporation in its filing of Form 10-Q for the period ended March
31, 2000. Based on a recent appraisal, the total consideration paid for such
acquisition has been determined to be $26,776,460. The effects of this change
include a reduction in stockholders equity of approximately $5,910,000
corresponding reduction in the value of the software and inventory acquired in
the same amount. Further, the amortization of the software acquired for the year
ended June 30, 2000, reflects the basis using the appraised value.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
These statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the
forward-looking statements. These risks and other factors include those listed
under "Risk Factors That May Affect Future Operating Results" and elsewhere in
this annual report on Form 10-K. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined under "Risk Factors That May Affect Future
Operating Results". These factors may cause our actual results to differ
materially from any forward-looking statement.
Overview
The Company is a corporation with a limited operating history, formed in
February 1998, when it commenced field trial and limited sales of its primary
product, "The FoxBox". Additionally, efforts were made to obtain operating
capital and convert the Company to a public entity. This was successfully
accomplished through a reverse merger with Watchdog Patrols, Inc., a publicly
traded (OTCBB), non-reporting corporation. Operating expenses have increased
significantly since the Company's inception. This reflects the cost associated
with the formation of the Company as well as increased efforts to promote market
awareness for the FoxBox (Multi-services Internet communications gateway),
solicit new customers, recruit personnel, build operating infrastructure and
continued product development. The FoxBox is a multi-functional product that
connects business networks [Local Area Networks (LANs) and Wide Area Networks
(WANs)] to the Internet. It supports secure access to the Internet for users
through a single connection, provides advanced electronic mail functions for
unlimited users and delivers firewall security. The Company's initial target
markets are the end users in small and mid-size businesses and large
organizations with satellite offices. Since inception the Company has entered
into certain significant agreements/acquisitions as detailed below.
In January 1999, the Company entered into an agreement with Sales &
Management Consulting, Inc. (d/b/a The Sullivan Group), a leading consulting
organization serving the needs of the automobile aftermarket, convenience stores
and oil industry. It maintains an extensive library of training modules
available to its client base of Amoco Oil, British Petroleum, ExxonMobil, Tosco
and Unocal. Pursuant to its agreement, The Sullivan Group appointed NetWolves as
its exclusive provider in the United States of a delivery system whereby The
Sullivan Group intends to sell its proprietary training programs to retail
locations throughout the United States. NetWolves is customizing an Internet
solution specifically to deliver distance learning to these locations utilizing
its FoxBox technology. In July 1999, the Company acquired The Sullivan Group and
the five principal officers and employees of The Sullivan Group were retained
under long-term employment contracts.
14
In February 2000, and in exchange for 1,775,000 restricted shares of the
Company's common stock, NetWolves acquired ComputerCOP Corp., whose assets
included ComputerCOP technology, inventory and $20.5 million in cash intended to
fund future growth. The shares issued by the Company in connection acquisition
are subject to a Voting Trust Agreement, wherein the Company's chief executive
officer has been granted the right to vote all Trust Shares for two years,
subject to earlier termination on the sale of the shares based on certain
parameters.
On June 29, 2000, NetWolves and General Electric Company ("GE") entered
into a six year agreement for the master purchase, license and support services
of NetWolves' security, remote monitoring and configuration management system.
GE, after extensive due diligence in looking for the all-in-one small office
solution for network management, interconnectivity and security management,
chose the FoxBox for deployment throughout their enterprise. In addition to
selling the FoxBox to GE, NetWolves will receive (a) a one-time installation fee
for each FoxBox unit installed and (b) a monthly service and maintenance fee for
which GE pays NetWolves upon installation for the first twelve months. GE will
be using the FoxBox for interconnectivity of worldwide offices. The FoxBox will
enable GE's offices to interact with each other, utilizing NetWolves advanced
firewall security. NetWolves believes that this agreement further validates the
Company's technology and innovations within the firewall and network security
markets. Network security is one of the most formidable challenges facing
Fortune 500 companies, and with its new "Mother System," NetWolves can offer the
appropriate solutions.
In connection with the Company entering into the agreement, the Company
issued GE a warrant to purchase 500,000 shares of common stock that may be
exercised ratably upon the Company receiving orders (as defined in the
agreement) of an amount equal to or in excess of, in the aggregate, $2,000,000,
$3,000,000, $4,000,000 and $5,000,000.
The Company issued 200,000 shares of common stock to GE in June 2000.
Results of Operations
Years ended June 30, 2000 ("Fiscal 2000") and 1999 ("Fiscal 1999")
Revenue
Revenue decreased to $1,423,690 in Fiscal 2000 from $1,789,144 in Fiscal 1999.
