AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 2004
REGISTRATION NO. 333-___________
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
IMPROVENET, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
____________________________
DELAWARE 1521 77-0452868
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
10799 NORTH 90TH STREET, SUITE 200
SCOTTSDALE, ARIZONA 85260
(480) 346-0000
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL
EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)
WITH COPIES TO:
____________________
____________________
____________________
____________________
JEFFREY RASSAS AND TO:
CHIEF EXECUTIVE OFFICER JEFFREY R. PERRY, ESQ.
IMPROVENET, INC. LAW OFFICE OF JEFFREY R. PERRY
10799 N. 90TH STREET, SUITE 200 10799 N. 90TH STREET, SUITE 200
SCOTTSDALE, ARIZONA 85260 SCOTTSDALE, ARIZONA 85260
TELEPHONE: (480) 346-0000 TELEPHONE: (480) 346-0000
FACSIMILE: (480) 346-3000 FACSIMILE: (480) 346-3000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
Approximate Date of Proposed Sale to the Public: As soon as practicable, from
time to time, after the Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
Dollar
Amount Proposed Maximum Proposed Maximum Amount of
to be Offering Price Aggregate Registration
Title of Each Class of Security to be Registered Registered(1) Per Share(2)(3) Offering Price(2)(3) Fee
================================================ ============ ==================== ==================== =============
Common stock, $.001 par value, outstanding 25,310,410 $0.21 $5,315,186 $673
------------------------------------------------ ------------ -------------------- -------------------- -------------
Common stock, $.001 par value, underlying
outstanding warrants 12,836,664 $0.21 $2,695,699 $342
================================================ ============ ==================== ==================== =============
TOTALS 38,147,074 $0.21 $8,010,885 $1,015
================================================ ============ ==================== ==================== =============
(1) Pursuant to Rule 416, there are also being registered such additional number of shares of Common Stock as may
become issuable pursuant to the anti-dilution provisions of the warrants.
(2) Estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule
457(c) under the Securities Act of 1933, as amended, based upon the average of the bid and asked prices
reported on the Over The Counter Bulletin Board on August 19, 2004.
(3) Per share price determined pursuant to Rule 457(c) as of August 19, 2004.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CROSS REFERENCE SHEET
ITEM
NO. CAPTION IN FORM SB-2 CAPTION IN PROSPECTUS
----- ------------------------------- ------------------------------------
1. Front of Registration Front Cover Page; Front Cover of
Statement and Outside Front Prospectus
Cover of Prospectus
2. Inside Front and Outside Inside Front Cover of Prospectus;
Back Cover Pages of Outside Book Cover of Prospectus
Prospectus
3. Summary of Information and Risk Factors
Risk Factors Summary;
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Plan of Distribution
Price
6. Dilution Not Applicable
7. Selling Securityholders Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Our Business - Litigation
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Shareholders
Beneficial Owners and Management
12. Description of Securities Description of ImproveNet's
Securities
13. Interest of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission Position Management-Limitation of Liability
on Indemnification for Securities and Indemnification Matters
Act Liabilities
15. Organization Within Last Five Certain Transactions
Years
16. Description of Business Management's Discussion and Analysis
of Financial Condition and Results
of Operations; The Business
17. Management's Discussion and Management's Discussion and Analysis
Analysis or Plan of Operation of Financial Condition and Results
of Operations
18. Description of Property Our Business-Facilities
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Market for Common Stock
Related Stockholder Matters
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and
Financial Disclosure
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED ___, 2004
UP TO 38,147,074 SHARES
IMPROVENET, INC.
This offering relates to the possible sale, from time to time, by
certain securityholders of ImproveNet, Inc. ("IMPROVENET") of shares of our
common stock. ImproveNet will not receive any of the proceeds from the sale of
these shares but will receive certain amounts upon exercise of outstanding
warrants.
ImproveNet's common stock is traded on the OTC Bulletin Board under the
symbol "IMPV." On August 19, 2004 the last reported sale price of the common
stock on the OTC Bulletin Board was $0.20 per share. The bid price and asked
price were $01.8 and $0.24, respectively.
The shares of common stock described in this prospectus are for resale
and are to be or have been issued to certain ImproveNet securityholders. The
shares offered are being registered, in some cases, due to ImproveNet's
contractual obligations to these selling securityholders while in other cases,
due to . The selling securityholders may elect to sell all, a portion or none of
the shares of common stock described in this prospectus. Sales may be made
through brokers at the prevailing market price at the time of such sales or at
other prices as may be negotiated. See "PLAN OF DISTRIBUTION." The common stock
also may be offered in block trades, private transactions or otherwise at prices
to be negotiated. All expenses of registration of these shares are being borne
by ImproveNet, but the selling securityholders will pay any brokerage and other
expenses of sale incurred by them.
____________
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT THE FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
____________
Each selling securityholder and any broker executing selling orders on
behalf of a selling securityholder may be deemed to be an "underwriter."
Commissions received by any broker may be deemed to be underwriting commissions.
____________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ___, 2004.
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Prospectus Summary
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
IMPROVENET, INC.
BUSINESS OF ISSUER
ImproveNet, Inc. is a nationally recognized provider of home
improvement services. There are two major categories of home improvement
services. The first category is service provider matching services and marketing
services, and the second, offered through our wholly-owned subsidiary
eTechLogix, is as a developer of and marketer of Enterprise Commerce Management
("ECM") software sold under the product servicemark of Smart FusionSM for the
Building Materials Industry ("BMI"), which is segmented into many vertical
markets.
SERVICE PROVIDER MATCHING SERVICES
Our service provider matching service is the process by which
homeowners are matched to our network of pre-screened ImproveNet contractors.
This was the core business model upon which the Company was founded and has been
the primary source of our revenue. Since its inception, we have invested quite
heavily in establishing a pool of national remodeling contractors. We consider
this to be the core of its business and we anticipate the major portion of the
Company's resources and efforts in the foreseeable future will be devoted to
further this service.
MARKETING SERVICES
We provide advertising and marketing services on behalf of home
improvement suppliers and marketing programs for building materials
manufacturers, distributors, contractors and trade professionals, as well as
other companies who wish to communicate to our consumer and service provider
audiences. We also provide content and on-line tools on behalf of companies to
assist them in serving their own customers on-line.
OTHER INFORMATION
We started business in January 1996 as a regional contractor matching
service. Originally ImproveNet was a California corporation but reincorporated
in Delaware in 1998. Our principal executive offices, customer care center, and
sales and marketing facilities are located at 10799 North 90th Street, Suite
200, Scottsdale, AZ 85260.
THE OFFERING
SECURITIES OFFERED.................... This prospectus relates to the offering
by our securityholders of up to
38,147,074 shares of our common stock.
The shares registered with this
prospectus include 25,310,410
outstanding shares of common stock, and
12,836,664 shares issuable upon exercise
of outstanding warrants.
COMMON STOCK OUTSTANDING
AFTER OFFERING........................ As of August 14, 2004, we had 53,707,715
shares of common stock outstanding,
including 25,310,410 shares covered by
this prospectus. The exercise of all
outstanding warrants covered by this
prospectus will result in the issuance
of an additional 12,836,664 additional
shares. The holders of the outstanding
warrants are not obligated to exercise
their warrants so there is no assurance
that all or any portion of these shares
will be issued.
For purposes of this prospectus, we have
assumed that an additional 12,836,664
shares will be issued upon exercise of
outstanding warrants.
3
SYMBOL................................ IMPV
RISK FACTORS.......................... This offering involves a high degree of
risk. See "RISK FACTORS" beginniNG on
page 5.
SUMMARY FINANCIAL DATA
The following summary financial information is derived from our
financial statements included in this prospectus. This data should be read with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the financial statements and related notes included herein.
Six Months Ended
Years Ending December 31, June 30,
------------------------------ ------------------------------
2003 2002 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Sales $ 3,223,587 $ 777,257 $ 1,880,247 $ 1,648,548
Cost of Sales 1,787,449 240,394 845,043 966,423
Gross Profit 1,436,138 536,863 1,035,204 682,125
Gain (Loss) From Operations (851,653) (405,220) (62,255) (355,378)
Net Loss Per Common Share (0.02) (0.02) (0.02) (0.01)
Weighted Average Number of Basic Shares 39,210,315 28,909,573 40,422,152 39,210,315
December 31, June 30,
----------------------------- ------------
2003 2002 2004
------------ ------------ ------------
(unaudited)
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 382,415 $ 446,833 $ 1,072,627
Current Assets 720,720 1,431,359 1,615,114
Total Assets 820,520 1,589,353 1,683,821
Current Liabilities 1,008,208 3,401,514 890,599
Accumulated Deficit (3,081,507) (412,794) (1,963,096)
Shareholders' Equity (Deficit) 872,689 (1,839,041) 791,100
4
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information, this prospectus contains
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"). We may also make
forward-looking statements from time to time in filings with the Securities and
Exchange Commission ("SEC"), press releases or otherwise. We intend that the
forward-looking statements be subject to the safe harbors created by these
statutory provisions. Wherever possible, we have identified the forward-looking
statements by words such as "ANTICIPATES," "BELIEVES," "CONTEMPLATES,"
ESTIMATES," "EXPECTS," "INTENDS," "PLANS," "PROJECTS," "FORECASTS" and similar
expressions.
Forward-looking statements involve risks and uncertainties and include,
but are not limited to, statements regarding future events, plans and
expectations. Although we believe that the assumptions underlying our
forward-looking statements are reasonable, any of these assumptions could prove
inaccurate. Our forward-looking statements reflect only our current views with
respect to future events and financial performance or operations and speak only
as of the date the statements are made. Our actual results may differ materially
from such statements. Factors that may cause or contribute to such differences
include, but are not limited to, those discussed in "RISK FACTORS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," as well as elsewhere in this prospectus. The inclusion of
forward-looking information should not be regarded as a representation that the
future events, plans or expectations contemplated will be achieved.
The inclusion of forward-looking information should not be regarded as
a representation that the future events, plans or expectations contemplated will
be achieved. We disclaim any obligation to subsequently revise forward-looking
statements to reflect subsequent events or circumstances or the occurrence of
unanticipated events.
RISK FACTORS
INVESTMENT IN THE SHARES OFFERED BY THIS PROSPECTUS INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW, WHICH CAN AFFECT THE COMPANY'S CURRENT POSITION AND FUTURE
PROSPECTS, AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO
INVEST IN THE SHARES. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY,
ADVERSELY AFFECTED. THIS COULD CAUSE THE TRADING PRICE OF THE COMMON STOCK TO
DECLINE AND A LOSS OF PART OR ALL OF ANY INVESTMENT IN THE COMMON STOCK.
WE HAVE A RECENT HISTORY OF LOSSES, AND WE MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
The Company has continued to sustain losses for the past two years but
with Funds received from its private placement in June 2004, the Company now has
positive working capital and positive net worth.
Our operating losses have limited our ability to obtain vendor credit
or extended payment terms and bank financing on favorable terms; accordingly, we
depend on our cash and cash equivalent balances to fund our operations.
As a result of the merger with ImproveNet in late 2002, both revenue
and operating expenses increased significantly in 2003. Prior to the Merger, the
ImproveNet business operated at a significant loss. The ImproveNet business has
been moved from California to Arizona and has been integrated into the
infrastructure of eTechLogix, leveraging existing technical, marketing and
administrative personnel. We believe that during 2004 ImproveNet will reach
operating profitability.
With Funds received from the private placement in June 2004, we expect
that our available cash resources will be sufficient to meet our anticipated
needs for operations and capital expenditures during the next 12 months. We will
strive to make ongoing realignments, if required, to achieve positive cash flow
with our existing cash resources. We are additionally decreasing our marketing
and other operating expenditures to assist us in maintaining our available cash
resources. We may need to raise additional funds in order to develop new or
enhance existing services, to respond to competitive pressures or to acquire
complementary businesses, services or technologies. No assurances can be made
that the Funds received from the recent Private placement will be adequate or
sufficient to fund expansion, react to competitive pressures, or take advantage
of unanticipated opportunities that we may identify.
5
WE FACE CONTINUED CHALLENGES IN THE INTEGRATION OF THE SEPARATE BUSINESSES OF
IMPROVENET AND ETECHLOGIX FOLLOWING THE MERGER.
We have not experienced the anticipated synergistic results from the
integration of the separate businesses of ImproveNet and eTechLogix following
the Merger. The strategies of cross-marketing service offerings, the
opportunities of expanded markets, the development of additional revenue
streams, the enhanced ability to raise capital, and the availability of public
currency for making strategic acquisitions have had limited success to date. It
is unknown how successful these efforts will be in the future. This could affect
the results of our operations, negatively impact our financial performance and
harm our business.
BECAUSE WE ARE NO LONGER LISTED ON THE NASDAQ NATIONAL MARKET SYSTEM, THE
LIQUIDITY OF OUR COMMON STOCK HAS BEEN SERIOUSLY LIMITED.
On June 29, 2001, we received a Nasdaq Qualification Panel Decision
indicating that we have failed to comply with the minimum bid price requirement
for continued listing, and we were delisted from the Nasdaq National Market
System. Our stock is currently being traded on the Nasdaq Over-The-Counter
Bulletin Board; however, the liquidity of our common stock is significantly
lower than when it was listed on the Nasdaq National Market System.
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK.
Currently only a very limited trading market exists for ImproveNet
common stock. Our common stock trades on the OTC Bulletin Board under the symbol
"IMPV.OB." The Bulletin Board is a limited market and subject to substantial
restrictions and limitations in comparison to the NASDAQ system. Any
broker/dealer that makes a market in our stock or other person that buys or
sells our stock could have a significant influence over its price at any given
time.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION.
Our shares are subject to the provisions of Section 15(g) and Rule
15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security that has
a market price less than $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be penny stock unless
that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
registrant's net tangible assets; or exempted from the definition by the
Commission. Since our shares are deemed to be "penny stocks", trading in the
shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors.
OUR MARKETS ARE COMPETITIVE AND VOLATILE AND WE MAY SUFFER PRICE REDUCTIONS, BE
UNABLE TO ATTRACT HOMEOWNERS TO OUR WEB SITE, BE UNABLE TO MAINTAIN OUR SERVICE
PROVIDER NETWORK OR ENTER INTO NEW MULTI-YEAR COMMERCIAL CONTRACTS IF WE DO NOT
COMPETE EFFECTIVELY.
The market for our services is intensely competitive, evolving and
subject to rapid technological change. To remain competitive, we must continue
to enhance and improve the ease of use, responsiveness, functionality and
features of our online and offline services in order to attract homeowners to
our Web site and maintain our service provider network. We expect the intensity
of competition to increase in the future. Increased competition may result in
changes in our pricing model, fewer homeowners visiting our
6
Web site, service providers leaving our network, less marketing revenue, reduced
gross margins and loss of market share, any one of which could significantly
reduce any future profitability. In addition, technological barriers to entry
are relatively low. As a result, current competitors, including local referral
businesses and online referral companies including ServiceMagic.com, and
Contractor.com as well as potential competitors such as The Home Depot, Lowe's
and Sears Roebuck & Company who have launched Web sites similar to ours that
could gain broader market acceptance based on content, products and services.
Because of the localized nature of the service provider matching services, our
Web site presentation, and the personalized approach of our customer service and
operations center, we believe that we distinguish our service provider matching
service from that of our competitors but cannot assure that our customers will
recognize such distinctions or that this will sustain our business.
The business management software, e-distribution and e-commerce markets
are intensely competitive, and we face increasing competition in every aspect of
this business. E-commerce distribution is a relatively new fragmented industry
and is anticipated to attract significant competition. We may not be able to
compete effectively in such an environment.
Some of our competitors have more resources and broader and deeper
customer access than we do. In addition, several of these competitors have or
can readily obtain extensive knowledge of the home improvement industry. Our
competitors may be able to respond more quickly than we can to new technologies
or changes in Internet user preferences and devote greater resources than we can
to the development, promotion and sale of their services. We may not be able to
maintain our competitive position against current and future competitors,
especially those with significantly greater resources and brand recognition.
HOMEOWNERS AND SERVICE PROVIDERS MAY BE RELUCTANT TO ACCEPT AN INTERNET-BASED
SERVICE PROVIDER MATCHING SERVICE.
Currently most homeowners use traditional means including word-of-mouth
referrals, Yellow Pages and local contractor matching services to obtain service
providers for their home improvement projects. In addition, many service
providers do not use the Internet for business purposes and may be reluctant to
become part of a network of service providers on an Internet-based service
provider matching service. If homeowners do not use our matching service or
service providers do not join our network, we will not be able to generate
significant revenues from either services or advertising.
IF WE DO NOT ATTRACT AND RETAIN A NETWORK OF HIGH QUALITY SERVICE PROVIDERS, OUR
BUSINESS COULD BE HARMED.
We expect to derive the majority of our revenues from our network of
service providers in the form of payments for each homeowner referral that we
provide to them and for each home improvement project that they win. Our
business is highly dependent on homeowners' use of our Web site to find service
providers for their home improvement projects so that service providers will
achieve a satisfactory return on their participation in the ImproveNet program.
A key element of the growth of our business is the pace at which
service providers adopt the ImproveNet matching process. This adoption includes
responding to homeowner inquiries within 72 hours, providing a competitive, firm
quote to homeowners quickly, and paying the service fees to ImproveNet. We
devote significant effort and resources to screening and supporting
participating service providers and to developing programs that monitor service
providers' job wins and that collect service fees from service providers for
these wins. Our inability to screen and support service providers effectively,
or the failure of our service providers to respond professionally and in a
timely manner to homeowner inquiries, could result in low homeowner satisfaction
and harm our business. In addition, the failure of our service providers to win
home improvement projects, report their wins to us, or pay us service fees could
harm our business.
We must actively recruit new service providers and retain and motivate
our current service providers to ensure that we continually have adequate
coverage. We believe that service providers in the home improvement industry
suffer from a relatively high failure or turnover rate that makes it difficult
for us to retain service providers. Accordingly, we expect that not all of our
service providers will remain active participants in our network. If we are
unable to achieve low turnover among our network of service providers our
business could be harmed.
THE MARKETS IN WHICH WE COMPETE ARE CYCLICAL WHICH CAN AFFECT OUR FINANCIAL
PERFORMANCE AND RESULTS.
The demand for our service provider matching services is cyclical and
fluctuates from season to season during the year. Historically during the spring
and summer, the demand of homeowners to proceed with home improvement projects
is stronger than at other times of the year. Numerous factors may account for
this increased demand. As a result, the quantity and quality of the home
improvement project leads we receive at various times of the year fluctuates.
This directly affects the number of home improvement project leads we provide.
Therefore, revenues from lead fees and win fees may be negatively impacted at
times when the demand is less. Our financial performance and results can be
impacted.
7
In a similar way, the demand from our manufacturer and distributor
customer base for our business management software, e-commerce and
e-distribution solutions is cyclical. During the late fall and winter when
demand for building materials decreases, manufacturers and distributors in the
BMI are more receptive to the business management software, e-commerce and
e-distribution solutions we offer. We believe this is primarily due to a less
demanding schedule for the manufacturers and distributors affording them time to
focus on our solutions. The result of this fluctuation can negatively impact our
financial performance and results.
IF HOMEOWNERS FAIL TO REPORT, AND SERVICE PROVIDERS FAIL TO REPORT AND TO PAY TO
US WIN FEES, DIRECTLY OR INDIRECTLY, OUR BUSINESS WOULD BE HARMED.
Our service providers are responsible for paying us a win fee for each
job that they obtain from us. We ask service providers not to pass on the cost
of the win fee to the homeowner. However, we do not currently provide any
guarantee to the homeowner that our service providers have not raised their
rates to cover the win fee nor do we audit or plan to audit our service
providers to confirm that they have not raised their rates. Homeowners may
believe that they are indirectly paying us our win fee through the higher rates
of service providers and, therefore, choose to select service providers through
word-of-mouth referrals, Yellow Pages, local contractor matching services or
other means rather than using our matching service. If homeowners choose not to
use our service, we will lose service revenues and visitors to our Web sites and
our business will be harmed.
We depend on our service providers to report that they have won a job,
report the correct contract amount, and pay us our win fee. We rely on our
relationships with our service providers and the incentive to receive future
leads from us to encourage service providers to report wins and pay win fees.
Currently, we do not have a control or an oversight mechanism in place with
either service providers or homeowners to ensure that they report wins and pay
win fees. If service providers do not report wins, the correct contract amounts,
or pay us win fees, we will lose service revenues and our business will be
harmed.
WE ARE UNCERTAIN IF OUR NEW SUBSCRIPTION BASED PROGRAM, RECENTLY INTRODUCED TO
OUR EXISTING AND PROSPECTIVE SERVICE PROVIDERS, WILL BE ACCEPTED.
In July 2004, we introduced a new subscription based program to our
existing and prospective service providers for purchasing homeowner home
improvement leads. The subscription program has three different pricing levels.
Two of those levels include a monthly subscription fee along with lead fees at
various rates. None of the three pricing levels includes win fees. Our
expectation is that all of our service providers will be converted to one of the
pricing levels of the subscription program eliminating win fees altogether.
There are no assurances that our existing and prospective service providers will
be receptive to the new subscription program or will be successfully converted
to the subscription program.
WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO ATTRACT VISITORS TO OUR WEB SITES.
We have entered into commercial contracts with Web based search engine
companies and suppliers of home improvement products and services to generate
revenues and increase the number of visitors to our Web sites. Under these
contracts, search engine companies link search requests to our Web site, and
suppliers have placed links to our Web site from their Web sites to allow their
customers to visit our Web site if the customers are interested in obtaining
home improvement information or searching for a service provider. We believe
that increasing the number of visitors to our Web sites will increase the number
of job submissions. We cannot assure you that these contracts will lead to
increased visits to our Web sites or that increased visits to our Web sites will
result in increased job submissions. If we do not maintain our existing
contracts on terms as favorable as currently in effect or if we are not able to
establish new contracts on commercially reasonable terms, our business could be
harmed.
Companies that we may pursue for a commercial contract may offer
services competitive with suppliers with which we currently have contracts. As a
result, these suppliers may be reluctant to enter into commercial contracts with
us.
We purchase preferential placement on high-traffic Web sites. We
believe these Web sites can help us to increase the number of visitors to
www.ImproveNet.com. There is intense competition for preferential placements on
these Web sites. If we lose our relationships with any one of these Web sites,
job submissions on ImproveNet.com may decrease and we may not be able to enter
into commercially reasonable contracts with replacement high-traffic Web sites,
if at all.
WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO PROVIDE SOFTWARE TOOLS AND
INFRASTRUCTURE.
We integrate third-party software into our service offerings on our Web
sites. We would be harmed if the providers from which we license software ceased
to deliver and support reliable products, to enhance their current products, or
to respond to emerging industry standards. In addition, third-party software may
not continue to be available to us on commercially reasonable terms or at all.
The loss of, or inability to maintain or obtain, this software could limit the
features available on our Web sites, which could harm our business.
8
IN 2003 WE WERE DEPENDENT UPON A THIRD-PARTY RELATIONSHIP FOR THE CUSTOMER
SERVICE AND OPERATIONS OF OUR SERVICE PROVIDER MATCHING SERVICE. ALTHOUGH THESE
FUNCTIONS WERE RECENTLY MOVED IN-HOUSE, IT IS UNCLEAR IF THE TRANSITION HAS BEEN
IMPLEMENTED SMOOTHLY.
Our customer service and operations for the service provider matching
service are performed under terms of a services agreement with a Canadian
corporation in Nova Scotia, Canada which provides for termination without cause
upon 180 days notice by the Canadian corporation. In January 2004, the Canadian
corporation provided written notice to us of termination of the services
agreement. We have staffed our Scottsdale, Arizona offices for the customer
service and operations for the service provider matching service. In late March
2004, the transition of our customer service and operations was made to our
Scottsdale, Arizona offices. It is unclear if the transition has been
implemented smoothly or if the customer service and operations will be performed
adequately in the new location. There is an element of goodwill associated with
the customer relationship aspect of the customer service center which could have
been lost when the services agreement was terminated. Early on, we experienced
some disruption in customer support, collections of accounts receivable and
revenues following the time of the transition of our Customer Care Center.
WE ARE DEPENDENT UPON CORPORATE ACCEPTANCE OF OUR SERVICES AND PRODUCTS NARROWLY
TARGETED TO THE MANUFACTURERS AND DISTRIBUTORS IN THE BUILDING MATERIALS
INDUSTRY.
Acceptance of technology based solutions within the building materials
industry is an unproven strategy and may not materialize despite our marketing
and sales efforts. Our focus on a narrow market for these offerings could harm
our business if the pace of acceptance is slower than we anticipate.
WE ARE DEPENDENT UPON A FEW MAJOR CUSTOMERS FOR REVENUE RECEIVED FROM SALES OF
E-COMMERCE AND E-DISTRIBUTION SOFTWARE.
Our reliance on a few major customers for revenue currently generated
by eTechLogix leaves our business vulnerable to the ability of those customers
to pay us timely. Although our efforts are focused on increasing our customer
base, there can be no assurances that we will be successful. Almost all of the
revenue generated by eTechLogix is received from eight primary customers.
WE CANNOT GUARANTEE THAT WE WILL BE ABLE TO MANAGE FUTURE GROWTH.
Any future growth we may experience will present many challenges and
place additional pressure on our already limited resources and infrastructure.
No assurances can be given that we will be able to execute our business plans
and strategies and effectively manage future growth. Our future growth may place
a significant strain on our managerial, operational, financial and other
resources. Our success will depend upon our ability to manage growth
effectively, which will require that we continue to implement and improve our
operational, administrative, financial and accounting systems and controls and
continue to expand, train and manage our employees. Our systems, procedures and
controls may not be adequate to support operations and we may not be able to
achieve the rapid execution necessary to successfully penetrate the building
materials industry. Our inability to manage internal or acquisition based growth
effectively would cause a significant strain on our resources and our resulting
financial performance would be materially adversely affected.
WE HAVE EXPERIENCED DIFFICULTY IN ACCURATELY FORECASTING OUR SALES, WHICH
RESULTS IN OUR SALES REVENUES TO VARY FROM OUR ESTIMATES.
As a result of our limited operating history, it is difficult to
accurately forecast our net sales and we have limited meaningful historical
financial data upon which to base operating expenses. We base our current and
future expense levels on our operating plans and estimates of future net sales,
and our expenses are to a large extent fixed. Sales and operating results are
difficult to forecast because they generally depend on the volume and timing of
the orders we receive. As a result, we may be unable to adjust our spending in a
timely manner to compensate for any unexpected revenue shortfall. This inability
could cause our net losses in a given quarter to be greater than expected.
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND MAY RESULT IN
CONTINUED LOSSES.
As a result of our limited operating history, rapid growth and change
in business focus, and because of the emerging nature of the market in which we
compete, our historical financial data is of limited value in planning future
operating expenses. Our expense levels will be based in part on expectations
concerning future revenues. Our revenue is derived primarily from service and
product sales, which are difficult to forecast accurately. Revenues from our
service provider matching services are subject to credits made to the service
providers from time to time, and the amount of credits made during any
particular period are difficult to forecast. We account for credits as they are
actually made. We may be unable to adjust spending in a timely manner to
compensate for any
9
unexpected shortfall in revenues. A significant shortfall in demand for our
products could have an immediate and material adverse effect on our business,
results of operations and financial condition. Our business development and
marketing expenses will increase significantly as we expand our operations. To
the extent that such expenses precede or are not rapidly followed by increased
revenue, our business, results of operations and financial condition may be
materially adversely affected.
OUR INABILITY TO COLLECT ACCOUNTS RECEIVABLE ON A TIMELY BASIS COULD CAUSE OUR
CASH FLOW TO BE IMPAIRED AND REDUCE OUR PROFITABILITY.
While we have gained significant expertise in dealing with Internet
distribution and collection issues and have instituted credit review and
approval procedures, no assurances can be given that future unexpected problems
and collection risks will not develop from these and other customers which could
reduce our profitability or increase our losses.
IF WE FAIL TO RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO CONTINUE TO OPERATE
COULD BE HARMED.
We depend on the continued service of our key technical, operational
and administrative personnel. In particular, the loss of the services of any of
the remaining personnel, individually or as a group, could cause us to incur
increased operating expenses and divert other personnel time in searching for
their replacements. We do not have employment agreements with any employee, and
we do not maintain any key person life insurance policies for any of our
employees. The loss of any of our remaining personnel could harm our business.
THREE OF OUR EMPLOYEE BOARD MEMBERS HOLD A CONTROLLING INTEREST IN US, WHICH
LIMITS THE ABILITY OF OTHER SHAREHOLDERS TO INFLUENCE CORPORATE DECISIONS.
Three of the current members of our Board of Directors who also serve
in senior management positions, collectively hold a controlling interest in our
outstanding common stock and can effectively control the election of our Board
of Directors. As a practical matter, these three members of our Board will
continue to control ImproveNet into the foreseeable future.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE COULD LOSE THESE
RIGHTS AND OUR BUSINESS COULD BE HARMED.
We depend upon our ability to develop and protect our intellectual
property rights, including our databases of homeowners and service providers and
our internally-developed matching criteria and algorithms, to distinguish our
services from our competitors' services. We rely on a combination of copyright,
trademark and trade secret laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary rights. We have
no issued patents. Our databases are protected by trade secret laws and our
matching service is protected primarily by trade secret and copyright laws.
Existing laws afford only limited protection of intellectual property rights.
Attempts could be made to copy or reverse engineer aspects of our processes or
services or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to protect our intellectual property rights
against unauthorized third-party copying or use. Furthermore, policing the
unauthorized use of our intellectual property is difficult, and expensive
litigation may be necessary in the future to enforce our intellectual property
rights. The use by others of our proprietary rights could harm our business.
OUR SERVICES COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS CAUSING
COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
Third parties could claim that we have infringed their intellectual
property rights by claiming that our matching service infringes their patents,
trade secrets or copyrights. In the ordinary course of business, we have
received, and may receive in the future, notices from third parties claiming
infringement of their proprietary rights. In addition, providers of goods and
services over the Internet are increasingly subject to claims that they infringe
patents that cover basic elements of electronic commerce. The resolution of any
claims could be time-consuming, result in costly litigation, delay or prevent us
from offering our services or require us to enter into royalty or licensing
agreements, any of which could harm our business. In the event an infringement
claim against us is successful and we cannot obtain a license on acceptable
terms, license a substitute technology or redesign our services, our business
would be harmed. Furthermore, former employers or our current and future
employees may assert that our employees have improperly disclosed to us or are
using confidential or proprietary information in our business.
IF WE EXPERIENCE SYSTEM FAILURES, OUR REPUTATION WOULD BE HARMED AND USERS MIGHT
SEEK ALTERNATIVE SERVICE PROVIDERS, CAUSING US TO LOSE REVENUES.
We depend on the efficient and uninterrupted operation of our computer
and communications hardware and software systems. Substantially all of our
computer hardware for operating our Web sites is currently located at AT&T in
Phoenix, Arizona with backups located at our facility in Scottsdale, Arizona.
These systems and operations are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar
events. They are also subject to break-ins,
10
sabotage, intentional acts of vandalism and similar misconduct. We do not have
fully redundant systems, have a limited formal disaster recovery plan and have
no alternative providers of hosting services, and we do not carry business
interruption insurance to compensate us for losses that could occur. Despite any
precautions we may take, the occurrence of a natural disaster or other
unanticipated problems either at AT&T or at our facility could result in
interruptions in our services. Any damage to or failure of our systems could
result in interruptions in our service. In addition to placing an increased
burden on our engineering staff, any system failure could create user questions
and complaints that must be responded to by our customer support personnel. The
system failures of various third-party Internet service providers, online
service providers and other Web site operators could result in interruptions in
our service to those users who require the services of these third-party
providers and operators to access our Web sites. These interruptions could
reduce our revenues and profits, and our future revenues and profits will be
harmed if our users believe that our system is unreliable. Since we have been
keeping logs of our Web sites, our ImproveNet.com Web site has been
unintentionally interrupted for periods ranging from two minutes to one hour,
the latter prior to February 2000.
WE MAY HAVE CAPACITY RESTRAINTS THAT COULD LIMIT THE GROWTH OF OR REDUCE OUR
REVENUES.
The satisfactory performance, reliability and availability of our Web
sites, processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain large numbers of users. If the
volume of traffic, including at peak times, on our Web sites increases, we may
need to expand and upgrade our technology, transaction processing systems and
network infrastructure. We may not be able to accurately project the rate or
timing of these increases, if any, in the use of our services or to expand or
upgrade our systems and infrastructure in a timely manner to accommodate these
increases.
We use internally developed systems for operating our services and
processing our transactions, including billing and collections processing. We
must continually improve these systems in order to accommodate the use of our
Web sites. If we add new features and functionality to our services, we could be
required to develop or license additional technologies. Our inability to add
additional software and hardware or upgrade our technology, transaction
processing systems or network infrastructure could cause unanticipated system
disruptions, slower response times, degradation in levels of customer support,
impaired quality of the users' experience, delays in accounts receivable
collection or losses of recorded financial information. Our failure to provide
new features or functionality also could result in these consequences. The
required hardware may not be readily available or affordable and we may be
unable to effectively upgrade and/or expand our systems in a timely manner or to
integrate smoothly any newly developed or purchased technologies with our
existing systems. These difficulties could harm or limit our ability to expand
our business.
WE COULD BE HELD LIABLE FOR PRODUCTS AND SERVICES.
We could be subject to claims relating to products and services that we
perform on behalf of homeowners or referrals to selected contractors through our
Web site. Homeowners may bring claims against us or our service providers, who
may have among other things, provided them with poor workmanship or caused
bodily injury or damage to property. Currently we have no insurance coverage for
such potential claims. In addition, claims, with or without merit, would result
in diversion of our financial resources and management resources.
WE DEPEND ON THE USE OF THE INTERNET. IF THE USE OF THE INTERNET DOES NOT GROW,
OUR REVENUES MAY NOT GROW AND COULD DECLINE AND OUR BUSINESS COULD BE HARMED.
We depend on increased acceptance and use of the Internet. In
particular, our matching service depends upon service providers being willing to
use the Internet to find jobs through our service. We believe that service
providers generally have not traditionally used computers or the Internet to
operate their businesses. Demand and market acceptance for recently introduced
products and services over the Internet are subject to a high level of
uncertainty. As a result, acceptance and use of the Internet may not develop or
a sufficiently broad base of users may not adopt or continue to use the Internet
as a medium of commerce.
THE INTERNET IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES, FREQUENT NEW
PRODUCT AND SERVICE INTRODUCTIONS AND EVOLVING INDUSTRY STANDARDS.
To succeed, we will need to adapt effectively to rapidly changing
technologies and continually improve the performance features and reliability of
our services. We could incur substantial costs in modifying our products,
services or infrastructure to adapt to these changes, and we may also lose
customers and revenues if our services fail to adapt to the rapid changes
characteristic of the Internet.
Conversely, if the Internet experiences increased growth in number of
users, frequency of use and bandwidth requirements, the Internet infrastructure
may be unable to support the demands placed on it. The success of our business
will rely on the Internet providing
11
a convenient means of interaction and commerce. Our business depends on the
ability of users to access information without significant delays or
aggravation.
FUTURE GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES PERTAINING TO THE INTERNET
COULD DECREASE THE DEMAND FOR OUR SERVICES OR INCREASE THE COST OF DOING
BUSINESS.
There is, and will likely continue to be, an increasing number of laws
and regulations pertaining to the Internet. These laws and regulations may
relate to liability for information retrieved from or transmitted over the
Internet, online content, user privacy, taxes or the quality of services. Any
new law or regulation pertaining to the Internet, or the adverse application or
interpretation of existing laws, could decrease the demand for our services or
increase our cost of doing business.
We are not certain how our business may be affected by the application
of existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues created by the Internet and related technologies. Changes in
laws intended to address these issues could create uncertainty for or adversely
affect companies doing business on the Internet. This could reduce demand for
our services or increase the cost of doing business.
GENERAL ECONOMIC CONDITIONS MAY CHANGE DRAMATICALLY FROM YEAR TO YEAR.
General economic conditions, which affect consumer confidence and home
improvement and home-building spending, including interest rates, the overall
level of economic activity, the availability of consumer credit and mortgage
financing and unemployment rates may change dramatically and impact our ability
to operate.
LEGISLATIVE AND REGULATORY INITIATIVES REGARDING THE COLLECTION AND USE OF OUR
USERS' PERSONAL INFORMATION MAY RESULT IN LIABILITY AND EXPENSES.
Current computing and Internet technology allows us to collect personal
information about our users. In the past, the Federal Trade Commission has
investigated companies that have sold personal information to third parties
without permission or in violation of a stated privacy policy. Currently, we
collect personal information only with the users' consent and under our privacy
policy. If we begin collecting or selling personal information without
permission or in violation of our privacy policy, we could face potential
liability for compiling and providing information to third parties.
THE IMPOSITION OF ADDITIONAL STATE AND LOCAL TAXES ON INTERNET-BASED
TRANSACTIONS WOULD INCREASE OUR COST OF DOING BUSINESS AND HARM OUR ABILITY TO
BECOME PROFITABLE.
We file state tax returns as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales and use tax collection
obligations on out-of-state companies such as ours that engage in or facilitate
Internet-based commerce. A number of proposals have been made at state and local
levels that could impose taxes on the sale of products and services through the
Internet or the income derived from those sales. These proposals, if adopted,
could substantially impair the growth of Internet-based commerce and harm our
ability to become profitable.
United States of America federal law limits the ability of the states
to impose taxes on Internet-based transactions. Until October 21, 2001, state
and local taxes on Internet-based commerce that are discriminatory against
Internet access are prohibited, unless the taxes were generally imposed and
actually enforced before October 1, 1998. It is unclear how long this tax
moratorium will continue. Failure to renew this legislation would allow various
states to impose taxes on Internet-based commerce. The imposition of state and
local taxes could harm our ability to become profitable.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT OR FUTURE STOCKHOLDERS MAY CAUSE
OUR STOCK PRICE TO DECLINE.
If our stockholders or option and warrant holders sell substantial amounts
of our common stock in the public market, including shares issued in completed
or future acquisitions or upon the exercise of outstanding options and warrants,
then the market price of our common stock could fall. As of June 30, the holders
of 12,000,000 shares of common stock and warrants to purchase an additional
8,000,000 shares of common stock have demand and/or piggyback registration
rights. All of these shares are included in this registration statement. In
addition, we have included in this registration approximately 13,310,410
additional shares of our common stock and shares underlying approximately
4,836,664 additional warrants. The registration of this amount of shares of our
common stock could adversely affect the market price of our common stock. We
also have filed a registration statement to register shares of common stock
under our 1999 Equity Incentive Plan and Stock Purchase Plan. Shares issued
pursuant to existing or future
12
shelf registration statements, upon exercise of stock options and warrants will
be eligible for resale in the public market without restriction.
WE HAVE A LARGE NUMBER OF SHARES OF COMMON STOCK THAT CAN BE SOLD IN THE PUBLIC
MARKET, AND FUTURE SALES OF OUR COMMON STOCK, OR THE PERCEPTION THAT SUCH FUTURE
SALES MAY OCCUR, MAY CAUSE OUR STOCK PRICE TO DECLINE.
A substantial number of shares of our common stock could be sold into
the public market in this offering. Up to 25,310,410 shares could be offered for
sale under this prospectus, representing approximately 45% of the outstanding
common stock as of August 14, 2004. In addition, as of such date, another
12,836,664 shares of common stock could be offered for sale upon the exercise of
warrants. The sale of a substantial number of shares of our common stock, or the
perception that such sales could occur, could materially and adversely affect
the market price of our common stock.
DIVIDEND POLICY
Under Delaware law, dividends may only be paid out of net profits.
Holders of our common stock are entitled to receive dividends, if any, as
declared by our Board of Directors. We have never declared or paid a dividend on
our common stock and we anticipate that we will retain any future earnings, if
any, for use in the operation and expansion of our business, and we do not
intend to pay dividends in the foreseeable future.
MARKET FOR COMMON STOCK
Our Common Stock began trading on the Nasdaq National Market System
under the symbol "IMPV" on March 16, 2000 and subsequently, on the Over The
Counter Bulletin Board on June 29, 2001. The following table sets forth the high
and low bid prices for our common stock as reported by the OTC Bulletin Board in
the periods indicated. The quotations set forth below reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not reflect
actual transactions.
Fiscal 2002 High Low
----------- ---- ---
First Quarter ended March 31, 2002 $ 2.1250 $ 0.7500
Second Quarter ended June 30, 2002 11.6250 0.5000
Third Quarter ended September 30, 2002 10.5000 4.5000
Fourth Quarter ended December 31, 2002 9.9375 3.3125
Fiscal 2003 High Low
----------- ---- ---
First Quarter ended March 31, 2003 $ 9.5000 $ 3.4375
Second Quarter ended June 30, 2003 7.0310 2.1250
Third Quarter ended September 30, 2003 9.3750 3.0310
Fourth Quarter ended December 31, 2003 3.500 1.6875
Fiscal 2004 High Low
----------- ---- ---
First Quarter ended March 31, 2004 $ 0.23 $ 0.09
Second Quarter ended June 30, 2004 0.35 0.09
As of June 30, 2004, there were approximately 407 owners of record of
our Common Stock.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the Common Stock in
this offering but may receive up to $1,935,700 upon the exercise of the warrants
if all of these warrants are exercised. There can be no assurance that any
warrants will be exercised. See "DESCRIPTION OF IMPROVENET'S SECURITIES -
Warrants" below for a complete description of the warrants. We plan to use the
proceeds, if any, from the exercise of the warrants for general corporate and
working capital purposes.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary financial information for the years ended
December 31, 2002 and 2003 is derived from our audited financial statements
included in this prospectus. The following summary financial information for the
six months ended June 30, 2003 and 2004 is derived from our unaudited financial
statements that, in our opinion reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial data for such
periods and as of such dates. This information should be read with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the financial statements and related notes included herein.