The 20% decrease in revenue was primarily the result of a decrease in sales of
the Company's FoxBox product partially offset by an increase in management and
consulting revenue. The decrease in sales of the Company's FoxBox product is
primarily the result of a one-time stocking order for 500 FoxBox units sold to
Anicom, Inc. in March/April 1999. While the Company did sell units to various
customers during Fiscal 2000, the levels of such sales were significantly below
the 500 units sold to Anicom, Inc. in the previous period. The Company's selling
efforts during the period were primarily designed to enhance future growth. The
increase in consulting revenue is primarily attributable to the Company entering
into an agreement to provide management and consulting services to certain
franchisees of BP Amoco commencing in December 1999. While the Company expects
to generate revenue from its management and consulting services in the future,
it expects to significantly increase its revenue derived from the sale of its
core product, the FoxBox. Through June 30, 2000 the Company has not generated
any revenue from the its ComputerCOP technology and any future revenue will be
dependent upon the signing of agreements similar to the Gateway agreement.
Cost of revenue and gross profit
Cost of revenue for sale of the Company's FoxBox include manufacturing
costs, which we have outsourced, packaging and shipping costs and warranty
expenses. Cost of revenue in connection with management and consulting services
include direct expenses of employees and consultants utilized in the generation
of management and consulting revenue. Cost of revenue increased to $959,039 in
Fiscal 2000 from $582,724 in Fiscal 1999.
15
Overall gross profit decreased to 33% in Fiscal 2000 from 67% in Fiscal
1999. This was primarily attributable to revenue from management and consulting
services, which have significantly reduced margins. The gross profit on the sale
of the Company's FoxBox decreased to 57% in Fiscal 2000 from 67% in Fiscal 1999.
This is primarily the result of competitive pricing pressure on the Company's
core product line. The Company believes that greater gross profits are
achievable at increased production levels. These results will depend, in part,
on the effects of economies-of-scale, the use of third-party assemblers and the
ability to competitively purchase rapidly evolving commodity hardware, which is
a significant component of cost of revenue. The use of non-proprietary hardware
is one of many inherent design features of the FoxBox which facilitates an
efficient and cost effective production cycle. There can be no assurance that
the Company will be successful in increasing its margins due to one or more
factors. These factors include, but are not limited to increases/decreases in
direct labor and material cost, as well as increased competition and general
economic conditions in the future. Engineering and development
Engineering and development expenses, which are expensed as incurred,
consist primarily of salaries and related expenses for personnel utilized in
designing, maintaining and enhancing our products as well as material costs for
test units and prototypes. Costs associated with the development of software
products are generally capitalized once technological feasibility is reached.
Engineering and development expenses increased to $1,334,341 in Fiscal 2000 from
$418,109 in Fiscal 1999. In addition, the company capitalized approximately
$170,000 in software development costs during Fiscal 2000. The increase in
engineering and development costs was primarily the result of the employment of
additional engineering and development personnel. We expect to incur significant
engineering and development costs in the future as we continue to maintain our
existing product line as well as develop new products and features, as evidenced
by the development of Mother.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer support
functions, as well as costs associated with trade shows, promotional activities,
advertising and public relations. Sales and marketing expenses increased to
$4,916,718 in Fiscal 2000 from $2,194,518 in Fiscal 1999. The increase in sales
and marketing expenses was primarily the result of the employment of additional
sales personnel and an increase in marketing efforts to effectuate brand
awareness designed for future growth. Included in sales and marketing expenses
for Fiscal 2000 and Fiscal 1999 are $2,539,362 and $1,467,750, respectively, of
non-cash compensation for services in the form of the Company's common stock,
options and warrants. The Company intends to continue to aggressively promote
its current and future products and, therefore, expects sales and marketing
costs to increase in absolute dollars in the future.
General and administrative
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, facilities and human resources
personnel, recruiting expenses and professional fees. General and administrative
expenses increased to $15,179,218 in Fiscal 2000 from $6,053,754 in Fiscal 1999.
The increase was primarily due to a full year of operations of the Company's
training and consulting segment as well as the employment of additional
administrative personnel, payment of professional fees for services rendered and
equity compensation given to various financial consultants. Included in general
and administrative expenses for Fiscal 2000 and Fiscal 1999 are $6,152,718 and
$3,695,000, respectively, of non-cash compensation for services in the form of
the Company's common stock, options and warrants. We expect general and
administrative costs to increase in absolute dollars in the future.
Impairment charges
On June 30, 2000, the Company recorded a writedown of its training content
and goodwill (training and consulting segment) relating to the acquisition of
SMCI in the amount of $4,016,080. This writedown eliminates all remaining
intangible assets relating to the acquisition. The intangible assets were
determined to be impaired because of the current financial condition of TSG and
TSG's inability to generate future operating income without substantial sales
volume increases which are uncertain. Moreover, anticipated future cash flows of
TSG indicate that the recoverability of the asset is not reasonably assured.
16
Other income (expenses)
Other income (expenses) consists primarily of portfolio income and
increased to $679,758 in Fiscal 2000 from $536,947 in Fiscal 1999. The increase
was primarily due to an increase in interest income in Fiscal 2000 due to the
increase average cash balance from the ComputerCOP Corp. acquisition compared
with a realized gain on the sale of marketable securities in Fiscal 1999.