Six Months Ended
Years Ending December 31, June 30,
------------------------------ ------------------------------
2003 2002 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Sales $ 3,223,587 $ 777,257 $ 1,880,247 $ 1,648,548
Cost of Sales 1,787,449 240,394 845,043 966,423
Gross Profit 1,436,138 536,863 1,035,204 682,125
Gain (Loss) From Operations (851,653) (405,220) (62,255) (355,378)
Net Loss Per Common Share (0.02) (0.02) (0.02) (0.01)
Weighted Average Number of Basic Shares 39,210,315 28,909,573 40,422,152 39,210,315
December 31, June 30,
----------------------------- ------------
2003 2002 2004
------------ ------------ ------------
(unaudited)
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 382,415 $ 446,833 $ 1,072,627
Current Assets 720,720 1,431,359 1,615,114
Total Assets 820,520 1,589,353 1,683,821
Current Liabilities 1,008,208 3,401,514 890,599
Accumulated Deficit (3,081,507) (412,794) (1,963,096)
Shareholders' Equity (Deficit) 872,689 (1,839,041) 791,100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information that we believe is
relevant to an assessment and understanding of ImproveNet's results of
operations and financial condition for the fiscal years ended December 31, 2003
and 2002 and the six months ended June 30, 2004 and 2003. The following
discussion should be read in conjunction with the Financial Statements and
related notes. See "INDEX TO FINANCIAL STATEMENTS" and the Financial Statements
referenced in the index.
OVERVIEW
BASIS OF PRESENTATION
On December 23, 2002, eTech merged into Etech Acquisition, Inc., (the
"Merger") an Arizona corporation and wholly owned subsidiary of ImproveNet.
Through this merger, the former shareholders of eTech acquired a controlling
interest in ImproveNet and accordingly, the Merger is accounted for as a reverse
merger, with eTech being the accounting acquirer of ImproveNet. The Company has
treated the merger as being effective December 31, 2002 as ImproveNet had de
minimus operations from December 23, 2002 to December 31, 2002. As such, the
financial statements present the historic financial position, operations
14
and cash flows of eTech for all periods up to December 31, 2002 but include both
ImproveNet and eTech for year 2003. Refer to Note 8, Merger with eTech, for
additional information and disclosures related to the Merger.
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has continued to
sustain losses for the past two years but with Funds Received from its private
placement in June 2004, the Company now has positive working capital and
positive net worth.
ACQUISITION
On December 23, 2002, eTech merged with eTech Acquisition, Inc., an
Arizona corporation and wholly-owned subsidiary of ImproveNet, that was created
during 2002 to merge eTech and ImproveNet. This Merger occurred pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") dated July 30, 2002. Under
the terms of the Merger Agreement, eTech paid $500,000 to ImproveNet and
incurred $19,000 in costs directly related to the merger. At the time of the
Merger, each outstanding share of eTech Common Stock, no par value per share,
was converted into the right to receive and became exchangeable for 5,555.555556
shares of ImproveNet Common Stock, par value $.001 per share. A total of
35,417,750 shares of ImproveNet common stock were issued in the Merger to eleven
(11) different shareholders of eTech. Through the merger, the former directors
of eTech collectively received 30,310,740 shares of ImproveNet Common Stock and
as a result, acquired control of the Company.
Each unexpired outstanding option to purchase eTech Common Stock was
converted, on the same vesting schedule, into an option to purchase a number of
shares of ImproveNet Common Stock equal to the number of shares of eTech Common
Stock that could have been purchased under such option multiplied by
5,555.555556, at a price per share of ImproveNet Common Stock equal to the per
share exercise price of $.05 per share. Options to acquire 788,889 shares of
ImproveNet Common Stock were issued in the Merger as a result of these
outstanding options, of which, 222,222 had vested as of the date of the Merger.
Warrants to purchase 1,500,000 shares of ImproveNet were issued as a
result of the Merger. These warrants were issued in conjunction with
subordinated convertible notes payable, as discussed below.
TENDER OFFER
Under the terms of the Merger Agreement, the Company agreed to present
a cash tender offer ("Tender Offer") to pre-merger shareholders of ImproveNet.
The price per share was based in part on ImproveNet's available cash balance at
the closing of the merger. The Tender Offer was available from the time of the
merger through January 2, 2003.
Prior to the closing of the merger, ImproveNet deposited approximately
$2,557,000 with its stock transfer agent for payments to be made under the
Tender Offer. In conjunction with the Tender Offer, the Company disbursed a
total of approximately $1,962,000 to various pre-merger ImproveNet shareholders
in January 2003 resulting in the acquisition of 13,913,975 treasury shares in
January 2003. Funds remaining with the stock transfer agent in excess of
disbursements of approximately $595,000 are classified as receivable from stock
transfer agent on the accompanying balance sheets.
CONVERSION OF SUBORDINATED CONVERTIBLE NOTES PAYABLE
During July 2002, eTech issued an aggregate of $150,000 of subordinated
convertible notes payable to two accredited investors. The notes are secured by
substantially all of the Company's assets and are subordinated to the eTech's
9.00% note payable to a bank (Refer to Note 5, Notes Payable). In conjunction
with the issuance of these subordinated convertible notes payable, eTech also
issued one-year warrants to purchase an aggregate of 1,500,000 shares of
ImproveNet at a purchase price of $0.15 per share. The subscription of the
warrants was expressly conditioned upon the closing of the Merger. The Company
expensed approximately $81,000 in connection with these warrants to recognize
the fair value of the warrants.
During August 2002, eTech issued an aggregate of $100,000 of
subordinated convertible notes payable to accredited investors and officers of
eTech (refer to Note 7, Related Party Transactions). The notes are secured by
substantially all of eTech's assets and are subordinated to the $150,000 of
aggregate subordinated notes payable discussed above and to the 9.00% note
payable to a bank (Refer to Note 5, Notes Payable).
15
All of the subordinated convertible notes payable described above bear
interest at a rate of 10.00% per annum and are due two years after the date of
issue, provided they are not converted prior to this date. The notes are
convertible into common shares of eTech in whole, or in part, at the option of
the lender at any time during the term of the note at a rate of one share for
every $555.5555556 of debt converted. The notes will automatically be converted
if there is a transfer of more than 50% of the voting control of the Company, in
one transaction or a series of transactions with ImproveNet directly or by
merger or consolidation in which the existing shareholders of eTech do not
directly retain more than 50% of the voting control of eTech, or a sale of all
or substantially all assets of eTech to ImproveNet or one of ImproveNet's
subsidiaries. The shares of eTech that will be received by the note holders if
automatic conversion occurs will be converted to shares of ImproveNet using the
same conversion rate as all other eTech shares converted in a merger
transaction. Immediately prior to the closing of the Merger, all of the
subordinated convertible notes payable were converted into shares of Etech
common stock and upon closing of the Merger were exchanged into shares of
ImproveNet common stock.
The proceeds of the subordinated notes payable of $250,000 were to be
used for a portion of a $500,000 deposit by Etech with ImproveNet. This deposit
was made prior to the Merger and in accordance with the Merger Agreement.
SHORT TERM PROMISSORY
In June 2003 following the closing of the Merger, we borrowed $75,000
for a 90-day period represented by a promissory note that we issued to an
accredited investor. Warrants to purchase 200,000 shares of our common stock
were also issued in that transaction. The promissory note was renewed in
September 2003 for $80,000 including accrued but unpaid interest, and a warrant
to purchase an additional 150,000 shares of our common stock was issued at that
time. The promissory note was paid in full in December 2003.
ISSUANCE OF UNSECURED CONVERTIBLE PROMISSORY NOTES
In December 2003, we completed a private placement of $400,000 of 8%
unsecured convertible promissory notes, each with a maturity of December 15,
2005, issued to a limited group of accredited investors.
The notes will accrue 8% interest per year payable quarterly commencing
March 15, 2004. The first quarterly payment was made on March 15, 2004. The
principal of each note and all accrued but unpaid interest is convertible into
shares of our common stock at the rate of five (5) shares for each one dollar of
debt represented by each note. Proceeds received from the issuance of the notes
are being used for working capital and general corporate purposes. In addition,
approved finders of the participating accredited investors were collectively
issued warrants to purchase 520,000 shares of our common stock.
PRIVATE PLACEMENT AND CONVERSION OF CONVERTIBLE PROMISSORY NOTES
On June 24, 2004, we completed a sale of 10,500,000 shares of our
common stock, par value $0.001 per share, for $0.10 per share to several
accredited investors (collectively, the "Investors"), for an aggregate purchase
price of $1,050,000 in a private placement transaction pursuant to provisions of
a Common Stock Subscription Agreement dated June 23, 2004 (the "Agreement"). We
also granted the Investors 3-year warrants to purchase a total of 8,000,000
shares of our common stock at an exercise price of $0.15 per share. The right to
designate a nominee to our Board of Director's was also granted to one of the
accredited investors. The funds received will be used for general corporate
purposes and to increase our financial flexibility.
As part of the transaction, the Investors also purchased 1,500,000
shares of common stock from affiliates of three of our officers and directors
for an aggregate purchase price $150,000. Each of these three selling parties
entered into a lock-up agreement restricting future sales of their common stock
for a specified period as well as a voting agreement regarding the accredited
investor's designated nominee to our Board of Directors.
In addition, the principal balance and all accrued interest on $370,000
of the $400,000 outstanding convertible promissory notes we issued to accredited
investors in December 2003 were converted into common stock and warrants on
similar terms to the private placement (the "Converting Investors") on June 24,
2004 as more specifically set forth in each respective Second Amendment to
ImproveNet, Inc. Unsecured Convertible Promissory Note Subscription Agreement
and 8% Unsecured Convertible Promissory Note (the "Second Amendments"). A total
of 3,707,400 shares of common stock were issued along with 3-year warrants to
purchase an additional 2,466,666 shares of common stock at an exercise price of
$0.15 per share. We have paid in full the remaining $30,000 of convertible
promissory notes in lieu of conversion.
We have agreed to file a registration statement with the Securities
Exchange Commission within sixty days of the closing of the Agreement covering
the resale of the common stock by the Investors and the Converting Investors.
16
ACCOUNTING FOR THE MERGER
The Company accounted for this merger in accordance with SFAS No. 141,
"Business Combinations." As discussed above, the former shareholders of eTech
acquired a controlling interest in the Company, accordingly, the transaction has
been accounted for as a reverse merger and the total consideration given by
eTech of $519,000 has been allocated to the fair values of the pre-merger assets
and liabilities of ImproveNet. At the time of the acquisition, the fair value of
the net assets of ImproveNet was $361,351 in excess of the consideration given
by eTech after all applicable reductions of amounts that otherwise would have
been assigned to the acquired assets were considered. This excess is reported in
the statement of operations as an extraordinary gain.
ImproveNet, Inc. ("ImproveNet" or the "Company") was incorporated in
California in January 1996, was reincorporated in Deleware in September 1998 and
is headquartered in Scottsdale, Arizona. The Company is a source for home
improvement information services for homeowners, service providers and suppliers
nationwide.
eTechLogix, Inc. ("eTech"), a wholly-owned subsidiary of ImproveNet,
licenses, installs and maintains its proprietary e-commerce software products to
companies primarily operating in the building material industry. eTech was
formerly known as First Systech International, Inc. and was originally
incorporated in March 1989 in the State of Texas. In July of 1994, eTech
relocated to the State of Arizona and incorporated itself under the laws of the
State of Arizona.
The following discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 7 of this Form
10-KSB. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, as discussed more
fully herein.
The forward-looking information set forth in this Form SB-2 is as of
August 23, 2004, and ImproveNet, Inc. undertakes no duty to update this
information. Should events occur subsequent to August 23, 2004 that make it
necessary to update the forward-looking information contained in this Form SB-2,
the updated forward-looking information will be filed with the SEC in a
Quarterly Report on Form 10-QSB or as an earnings release included as an exhibit
to a Form 8-K, each of which will be available at the SEC's website at
www.sec.gov. More information about potential factors that could affect our
business and financial results is included in the section entitled "Factors
Affecting Future Performance, Results of Operations and Financial Condition" in
Part I--Item 1. Description of Business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
ImproveNet, Inc.'s discussion and analysis of its financial condition
and results of operations are based upon ImproveNet, Inc. consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires ImproveNet to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis,
ImproveNet evaluates its estimates, including those related to customer
programs, bad debts, income taxes, contingencies and litigation. ImproveNet
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
ImproveNet believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
SOFTWARE DEVELOPMENT AND SALES FOR THE BUILDING MATERIALS INDUSTRY SEGMENT
The Company recognizes revenue in accordance with SOP 97-2, "Software
Revenue Recognition." This SOP provides guidance on revenue recognition of
software transactions. The Company recognizes revenue principally from the
development and licensing of its software and from consulting and maintenance
services rendered in connection with such development and licensing activities.
Maintenance contract revenue is recognized on a straight-line basis over the
life of the respective contract. The Company also derives revenue from the sale
of third party hardware and software which is recognized based on the terms of
each contract. Consulting revenue is recognized when the services are rendered.
No revenue is recognized prior to obtaining a binding commitment from the
customer.
17
Revenue from fixed price software development contracts, which require
significant modification to meet the customer's specifications, is recognized on
the percentage-of-completion method using the units-of-work-performed method to
measure progress towards completion. Revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Revenue from software package license agreements without
significant vendor obligations is recognized upon delivery of the software.
Contract terms may provide for billing schedules that differ from revenue
recognition and give rise to costs and estimated earnings in excess of billings
on uncompleted software contracts, and billings in excess of costs and estimated
earnings on uncompleted software contracts.
Deferred revenue represents revenue billed and collected but not yet
earned.
The cost of maintenance and research and development related revenues,
which consist principally of staff payroll and applicable overhead, are expensed
as incurred.
HOME IMPROVEMENT SERVICES SEGMENT
Revenues in the home improvement services segment are derived from two
sources: Service revenues and marketing revenues.
Service revenues:
-----------------
Service revenues include lead fees and win fees from ImproveNet's
contractor matching service paid by service providers in the ImproveNet
membership network. Lead fees are recognized at the time we match a homeowner
and service provider and the service provider becomes obligated to pay such fee.
Win fees are recognized at the time the service provider or the homeowner
notifies us that a job has been sold and the service provider becomes obligated
to pay such fee. Refunds and credits against the lead fees and win fees are
recognized when actually made.
Marketing revenues:
-------------------
Marketing revenues include co-branding programs surrounding content and
site integration. Currently marketing revenues are comprised of cash co-branding
programs.
CASH ADVERTISING
Cash co-branding revenues generally are derived from flat rate
co-branding engagements in which all impressions delivered to our Web site in a
particular home improvement category will be delivered to the co-branding
participant over a specified period of time for a fixed monthly fee. Cash
co-branding revenues are recognized on a monthly basis.
We follow the allowance method of recognizing uncollectible accounts
receivable. The allowance method recognizes bad debt expense as a percentage of
accounts receivable based on a review of the individual accounts outstanding and
our prior history of uncollectible accounts receivable. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Deferred income taxes are provided for on an asset and liability
method, whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis.
Deferred tax assets are reduced by a valuation allowance, when in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
BUSINESS SEGMENTS
We follows SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information." SFAS No. 131 requires publicly held companies to
report financial and other information about key revenue segments of an entity
for which this information is available and is utilized by the chief operating
decision maker. We operate in two segments: Software development and sales for
18
the building materials industry through eTechLogix and home improvement
information services through ImproveNet. Our consolidated statements of
operations and cash flows do not reflect operations for year 2002 of the home
improvement services segment as this segment was acquired effective December 31,
2002 through the Merger between ImproveNet and eTech but do reflect both
segments for year 2003.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30,
2003
Our revenues increased to approximately $1,880,000 for the six months
ended June 30, 2004 from approximately $1,648,000 for the six months ended June
30, 2003, an increase of approximately $232,000 or 14%. The increase is
primarily due to increased revenues from the Home Improvement Services Segment.
Our revenues increased to approximately $1,000,000 for the quarter ending June
30, 2004 compared with $841,000 for the year earlier period and from $880,000
for the quarter ending March 31, 2004. The increase is primarily due to the
increased revenues from the Home Improvement Services Segment. The increase in
our accounts receivable reflects slowed collection activity.
eTechLogix revenue decreased to approximately $282,000 for the six
months ended June 30, 2004, from approximately $287,000 for the six months ended
June 30, 2003, a decrease of approximately $5,000 or 2%. The decrease in
eTechLogix's revenue resulted from a decrease in sales of the company's products
and consulting services. eTechLogix relies on eight primary customers for its
revenue.
ImproveNet revenue increased to approximately $1,598,000 for the six
months ended June 30, 2004, from approximately $1,361,000 for the six months
ended June 30, 2003, an increase of approximately $237,000 or 17%. The increase
in ImproveNet's revenue resulted from the continued building of a network of
service providers and an increased number of home improvement projects which
were matched to those service providers. ImproveNet revenue consists almost
entirely of service revenues from its contractor matching service.
Cost of revenues decreased to approximately $845,000 for the six months
ended June 30, 2004 from approximately $966,000 for the six months ended June
30, 2003, a decrease of approximately $121,000 or 13%. The decrease is primarily
due to our improvement of website optimization, ROI analysis of home improvement
leads sources, and locating new home improvement lead providers, all of which
has increased efficiencies in our acquisition of home improvement leads.
The following table and discussion highlights our approximate cost of
revenues for the six months ended June 30, 2004 and 2003:
Six months ended June 30,
----------------------------------------
2004 2003 Change
---------- ---------- ----------
(unaudited) (unaudited)
Cost of revenues
Software Sales (eTechLogix) $ 56,000 $ 57,000 $ (1,000)
Home Improvement Services (ImproveNet) 789,000 909,000 (120,000)
---------- ---------- ----------
Total $ 845,000 $ 966,000 $ (121,000)
========== ========== ==========
eTechLogix cost of revenues decreased to approximately $56,000 for the
six months ended June 30, 2004, from approximately $57,000 for the six months
ended June 30, 2003. The decline in eTechLogix's cost of revenue is primarily a
result of a decrease in sales in the current year over the prior year reported
period. After evaluating the method of accounting for cost of software sales,
management has determined that variable costs associated with software sales
revenue is approximately twenty percent (20%) of revenues and therefore has been
applied as a cost of revenue and reallocated from selling, general, and
administrative expenses. This method was originally implemented in the first
quarter of 2004 and will be re-evaluated periodically for application as a cost
of revenue.
ImproveNet cost of revenue decreased to approximately $789,000 for the
six months ended June 30, 2004, from approximately $909,000 for the six months
ended June 30, 2003, a decrease of approximately $120,000 or 13%. The decrease
is primarily due to our improvement of website optimization, ROI analysis of
home improvement leads sources, and locating new home improvement lead
providers, all of which has increase efficiencies in our acquisition of home
improvement leads. The move of our Customer Care Center from Canada to our
Scottsdale, Arizona offices for the customer service and operations for the
service provider matching service in March 2004 has also contributed to the
decrease in the cost of revenues. ImproveNet's cost of
19
revenue consists primarily of the acquisition and processing costs of home
improvement leads and the costs of our Customer Care Center, which is
responsible for management, staffing and processing of our proprietary matching
services. During all of year 2003 and up to late March 2004, our Customer Care
Center was outsourced.
Our selling, general and administrative expenses decreased to
approximately $800,000 for the six months ended June 30, 2004 from approximately
$844,000 for the six months ended June 30, 2003, a decrease of approximately
$44,000 or 5%.
Our selling, general and administrative expenses include payroll and
related costs and travel, recruiting, professional and advisory services and
other general expenses for our executive, sales, finance, legal, and human
resource departments. The decrease in our general and administrative expenses is
primarily the result of a decrease in payroll cost.
Our research and development expenses increased to approximately
$198,000 for the six months ended June 30, 2004 from approximately $193,000 for
the six months ended June 30, 2003, an increase of approximately $5,000 or 3%.
Our research and development costs include the payroll and related
costs of our technology staff, other costs of Web site design and new
technologies required to enhance the performance of our Web site.
The increase in research and development expenses in 2004 was primarily
attributable to increased payroll and related costs associated with improving
the functionality and features of www.improvenet.com and work on the integration
and improvement of the eTechLogix software products which management believes
will benefit us long-term if we are successful in implementing our sales and
marketing strategy.
Upon review management has determined separating marketing expenses out
of selling, general & administrative was not appropriate. Marketing expenses are
no longer being reported and discussed as a separate item as of the second
quarter 2003.
Other revenue (expenses) decreased to an expense of approximately
$1,906,313 for the six months ended June 30, 2004 from revenue of approximately
$109,000 for the six months ended June 30, 2003, a decrease of approximately
$2,011,000.
The following table and discussion highlights our approximate other
revenues (expenses) for the three months ended June 30, 2004 and 2003:
Six months ended June 30,
------------------------------------------
2004 2003 Change
---------- ---------- ----------
(unaudited) (unaudited)
Other Revenues (Expenses)
Interest income $ 1,000 $ 3,000 $ (2,000)
Interest expense and financing costs (700,000) (7,000) (693,000)
Relief of debt -- 104,000 (104,000)
Miscellaneous income 17,000 9,000 8,000
---------- ---------- ----------
$ (682,000) $ 109,000 $ (791,000)
========== ========== ==========
The decrease in other revenues (expenses) from the prior year quarter
is primarily due to financing costs related the completion of the private
placement and conversion of $370,000 of the convertible promissory notes during
the quarter.
We have recorded a 100% valuation allowance against our net deferred
tax assets, swhich arose primarily as a result of our aggregate operating
losses. The valuation allowance will remain at this level until such time that
we believe that the realization of the net deferred tax assets is more likely
than not. Accordingly, our results of operations do not reflect any tax benefits
for our reported losses.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Our revenues increased from $777,257 to $3,223,587 in the years ended
December 31, 2002 and 2003. The increases from 2002 to 2003 were achieved
primarily by revenues from the home improvement information services segment
reported in the current year but not included in the prior year. The addition of
the service provider matching service resulted in lead fees and win fees from
service providers in 2003 that were not included in 2002.
20
The following table and discussion highlights our revenue for the years
ended December 31, 2003 and 2002.
2003 2002 % CHANGE
---------- ---------- ----------
Revenues:
eTechLogix software revenues $ 548,042 $ 777,257 (29)%
ImproveNet service revenues 2,675,545 -- --
---------- ---------- ----------
Total revenues $3,223,587 $ 777,257 315%
========== ========== ==========
For the year ended December 31, 2003, eTechLogix revenue decreased 29%
to $548,042 compared to $777,257 in 2002. The decrease in eTechLogix's revenue
resulted from a decrease in sales of the company's products and consulting
services. ETechLogix relies on eight primary customers for its revenue.
ImproveNet reported revenue of $2,675,545 for the year ended December
31, 2003. No ImproveNet revenue was reported in 2002, as the Merger occurred
effective December 31, 2002. ImproveNet revenue consists almost entirely of
service revenues from its contractor matching services.
Cost of revenues increased from $240,394 to $1,787,449 in the years
ended December 31, 2002 and 2003, an increase of $1,547,055. The increase is
primarily due to cost of revenues from the newly acquired home improvement
information services segment.
The following table and discussion highlights our cost of revenues for
the years ended December 31, 2003 and 2002.
2003 2002 % CHANGE
---------- ---------- ----------
Cost of revenues:
Software (eTechLogix) $ 109,609 $ 240,394 (54)%
Information Services (ImproveNet) 1,677,840 -- --
---------- ---------- ----------
Total $1,787,449 $ 240,394 644%
========== ========== ==========
For the year ended December 31, 2003, eTechLogix cost of revenue
decreased 54% to $109,609 compared to $240,394 in 2002. The decrease in
eTechLogix's cost of revenue is primarily a result of a decrease in sales in the
current year over the prior year reported. Upon further evaluation, management
has determined that variable costs associated with software revenue approximates
twenty percent (20%) of revenues and has been applied as a cost of revenue from
selling, general, and administrative expenses, and we will re-evaluate on a
regular basis moving forward, the allocation of variable costs of revenue.
ImproveNet reported cost of revenue of $1,677,840 for the year ended
December 31, 2003. No ImproveNet cost of revenue was reported in 2002, as the
Merger occurred effective December 31, 2002. ImproveNet cost of revenue consists
primarily of the cost of home improvement leads and the cost for the outsourced
project service group, which through year 2003 has been responsible for all
phases of our proprietary matching services.
Selling, general and administrative expense increased from $855,282 to
$1,888,746 in the years ended December 31, 2002 and 2003, an increase of
$1,033,464. The increase in selling, general and administrative expenses in 2003
was primarily attributable to the acquisition of the home improvement
information services segment. The Company's overall infrastructure was enlarged
to properly handle increased responsibilities associated with the Merger.
Our selling, general, and administrative expenses include payroll and
related costs, travel, recruiting, professional and advisory services and other
general expenses for our executive, sales, finance, legal, and human resource
departments.
Our research and development expenses increased from $86,801 to
$399,045 in the years ended December 31, 2002 and 2003.
21
Our research and development costs include payroll and related costs of
our technology staff, other costs of Web site design and new technologies
required to enhance the performance of our Web sites.
The increase in research and development expenses in 2003 was primarily
attributable to increased payroll and related costs improving the functionality
and features of www.improvenet.com and working on integration and improvement of
the eTechLogix software products which management believes will benefit the
Company longer-term if it is able to implement its sales and marketing strategy.
The following table highlights our other revenues (expenses) for the
years ended December 31, 2003 and 2002.
2003 2002 CHANGE
---------- ---------- ----------
Other Revenues (Expenses):
Interest income $ 3,848 $ 220 $ 3,628
Interest expense and financing costs ($ 69,416) ($ 204,773) $ 135,357
Loss on disposal of fixed assets ($ 51,294) $ 51,294
Relief of debt $ 103,876 -- $ 103,876
Miscellaneous income 27,157 6,034 $ 21,123
---------- ---------- ----------
Total $ 65,465 ($ 249,813) $ 315,278
========== ========== ==========
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
During our recent history we have funded our operations and investments in
property and equipment through cash from operations, short term borrowing from
private lending sources, and proceeds from private placements of convertible
debt. Since inception funding sources have also included private placement and
public offerings of equity. The funds raised through the private placement at
the end of the second quarter of 2004 are expected to provide sufficient
liquidity for the operation of our business and investments in property and
equipment for the next 12 months and possibly for additional periods
thereafter..
Cash and cash equivalents totaled approximately $1,073,000 at June 30,
2004, an increase of approximately $690,000 or 180% from approximately $383,000
at December 31, 2003. The increase was primarily due to the $1,050,000 proceeds
from the recent private placement.
Cash used in operating activities for the six months ended June 30, 2004
was approximately $305,000, compared to cash used of approximately $218,000 for
the six months ended June 30, 2003. The cash used in operating activities in the
current quarter reflects the changes in the operating assets and liabilities.
Cash used in operating activities in the prior year first six months period
reflected the impact of the Merger and tender offer obligations as well as our
net loss before depreciation, offset by changes in operating assets and
liabilities.
Cash used in investing activities was approximately $12,000 for the six
months ended June 30, 2004, a decrease of approximately $10,000 above cash used
of approximately $22,000 for the six months ended June 30, 2003. In the first
six months of both 2004 and 2003 the cash was used to purchase equipment.
Cash provided by financing activities was approximately $1,007,000 for the
six months ended June 30, 2004, an increase of approximately $962,000 from cash
provided of approximately $45,000 for the six months ended June 30, 2003. The
increase was primarily due to the proceeds from the recent private placement,
offset by cash used to repay $30,000 of the convertible promissory notes that
did not convert.
We anticipate increased revenues from the expansion of the home improvement
information services segment throughout 2004 and thereafter. Expansion of the
home improvement services segment will require us to add additional personnel to
our Customer Care Center as well as necessitate new investments in additional
property and equipment. We continue to research and develop more innovative ways
of pricing our services, expanding our core service offerings, and identifying
more efficient ways of operating our
22
business. We continue to experience challenges in expanding sales volume of our
primary software products due to a market which is slow to adapt new
technologies and increasing competition.
The additional funds from the expected increase in sales of our home
improvement information services segment, continued software sales and the
completed private placement will be used to finance continued operations and
increase the Company's sales and marketing functions.
Our operating losses have limited our ability to obtain vendor credit
or extended payment terms and bank financing on favorable terms; accordingly, we
depend on our cash and cash equivalent balances to fund our operations.
With funds received from the private placement completed in June 2004,
we expect that our available cash resources will be sufficient to meet our
anticipated needs for operations and capital expenditures during the next 12
months and possibly for additional periods thereafter. We will strive to make
ongoing realignments, if required, to achieve positive cash flow with our
existing cash resources. We are additionally decreasing our marketing and other
operating expenditures to assist us in maintaining our available cash resources.
We may need to raise additional funds in order to develop new or enhance
existing services, to respond to competitive pressures or to acquire
complementary businesses, services or technologies. No assurances can be made
that the funds received from the recent private placement will be adequate or
sufficient to fund expansion, react to competitive pressures, or take advantage
of unanticipated opportunities that we may identify.
As a result of the above factors, our auditors have removed the
qualification in their opinion to our financial statements doubting our ability
to continue as a going concern.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Cash and cash equivalents totaled $382,415 at December 31, 2003,
including $400,000 raised by issuance of the unsecured convertible promissory
notes in December 2003, a decrease of $64,418 from $446,833 at December 31,
2002. Most of the decrease came from cash used in operating activities and
reducing indebtedness.
Net cash provided by operating activities was $77,238 in 2002 as
compared to net cash used in operating activities of $403,587 in 2003. Net cash
provided by operating activities in 2002 primarily represented increases in
accrued liabilities, the proceeds from the prior year's income taxes receivable
partially offset by the net loss for the period. Net cash used in 2003 operating
activities resulted primarily from our net loss.
Net cash used in investing activities was $102,088 in 2002 and $22,104
in 2003. The purchase of pre-merger net assets of ImproveNet by eTech accounts
for $519,000 of the cash used in investing activities in 2002 offset by cash
acquired in the merger of $418,000. Net cash used in investing activities was
used to purchase property and equipment.
Net cash provided by financing activities was $440,053 in 2002 and
$361,273 in 2003. Net cash provided by financing activities in 2002 was
primarily due to proceeds from the convertible notes payable and the sale of
eTech common stock partially offset by debt payments on capital lease
obligations, notes payable and the line of credit. Net cash provided by
financing activities in 2003 was primarily due to proceeds from the unsecured
convertible promissory notes issued in December 2003.
We have continued to sustain losses for the past two years and have
negative working capital and negative net worth.
During 2003 the Company procured contracts for software sales of its
products with existing customers. We look to increase sales volume of our
primary software products throughout 2004 and thereafter by adding new
customers. We anticipate increased revenues from the home improvement
information services segment as a result of increasing lead generation,
additional contractor participation in our membership network, and greater
efficiencies in our operations. We also intend to raise additional capital
either through a public or private offering of securities.
The additional funds from continued software sales, home improvement
information services, and capital financing will be used to finance continued
operations and increase the Company's sales and marketing functions.
Our operating losses have limited our ability to obtain vendor credit
or extended payment terms and bank financing on favorable terms; accordingly, we
depend on our cash and cash equivalent balances to fund our operations.
23
As a result of the Merger, both revenue and operating expenses
increased significantly in 2004. Prior to the Merger, the ImproveNet business
operated at a significant loss. The ImproveNet business has been moved from
California to Arizona and has been integrated into the infrastructure of
eTechLogix with the expectation of leveraging existing technical, marketing and
administrative personnel.
However, due to the significant level of current liabilities and the
history of operating losses, there is no assurance that our available cash
resources will be sufficient to meet our anticipated needs for operations and
capital expenditures during the next 12 months. We will strive to make ongoing
realignments, if required, to achieve positive cash flow with our existing cash
resources. We are additionally decreasing our marketing and other operating
expenditures to assist us in maintaining our available cash resources. We may
need to raise additional funds, however, if results of operations for 2004 do
not meet our expectations, or in order to develop new or enhance existing
services, to respond to competitive pressures or to acquire complementary
businesses, services or technologies. If we raise additional funds by selling
equity securities, the percentage ownership of our stockholders will be reduced.
We cannot be sure that additional financing will be available on terms favorable
to us, or at all. If adequate funds are not available on acceptable terms, our
ability to fund expansion, react to competitive pressures, or take advantage of
unanticipated opportunities would be substantially limited. If this occurred,
our business would be significantly harmed. We will continue to evaluate our
needs for funds based on our assessment of access to public or private capital
markets and the timing of our need for funds. Although we have no present
intention to conduct additional public equity offerings, we may seek to raise
these additional funds through private or public debt or equity financings.
As a result of the above factors, among others, our auditors have
modified their opinion to our financial statements indicating there is
substantial doubt about our ability to continue as a going concern.
OUR BUSINESS
COMPANY OVERVIEW AND BUSINESS DEVELOPMENT
We started business in January 1996 as a regional contractor matching
service. Originally ImproveNet was a California corporation but reincorporated
in Delaware in 1998. We spent most of 1996 and 1997 building our service
provider database, developing our services and technology, recruiting personnel
and raising capital. We launched our Web site and homeowner/service provider
matching service on a national scale in August 1997. In December 1998, we began
selling Web site advertising and direct marketing services to suppliers of home
improvement products as a way to send targeted messages about their products,
including product promotions, to homeowners at the time of purchase, as well as
to our network of service providers. In March 1999, we began to hire a new
senior management team. In April 1999, we introduced Powered by ImproveNet, a
service that allows third parties to offer the ImproveNet matching services and
content on their Web sites. We completed the acquisition of two regional
contractor referral companies, Contractor Referral Service, LLC and The J.L.
Price Corporation, in September and November 1999, respectively. These entities
were integrated into our operations during the course of calendar year 2000.
On March 15, 2000, we completed our initial public offering. We sold
2,760,000 shares of our common stock in the offering at $16.00 per share and
received approximately $44,160,000 in gross proceeds. Shares of our common stock
were listed for trading on the Nasdaq National Market System. From January
through June 2000, we spent substantial amounts primarily on marketing and
marketing related activities, as well as the development and expansion of our
service and operations infrastructure. Over the following two year period we
worked to build our customer base and revenue from our service offerings.
On June 10, 2002 we entered into a letter of intent with eTechLogix
which outlined the substantive terms of an agreement and plan of merger
involving the companies. The resulting Merger Agreement was entered into on July
30, 2002. On December 23, 2002, eTechLogix became our wholly-owned subsidiary by
way of a merger of a newly created and wholly owned subsidiary, Etech
Acquisition, Inc., with and into eTechLogix pursuant to terms of the Merger
Agreement. With regard to ImproveNet, it was anticipated that as a result of the
merger our stockholders would be offered a share buyback at a price to be
finalized on or before the closing that would represent a premium over what they
would receive upon a liquidation and dissolution of the company.
The board of directors of ImproveNet based its decision to enter into
the letter of intent, in part, upon a liquidation analysis which it prepared
which projected the anticipated proceeds to the stockholders were the company to
dissolve and liquidate. The liquidation analysis necessarily made assumptions
concerning numerous important factors relevant to the amount of proceeds which
would be available, such as the revenues which would be generated by ImproveNet
during the dissolution process, the extent to which it could resolve long term
liabilities on a reasonable basis and the costs associated with the process of
dissolution and liquidation.
24
While the board recognized that its liquidation analysis involved many
uncertainties, the board nevertheless concluded that the analysis provided a
basis for its anticipation that the proposed transaction with eTechLogix would
likely provide a premium to the stockholders over the proceeds of a possible
dissolution and liquidation.
The board of directors of ImproveNet also based its decision upon its
belief that that it was unlikely that ImproveNet could be sold as an entity to a
party other than eTechLogix on a basis more favorable to the stockholders of
ImproveNet than the transaction with eTechLogix. During the second quarter of
2002, the chairman of ImproveNet contacted five substantial companies in the
building materials industry with which he had previous business relationships in
order to discuss the possibility of their acquiring ImproveNet as a company or
purchasing some or all of its assets. None of the five companies indicated any
interest in pursuing a transaction with ImproveNet which would have provided
value to the stockholders of ImproveNet comparable to the value they were to be
entitled to receive in the proposed transaction with eTechLogix.
The primary reason for eTechLogix entering into the Merger Agreement
was to extend its business to include consumers and contractors in the building
materials industry. The company has, to date, directed its business to
manufacturers and distributors in that industry. Early in 2002, the board of
directors of eTechLogix concluded that eTechLogix would benefit if it could
include consumers and contractors in its target market as well as manufacturers
and distributors. With the approval and support of the board, the chief
executive officer of eTechLogix began a search for companies which eTechLogix
could acquire to provide it with a means of reaching consumers and contractors.
In February 2002, the chief executive officer identified ImproveNet as a
potential candidate and made contact with the chairman of ImproveNet, who was
then its chief executive officer. A letter of intent was executed between the
parties on June 10, 2002, and the Merger Agreement was executed the following
month.
eTechLogix advised us that the board of directors of eTechLogix
approved the Merger Agreement and the Merger for a variety of reasons, including
the following:
o The combination of eTechLogix with ImproveNet will create a combined
company with access to strategic relationships not currently available
to eTechLogix with companies in the building materials industry which
could become key business partners.
o eTechLogix has developed intellectual property which it has marketed
under the brand name Smart FusionSM to manufacturers and distributors
in the building materials industry. The combination with ImproveNet
will enable the combined company to market this intellectual property
to consumers and contractors as well as distributors and
manufacturers.
o eTechLogix has developed intellectual property, marketed under the
brand name of SmartDistributorSM, that has been designed to meet the
specific needs of distributors and contractors. The board of
eTechLogix believes that the combination of eTechLogix and ImproveNet
will enable the combined company to generate additional revenue by
marketing the software to new potential customers to whom the combined
company will have access as a result of the operations of ImproveNet.
o eTechLogix was a privately held company. The board of eTechLogix
believed that the combined company, by continuing to file reports with
the SEC and remaining a public company, will be better positioned to
raise additional capital under current market conditions than is
eTechLogix as a private company.
o Since the combined company will be a public reporting company,
eTechLogix believes that the combined company may be able to utilize
its stock to make strategic acquisitions, something which is more
difficult for eTechLogix to do as a privately held company.
The combined company of Etech and ImproveNet, to date, has not
experienced the strategic benefits originally anticipated at the time of the
Merger.
BUSINESS OF ISSUER
ImproveNet, Inc. is a nationally recognized provider of home
improvement services. There are two major categories of home improvement
services. The first category is service provider matching services and marketing
services, and the second, offered through our wholly-owned subsidiary
eTechLogix, is as a developer of and marketer of Enterprise Commerce Management
("ECM") software sold under the product servicemark of Smart FusionSM for the
Building Materials Industry ("BMI"), which is segmented into many vertical
markets.
25
SERVICE PROVIDER MATCHING SERVICES
Our service provider matching service is the process by which
homeowners are matched to our network of pre-screened ImproveNet contractors.
This was the core business model upon which the Company was founded and has been
the primary source of our revenue. Since our inception, we have invested quite
heavily in establishing a pool of national remodeling contractors. We consider
this to be the core of our business and we anticipate the major portion of the
Company's resources and efforts in the foreseeable future will be devoted to
further this service.
MARKETING SERVICES
We provide advertising and marketing services on behalf of home
improvement suppliers and marketing programs for building materials
manufacturers, distributors, contractors and trade professionals, as well as
other companies who wish to communicate to our consumer and service provider
audiences. We also provide content and on-line tools on behalf of companies to
assist them in serving their own customers on-line.
DEVELOPER AND MARKETER OF BUSINESS MANAGEMENT SOFTWARE
With regard to our business management software offerings, we have
initially focused our business strategy on the window and door manufacturers and
distributors ("WND") niche of the BMI, which accounts for over $25 billion in
industry wide annual sales. It encompasses a finite universe of prospective
customers with a distinct multi-tiered distribution channel and supply chain
procurement processes that can be significantly enhanced with web based
Enterprise Commerce Solutions ("ECM"). We provide a comprehensive, integrated
software platform that enables manufacturers to quickly create a "Pure Internet"
true eCommerce solution specifically with regard to their product order
configuration packages and electronic catalogs. Our solutions enable customers
to increase profitability through improved sales processes and reduce costs by
minimizing operating inefficiencies.
INDUSTRY BACKGROUND
THE HOME IMPROVEMENT INDUSTRY
According to the United States Census Bureau, there were an estimated
122 million housing units in the United States of America as of the second
quarter of 2001. Approximately 107 million housing units were occupied: 73
million by owners and 34 million by renters. Expenditures for improvements and
repairs of residential properties in the second quarter 2001, the most recently
reported period were at a seasonally adjusted annual rate of $256.3 billion,
divided 77% on larger discretionary projects and 23% for maintenance and repair
projects. According to the "Improving America's Housing" study from the Joint
Center for Housing Studies at Harvard University, the residential remodeling
industry accounts for about 2% of gross domestic product.
The participants in the home improvement market include homeowners,
service providers, manufacturers, distributors, and suppliers of home
improvement products. These participants face distinct challenges in meeting
their objectives.
HOMEOWNERS
The appearance and general working condition of their home is highly
important to homeowners. Maintaining and improving the home involves an ongoing
financial and emotional investment to design, budget, hire service providers,
and successfully complete repair and remodeling projects. Traditionally,
homeowners must rely upon books, magazines, local newspaper articles and
advertisements, Yellow Pages and word-of-mouth recommendations to accomplish
these tasks. None of these resources provides immediate, objective, reliable and
personalized information. As a result, homeowners are often poorly informed and
uncertain about how best to identify and locate reputable, experienced and
competitively priced service providers for their projects.
SERVICE PROVIDERS
Based upon a compilation of industry sources, we believe there are up
to 800,000 service providers including contractors, architects, designers, and
handymen in the United States. These service providers have few channels to
communicate effectively with homeowners or with one another. There is no
industry-wide certification based on work quality or a code of conduct and
ethics for contractors as there is for architects and designers. As a result,
reputable contractors are often unable to differentiate themselves based on
reliability, adequate capitalization and areas of specialization. Service
providers currently rely on word-of-mouth recommendations, the Yellow Pages and
other traditional mass media advertising that require them to pay upfront fixed
costs.