For the year ended June 30, 1999 ("Fiscal 1999") compared to the period
from February 13, 1998 (inception) through June 30, 1998 ("Fiscal 1998")
Revenue
Revenue increased to $1,789,144 in Fiscal 1999 from $29,621 in Fiscal 1998.
The increase in revenues was almost entirely related to a one time stocking
order of 500 FoxBox units sold to Anicom in March/April 1999.
Cost of revenue and gross profit
Cost of revenue increased to $582,724 in Fiscal 1999 from $5,681 in Fiscal
1998 and gross profit decreased to 67% in Fiscal 1999 from 82% in Fiscal 1998.
Engineering and development
Engineering and development expenses increased to $418,109 in Fiscal 1999
compared to none in Fiscal 1998. The increase was primarily the result of the
employment of engineering and development personnel in the Company's first full
year of operation.
Sales and marketing
Sales and marketing expenses increased to $2,194,518 in Fiscal 1999 from
$44,463 in Fiscal 1998. The increase in sales and marketing expenses was
primarily the result of the employment of additional sales personnel, equity
compensation given to various sales and marketing individuals and an increase
marketing efforts to effectuate brand awareness. Included in sales and marketing
expenses for Fiscal 1999 is $1,467,750 in non-cash compensation for services in
the form of the Company's common stock, options and warrants.
General and administrative
General and administrative expenses increased to $6,053,754 in Fiscal 1999
from $105,047 in Fiscal 1998. The increase was primarily due to the employment
of additional administrative personnel, equity compensation given to various
individuals and payment of professional fees for services rendered. Included in
general and administrative expenses for Fiscal 1999 is $3,695,000 in non-cash
compensation for services in the form of the Company's common stock, options and
warrants.
Other income (expenses)
Other income (expenses) consist increased to $536,947 in Fiscal 1999 from
$6,156 in Fiscal 1998. The increase was primarily due to a realized gain on the
sale of marketable securities.
17
Liquidity and Capital Resources
On June 17, 1998 the Company executed a reverse merger with Watchdog
Patrols, Inc. a publicly traded non-reporting company engaged in the activity of
providing armed and unarmed security guard services for the New
York/Metropolitan Area. This merger made available to the Company, approximately
$2.3 million of cash, cash equivalents and marketable securities to be used as
operating capital. On November 22, 1998 the Company sold substantially all the
assets of the security guard business, consisting primarily of uniforms,
vehicles, computer systems and furniture to a third party. This generated an
additional $600,000 of cash flow to the Company. On June 29, 1999 NetWolves
concluded a private offering of 800,000 shares of common stock that generated
$5.4 million (net of $.6 million of expenses).
From September 29, 1999 through November 4, 1999, an aggregate of 287,500
shares of the Company's common stock were issued to 17 accredited investors at a
price of $15 per share for an aggregate sum of approximately $4.2 million. In
February 2000, NetWolves acquired ComputerCOP Corp., whose assets included
ComputerCOP technology, inventory and $20.5 million in cash.
NetWolves had cash and cash equivalents of $ 20.3 million and $5.6 million
at June 30, 2000 and June 30, 1999, respectively. Management believes that the
Company has adequate capital resources to meet its working capital needs for at
least the next twelve months based upon its current operating level. To the
extent necessary, the Company intends to raise additional monies from the sale
of its capital stock to fund its growth over the next 24 to 36 months, however,
there can be no assurance that the Company will have sufficient capital to
finance its planned growth.
Currently the Company's source of liquidity is equity financing which is
used to fund losses from operation activities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and its subsidiaries are included
herein:
-- Reports of Independent Public Accountants
-- Consolidated Balance Sheets at June 30, 2000 and 1999
-- Consolidated Statements of Operations, Cash Flows and Shareholders'
Equity for the years ended June 30, 2000 and 1999 and the period from
February 13, 1998 (inception) to June 30, 1998
-- Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their ages are as
follows:
Name Age Position
- ---- --- --------
Walter M. Groteke 30 Chairman of the Board, President and
Chief Executive Officer
Walter R. Groteke 53 Vice President - Sales and Marketing
and Director
Peter Castle 32 Treasurer, Secretary, Vice President-Finance
Ed Lavin 56 Director
James A. Cannavino 55 Director
Principal Occupations of Officers and Directors
Walter M. Groteke, a co-founder of the Company, has been Chairman of the
Board, Chief Executive Officer and a director of the Company since June 1998.
Mr. Groteke is responsible for planning, developing and establishing policies
and business objectives for the Company. From June 1995 until 1997, Mr. Groteke
was regional business development manager for Techmatics, Inc., an information
systems Department of Defense contractor. From May 1993 to June 1995, Mr.
Groteke was senior account manager for NYNEX's strategic account management
program.
Walter R. Groteke has been a director of the Company since February 1999
and Vice President - Sales and Marketing since August 1998. From 1995 through
July 1998, Mr. Groteke was a regional and district sales manager for GTE Florida
and GTE Communications Corporation. Mr. Groteke founded Hawk Telecom in 1975 and
was President until its sale in 1994. Mr. Groteke is the father of Walter M.
Groteke.
Peter C. Castle has been Vice President - Finance since January 2000,
Controller from August 1998 until December 1999 and Treasurer and Secretary
since August 1999. From 1996 through July 1998 Mr. Castle was the Southeast
Regional Finance Manager for Magellan Health Service, Inc. a $1.6 billion
managed behavioral care company based in Georgia. Prior to that Mr. Castle was
the Controller for Physician's Care Network of NY, Inc.
James A. Cannavino has been a director of the Company since April, 2000.
Mr. Cannavino is President and Chief Executive Officer of CyberSafe, Inc., a
corporation specializing in network security. Additionally, he is Chairman of
Direct Insite Corp. (f/k/a Computer Concepts Corp.) He was the President and
Chief Executive Officer of Perot Systems Corporation through July 1997, and
prior to that was a Senior Vice President at IBM, responsible for strategy and
development. He also served on the IBM Corporate Executive Committee and
Worldwide Management Council, and on the board of IBM's integrated services and
solutions company. Mr. Cannavino currently serves on the boards of National
Center for Missing and Exploited Children, 7th Level, Inc. and Marist College.
Ed Lavin has been a director of the Company since February 1999. Mr. Lavin
has been Chairman and Chief Executive Officer of Staples Communications, a
subsidiary of Staples Corporation since March, 1999. Mr. Lavin began his career
at ADT from 1967 to 1972. In 1970 he was promoted into ADT's National Accounts
Division. Mr. Lavin then joined the L. M. Ericcson Company of Sweden from 1973
to 1979 where he served as Vice President of Sales in the United States. Mr.
Lavin immigrated to Canada in 1980 to form Canadian Telecommunications Group and
was Chairman and CEO of Canadian Telecommunications Group (CTG) from 1980 to
1986. Mr. Lavin moved to TIE Communications where he served as president from
1987 to 1990. TIE Communications acquired Centel Communications, which was later
merged with WilTel Communications where he served as CEO from 1990 to 1993. In
November 1993, Mr. Lavin founded Quest America, a telecommunications consulting
company based in Boston, Massachusetts. On April 10, 1996, Mr. Lavin led a group
that acquired Executone Information Systems' Network Division. The purchaser was
a group financed by Bain Capital, Inc. of Boston, Massachusetts. The company
name was later changed to Claricom, Inc. In March 1999, Claricom successfully
merged its business with Staples Corporation.
19
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
regard to the Chairman/Chief Executive Officer and each of the other executive
officers of the Company who received more than $100,000 for services rendered
during the fiscal year ended June 30, 2000.
Summary Compensation Table
Annual Compensation
------------------------------------------------------------------
Name and Other annual
Principal Position Fiscal Year Salary (1) Bonus compensation (2)
- ------------------ ----------- ---------- ----- ----------------
Walter M. Groteke 2000 $ 130,000 $ - $ -
Chairman and Chief Executive Officer 1999 101,250 - -
1998 - - -
Daniel G. Stephens 2000 130,000 - -
Vice Chairman and Chief Information 1999 101,250 - -
Officer 1998 - - -
Walter R. Groteke 2000 154,740 - -
Vice President 1999 - - -
1998 - - -
(1) Represents compensation received under employment agreements. Mr. Stephens
resigned as an officer and director of the Company in July 2000.
(2) Other annual compensation excludes certain perquisites and other non-cash
benefits provided by the Company since such amounts do not exceed the
lesser of $50,000 or 10% of the total annual base salary disclosed in the
table for the respective officer.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning options exercised
during the year ended June 30, 2000 by the named executive officers and the
value of unexercised options held by them as of June 30, 2000.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options at Fiscal Options at Fiscal
Acquired on Value Year End (#) Year End ($)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ----------- -------------
Walter M. Groteke........ 0 0 0 200,000 0 $724,000
Daniel G. Stephens....... 0 0 0 200,000 0 $724,000
Walter R. Groteke........ 0 0 0 200,000 0 $724,000
Peter C. Castle.......... 0 0 0 40,000 0 $ 10,000
- -------
(1) Based upon the closing price of common stock of $5.25 on June 30, 2000.
Employment Agreements
Walter M. Groteke and Daniel G. Stephens entered into employment agreements
in June 1998 in connection with the acquisition of Watchdog Patrols, Inc.
("Watchdog Patrols"). Pursuant to these agreements, Messrs. Groteke and Stephens
were employed as Chief Executive Officer and Information Officer, respectively,
for a term of three years. Mr. Stephens resigned as an officer and director of
the Company effective July 15, 2000 and receives no salary from the Company. The
current base salary for Mr. Groteke is $150,000.
The employment agreement with Mr. Groteke further provides for certain
payments following death or disability for certain fringe benefits such as
reimbursement for reasonable expenses and participation in medical plans, and
for accelerated payments in the event of change of control of the Company.