26
Therefore, service providers must allocate significant time, money and energy to
qualifying and verifying the leads they receive. Typically, small independent
contractors experience difficulty in predicting lead flow, managing staffing and
working capital requirements and systematically building a stable business.
MANUFACTURERS, DISTRIBUTORS, AND SUPPLIERS OF HOME IMPROVEMENT PRODUCTS
There are many well-known brand names supplying a wide array of home
improvement products on a national basis. There are also a large number of
regional firms with limited means to distribute and market their products
effectively to homeowners. Currently, the majority of supplier advertising
dollars is spent on co-marketing and co-branding advertising and print and
broadcast advertising. Although suppliers have often used traditional media
effectively to build brand recognition, they have difficulty using traditional
media to target homeowners who are in the process of making time-critical
purchasing decisions regarding home improvement products. These traditional
media lack a centralized database of information that can be searched based on
specified terms, and the ability to conduct two-way communications.
THE INTERNET HOME IMPROVEMENT OPPORTUNITY
According to a study published by the National Telecommunications and
Information Administration and the Economics and Statistics Administration, 143
million Americans were online in September 2001 and 239 million will be online
by 2005. According to a study done in 2001 by the Pew Internet And American Life
Project, 82 percent of people in households earning more than $75,000 per year
have Internet access.
We believe that an opportunity exists for an online home improvement
service that provides a central repository of information for the benefit of
homeowners, service providers and suppliers. This service would enable
homeowners to access design and planning tools, find service providers and
obtain other project management services. This service would also enable service
providers to access job leads, differentiate themselves from competitors and
communicate with fellow professionals. Finally, this service would enable
suppliers to market their products to a targeted audience of homeowners and
service providers at the time they are making time-critical purchasing
decisions.
BUSINESS OBJECTIVES AND STRATEGIES
THE IMPROVENET STRATEGY
ImproveNet's strategy is to become one of America's premiere web-based
home improvement services company. The key elements of our strategy are:
DELIVER A SATISFYING HOME IMPROVEMENT PROJECT EXPERIENCE FOR HOMEOWNERS, SERVICE
PROVIDERS AND SUPPLIERS
The core of our strategy is to make it easy for homeowners, service
providers, and suppliers to work together effectively throughout the entire home
improvement project experience to deliver a successful result for all of the
participants. Our focus on identifying homeowners that are highly interested in
undertaking and completing a home improvement project and screened service
providers interested in providing such services, in addition to providing
homeowners quick and easy access to information on service providers and
improved project support allows us to change the current approach and execution
of a home improvement project.
Access to this marketplace allows service providers in our network to
increase their own business and financial efficiencies and differentiate
themselves from their competitors. Similarly, this access allows suppliers to
market their home improvement products and services within a cost effective
advertising medium. We believe that the execution of our ongoing strategy
requires us to:
o Strengthen the pool of high quality information and content on our Web
sites;
o Strengthen the size and capabilities of our network of service
providers;
o Strengthen our relationships with suppliers through enhanced
co-branded opportunities and highly targeted advertising products; and
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o Strengthen and improve the business management software solutions and
marketing programs we offer to manufacturers and distributors in the
BMI.
We believe that achieving these goals will improve the level of
professionalism and reliability among service providers as well as the
perception of the home improvement industry in general.
ATTRACTING MORE SCREENED SERVICE PROVIDERS TO OUR NETWORK
We continue our efforts to develop and implement initiatives that will
result in additional screened service providers participating in our network by:
o Upgrading and improving our Web based content to create better quality
home improvement jobs;
o Increasing participation by interested, responsive and screened
service providers;
o Offering tools and incentives to help ImproveNet service providers
compete more successfully;
o Developing tracking systems and procedures to identify wins that are
not reported to us by either the service provider or the homeowner;
and
o Initiating service provider recruitment programs to increase
participation in our network by utilizing call center operations.
We have invested heavily in the development of content design tools and
services and have refined our submission process to increase the quality of the
homeowner experience and the quality and number of jobs submitted. We have also
invested in a more highly targeted matching program, increasing the
project-types from 28 broad categories to more than 50 specific home improvement
project types. This action should permit us to more closely match prospective
service providers to each specific home improvement project lead we receive.
Again, we require each homeowner to evaluate, on his own, the prospective
service providers identified before selecting one for his home improvement
project.
COMMERCIAL RELATIONSHIPS WITH SUPPLIERS OF HOME IMPROVEMENT PRODUCTS, SERVICES
AND RELATED HOME SERVICES
For businesses selling to remodeling contractors, ImproveNet provides
marketing and loyalty solutions to its service provider network. The network has
approximately 30,000 professionals representing, by our estimates, approximately
$10 billion in annual product and services purchases. The number of service
providers that actually receive leads each month is dependent upon the number of
home improvement project leads submitted to us and the type of work required for
each project submitted. The number of service providers receiving leads from us
in any given month is less than the total number of those service providers
actually enrolled in our network. Through electronic communications tools such
as pager, e-mail, and ImproveNetPRO.com we can deliver a targeted personalized
marketing campaign on behalf of manufacturers, retailers and other service and
product providers to our network. In addition, we can supply co-branded content
and services to enhance their Internet offering.
BUSINESS MANAGEMENT SOLUTIONS AND MARKETING PROGRAMS FOR THE BUILDING MATERIALS
INDUSTRIES
We recognize the tremendous untapped need within the BMI for technology
solutions to solve critical business needs. The Company's strategy for success
is to:
o Target the BMI one vertical segment at a time such as, WND, roofing,
plumbing, lumber, etc., providing a highly targeted solution;
o Continually develop and possess an extensive knowledge base of the
vertical market served that is equal to the customer's and unsurpassed
by the competition;
o Develop and market the best web-based solutions that solve pervasive,
urgent problems for customers;
o Ensure seamless integration to the BMI supply chain from end user to
manufacturer, enabling companies to leverage their existing IT
Infrastructure investment;
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o Define a specific niche market segment utilizing a direct sales model,
while leveraging vertical partnerships to penetrate enterprise
customers;
o Deliver customer-driven value propositions based on deep domain
experience and understanding of our target market;
o Maintain technological expertise and competitive advantage to deliver
open solutions that are "Pure Internet"; and
o Create options for significant expansion (geographically, vertically
and with new products).
o Leverage existing relationships and favorable cost and expense
structure with companies in India and Bangladesh for continued
research and development of business management software, e-commerce
and e-distribution technology solutions.
PRINCIPAL SERVICES AND PRODUCTS
THE IMPROVENET SOLUTION
We provide home improvement information and services leveraging our
Internet presence and our network of highly qualified service providers. We
aggregate and organize information and design tools for homeowners, generate job
leads for our network of service providers and provide value chain management
solutions, channel development services, strategic market research services, and
e-commerce software solutions on behalf of home improvement manufacturers,
distributors, and suppliers. We have built and currently maintain a national
network of service providers. We independently screen and monitor to ensure that
our homeowners' qualified job leads are matched with pre-screened service
providers.
Our solution offers the following benefits:
For Homeowners:
---------------
o ONLINE PROJECT PLANNING ASSISTANCE. We believe our online services,
including our product showcase, our design gallery and our planning
and estimating tools, provide answers to homeowners' diverse questions
and needs regarding home improvement and repairs. Our Web site allows
each homeowner to generate ideas from the product showcase and design
gallery and access the personal project folder, an archive of previous
product ideas. In addition, we offer homeowners the ability to search
for home improvement services and to plan their current projects using
our interactive planning tools.
o ACCESS TO QUALITY SERVICE PROVIDERS. ImproveNet has built a network of
qualified service providers covering most US markets and home
improvement trade categories. Our screening process is designed to
identify high quality service providers in each local market
nationwide. To pass our screening criteria, a service provider must
have been in business for a minimum of three (3) years, have no
adverse legal or credit actions against it, appropriate general
liability insurance and the appropriate licenses (if required by law),
and no significant negative references from customers or other service
providers. By creating a national network of screened service
providers, we improve the likelihood that homeowners who contact us
will hire qualified, experienced and reputable service providers.
o CONVENIENT AND COST EFFECTIVE SERVICES. We choose the service
providers by matching their geographical, job type and job size
preferences, with the homeowner's job specification. We encourage the
selected service providers to contact the homeowner directly to
discuss the job in detail within 48 hours. Our matching process
typically provides more than one service provider, creating a
competitive marketplace for their home improvement bid.
For ImproveNet Service Providers:
---------------------------------
o QUALITY JOB LEADS. Service providers who receive leads through our
proprietary matching service benefit from the likelihood that the
homeowner's interest is real and that the potential project is
correctly characterized. In addition, service providers give us
geographic, job type and job size preferences, which enable us to
match the jobs that meet their preferences and expertise. Service
providers can change their preferences at any time to reflect their
changing
29
needs and circumstances. Through our ImproveNetPro.com website, we
communicate job leads in near real-time to the selected service
providers.
o COMPETITIVE DIFFERENTIATION. We believe service providers can
differentiate themselves from their competitors by successfully
completing our proprietary screening process and joining our network.
Approximately 50% of the service providers that we have screened meet
our selection standards of professionalism and reliability. Currently,
we have approximately 27,000 eligible service providers in our network
who may receive qualified job leads from us.
o BUSINESS AND FINANCIAL EFFICIENCIES. Service providers who participate
in our matching service pay only for job leads that they accept and
for jobs that they win, allowing them to reduce their upfront
marketing costs. New job leads from our matching service supplement
the flow of work that contractors, architects and designers receive
from their traditional sources, which allows them to plan and operate
their businesses more efficiently.
For Manufacturers, Distributors, and Suppliers Of Home Improvement
------------------------------------------------------------------
Products:
---------
o TARGETED ADVERTISING TO HOMEOWNERS. ImproveNet.com is designed to
attract visitors who are focused on remodeling, repairing and
maintaining their homes. We believe that this audience is a valuable
target for suppliers of home improvement products and services.
Co-branding programs surrounding content and site integration allow
these suppliers to target their message more efficiently and
cost-effectively to a highly responsive and focused audience
o CO-BRANDED WEB SITES. We offer suppliers the opportunity to place our
content and services on their own Web sites or link to co-branded Web
sites, without having to expend development time or resources. These
co-branded Web sites allow suppliers to offer our content and services
to their customers. In many of these arrangements, the suppliers'
share in the revenues from jobs referred through their site or the
co-branded Web site.
o LEAD GENERATION PROGRAMS. From our targeted advertising to homeowners,
we generate targeted leads for suppliers of home improvement products
and services as well as service providers.
o CHANNEL MARKETING SOLUTIONS. We offer a channel marketing solution
that allows manufacturers and distributors entree to a $1.3B+ annual
renovation and remodeling market. This channel marketing solution has
our wholly-owned subsidiary's SmartFusionSM configuration, ecommerce
and cataloging software on the backend making it easier for
contractors to buy building materials and products from their favorite
manufacturers and distributors. This program also allows manufacturers
and distributors to build and reinforce their brand, provide discount,
rebate and other types of incentives, and allows them to market and
sell directly into a market rich with contractors and homeowners who
are spending over $2M dollars per day on remodeling and renovation
projects and processing their requests through our site(s). In
addition, the communications between our customer service center
representatives and homeowners and service providers who utilize our
service provider matching services offers a personal touch that can
help to enhance the effectiveness of the channel marketing solution.
o ECOMMERCE SOFTWARE SOLUTIONS. Initially targeted for the window and
door manufacturers and distributors, our Smart FusionSM ("SF")
provides WND manufacturers with an efficient, easy to deploy and
manage, sales oriented eCommerce solution. SF is a fully developed
product that integrates seamlessly into any enterprise back office
(ERP, CRM) system, allowing Application-to-Application (A2A)
capability throughout the entire supply chain. An order placed through
SF automatically updates the back-office system without additional
input, eliminating errors and reducing order-processing time. SF is
scalable to meet the needs of any size company, whether the volume is
10 or 100,000 orders per day, enabling manufacturers to sell
off-the-shelf, standard products, as well as complex configurable
products and services. SF proves the concept of "mass-customization,"
completely automating the transaction process, with orders placed
based on individual options and specifications. Customers can access a
manufacturer's eCommerce site to check availability, evaluate options
and obtain pricing in real-time, eliminating delays and errors in the
ordering process. They can define a virtually unlimited number of
applicable options such as size, model, configurable components and
services.
o EDISTRIBUTION SOFTWARE SOLUTIONS. We recognize that WND distributors
required an integrated back-office solution to facilitate eCommerce as
well. Therefore, we developed SmartDistributorSM , a comprehensive
web-based ERP solution designed specifically to meet the needs of
wholesale distributors. It includes: Order Entry, Purchasing
(procurement), Inventory Management, Accounts Receivable and Payable,
General Ledger, Sales Analysis. It also fully integrates to
ETechLogix's SF. Modules are highly open and scalable for
communications to other eBusiness products as well as future growth.
All applications are fully written in Pure Java and Enhanced Java
Beans (EJB) with Oracle or SQL as the back end databases and are fully
web enabled. Modules are designed specifically for BMI and allow
multi-location distributors to conduct business over a private network
or the Internet. Functional security has been provided throughout the
product for control and eligibility.
30
COMPLEMENTARY SERVICE PROVIDERS
From our targeted advertising to homeowners, we also generate leads for
complement services such as home equity financing, and home improvement design
planning.
Our key service offerings and capabilities include:
PRODUCTS AND SERVICES
FOR HOMEOWNERS
IMPROVENET.COM
Our consumer Web site, www.ImproveNet.com, enables homeowners to
browse, free of charge, pages of ideas and information for use in their home
improvement projects and to use our project tools to help them better understand
their home improvement project. Our design gallery on our Web site
www.ImproveNet.com features color images of the work of leading architects and
designers. For most designs, we provide images, comments from both the designer
and our editors and a detailed list of products used in the design. Our product
showcase on ImproveNet.com contains images of a full range of more than 5,000
distinct home improvement products and includes brands such as Armstrong,
DuPont, General Electric Appliances, Owens Corning, Price-Pfister, Masco's
KraftMaid and Merrillat. Our eight interactive estimators designed to assist
homeowners through the planning and budgeting stage of the home improvement
process allow homeowners to calculate prices for a project based on parameters
such as physical dimensions, styles and the homeowner's location.
Homeowners can register as members, which entitle them to access to
additional products and services. As part of the on-site registration process,
we create a customized interface for each registered member, known as the
personal project folder. The personal project folder permanently stores all
information related to that homeowner's project and allows us to present
custom-tailored information to that homeowner. Homeowners can store ideas they
get from our design gallery, product showcase and product estimator, in addition
to their own thoughts, as they plan and design their home improvement project.
Our Web site gives homeowners access to a community of fellow Web site
visitors and to service providers and industry professionals who can respond to
home improvement questions. Visitors may read discussions currently on our
message boards, and registered members may join in the discussions or post a new
question. This feature gives homeowners who are now in the home improvement
process a friendly environment in which to educate themselves further and to
reduce their anxiety related to home improvement.
IMPROVENET'S NETWORK OF SERVICE PROVIDERS
ImproveNet has built a network of screened service providers covering
most U.S. markets and home improvement trade categories. Approximately 27,000
are enrolled in our network. The number of service providers that actually
receive leads each month is dependent upon the number of home improvement
project leads submitted to us and the type of work required for each project
submitted. The number of service providers receiving leads from us in any given
month is less than the total number of those service providers actually enrolled
in our network. Service Providers join our network by coming directly to our Web
site and completing an application and consenting to and undergoing our
screening process. In addition, we recruit service providers via direct
telemarketing activities. In order to qualify to participate, a service provider
must maintain a clear credit history and have no legal judgments for at least
three years. They must also provide proof of insurance and valid professional
licenses in those jurisdictions that require such licenses. Finally, they must
maintain good references with the consumers and suppliers from whom we receive
feedback. We offer no warranty or guaranty of the work of any service provider
and serve only to identify contractors that meet our screening criteria. Each
homeowner must make his own decision regarding the hiring of any service
provider.
We believe that these qualifications make ImproveNet's service
providers more likely to deliver quality professional work to our customers. We
also believe that ImproveNet service providers are more likely to be successful,
making them highly attractive customers for our home improvement supplier
partners.
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IMPROVENET'S MATCHING SERVICES
We offer homeowners through our network an opportunity to submit to us
a home improvement project that we match with local service providers, who want
to bid on the project. Homeowners who are starting home improvement projects
begin the process by clicking on our homepage links to "Find a Contractor" or
"Find a Designer" and are then asked to complete a brief project request form
that specifies the type of job the homeowner desires.
Our proprietary matching service uses the homeowner's project
description to select the ImproveNet service providers in the homeowner's
geographic area that do the type of work required by the project description. We
deliver job leads to selected service providers by email or by posting the leads
on ImproveNetPro.com. Currently, we have approximately 27,000 eligible service
providers in our network who have indicated an interest in continuing to receive
qualified job leads from us. The interested service providers who first contact
us get the opportunity to bid on the project. We allow up to four service
providers to be matched to each project depending upon the project size and
type.
Service providers contact the homeowner to discuss the job in detail,
ideally within 48 hours of receipt of our e-mail. Once the homeowner and service
provider have been matched, the service provider is able to bid on the project
at any time after meeting with the homeowner. Following the completion of the
project, we send a quality-assurance survey form to the homeowner to determine
the outcome of the project and the level of homeowner satisfaction.
We invoice service providers for a win fee based on a pre-determined
percentage of the job's value for every job they win through our matching
service. We ask our service providers not to charge the win fee in the bid quote
to the homeowner. We currently collect our win fees directly from service
providers once the service provider or the homeowner informs us that the
homeowner has hired a service provider through our matching service.
FOR SERVICE PROVIDERS, CONTRACTORS AND BUILDERS
A. SERVICES
SERVICE PROVIDER MATCHING SERVICES
With one of the most robust web-based matching services for
professional builders, general and remodeling contractors available in the
market, we have over 350,000 registered contactors in our national network. Over
27,000 of them are activated in our Membership Program. The number of service
providers that actually receive leads each month is dependent upon the number of
home improvement project leads submitted to us and the type of work required for
each project submitted. The number of service providers receiving leads from us
in any given month is less than the total number of those service providers
actually enrolled in our network. This elite group of trade professionals
receives over 10,000 renovation and home improvement project leads each month
that have been qualified by our highly skilled, professional staffed customer
service center located in Canada.
Leads are qualified and opened daily by our highly-skilled customer
service center staff, some of whom are former trade professionals and
contractors themselves. We qualify these leads to ensure they are authentic and
reliable, and so we don't waste time of contractors participating in our
Membership Program. Better leads equal more work for participating contractors,
and an expected increase in revenues.
IMPROVENETPRO.COM
Our commercial Web site, www.ImproveNetPro.com, provides new or
enhanced services to our service providers. ImproveNetPro.com allows us to
communicate in near real-time with participating service providers who are
online. ImproveNetPro.com provides our contractors, architects and designers
with immediate access to new job postings. Once a service provider enters the
password-protected section of ImproveNetPro.com, he or she is immediately
presented with the status of new jobs available to the service provider that
matches their location, preferences and expertise. ImproveNetPro.com also has
information similar to our consumer design gallery and product showcase to help
our service providers be better informed. Finally, ImproveNetPro.com includes
supplier information and special offers or products and services that are
relevant to their business. We believe that ImproveNetPro.com assists us to
enhance the loyalty of our contractors, architects and designers.
CUSTOMER SERVICE AND OPERATION FUNCTIONS
All of our customer service and operation functions for homeowners and
service providers regarding the service provider matching services have been
relocated in-house to our headquarters in Scottsdale, Arizona. The functions
performed in Scottsdale
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include (i) receipt and processing of homeowner projects leads, (ii)
verification of homeowner project leads, (iii) distribution of homeowner project
leads to screened service providers, (iv) screening of service provider
applicants for participation in our network, and (v) collection of accounts
receivable from participating service providers. The communications activities
with homeowners and service providers that is performed as part of the customer
service and operations functions provides a personal touch that we believe
enhances the effectiveness of the service provider matching services.
FOR MANUFACTURERS AND DISTRIBUTORS
DISTRIBUTION METHOD - The service offerings and programs for manufacturers and
distributors set forth below are distributed through our in-house direct sales
force.
IMPROVENET MARKETMAKERSM - Is a value chain management solution for building
materials manufacturers and distributors. Comprised of hosted and enterprise
web-based business management software, online services, and marketing programs,
Market Maker provides building materials manufacturers and distributors direct
access to a $1.3B+ annual renovation and remodeling market.