Walter M. Groteke, Daniel G. Stephens and Walter R. Groteke also entered
into warrant agreements with the Company in 1998 whereby they are entitled to
receive warrants to purchase 200,000, 200,000 and 150,000 shares, respectively,
of the Company's common stock at $1.63 per share under certain terms and
conditions. The warrants fully vested at June 30, 2000.
20
Stock Option Plans
In June 1998, the Company adopted a 1998 Long Term Incentive Plan (the
"1998 Incentive Plan") in order to motivate qualified employees of the Company,
to assist the Company in attracting employees and to align the interests of such
persons with those of the Company's shareholders.
The 1998 Incentive Plan provides for a grant of "incentive stock options,"
"non-qualified stock options," restricted stock, performance grants and other
types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates.
The 1998 Incentive Plan, which will be administered by the Board of
Directors, authorizes the issuance of a maximum of 282,500 shares of common
stock, which may be either newly issued shares, treasury shares, reacquired
shares, shares purchased in the open market or any combination thereof. If any
award under the 1998 Incentive Plan terminates, expires unexercised, or is
cancelled, the shares of common stock that would otherwise have been issuable
pursuant thereto will be available for issuance pursuant to the grant of new
awards. As of June 30, 2000, the Company had granted options to purchase 265,833
shares of common stock (net of cancellations) under the 1998 Incentive Plan to
its officers and key employees.
In July 2000, the Company adopted a 2000 Long Term Incentive Plan (the
"2000 Incentive Plan") in order to motivate qualified employees of the Company,
to assist the Company in attracting employees and to align the interests of such
persons with those of the Company's shareholders.
The 2000 Incentive Plan provides for a grant of "incentive stock options,"
"non-qualified stock options," restricted stock, performance grants and other
types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates.
The 2000 Incentive Plan, which is administered by the Board of Directors,
authorizes the issuance of a maximum of 1,500,000 shares of common stock, which
may be either newly issued shares, treasury shares, reacquired shares, shares
purchased in the open market or any combination thereof. As with the 1998
Incentive Plan, if any award under the 2000 Incentive Plan terminates, expires
unexercised, or is cancelled, the shares of common stock that would otherwise
have been issuable pursuant thereto will be available for issuance pursuant to
the grant of new awards. As of June 30, 2000, the Company had granted options to
purchase 217,500 shares of common stock under the 2000 Incentive Plan to its
officers and key employees. As of September 30, 2000, approximately 1,015,000
options have been granted under the Plan including 450,000 options to Walter M.
Groteke, 100,000 options to Walter R. Groteke and 75,000 options to Peter C.
Castle.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of voting
stock of the Company, as of August 31, 2000, of (i) each person known by the
Company to beneficially own 5% or more of the shares of outstanding common
stock, based solely on filings with the Securities and Exchange Commission, (ii)
each of the Company's executive officers and directors and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares are beneficially owned, and investment and voting power is
held by, the persons named as owners.
Name and Address Amount and Nature
of Shares Ownership of Beneficial Owner Percentage
- ------------------- ------------------- ----------
Computer Concepts Corp. 2,000,000 (1) 22.8%
Greenleaf Capital Partners, LLC 861,360 9.9%
Walter M. Groteke 2,653,064 (2) 30.2%
Daniel G. Stephens 428,064 (3) 4.9%
Walter R. Groteke 175,000 (4) 2.0%
Peter C. Castle 120,833 (5) 1.4%
James A. Cannavino 200,000 (6) 2.2%
Ed Lavin 50,000 *%
Kirlin Securities, Inc. 500,000 (7) 5.4%
Executive officers and
directors as a group 3,447,086 (7) 36.9%
* less than one percent (1%) unless otherwise indicated.
(1) The voting rights to these shares are held by Mr. Walter M. Groteke
pursuant to the terms of a voting agreement.
(2) Includes 2,000,000 shares owned by Computer Concepts Corp. covered by a
voting agreement and options to purchase 225,000 shares of common stock at
$5.00 per share. Does not include warrants to purchase 200,000 shares at an
option price of $1.63 per share and options to purchase 225,000 shares of
common stock at $5.00 per share.
(3) Does not includes warrants to purchase 200,000 shares at $1.63 per share
and options to purchase 50,000 shares o f common stock at $5.00 per share.
(4) Includes options to purchase 50,000 shares at $5.00 per share. Does not
include 200,000 warrants at $1.63.
(5) Includes options to purchase 50,833 shares of common stock at $5.00 per
share and options to purchase 65,000 shares of common stock at $12.00 per
share. Does not include options to purchase 64,167 shares of common stock
at $5.00 per share.
(6) Represents a warrant issued to Mr. Cannavino for joining the Board of
Directors to purchase 200,000 shares at an exercise price of $10 per share.
(7) Represents warrants currently exercisable by Kirlin Securities, Inc. and
its affiliates to purchase 500,000 shares of common stock at $1.63 per
share. Kirlin Securities, Inc. has demand registration rights on the shares
of common stock issuable upon exercise of the warrants.
(8) The natural person or persons who exercise sole or shared voting and
dispositive powers over the shares held of record by these entities are as
follows: Greenleaf Capital Partners, LLC - Mr. Phillip LoRusso and Mr.
Edmund McCormick; Kirlin Securities, Inc. - Mr. Anthony Kirincic.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements at beginning of attached financial
statements.
(b) Reports on Form 8-K
Report on Form 8-K dated July 7, 1999, as amended.
(c) Exhibits
3.1 Certificate of Incorporation, as amended.*
3.2 By-Laws. *
4.1 Specimen common stock certificate.*
4.2 Form of warrant to investment banking firm. *
4.3 Form of warrant to employees.*
10.2 Agreement between The Sullivan Group and NetWolves Corporation dated
January 5, 1999.*
10.3 Employment Agreement between NetWolves Corporation and Walter M.Groteke
dated June 17, 1998.*
10.4 Warrant Agreement between NetWolves Corporation and Walter M. Groteke dated
June 17, 1998.*
10.5 Warrant Agreement between NetWolves Corporation and Daniel G. Stephens, Jr.
dated June 17, 1998.*
10.6 1998 Stock Option Plan*
10.7 2000 Stock Option Plan
10.8 Form of Indemnification Agreement*
10.9 Agreement and Plan of Merger dated as of July 7, 1999 among NetWolves
Corporation, TSG Global Education Web, Inc. and Sales and Management
Consulting, Inc., d/b/a The Sullivan group and Duffy-Vinet Institute. **
10.10Exchange Agreement dated as of February 10, 2000 by and among NetWolves
Corporation, Computer Concepts Corp. and ComputerCOP Corporation with
Exhibits.****
27 Financial Data Schedule
- ------
* Previously filed as exhibits to Report on Form 10, as amended.
** Previously filed as an exhibit to Report on Form 8-K dated July 7, 1999, as
amended.
*** Previously filed as an exhibit to Report on Form 10/A, Amendment No. 1.
**** Previously filed as an exhibit to Report on Form 8-K dated February 10,
2000.
23
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 11th day of October, 2000.
NetWolves Corporation
By: /s/ Walter M. Groteke
Walter M. Groteke
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on October 11, 2000 by the following persons in the
capacities indicated:
/s/ Walter M. Groteke Chairman of the Board and President
- ----------------------------
Walter M. Groteke Chief Executive Officer
/s/ Walter R. Groteke Vice President - Sales and Marketing
- ---------------------------- and Director
Walter R. Groteke
/s/ Peter C. Castle
- ---------------------------- Secretary and Treasurer
Peter C. Castle Principal Financial Officer and
Principal Accounting Officer
/s/ James A. Cannavino
- ---------------------------- Director
James A. Cannavino
/s/ Ed Lavin Director
- ----------------------------
Ed Lavin
24
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000 AND 1999 AND THE PERIOD
FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000 AND 1999 AND THE PERIOD
FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
CONTENTS
INDEPENDENT AUDITORS' REPORT .......................................... F-1
INDEPENDENT AUDITORS' REPORT .......................................... F-2
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999 .............................................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2000 and 1999 and the period from
February 13, 1998 (inception) to June 30, 1998 ..................... F-4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the period from February 13, 1998 (inception) to June 30, 1998
and the years ended June 30, 1999 and 2000 ......................... F-5-F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2000 and 1999 and the period from
February 13, 1998 (inception) to June 30, 1998 ..................... F-7 -F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................ F-9-F-35
Board of Directors and Shareholders
NetWolves Corporation
Melville, New York
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of NetWolves
Corporation and subsidiaries (the "Company") as of June 30, 2000 and, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NetWolves
Corporation and subsidiaries as of June 30, 2000, and the consolidated results
of their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
August 24, 2000
With respect to Notes
4, 10, 15 and 16,
October 10, 2000.
F-1
Board of Directors and Shareholders
NetWolves Corporation
Melville, New York
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of NetWolves
Corporation and subsidiaries (the "Company") as of June 30, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended June 30, 1999 and the period from February 13, 1998
(inception) to June 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NetWolves
Corporation and subsidiaries as of June 30, 1999, and the consolidated results
of its operations and cash flows for the year ended June 30, 1999 and the period
from February 13, 1998 (inception) to June 30, 1998 in conformity with generally
accepted accounting principles.