MarketMaker helps companies to:
o Define strategic marketing and product launch activities through our
state-of-the-art market research services that tap into tens of
thousands of contractors and hundreds of thousands of consumers who
spend over $2M dollars per day on remodeling and renovation projects
o Define, develop and optimize your channel marketing efforts to deploy
best practice go-to-market activities and increase revenues
o Save money, increase revenues and maximize distribution by
streamlining critical manufacturing processes like product
configuration, bill of material generation and order entry, and by
commerce-enabling your business with seamless integration into your
back-office system
o Increase profitability, reduce inefficiencies, and effectively manage
your distribution processes by leveraging leading edge web-based back
office business management and e-commerce technology that provides
end-to-end accounting, sales analysis, market trending, inventory,
channel management functionality and more
MarketMaker contains five modules:
o Strategic market research services
o Channel development services
o Channel management services
o E-commerce software for manufacturers
o Web-based business management software for distributors
B. Software
According to Harris Information, a leading market research authority
for the building materials and construction trade industry, "Early adopters of
technology that supports web-based back-office automation and provides
e-commerce front-end access to trade partners and customers, will leapfrog
dominant brands who continue to do business as they always have. "Expensive
software based supply chain solutions, coupled with traditionally extended
implementation times and costs, will be replaced by niche, best of breed
web-based systems. The need for building materials manufacturers to web-enable
critical manufacturing and go-to-market processes, necessitates that the
traditionally fragmented software providers to the industry find better ways of
consolidating their offerings and moving the industry toward the same economies
e-commerce applications afford other industries." Our focus in our software
offerings is to address our customers' needs for web-enabled and web-based
e-commerce systems that better automate their business processes. We have two
primary software offerings that target those needs as follows:
SMARTFUSIONSM - Web-based configuration, order entry and e-commerce
software SmartFusionSM is a web-based software solution that allows
manufacturers to increase revenues and profitability by streamlining order
entry, simple and complex product
33
configuration, and bill of material generation (complete with product
visualizers). SmartFusionSM allows manufacturers the ability to leverage
e-commerce functionality to provide an `always on' sales and support
infrastructure to their customers. SmartFusionSM integrates seamlessly into any
enterprise back office (ERP, CRM) system, allowing Application-to-Application
(A2A) capability throughout the entire supply chain. An order placed through
SmartFusionSM automatically updates the back-office system without additional
input, eliminating errors and reducing order-processing time.
SmartFusion's web-based infrastructure takes the business of our
clients to the next level, a level that exceeds the limitations of many
client-server software systems available today. Customers are migrating to the
Internet at a rapid pace. SmartFusionSM ensures customer loyalty for channel
participants, and ongoing support for sales of products offered. SmartFusionSM
ensures that our clients will deliver value to your customers that exceeds their
expectations.
SMARTDISTRIBUTORSM - Web-based business management and e-commerce
software SmartDistributorSM is a web-based business management and e-commerce
software solution that provides distributors with a fully integrated sales and
order entry, purchase order management, inventory control and management,
accounts receivable, accounts payable and general ledger management, sales
analysis, product configuration, bar code interface, channel management,
marketing program management, and lead management. SmartDistributorSM is an
entirely web-based solution that improves productivity and accelerates
profitability.
Our Smart FusionSM software has been developed with best of class
technologies including JAVA, Enterprise JAVA Beans, Oracle DB, and WebLogix, and
integrates seamlessly to any back office technology platform using Extensible
Markup Language (XML).
COMPETITION
Our current competitors with regard to home improvement projects
include:
o LOCAL, PRIMARILY PHONE-BASED, CONTRACTOR REFERRAL BUSINESSES. These
are generally small operations that take phone requests from
homeowners that they attract through Yellow Pages advertising or
direct marketing initiatives and that refer projects to contractors
with whom they often have a personal relationship.
o ONLINE REFERRAL COMPANIES. Some of our competitors such as
ServiceMagic.com offer a publicly accessible online database and other
companies such as Contractor.com have matching services but do not
have national coverage. Homestore.com, also offers a matching service
o SUPPLIERS OF HOME IMPROVEMENT PRODUCTS. Retailers and manufacturers of
home improvement products such as The Home Depot, Lowe's, Masco, and
Sears Roebuck & Co. offer installation services.
Additional information on some of the competitors identified above.
-------------------------------------------------------------------------------
SERVICE MAGIC.COM
Headquartered in Golden, Colorado and founded in 1998, ServiceMagic.com provides
an online marketplace connecting homeowners to prescreened contractors and
service professionals. ServiceMagic.com's service is designed to provide
consumers with up to three qualified and interested home service professionals
in their local areas within one business day. All of ServiceMagic.com
contractors are pre-screened for licensing, bankruptcy and insurance.
ServiceMagic.com addresses more than 500 different home service needs in more
than 40 markets nationwide. ServiceMagic.com also offers educational online
tools to homeowners including; expert advice, design ideas, quick tips, over
thousands of articles and a homeowner toolbox containing estimating tools,
example contracts and guides on licensing and insurance.
Strategic Partners include: Certainteed Building Solutions, HomeStore, Maytag,
Quest, Sequel, Mobius and Tango.
Funding: (1) $16M in October 1999 from SOFTBANK, Sequel and Tango, (2) $29M in
May 2000 from CertainTeed, Maytag, QwestDex, SOFTBANK, Sequel and Tango and (3)
$5M in early 2002. Recently announced that the company is being purchased by
ICA/InterActiveCorp.
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ICASTLE
Headquartered in Walnut Creek, California, iCastle is a division of Next Phase
Media, a referral source for qualified business services, leads and
professionals. iCastle is a one-stop resource providing property owners with a
complete archive of original articles, tips on home improvement topics and
access to
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34
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qualified contractors for residential and commercial property improvement
projects. All of iCastle.com contractors are prescreened for proper insurance,
licensing and must offer a warranty. iCastle is in the process of building an
internal network of qualified service professional and leverages
ServiceMagic.com to provide service coverage in areas where they are currently
weak.
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CONTRACTOR.COM
Headquartered in Denver, Colorado, Contractor.com maintains a comprehensive
nationwide directory of service providers allowing homeowners the ability to
search by trade and zip code, on their own, for home improvement service
providers in their area (a customer rates system has been put in place to
provide a quasi "word of mouth environment"). Contractor.com contractors are
prescreened for liability insurance and must provide business references in
order to be listed in the Contractor.com directory. Contractor.com also provides
homeowners with tips on how to find and hire the right contractor for their home
improvement projects.
Contractor.com offers membership programs to contractors which provide access to
free home improvement leads and unlimited use of business solutions including;
sales and marketing tools, information on the construction industry, cost
estimators, and business management and financing tools.
Partners include: HomePlanFinder, Eloan, NetClerk, 4Spec.com, YellowPages.com
and Respond.com.
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In addition, parties with which we have commercial relationships and
other suppliers of home improvement products could choose to develop their own
Internet strategies or competing home improvement services. Many of our existing
and potential competitors have longer operating histories, greater name
recognition, larger homeowner bases and significantly greater financial,
technical and marketing resources than we do. We believe that we and any
competitor seeking to establish web enabled home improvement services confront
significant challenges, including:
o The number of visitors to the Web sites, the number of home
improvement jobs submitted by those visitors, the time spent by those
visitors at those Web sites and the resultant loyalty created among
those visitors, the degree to which Web site content and loyalty
create allegiance to the service provider, and, ultimately, the
ability to generate repeat customers;
o The ability to cost effectively recruit and retain a network of
quality service providers that have broad trade and geographical
coverage so that a large number of jobs can be successfully completed;
o The ability to generate significant traffic from online homeowners and
qualify their projects so that they can be efficiently handled by a
network of service providers;
o The ability to develop an effective process for handling a large
volume of homeowner requests and delivering a high level of customer
service;
o The ability to develop and maintain an excellent performance record on
repair and remodeling jobs in which we act as the contractor of
record; and
o The ability to develop commercial relationships with suppliers of home
improvement products and services that provide value to consumers and
service providers, as well as revenue from advertising.
Nevertheless, the service provider matching services operate on a localized
basis and it is challenging for one company to dominate in all locations.
Various locations where we experience service provider matching opportunities
are greater in number than others. We believe that because of our web site
presentation and our customer service and operation center, we compare favorably
with others offering service provider matching services.
Our current competitors with regard to business management software and
marketing programs for the BMI include:
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SOFTTECH
SoftTech offers configuration software ("V6 Manufacturer") designed to enable
manufacturers of framed products to configure, price and fabricate their
products. The program can be interfaced with other programs to accommodate
ERP/MRP, distribution and accounting functions. In addition to V6, manufacturers
can distribute a scaled-down version, "V6 Dealer", to their distribution channel
or customers, enabling clients to configure and price products remotely. Orders
can then be sent directly to the manufacturer's V6 program.
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EDGENET
EdgeNet is focused on electronic catalog development. m2o is EdgeNet's custom
configuration software for the WND industry. Customers include: The Home Depot,
Anderson Windows, Pella Windows.
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BIDMASTER
BidMaster develops electronic catalogs. Their software products incorporate an
electronic catalog with quoting functions. The program prompts the user for all
options available for any selected unit.
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SELECTICA, INC. (NASDAQ: SLTC)
Selectica ISS is a comprehensive software application that accelerates the
process of selecting, configuring, pricing, and purchasing complex products with
efficiency and accuracy. Three primary functions include: knowledge capture;
information dissemination; configuration and ordering. Software suggests product
configurations based on business rules, sales objectives, marketing information,
and product constraints and connects with Siebel, SAP and Oracle applications.
Services account for 45% of sales. The company targets financial services and
manufacturing industries. Clients include: Dell, BMW, Cisco, Fireman's Fund,
Hewlett-Packard. Revenue: FY 2001 = $53.9 million up from $16.1 million in 2000.
--------------------------------------------------------------------------------
CALICO COMMERCE, INC. (NASDAQ: CLIC)
Calico is a provider of interactive selling software for manufacturers. With its
advanced configuration and recommendation technology, Calico enables clients to
better understand and best serve their customers. The company recently filed for
bankruptcy protection and its software assets have been acquired by PeopleSoft.
Calico targets telecommunications, financial services, retail, industrial
manufacturing, electronic finished goods, and medical industries. Customers
include: Telia, Nortel, Best Buy, Staples, and Honeywell. Recent alliance with
Toshiba Information Systems. Revenue: FY 2001 = $29.7 Million down from $35.6
Million FY 2000.
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SOFTWARE SOLUTIONS
Software Solutions provides custom and turnkey eCommerce solutions native on the
AS/400 computer system for all industries, including manufacturing and wholesale
or retail distribution applications. AS/400 Platform. Software installed at
hundreds of sites throughout the US. Not a business partner of any of the large
software providers.
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NXTREND
NxTrend provides software solutions for supply-chain management designed to
enable the distributor to implement best practices for inventory management,
order processing, sales, customer service, warehouse logistics, and strategic
business analysis. The company targets electrical, building materials,
industrial, PHAC, paper and medical industries. Installed base of over 1000.
Includes Huttig Building Products - the largest distributor of building products
in the nation. Its expanding list of products include: doors, windows, moldings,
lumber, house wrap, decking, fencing, trusses, dry wall, paneling, installation.
In 2000, NxTrend was acquired by BuildNet (an industry vertical exchange), which
provides software to homebuilders and suppliers in the residential construction
industry. BuildNet's objective was to become the B2B eCommerce solution for the
residential construction industry. In August of 2001 BuildNet filed under
Chapter 11 - NxTrend was not included in the filing.
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36
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WINDOWMAKER
Provides solutions for the window industry supply chain. Solutions include a
comprehensive product suite made up of a number of integrated modules.
Manufacturers pick and choose elements most appropriate to their requirements.
Drag and drop design tools allow creation of custom design on the fly with
engineering rules and limitations automatically checked.
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OUR WEB ENABLED AND BASED BUSINESS MANAGEMENT SOFTWARE OFFERINGS ARE
PROPRIETARY IN NATURE, FOCUSED ON THE BUILDING MATERIALS INDUSTRY, AND WE
BELIEVE COMPARE MORE FAVORABLY TO OUR CUSTOMERS THAN THOSE OF MANY OF OUR
COMPETITORS.
CUSTOMER CONCENTRATION - Almost all of the revenues generated from our
manufacturer and distributor customer base are concentrated among eight primary
customers.
OTHER BENEFICIAL RELATIONSHIPS
POWERED BY IMPROVENET AND FIND A CONTRACTOR
We provide a customized product superimposing ImproveNet.com content
including our matching services on third-party Web sites so that the content
looks like the third party's own content but is actually Powered by ImproveNet.
This customized product allows our logo and our products and services to be
placed across a broad spectrum of third-party Web sites related to home
improvement, from online versions of traditional media properties to Web sites
related to manufacturing, finance, real estate and local and regional guides. If
a customer of these third parties uses our matching services, we pay the
supplier a portion of any service revenue from that match. We also advertise on
third party Web sites through our Find a Contractor service. We place a "Find a
Contractor" banner or button on third party Web sites that links the user to
ImproveNet.com. We pay these third parties either a flat fee or on a per
referral basis. Since many of the third-party Web sites that use Powered by
ImproveNet and Find a Contractor are related to the home improvement industry,
we believe these programs will deliver more qualified traffic to our Web site.
We also believe that Web sites that are related to the home improvement industry
and that participate in these programs will benefit from the access to our
service provider matching services.
THIRD PARTY PROVIDERS
We believe that contracting with the best companies in the Internet and
home improvement space is an important component in ImproveNet's effort to be
America's home improvement destination. Our primary means of creating demand for
ImproveNet services has been through interactive marketing. We have entered into
these arrangements, which are generally performance based, long term in length
but cancellable with reasonable notice, that obligate us to pay based upon
performance including revenue sharing and cost per acquisition :
o Frequently visited portals, such as Yahoo!, Google, Overture and MSN;
and
o Web sites related to home improvements, such as HomeTime and Mills
Pride.
In addition, we have supplemented our online advertising with offline
advertising in print media and through customary public relations initiatives.
TECHNOLOGY INFRASTRUCTURE
Our Web sites are designed to provide fast, reliable, high quality
access to our online services. Our hardware and software systems must assimilate
and process large volumes of visitor traffic and store, process and disseminate
large amounts of user data, and process interactive applications.
We have implemented a broad array of site management, customer
interaction and processing systems using our own proprietary technologies and,
where appropriate, commercially available licensed technologies. Our systems use
Windows NT, Linux, Unix, SQL, BEA WebLogix, and Oracle and are designed for a
high level of automation and performance. We have redundant power supplies,
fail-over machines and fully clustered databases and Web servers to optimize
up-time and user experience. We monitor our network and machines 24 hours a day
for reliability.
37
Our Web sites have been developed internally using a Microsoft
platform. In developing our Web sites we use a variety of tools to support rapid
database/Web application development. Our ability to successfully receive
homeowner job submissions online, provide high-quality homeowner service, and
serve a high volume of advertisements largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems. Our
Web sites and databases are hosted by AT&T in Phoenix, Arizona. All of our
computer, communications systems and database back-ups are located in our
administrative headquarters in Scottsdale, Arizona. Visitor traffic to our Web
sites varies significantly. Spikes in visitor traffic and user demand can affect
expected performance of our Web sites and could cause outages. Since we have
been keeping logs on our Web sites, we believe that our ImproveNet.com Web site
has been unintentionally interrupted for periods ranging from two minutes to one
hour, except that on one occasion, some users experienced interruptions in part
of our service for a period of 48 hours. We believe that we have had no
unintentional interruptions or outages of our ImproveNetPro.com Web site since
its inception in December 1999. The primary reason for interruptions in service
relate to new content introductions onto our Web sites, such as our visualizer
or estimator tools, which involve a complex code base. Implementation of
increased security measures, such as additional firewalls, has caused
interruptions in our Internet-based services. Having fatal system failures or
serious catastrophe to the systems could result in a significant downtime.
We seek to maintain and advance our market position by continually
enhancing the performance of our Web sites and expanding the features that we
offer homeowners, service providers and suppliers. We expect that enhancements
to our Web sites and services will continue.
INTELLECTUAL PROPERTY RIGHTS
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual proprietary rights, including our
databases of homeowners, service providers, distributors and manufacturers and
our matching criteria and algorithms. We rely primarily on a combination of
contractual provisions, confidentiality procedures, trade secrets, and copyright
and trademark laws to accomplish these goals. Our databases are trade secrets,
and our matching service is protected by trade secret and copyright laws.
In addition, we seek to avoid disclosure of our trade secrets by
requiring employees, customers and others with access to our proprietary
information to execute confidentiality agreements. We also seek to protect our
software, documentation and other written materials under trade secret and
copyright laws.
Despite our efforts to protect our proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse engineer
aspects of our services or to obtain and use information that we regard as
proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Use by others of our proprietary rights could materially harm our business.
Furthermore, policing the authorized use of our product is difficult and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
In the ordinary course of business, we have received, and may receive
in the future, notices from third parties claiming infringement of their
proprietary rights. Any claims, with or without merit, could be time-consuming,
result in costly litigation, cause delays or require us to enter into royalty or
licensing agreements, any of which could harm our business. Patent litigation in
particular has complex technical issues and inherent uncertainties. In the event
an infringement claim against us were successful and we could not obtain a
license on acceptable terms, license a substitute technology or redesign to
avoid infringement, our business would be harmed.
GOVERNMENT REGULATION
Our business is subject to rapidly changing laws and regulations.
Although our operations are currently based in Arizona, the United States of
America government and the governments of other states and foreign countries
have attempted to regulate activities on the Internet. The following are some of
the evolving areas of law that are relevant to our business:
o PRIVACY LAW. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and
disclosure of personal information could limit our ability to leverage
our databases to generate revenues; and
o BUILDING REQUIREMENTS. The Company's activities and that of our
service providers are subject to various federal, state and local
laws, regulations and ordinances relating to, among other things, the
licensing of home improvement contractors, OSHA standards, building
and zoning regulations and environmental laws and regulations relating
to
38
the disposal of demolition debris and other solid wastes. In addition,
many jurisdictions require the contractor of record to obtain a
building permit for each home improvement project.
Because of this rapidly evolving and uncertain regulatory environment,
we cannot predict how these laws and regulations might affect our business. In
addition, these uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do
business.
EMPLOYEES
As of December 31, 2003, we employed 15 full-time persons. None of our
employees are represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are good.
PROPERTIES
Our principal administrative offices and part of our business and
systems operations are located in Scottsdale, Arizona in approximately 3,529
square feet of office space under a lease agreement with gross lease payments of
$5,000.00 per month plus tax at 1.9% for a two year term commencing June 15,
2003.
We believe that our facilities are adequate for our current operations
and that additional office space, if required, can be readily obtained. See Note
6 of the Notes to the Consolidated Financial Statements for information
regarding the Company's lease obligations.
At this time, the registrant has no policy in terms of investment in
real estate nor does it have any investment in real estate. The registrant has
no immediate plans to invest in real estate mortgages.
LEGAL PROCEEDINGS
From time to time, we may be involved in routine litigation relating to
claims arising out of or incidental to our operations. As of the date of this
filing, we are engaged in various legal proceedings that are incidental to our
business. As of the date of this filing, we are engaged in legal proceedings
that could materially affect our business should an adverse judgment be entered
against us. Should a third party in any of the ongoing litigation matters obtain
a judgment against the Company or its subsidiary, it is unlikely the Company or
its subsidiary would have sufficient working capital available to timely pay any
such judgment. In addition, we have received preliminary information regarding
possible erroneous cancellation of health insurance benefits for former
employees under COBRA for which we may have potential liability.
One arbitration matter in Phoenix, Arizona involved First Systech
International, Inc., a predecessor to Etech, our wholly-owned subsidiary. This
proceeding concerns the 1998 sale of an ERP software product to a client who is
demanding a refund of the purchase price, and First Systech International
counterclaimed for the balance due on the contract plus additional work
performed and professional expenses of the litigation. The matter was before an
arbitrator who recently entered an award against First Systech for $116,886 plus
simple interest at 10% per year. Recently, First Systech International reached
agreement with Friedman Corporation ("friedman") pursuant to terms and
conditions of a Repayment and Security Agreement effective May 25, 2004 (the
"Agreement") which finalizes a payment plan for First Systech International's
obligations for the arbitration award that Friedman has paid. The amount owing
is approximately $182,000 with interest accruing at 8% per annum from April 2,
2004 and attorney's fees incurred by Friedman in the minimum amount of $4,500
and not to exceed $10,000 as set forth therein. Payments of $5,000 per month
commencing June 20, 2004 are to be made with annual increases of a minimum of
$5,000 per month until the outstanding balance is paid in full. The payments due
June 20 and July 20, 2004 were made timely. Pursuant to provisions of the
Agreement, First Systech International has granted a security interest and lien
on all of its assets to secure performance of its obligations under the
Agreement. First Systech International continues to maintain ownership of all of
the assets that it has pledged. The Agreement allows First Systech International
to quantify its specific payment obligations for the arbitration award.
In late March 2004, we initiated litigation in Nova Scotia, Canada
against the Canadian corporation that had been performing our Customer Care
Center and operations for the service provider matching service to enforce and
protect our rights under the services agreement regarding our proprietary
material. On March 26, 2004, the Canadian court entered an order
39
prohibiting the Canadian corporation from utilizing in any way ImproveNet's
proprietary materials and from soliciting or contacting any ImproveNet
contractor. At a court hearing in Canada on March 31, 2004, the order entered by
the court provided very specific limitations on the Canadian corporation's
ability to contact contractors that are participating in our membership program
for a specified period of time. The provisions of that agreement were set forth
in a writing filed with the Canadian court. Although no further matters are
pending before the Canadian court, we are prepared to pursue additional
litigation in the Canadian court or by arbitration in Arizona, if necessary, to
protect our proprietary material.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Information concerning the directors and executive officers of
ImproveNet is set forth below:
NAME AGE POSITION
---- --- --------
Jeffrey I. Rassas 41 Co-Chairman, Chief Executive Officer
Homayoon J. Farsi 50 Co-Chairman, President & Acting CFO
Naser Ahmad 50 Co-Chairman, Chief Technology
Officer
Ronald B. Cooper 49 Director
Jay Stead 40 Director
Alok Mohan 56 Director
Jeffrey R. Perry 45 General Counsel & EVP, Mergers &
Acquisitions
The following is a brief summary of the directors and executive
officers including their business experience for at least the past five years.