/s/ Hays & Company
August 12, 1999
New York, New York
F-2
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30,
------------------------
2000 1999
------------ ---------
ASSETS
Current assets
Cash and cash equivalents $20,204,309 $ 5,585,981
Marketable securities, available for sale 99,500 606,000
Accounts receivable, net of allowance for doubtful accounts of
$44,747 and $40,000 at June 30, 2000 and 1999, respectively 248,861 76,907
Inventories 633,453 118,354
Prepaid expenses and other current assets 284,614 153,099
----------- -----------
Total current assets 21,470,737 6,540,341
Property and equipment, net 590,906 224,691
Software 3,427,688 -
Intangible assets - 6,024,121
Other assets 53,799 22,781
----------- -----------
$25,543,130 $12,811,934
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,792,030 $ 453,336
Deferred compensation - 100,000
Loans and advances from TSG officer - 144,348
Deferred revenue 11,173 -
Current maturities of long-term debt 208,435 43,411
----------- -----------
Total current liabilities 2,011,638 741,095
Long-term debt, net of current maturities 418,102 266,537
----------- -----------
Total liabilities 2,429,740 1,007,632
----------- -----------
Minority interest 305,761 704,500
Commitments and contingencies
Shareholders' equity
Common stock, $.0033 par value; 10,000,000 shares
authorized; issued and outstanding; 8,592,613 - June 30,
2000 and 6,063,870 - June 30, 1999 28,356 20,011
Additional paid-in capital 56,076,197 17,726,374
Unamortized value of equity compensation (1,851,893) -
Accumulated deficit (31,349,376) (7,022,428)
Accumulated other comprehensive income (loss) (95,655) 375,845
----------- -----------
Total shareholders' equity 22,807,629 11,099,802
----------- -----------
$25,543,130 $12,811,934
=========== ===========
See notes to financial statements.
F-3
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
February 13,
Year ended June 30, 1998
(inception) to
2000 1999 June 30, 1998
------------ ------------ -------------
Revenue
Product $ 132,825 $ 1,789,144 $ 29,621
Services 1,290,865 - -
------------ ------------ -----------
$ 1,423,690 $ 1,789,144 $ 29,621
============ ============ ============
Cost of revenue
Product 56,739 582,724 5,681
Services 902,300 - -
------------ ------------ -----------
959,039 582,724 5,681
------------ ------------ -----------
Gross profit 464,651 1,206,420 23,940
------------ ------------ -----------
Operating expenses
General and administrative (inclusive of $6.1
million and $3.7 million in non cash, equity
compensation for fiscal 2000 and 1999) 15,179,218 6,053,754 105,047
Engineering and development 1,334,341 418,109 -
Sales and marketing (inclusive of $2.5 million
and $1.5 in non cash, equity compensation
for fiscal 2000 and 1999) 4,916,718 2,194,518 44,463
Impairment charges 4,016,080 - -
------------ ------------ -----------
25,446,357 8,666,381 149,510
------------ ------------ -----------
Loss before other income (expense)
and income taxes (24,981,706) (7,459,961) (125,570)
Other income (expense)
Investment income 611,746 58,884 6,501
(Loss) gain on sale of marketable securities (35,000) 478,518 -
Minority interest 148,739 - -
Interest expense (45,727) (455) (345)
------------ ------------ -----------
Loss before income taxes (24,301,948) (6,923,014) (119,414)
(Provision for) benefit from income taxes (25,000) - 20,000
------------ ------------ -----------
Net loss $(24,326,948) $ (6,923,014) $ (99,414)
============ ============ ===========
Basic and diluted net loss per share $ (3.46) $ (1.48) $ (0.04)
============ ============ ===========
Weighted average common shares
outstanding $ 7,034,994 $ 4,691,651 $ 2,810,102
============ ============ ===========
See Notes to financial statements
F-4
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
AND FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
Accumulated
Additional other Unamortized Total
Common stock paid-in Accumulated comprehensive value of equity shareholders' Comprehensive
Shares Amount capital deficit income (loss) compensation equity income(loss)
------ ------ ---------- --------- --------------- ---------------- ------------ -------------
Initial capital contributions
to NetWolves, LLC 100 $ 64,245 $ - $ - $ - $ - $ 64,245
Reverse Acquisition,
June 17, 1998 (Note 3)
Exchange of NetWolves, LLC
membership interests (100) (64,245) - - - - (64,245)
Issuance of common stock
to owners of
NetWolves, LLC 2,640,322 8,713 55,532 - - - 64,245
Outstanding common stock
of Watchdog
Patrols, Inc. 1,673,548 5,523 2,956,627 - - - 2,962,150
Marketable securities
valuation adjustment - - - - 1,022 - 1,022 $ 1,022
Net loss, period from
February 13, 1998
(inception) to
June 30, 1998 - - - (99,414) - - (99,414) (99,414)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive loss $ (98,392)
==========
Balance, June 30, 1998 4,313,870 14,236 3,012,159 (99,414) 1,022 - 2,928,003
Common stock and warrants
issued for services 770,000 2,541 5,160,209 - - - 5,162,750
Proceeds from sale
of warrants - - 300,000 - - - 300,000
Common stock issued in
private placement,
net of expenses 800,000 2,640 5,350,085 - - - 5,352,725
Adjustment to fair value
of Reverse Acquisition - - (190,485) - - - (190,485)
Common stock issued in
purchase business
combination (Note 4) 180,000 594 4,094,406 - - - 4,095,000
Marketable securities
valuation adjustment - - - - 374,823 - 374,823 $ 374,823
Net loss, year ended
June 30, 1999 - - - (6,923,014) - - (6,923,014) (6,923,014)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total comprehensive loss $(6,548,191)
===========
Balance, June 30, 1999 6,063,870 20,011 17,726,374 (7,022,428) 375,845 - 11,099,802
F-5
(continued)
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM FEBRUARY 13, 1998 (INCEPTION) TO JUNE 30, 1998
AND FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
Accumulated
Additional other Unamortized Total
Common stock paid-in Accumulated comprehensive value of equity shareholders' Comprehensive
Shares Amount capital deficit income (loss) compensation equity income(loss)
------ ------ ---------- --------- --------------- ---------------- ------------ -------------
Balance, June 30, 1999
Common stock 6,063,870 $ 20,011 $17,726,374 $(7,022,428) $ 375,845 $ - $11,099,802
Common stock issued
for services 212,500 701 2,200,299 - - - 2,201,000
Options and warrants
issued for services - - 8,342,973 - - (1,851,893) 6,491,080
Common stock issued in
private placement,
net of expenses 287,500 949 3,980,726 - - - 3,981,675
Common stock issued
upon exercise of
warrants (cashless) 114,855 379 (379) - - - -
Common stock and
warrants issued in
purchase business
combination (Note 4) 1,900,000 6,270 23,576,250 - - - 23,582,520
Common stock issued in
conversion of TSG
preferred stock 13,888 46 249,954 - - - 250,000
Marketable securities
valuation adjustment - - - - (471,500) - (471,500)$ (471,500)
Net loss, year ended
June 30, 2000 - - - (24,326,948) - - (24,326,948) (24,326,948)
---------- ---------- ----------- ---------- ---------- ----------- ---------- -----------
Total comprehensive loss (24,798,448)
===========
Balance, June 30, 2000 8,592,613 $ 28,356 $56,076,197 $(31,349,376) $(95,655) $(1,851,893) $22,807,629
========== ========== =========== ============ ======== =========== ===========
F-6
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
Year ended June 30, February 13, 1998
(inception) to
2000 1999 June 30, 1998
------------ ------------ --------------
Cash flows from operating activities
Net loss $(24,326,948) $(6,923,014) $ (99,414)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation 93,763 15,896 401
Amortization 2,968,786 - -
Writedown/realized loss (gain) on sale of
marketable services 35,000 (478,518) -
Provision for impairment 4,016,080 - -
Provision for doubtful accounts 4,747 35,000 5,000
Non-cash charge to operations with respect to
common stock and warrants issued for
services 8,692,080 5,162,750 -
Deferred income tax benefit - - (20,000)
Minority interest (148,739) - -
Changes in operating assets and liabilities
Accounts receivable (176,701) (34,883) (11,803)
Inventories (340,099) (95,944) (22,410)
Prepaid expenses and other current assets (75,515) (134,781) (18,318)
Accounts payable and accrued expenses 978,694 187,863 31,448
Deferred compensation (100,000) - -
Deferred revenue 11,173 - -
------------ ----------- ----------
Net cash used in operating activities (8,367,679) (2,265,631) (135,096)
------------ ----------- ----------
Cash flows from investing activities
Proceeds from the sale of marketable securities - 1,311,169 -
Issuance of notes receivable (56,000) - -
Proceeds from assets held for sale, net - 549,515 -
Finders fees paid in connection with acquisition
of ComputerCOP Corp. (550,000) - -
Appraisal fee paid in connection with
acquisition of ComputerCOP Corp. (40,000) - -
Cash acquired - ComputerCOP Corp. 20,500,000 - -
Purchases of property and equipment (459,978) (200,383) (5,350)
Advances to subsidiary, net of cash acquired of
$412,224, plus acquisition costs paid of $25,000 - (561,776) -
Capitalized software costs 170,913) - -
Payments of security deposits (31,018) (18,054) (4,727)
------------ ----------- ----------
Net cash provided by (used in) investing
activities 19,192,091 1,080,471 (10,077)
------------ ----------- ----------
See notes to financial statements.
F-7
NETWOLVES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
Year ended June 30, February 13, 1998
(inception) to
2000 1999 June 30, 1998
------------ ------------ --------------
Cash flows from financing activities
Proceeds from initial capital contribution - - 64,245
Repayment of long term debt (43,411) - -
Repayment of advances from TSG officer (144,348) - -
Cash acquired in Reverse Acquisition - - 1,460,366
Transaction costs paid in connection with Reverse
Acquisition - - (261,022)
Cash proceeds from issuance of common stock 4,312,500 6,000,000 -
Financing costs paid in connection with sale of
common stock (330,825) (647,275) -
Cash proceeds from sale of warrants - 300,000 -
------------ ----------- ------------
Net cash provided by financing activiti