NASER AHMAD
Mr. Ahmad, 50, is the co-chairman, chief technology officer and a
co-founder of eTechLogix. He became chief technology officer, a director, and
co-chairman of ImproveNet on January 7, 2003. He has been active for over 25
years in the development of computer solutions for distribution and
manufacturing companies. Throughout his career, Mr. Ahmad has held technical
leadership positions with both entrepreneurial ventures as well as Fortune 100
companies including Caterpillar International, Inc., Sante Fe International and
Taylor Management Systems.
In 1989, Mr. Ahmad and Mr. Farsi co-founded SysTech International,
Inc., a Texas corporation, which was the predecessor-in-interest to eTechLogix.
In 1994, SysTech International, Inc. was merged into an Arizona corporation
named First SysTech International, Inc. which changed its name to eTechLogix,
Inc. in 2000. Mr. Ahmad served as executive vice president and chief technology
officer of SysTech International, Inc. from 1989 to 1994 and has held the same
positions with eTechLogix since 1994.
At Sante Fe International, Mr. Ahmad was a member of the task force for
evaluating and determining the next generation of application systems for the
organization. At Caterpillar, he was the software development manager and the
chief architect of the Company's enterprise resource planning (ERP) distribution
system.
40
Mr. Ahmad has been instrumental in the development of technology
products throughout his career. He co-founded the National Institute of
Technology in Karachi, Pakistan, is a member of the Advisory council of the
Darul Islam University, Dhaka, Bangladesh and serves as a director of several
privately held U.S. and foreign corporations. Mr. Ahmad is a graduate of the
University of Karachi with a BA in Accounting and a postgraduate degree in
Computer Science.
HOMAYOON J. FARSI
Mr. Farsi, 50, is the co-chairman, president and a co-founder of
eTechLogix. He became president, a director, and co-chairman of ImproveNet on
January 7, 2003. He has over 20 years experience as an entrepreneur in the
computer software industry. Mr. Farsi is knowledgeable concerning manufacturing,
distribution business processes and information systems and has been
instrumental in the development and launch of numerous software products
throughout his career. Mr. Farsi has held senior technical and operations
management positions with software and hardware companies including Taylor
Management Systems and Unisys, Inc.
In 1989, Mr. Farsi and Mr. Ahmad co-founded SysTech International,
Inc., a Texas corporation, which was the predecessor-in-interest to eTechLogix.
In 1994, SysTech International, Inc. was merged into an Arizona corporation
named First SysTech International, Inc. which changed its name to eTechLogix in
2000. Mr. Farsi served as president of SysTech International, Inc. from 1989 to
1994 and has served as president of eTechLogix since 1994. Mr. Farsi has an MS
Degree in Computer Systems from the University of Salford, Manchester, England.
JEFFREY I. RASSAS
Mr. Rassas, 41, has served as chief executive officer of eTechLogix
since October, 2001. He became chief executive officer, a director, and
co-chairman of ImproveNet on January 7, 2003. Mr. Rassas also helped launch and
fund two private Arizona companies, the TOLIS Group, Inc., a data back-up and
recovery software company supporting both the Linux and Unix operating systems,
and Channel Pros, Inc., a technology marketing and sales organization which
services clients across the country. Mr. Rassas founded EBIZ Enterprises, Inc.,
a Linux solution provider and computer cluster developer, in 1995. The common
stock of EBIZ Enterprises has been traded on the NASD Over-The-Counter Bulletin
Board. Mr. Rassas served as chief executive officer of EBIZ Enterprises from
1995 to October, 2000 and as its chairman of the board from 1995 until May 21,
2002. EBIZ Enterprises filed a voluntary petition to reorganize under Chapter 11
of the Bankruptcy Code on September 7, 2001. Its Plan of Reorganization was
confirmed on April 11, 2002, and became effective on May 21, 2002.
Between 1989 and 1994, Mr. Rassas founded and operated The Wilsaac
Group, Inc. dba DLC Consulting, an office services outsourcing firm for large
corporations. The Wilsaac Group, Inc. was acquired by a division of Air Canada
in 1994. Mr. Rassas co-founded ITS Travel Group, Inc., in 1985 and was involved
in its management until it was sold in 1989. By the time of its sale, it had
become the third largest travel organization in Arizona. From 1982 to 1985, Mr.
Rassas held the position of Magnetics Design Engineer at CTM Magnetics.
RONALD B. COOPER
Mr. Cooper, 49, has served as a director since September 1999 and as
chairman of the board of directors from August 2000 until January 7, 2003. He
served as chief executive officer and president of ImproveNet, Inc. from March
1999 until he stepped down from those positions on June 7, 2002. From July 1996
to March 1999, Mr. Cooper was president of Price Pfister, Black and Decker's
plumbing products division. From August 1992 to July 1996, Mr. Cooper was
president of three other Black and Decker divisions: Power Tool Accessories, PRC
Realty Systems and PRC Commercial Systems Group.
JAY STEAD
Mr. Stead, 40, based in Auckland, New Zealand, became a director on
January 7, 2003. He is currently the managing director of Mokka Enterprises,
LLP, a technology-oriented private investment firm focused on emerging
companies, which he joined in 2001. From 1999 to 2000 Mr. Stead was the
President & CEO of Sagebrush Corporation, an educational software company, and
from 1994 to 1998 was a senior executive at Reynolds and Reynolds. In addition,
Mr. Stead has held key management positions with Allen-Bradley and McKinsey &
Company. His career includes general management, marketing and business
development roles across software, services, consulting, hardware and
manufacturing sectors.
41
Mr. Stead holds a Bachelor of Science in Industrial Management from
Purdue University and received a Masters in Management from Northwestern's
Kellogg School of Management in 1989. Mr. Stead also serves on the board of
directors for MD Online and GolfLogix.
ALOK MOHAN
Mr. Mohan, 56, has been a director of Tarantella, Inc. (formerly SCO)
since 1994 and became Chairman of the Board in April 1998. From May to December
of 1994, Mr. Mohan served as Senior Vice President, Operations and Chief
Financial Officer of the Company. In December 1994 he was elected a director and
assumed the position of President and Chief Operating Officer. He served as the
Company's Chief Executive Officer from July 1995 until April 1998.
Prior to joining Tarantella, Inc., Mr. Mohan was employed with NCR
Corporation for over 20 years. He served as Vice President and General Manager
of the Workstation Products Division, from January 1990 until July 1993. From
July 1993 to May 1994 he served as Vice President of Strategic Planning and
Controller responsible for financial planning, analysis, and worldwide
reporting.
Mr. Mohan serves as a director on the boards of Rainmaker Systems,
Inc.and Crystal Graphics. He is also a venture partner with Blue Chip Venture
Company. From November 2000 until July 2001, Mr. Mohan served as a director of
Ebiz Enterprises, Inc. a Linux solution provider and computer cluster developer.
JEFFREY R. PERRY
Mr. Perry, 45, has served as general counsel of eTechLogix since May
2002 and served as chief financial officer until December 2002. In January 2003,
he began his duties as executive vice-president mergers & acquisitions and
general counsel with ImproveNet. From October 2000 to April 2003 he has also
served as general counsel of EBIZ Enterprises, Inc., a Linux solution provider
and computer cluster developer. Shares of the common stock of EBIZ Enterprises
have been traded on the NASD Over-The-Counter Bulletin Board. Mr. Perry began
private law practice in 1988 and served as an investment manager and financial
advisor with Prudential Securities from 1997 to 2000. Mr. Perry previously
founded and held the position of president and principal financial officer for
several private companies involved in the development of proprietary consumer
sports products and sports themed gifts with distribution through a network of
national catalog companies.
Mr. Perry holds business, political science, and law degrees from
Southern Methodist University. He holds law licenses in Arizona and Texas.
None of the executive officers or directors of ImproveNet or eTechLogix
has, during the last five years, been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or has been a party to a
civil proceeding which resulted in a judgment, decree or final order enjoining
further violations of, or prohibiting activities subject to, federal or state
securities laws or finding any violation of such laws. All of the executive
officers and directors of ImproveNet and eTechLogix are citizens of the United
States.
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid by the
Company to certain of the Company's executive officers whose annual
compensation, including salary and bonus, exceeded $100,000 ("the Named
Executive Officers"). Note that the executive officers' employment during the
year of 2002 was solely as an employee of eTechLogix, our wholly owned
subsidiary. The following table shows for the fiscal years ended December 31,
2000, 2001 and 2002 all compensation paid by ImproveNet, Inc. to Mssr. Rassas,
Farsi and Ahmad in all capacities:
42
Summary Compensation Table
Long-Term Compensation
---------------------------------------
Annual Compensation Awards
-------------------------------------------------- ---------------------------------------
Other Annual Restricted Stock Securities Underlying
Name and Principal Position Year Salary Bonus Compensation Awards Options/SARS (#)
--------------------------- ---- ------ ----- ------------ ------ ----------------
Jeffrey I. Rassas 2003 $ 174,166 $ - $ - $ -
Chief Executive Officer 2002 $ 60,000 $ - (1) $ - $ - -
2001 $ - $ - $ - $ - -
Homayoon J. Farsi 2003 $ 174,166 $ - $ - $ -
President and 2002 $ 67,500 $ - (1) $ - $ - -
Acting CFO 2001 $ 127,000 $ - (2) $ - $ -
Naser Ahmad 2003 $ 174,166 $ - $ - $ -
Chief Technology Officer 2002 $ 67,500 $ - (1) $ - $ -
2001 $ 127,500 $ - (2) $ - $ - -
-----------
1. Salary totaling $52,500 in 2002 was deferred and paid in 2003.
2. Salary totaling $47,000 in 2001 was deferred and paid 2002.
Option Grants in Last Fiscal Year
AGGREGATED OPTION/SAR EXERCISES IN 2003 FISCAL YEAR AND FY-END OPTION/SAR VALUES
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY
ON OPTIONS/SARS AT FY-END OPTION/SARS AT FY-END
EXERCISE (#) EXERCISABLE/ ($) EXERCISABLE/
NAME POSITION (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
---- -------- --- ------------------ ------------- -----------------
Jay Stead Director 0 0 106,111/13,889 0/0
------------------ ------------- -----------------
Ronald B. Cooper Director 0 0 338,213/18,889 0/0
------------------ ------------- -----------------
-------------
1. Closing price on 12/31/03 was $0.12.
COMPENSATION OF DIRECTORS
Directors currently receive no cash compensation from the Company for
their services as members of the Board or for attendance at committee meetings.
Members of the Board are reimbursed for some expenses in connection with
attendance at Board and committee meetings. Under the Company's 1999 Equity
Incentive Plan, each non-employee director is entitled to receive options to
purchase 100,000 shares of common stock for each year of service as a director
with an option to purchase an additional 50,000 shares of common stock for
chairman of the audit committee. For fiscal year 2003, Jay Stead and Ronald B.
Cooper, each received two grants of options to purchase a total of 120,000
shares of common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and footnotes set forth certain information
regarding the ownership of the common stock of ImproveNet as of June 30, 2004
by: (i) all those known by ImproveNet to be beneficial owners of more than five
percent of its common stock;
43
(ii) each director of ImproveNet; and (iii) all executive officers and directors
of ImproveNet as a group. Unless indicated below, the address for each listed
stockholder is c/o ImproveNet, Inc., 10799 N. 90th Street, Suite 200 Scottsdale,
AZ 85260.
NUMBER OF
SHARES OF
COMMON STOCK PERCENT
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) OWNED OWNED(1)
---------------------------------------- ----- --------
Kinderhook Partners, LP (2) 16,150,000 30.00%
Jeffrey I Rassas (3) 9,399,580 17.50%
Naser Ahmad (4) 8,875,580 16.52%
Homayoon J. Farsi (5) 8,619,580 16.05%
Joel A. Stead (6) 3,768,666 7.02%
Jay Stead(7) 160,555 *
Ronald B. Cooper(8) 397,652 *
Alok Mohan (9) 75,000 *
All executive officers and directors as a group 47,446,613 51.26%
---------------
* Less than one percent.
1. This table is based upon information supplied by officers, directors and
principal stockholders and Forms 3, 4 and 5 and Schedule 13D as filed with
the Securities and Exchange Commission (the "SEC"). Unless otherwise
indicated in the footnotes to this table and subject to community property
laws where applicable, ImproveNet believes that each of the stockholders
named in this table has sole voting and investment power with respect to
the shares indicated as beneficially owned. Applicable percentages are
based on 53,707,715 shares outstanding on August 14, 2004, adjusted as
required by rules promulgated by the SEC. Such SEC rules require that
shares of common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of August 14,, 2004 are deemed to
be outstanding and to be beneficially owned by the person or entity holding
the options or warrants but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
2. Includes 6,460,000 shares issuable upon exercise of warrants at $0.15 per
share. The General Partner of Kinderhook Partners, LP is Kinderhook GP,
LLC. Stephen J. Clearman is the managing member of Kinderhook GP, LLC.
Kinderhook GP, LLC and Stephen J. Clearman each disclaim beneficial
ownership of the shares except to the extent of their pecuniary interest
therein.
3. Shares held indirectly by Hayjour Family Limited Partnership.
4. Shares held indirectly by Ahmad Family Trust.
5. Shares held indirectly by Farsi Family Trust.
6. Includes 1,252,000 shares and 666,666 shares issuable upon the exercise of
warrants at $0.15 per share held indirectly by Joel A. Stead Trust dated
February 7, 2002, and 1,250,000 shares and 666,666 shares issuable upon the
exercise of warrants at various prices ranging from $0.10 to $0.25 per
share held directly.
7. Includes the right to directly acquire within 60 days, 10,555 shares at
$0.12 per share, 100,000 at $0.15 per share and 50,000 at $0.20 per share
upon the exercise of non-employee director options.
8. Includes 177,102 shares issuable at a per share exercise price of $0.25
pursuant to options that vest within 60 days and 60,000 shares issuable at
a per share exercise price of $6.25. Mr. Cooper retains a seat on the
Company's Board of Directors and has the right to acquire 10,555 shares at
$0.12 per share, 100,000 at $0.15 per share and 50,000 at $0.20 per share
pursuant to non-employee director options that vest within 60 days.
9. Includes the right to directly acquire within 60 days, 75,000 shares at
$0.20 per share upon the exercise of non-employee director options.
44
The following information is set forth as of the close of the 2003 Fiscal
Year for outstanding options.
NUMBER OF
SECURITIES TO BE
ISSUED UPON WEIGHTED-AVERAGE NUMBER OF
EXERCISE OF EXERCISE PRICE OF SECURITIES
OUTSTANDING OUTSTANDING REMAINING AVAILABLE
OPTIONS, OPTIONS, FOR FUTURE ISSUANCE
WARRANTS AND WARRANTS AND UNDER EQUITY
RIGHTS RIGHTS COMPENSATION PLANS
-------------------- -------------------- ---------------------
Equity compensation plans approved
by security holders (1999 Equity
Incentive Plan) 2,005,991 $0.31 5,286,509
==================== ==================== =====================
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We subcontract a portion of our research and development to eTechLogix
Systems India Pvt. Ltd. and eTechLogix Systems Bangladesh Ltd., each owned
equally by Homayoon J. Farsi and Naser Ahmad, two of our officers and directors.
During the years ended December 31, 2003 and 2002, the Company incurred expenses
from these companies totaling approximately $102,000 and $38,000, respectively,
which is included in research and development expenses in the accompanying
financial statements.
DESCRIPTION OF IMPROVENET'S SECURITIES
ImproveNet is a Delaware corporation and is authorized to issue
100,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value. As of July 31, 2004, 53,707,715 shares of
common stock were outstanding, and no shares of preferred stock are outstanding
and there has been no designation of any series or class of preferred stock. The
rights, preferences, privileges and limitations of the undesignated preferred
stock may be determined by the Board of Directors, and may be issued in more
than one series. As of July 31, 2004, ImproveNet had a total of 3,872,675 awards
granted under its 1999 Equity Incentive Plan and outstanding, of which 1,451,210
were vested, each award entitling the holder thereof to acquire one share of
ImproveNet's common stock. As of July 31, 2004, ImproveNet had outstanding
warrants to purchase 14,104,260 shares of its common stock which were
exercisable at prices ranging from $0.01 to $13.50 per share.
COMMON STOCK
The holders of the common stock are entitled to one vote per share on
all matters submitted to a vote of shareholders of ImproveNet. In addition,
holders are entitled to ratably receive dividends, if any, as declared from time
to time by the Board of Directors out of funds legally available for payment of
dividends. No dividends are payable on the common stock until all accrued but
unpaid dividends on any outstanding preferred shares have been paid. In the
event of the dissolution, liquidation or winding up of ImproveNet, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of all liabilities of ImproveNet and the preference amount distributable
to holders of any outstanding preferred shares. The holders of common stock do
not have any subscription, redemption or conversion rights, nor do they have any
preemptive or other rights to acquire or subscribe for additional, unissued or
treasury shares.
Under the terms of ImproveNet's bylaws, except for any matters which,
pursuant to Delaware law, require a greater percentage vote for approval, the
holders of a majority of the outstanding common stock, if present in person or
by proxy, are
45
sufficient to constitute a quorum for the transaction of business at meetings of
ImproveNet's shareholders. Except as to any matters which, pursuant to Dleaware
law, require a greater percentage vote for approval, the affirmative vote of the
holders of a majority of the common stock present in person or by proxy at any
meeting (provided a quorum is present) is sufficient to authorize, affirm or
ratify any act or action, including the election of the Board of Directors.
The holders of the common stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of common
stock can elect all of the directors to be elected in any election, if they
choose to do so. In such event, the holders of the remaining shares of common
stock would not be able to elect any directors. The Board of Directors is
empowered to fill any vacancies on the Board created by the resignation, death
or removal of directors.
In addition to voting at duly called meetings at which a quorum is
present in person or by proxy, Delaware law and ImproveNet's bylaws provide that
shareholders may take action without the holding of a meeting by written consent
or consents signed by the holders of a majority of the outstanding shares of the
capital stock of ImproveNet entitled to vote on the action. Prompt notice of the
taking of any action without a meeting by less than unanimous consent of the
shareholders will be given to those shareholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
shareholders and to reduce the corporate expense associated with special
meetings of shareholders.
PREFERRED STOCK
Under ImproveNet's Articles of Incorporation, shares of preferred stock
may, without any action by the shareholders of ImproveNet, be issued by the
Board of Directors from time to time in one or more series as designated by the
Board of Directors, for such consideration and with such relative rights,
privileges and preferences as the Board may determine. Accordingly, the Board of
Directors has the power, without shareholder approval, to fix the dividend rate
and to establish the provisions, if any, relating to voting rights, redemption
rate, sinking fund, liquidation preferences and conversion rights for any series
of preferred stock issued in the future, which could adversely affect the voting
power or other rights of the holders of common stock.
The Board's authority to issue preferred stock provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a person or group to
gain control of ImproveNet. ImproveNet has no present plans to issue any shares
of preferred stock.
OPTIONS AND OTHER WARRANTS
As of July 31, 2004, 14,104,260 warrants were outstanding, which
consist of 245,000 warrants expiring on November 23, 2004 with a $0.01 per share
exercise price; 100,000 warrants expiring on December 6, 2004 with a $0.01 per
share exercise price 583,333 warrants expiring on December 6, 2004 with a $13.50
per share exercise price; 750,000 warrants expiring on December 12, 2004 with a
$0.01 per share exercise price and 259,263 warrants expiring on December 12,
2004 with a $13.50 per share exercise price; 1,500,000 warrants expiring on
December 23, 2004 with a $0.15 per share exercise price; 200,000 warrants
expiring on June 27, 2005 with a $0.10 per share exercise price; 150,000
warrants expiring on September 25, 2005 with a $0.25 per share exercise price;
500,000 warrants expiring on December 4, 2005 with a $0.16 per share exercise
price; 20,000 warrants expiring on December 12, 2005 with a $0.16 per share
exercise price; ,5,000 warrants expiring on June 16, 2007 with a $1.00 per share
exercise price; and 10,466,664 warrants expiring on June 23, 2007 with a $0.15
per share exercise price.
As of July 31, 2004, ImproveNet had outstanding 3,172,675 options
granted to employees and consultants with exercise prices ranging from $0.05 to
$6.25 per share, of which 1,451,210 had vested. Each outstanding warrant and
option is exercisable for one share of ImproveNet's common stock.
TRANSFER AGENT
The transfer agent for ImproveNet's common stock is American Stock
Transfer & Trust, Inc., 59 Maiden lane- Plaza Level, New York, New York 10038.
SHARES ELIGIBLE FOR FUTURE SALE AND SELLING SECURITYHOLDERS
46
ImproveNet currently has 53,707,715 shares outstanding as of August 14,
2004 and will have a total of 66,544,379 shares outstanding assuming the
exercise in full of the warrants exercisable for shares registered in the
offering and a total of 67,811,975 shares outstanding assuming the exercise in
full of other warrants issued and outstanding. All the shares being registered
under the registration statement of which this prospectus is a part will be
freely transferable by persons except "affiliates" of ImproveNet, as that term
is defined under the Securities Act, without restriction or further
registration.
ImproveNet has agreed to register 38,147,074 additional shares of its
common stock for resale by certain securityholders. Of these 38,147,074 shares,
25,310,410 are outstanding and 12,836,664 are underlying outstanding warrants.
ImproveNet currently has outstanding 48,524,150 shares of "restricted
securities" of which 36,524,150 are currently or relatively soon will be
eligible for resale under Rule 144(k). An additional 5,183,565 shares
outstanding are not deemed "restricted securities". The remaining 12,000,000
shares of these restricted securities are held by the New Investors which
acquired them on June 24, 2004.
ImproveNet is unable to estimate the number of shares that may be sold
in the future by its existing securityholders or the effect, if any, that sales
of shares by such holders will have on the market price of the common stock
prevailing from time to time. Sales of substantial amounts of common stock by
existing shareholders could adversely affect prevailing market prices. See "RISK
FACTORS - Future sales of our common stock could cause our stock to decline in
price." for additional discussion concerning this risk.
RULE 144
In general, under Rule 144 as currently in effect, a person (or group
of person whose shares are aggregated), including affiliates of the Company, who
have beneficially owned shares of our Common Stock for at least one year would
be entitled to sell within any three-month period, an amount of restricted
securities that does not exceed the greater of:
- 1% of the number of shares of Common Stock then outstanding
(approximately 537,077 shares as of July 31, 2004; or
- the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
No prediction can be made as to the effect, if any that market sales of
the Company's Common Stock, or the availability of the Common Stock for sale,
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of a significant number of shares of the Company's Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and impair our future
ability to raise capital through an offering of equity securities. See "RISK
FACTORS - Future sales of our common stock could cause our stock to decline in
price." for additional discussion concerning this risk.
47
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BEFORE OFFERING AFTER OFFERING
---------------------------------------------------- --------------------------------
NUMBER OF SHARES
ISSUABLE UPON NUMBER OF SHARES
SECURITYHOLDER NUMBER OF SHARES EXERCISE OF WARRANTS PERCENTAGE OFFERED PERCENTAGE
NAME OF COMMON STOCK AND SHARES OFFERED OF CLASS HEREBY NUMBER OF CLASS
---- --------------- ------------------ -------- ------ ------ --------
Kinderhook
Partners,
L.P. (2) 9,690,000 6,460,000 17.50% 16,150,000 0 *
Hayjour Family
Limited
Partnership
(3) 9,399,580 0 17.50% 1,000,000 8,399,580 15.64%
Ahmad Family
Trust (4) 8,875,580 0 16.52% 1,000,000 7,875,580 14.66%
Farsi Family
Trust (5) 8,619,580 0 16.05% 1,000,000 7,816,580 14.55%
JMJS Group,
L.L.L.P. 1,801,000 333,333 3.97% 2,134,333 0 *
DKCP 5, L.P. 1,500,000 1,000,000 4.65% 2,500,000 0 *
Joel A. Stead
Trust dated
2/7/02 1,253,000 1,266,666 4.70% 2,518,666 0 *
Joel A. Stead
(6) 1,400,000 0 2.61% 1,400,000 0 *
Hexon
Technology
PTE LTD 1,002,000 666,666 3.11% 1,668,666 0 *
Rod & Kim
Cullum 833,960 750,000 2.95% 1,568,960 15,000 *
James T.
Donnelly 818,960 750,000 2.92% 1,568,960 0 *
John
Hassenmiller
& Joann
Baxter 517,920 0 0.96% 517,920 0 *
Mark Ploen (7) 501,000 333,333 1.55% 834,333 0 *
Elthem Kabir 501,000 383,333 1.65% 884,333 0 *
Timothy M.
Riley (8) 538,149 333,333 1.62% 833,332 38,150 *
Vinodray Shah 310,001 206,667 0.96% 516,668 0 *
Jamshid Farsi 201,170 0 0.37% 201,170 0 *
James R. Perry
(9) 200,400 133,333 0.62% 333,733 0 *
Jerre Stead
(10) 150,000 50,000 0.37% 200,000 0 *
Osama Ahmad 130,000 0 0.24% 130,000 0 *
Mesbah Ahmad 130,000 0 0.24% 130,000 0 *
Henry Lim (11) 0 100,000 0.18% 100,000 0 *
QualiTech,
Inc. 0 50,000 0.09% 50,000 0 *
June Perry (12) 0 20,000 0.03% 20,000 0 *
---------------------------------------------------------------------------------------
48
Mehdi Farsi 368,000 0 0.69% 368,000 0 *
Reza Farsi 368,000 0 0.69% 368,000 0 *
Najmuddin Ahmad 130,000 0 0.24% 130,000 0 *
Nazemuddin Ahmad 130,000 0 0.24% 130,000 0 *
Heidi Lisherness 50,000 0 0.09% 50,000 0 *
Hassan U. Ahmad 5,000 0 0.01% 5,000 0 *
Alya Ahmad 5,000 0 0.01% 5,000 0 *
---------------------------------------------------------------------------------------
TOTAL 49,429,300 12,836,664 38,147,074 24,144,890
=======================================================================================
------------
* Less than 1%.
(1) Applicable percentages are based on 53,707,715 shares outstanding on August
14, 2004, adjusted as required by rules promulgated by the SEC.
(2) The General Partner of Kinderhook Partners, LP is Kinderhook GP, LLC.
Stephen J. Clearman is the managing member of Kinderhook GP, LLC.
Kinderhook GP, LLC and Stephen J. Clearman each disclaim beneficial
ownership of the shares except to the extent of their pecuniary interest
therein. Kinderhook Partners, LP has the right to appoint a nominee to the
Company's Board of Directors.
(3) Jeffrey I. Rass?s is a general partner, along with his spouse, of Hayjour
Familt Limited partnership. He serves as the Co-Chairman and Chief
Executive Officer of the Company.
(4) Naser Ahmad is trustee of the Ahmad Family Trust. He serves as Co-Chairman
and Chief Technology Officer of the Company.
(5) Homayoon J. Farsi is trustee of the Farsi Family Trust. He serves as
Co-Chairman, President, and recently as the Acting Chief Financial Officer.
(6) Joel Stead holds indirect beneficial ownership in the Joel A. Stead Trust
dated February 7, 2002. (7) Mark Ploen is an officer, director and primary
shareholder of Quali Tech, Inc. (8) Includes 150 shares held as custodian
for his son under the New York Uniform Transfers to Minors Act and 15,000
held jointly with his wife and 23,000 shares held in his wife's IRA. Mr.
Riley disclaims all beneficial interest in 23,000 shares held in his wife's
IRA.
(9) James R. Perry and June Perry are husband and wife.
(10) Jerre Stead is the general partner of JMJS Group, LLLP and holds indirect
beneficial ownership in the shares held by JMJS Group, LLLP.
(11) Henry Lim is a director, officer and Principal shareholder of Hexon
Technologies PTE LTD. (12) June Perry and James R. Perry are husband and
wife.
PLAN OF DISTRIBUTION
Securityholders whose shares of common stock are being registered with
this prospectus may sell or distribute their common stock directly or indirectly
in transactions through underwriters, brokers, dealers or agents, as they
determine. The securityholders may also transfer, devise or gift their shares by
other means not described in this prospectus. In addition, if any shares covered
by this prospectus qualify for sale pursuant to Rule 144 under the Securities
Act, the securityholders may sell such shares pursuant to Rule 144 rather than
pursuant to this prospectus. They may sell their shares through privately
negotiated transactions, including distributions to shareholders or partners or
other persons affiliated with the shareholders. These securityholders are not
restricted as to the prices at which they may sell their shares, and sales at
less than market price may depress the market price of ImproveNet's common
stock. These securityholders are also not restricted as to the number of shares
they may sell at any one time. It is possible that a significant number of
shares being sold at the same time may also depress the price of ImproveNet's
common stock.
There are no contractual arrangements between or among ImproveNet and
any of the securityholders, other than Kinderhook Partners, L.P., DKCP 5, L.P.,
Timothy M. Riley and Vinodray Shah (the "New Securityholders") to whom we
provided certain registration rights in the ImproveNet, Inc. Common Stock
Subscription Agreement dated June 23, 2004 (the "Subscription Agreement") with
each of these securityholders. To fulfill our obligations regarding the
registration rights granted, ImproveNet will file this registration statement on
Form SB-2 with the SEC covering the shares of common stock each of those parties
under the Subscription Agreement as well as shares of common stock underlying
the Warrants each of the New Securityholders. We have also agreed to prepare and
file any amendments and supplements to such registration statement and the
prospectus as may be necessary to keep it effective until the earlier of (i) two
(2) years from the effectiveness date of such registration statement, or (ii)
the date when the New Securityholders may sell their shares under Rule 144(k),
or (iii) the date when the New Securityholders have disposed of all of their
shares of ImproveNet common stock including shares of common stock underlying
the Warrants. We have also agreed to indemnify and hold the New Securityholders
harmless from and against certain liabilities under the Securities Act that
could arise in connection with their sale of the underlying shares of common
stock and have agreed to pay all reasonable fees and expenses incident to the
filing of the registration statement.
49
In addition, under provisions of the Subscription Agreement ImproveNet
may include other selling securityholders in the registration statement. In
addition to the New Securityholders, we have elected to allow the other
securityholders listed above to be included in the registration statement as
selling securityholders of the securities set forth opposite their respective
names as noted above.
No professional underwriter in its capacity as such will be acting for
the securityholders. We anticipate that the sale of common stock by the selling
securityholders will be made through customary brokerage channels. However, the
distribution of the common stock may be effected from time to time in one or any
combination of the following transactions (which may involve crosses or block
transactions): (i) in the over-the-counter market, (ii) in transactions
otherwise than in the over-the-counter market (including on any national
security exchange or quation service on which the common stock may be listed at
the time of sale, including the Nasdaq Smallcap Market), or any privately
negotiated transaction, (iii) through the granting of options on the common
stock (whether such options are listed on an options exchange or otherwise),
(iv) by pledge to secure debts or other obligations, or (v) to cover short sales
made pursuant to this prospectus. Any of these transactions may be effected at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at negotiated prices or at fixed prices.
In effectuating sales, brokers or dealers engaged by the
securityholders may arrange for other brokers or dealers to participate in the
resales. The securityholders may enter into hedging transactions with
broker-dealers and in connection with those transactions, broker-dealers may
engage in short sales of the shares. The securityholders may also sell the
shares short and deliver shares to close out such short positions. The
securityholders may also enter into option or other transactions with
broker-dealers that require the delivery to the broker-dealer of the shares,
which the broker-dealer may resell pursuant to this prospectus. The
securityholders may also pledge the shares to a broker-dealer or other person to
secure obligations, and upon default, the pledgee may effect sales of the
pledged securities pursuant to the prospectus.
If the securityholders effect any of these transactions by selling
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the shareholders or commissions from
purchasers of common stock for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents might be in excess of those customary in the types of transactions
involved). The securityholders and any brokers, dealers or agents that
participate in the distribution of the common stock might be deemed to be
underwriters, and any profit on the sale of the common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act.
A securityholder may pledge its common stock from time-to-time in
connection with such securityholder's financing arrangements. To the extent any
such pledgees exercise their rights to foreclose on and sell the underlying
common stock, such pledgees may be deemed underwriters with respect to such
common stock and sales by them may be effected under this prospectus.
Under the Exchange Act and applicable rules and regulations promulgated
thereunder, any person engaged in a distribution of any of the common stock may
not simultaneously engage in market making activities with respect to the common
stock, depending on the circumstances, for five business days prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the shareholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations promulgated thereunder, which
provisions may limit the timing of purchases and sales of any of the common
stock by the securityholders
Under the securities laws of certain states, the common stock may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in certain states the common stock may not be sold unless the common
stock has been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
EXPERTS
The financial statements of ImproveNet as of December 31, 2002 and 2003
and for each of the two years in the period ended December 31, 2003 included in
this prospectus and elsewhere in the registration statement have been audited by
Semple & Cooper L.L.P., independent public accountants, as indicated in their
reports with respect thereto, and are included in reliance upon the authority of
such firm as experts in accounting and auditing in rendering the reports.
Reference is made to such report, which includes an explanatory paragraph with
respect to the uncertainty regarding ImproveNet's ability to continue as a going
concern as discussed in the Note 1 to the financial statements. However, in the
most recent quarterly filing on Form 10-QSB for the period ended June 30, 2004,
our auditors have removed the qualification in their opinion to our financial
statements doubting our ability to continue as a going concern.
50
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered will be passed upon by ImproveNet's legal counsel, Law Office of Jeffrey
R. Perry, Scottsdale, Arizona.
ADDITIONAL INFORMATION
ImproveNet has filed with the Commission a registration statement on
Form SB-2 under the Securities Act, with respect to the common stock offered
under this prospectus. This prospectus does not contain all the information
contained in the registration statement. For further information, please refer
to the registration statement, including the exhibits filed or incorporated as
part thereof. The registration statement and exhibits are available for
inspection without charge at the Public Reference Section of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained
in this prospectus as to the contents of any contract or other document are not
necessarily complete and reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement. All statements
contained in this prospectus are qualified in their entirety by such reference.
REPORTS TO SHAREHOLDERS
ImproveNet will furnish holders of shares of common stock annual
reports containing audited financial statements and any such other periodic
reports as may be appropriate or as may be required by law. ImproveNet is
subject to the periodic reporting requirements of the Exchange Act. In
accordance with the Exchange Act, ImproveNet will file reports, proxy statements
and other information with the Commission. These reports, proxy statements and
other information may be read and copied at public reference facilities of the
Commission at 450 Fifth Street N.W., Washington, D.C. 0549; and at the regional
offices maintained by the Commission at 500 West Madison Street , Suite 1400,
Chicago, Illinois 60661; 7 World Trade Center, 13th Floor, New York, New York
10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of
these materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates.
Additionally, the Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. You may obtain
information on the operation of the SEC's public reference facilities by calling
the SEC at 1-800-SEC-0330.
51
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Balance Sheets at June 30, 2004, (unaudited)
December 31, 2003 and December 31, 2002 F-3
Statements of Operations for the Years Ended December 31, 2003 and
2002 and the Six Months Ended June 30, 2004 and 2003 (unaudited) F-5
Statements of Stockholders' Equity for the Years Ended December 31, 2003
and 2002 and the Six Months Ended June 30, 2004 and 2003 (unaudited) F-6
Statements of Cash Flows for the Years Ended December 31, 2003 and 2002 and
for the Six Months Ended June 30, 2004 and 2003 (unaudited) F-7
Notes to Financial Statements F-10
F-1
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of ImproveNet, Inc.
We have audited the accompanying consolidated balance sheets of ImproveNet, Inc.
as of December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ImproveNet, Inc. as
of December 31, 2003 and 2002, and the results of its consolidated operations,
stockholders' equity (deficit), and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses and had an accumulated
deficit and negative working capital as of December 31, 2003 and 2002. These
factors raise doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments to
the amounts and classifications of assets or liabilities that might result
should the Company be unable to continue as a going concern.
/s/ Semple & Cooper, LLP
Certified Public Accountants
Phoenix, Arizona
March 26, 2004
F-2
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2004 December 31, December 31,
(unaudited) 2003 2002
---------- ---------- ----------
Cash and cash equivalents $1,072,627 $ 382,415 $ 446,833
Accounts receivable, net 494,189 330,472 329,657
Receivable from stock transfer agent -- -- 594,715
Other receivables -- -- 1,000
Prepaid expenses 48,298 7,833 55,054
Costs and estimated earnings in excess of billings
on uncompleted software contracts -- -- 4,100
---------- ---------- ----------
Total Current Assets 1,615,114 720,720 1,431,359
Property and equipment, net 68,707 99,800 157,994
---------- ---------- ----------
Total Assets $1,683,821 $ 820,520 $1,589,353
========== ========== ==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, 2004 December 31, December 31,
(unaudited) 2003 2002
----------- ----------- -----------
Current Liabilities:
Notes payable - current portion $ -- $ -- $ 12,592
Obligations under capital leases - current portion 17,824 17,824 15,843
Line of credit 61,532 65,619 77,755
Accounts payable 363,227 378,679 221,096
Accrued compensation -- 1,329 194,082
Accrued customer claims 248,005 305,588 137,080
Accrued furniture lease buyout - current portion 37,500 60,000 216,376
Accrued merger and tender offer redemption liabilities -- -- 2,378,029
Deferred revenue 37,642 49,292 35,958
Billings in excess of costs and estimated earnings
on uncompleted software contracts -- -- 89,250
Other liabilities and accrued expenses 124,869 129,877 23,453
----------- ----------- -----------
Total Current Liabilities 890,599 1,008,208 3,401,514
Long-Term Liabilities:
Notes payable - long-term portion -- 400,000 605
Obligations under capital leases - long-term portion 2,122 10,900 26,275
Accrued furniture lease buyout - long-term portion -- 7,500 --
----------- ----------- -----------
Total Liabilities 892,721 1,426,608 3,428,394
----------- ----------- -----------
Stockholders' Deficit:
Common stock, $.001 par value, 100,000,000 shares
authorized, 53,767,715, 39,210,315 and 53,124,290
shares outstanding at June 30, 2004, December 31, 2003 53,768 53,124 53,124
and 2002, respectively
Additional paid-in capital 2,700,428 539,770 482,570
Accumulated deficit (1,963,096) (1,198,982) (412,794)
----------- ----------- -----------
791,100 (606,088) 122,900
Less: Treasury stock, at cost,
underlying 13,913,975 shares -- -- (1,961,941)
----------- ----------- -----------
Total Stockholders' Equity (Deficit) 791,100 (606,088) (1,839,041)
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 1,683,821 $ 820,520 $ 1,589,353
=========== =========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, Year Ended December 31,
------------------------------ ------------------------------
2004 2003 2003 2002
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenues $ 1,880,247 $ 1,648,548 $ 3,223,587 $ 777,257
Cost of Revenues 845,043 966,423 1,787,449 240,394
------------ ------------ ------------ ------------
Gross Profit 1,035,204 682,125 1,436,138 536,863
Selling, General and Administrative Expenses 899,081 844,015 1,888,746 855,282
Research and Development Expenses 198,378 193,488 399,045 86,801
------------ ------------ ------------ ------------
Loss from Operations (62,255) (355,378) (851,653) (405,220)
Other Revenues (Expenses):
Interest income 607 3,269 3,848 220
Interest expense and financing costs (719,946) (6,965) (69,416) (204,773)
Loss on disposal of fixed assets -- (51,294)
Relief of Debt -- 103,876 103,876
Miscellaneous revenues 17,480 9,300 27,157 6,034
------------ ------------ ------------ ------------
Loss from Operations before Income Taxes and Extraordinary Gain (764,114) (245,898) (786,188) (655,033)
Benefit for Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Loss before Extraordinary Gain (764,114) (245,898) (786,188) (655,033)
Extraordinary Items:
Gain on Merger with eTech -- -- -- 361,357
------------ ------------ ------------ ------------
Net Loss $ (764,114) $ (245,898) $ (786,188) $ (293,676)
============ ============ ============ ============
Net earnings (loss) per common share, basic and diluted:
Loss before extraordinary gain on Merger with eTech $ (0.02) $ (0.01) $ (0.02) $ (0.02)
Extraordinary gain on Merger with eTech $ -- $ -- $ -- $ 0.01
------------ ------------ ------------ ------------
Net loss per common share $ (0.02) $ (0.01) $ (0.02) $ (0.01)
============ ============ ============ ============
Weighted average common shares: basic and diluted 39,778,895 39,210,315 39,210,315 28,909,573
============ ============ ============ ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002 AND THE SIX MONTHS ENDED JUNE 30, 2004
Common Stock Treasury Stock
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance at December 31, 2001 3,600 $ 10,000 6,400 $ (110,000)
Conversion of a related party
note payable for stock 1,800 12,000 -- --
Effect of Merger with eTech 53,118,890 31,124 (6,400) 110,000
Tender offer of common shares -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2002 53,124,290 53,124 -- --
Detachable warrants issued
with convertible debt -- -- -- --
Payment of treasury stock
subscribed -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2003 53,124,290 53,124 -- --
Retirement of treasury stock (13,913,975) (13,913) -- --
Issuance of new common stock
in private placement 10,500,000 10,500 -- --
Warrants issued in conversion
of debt -- -- -- --
Issuance of bonus stock to
compensate outside directors 100,000 100 -- --
Issuance of common stock for
consulting services 250,000 250 -- --
Conversion of convertible
promissory notes and interest 3,707,400 3,707 -- --
Net loss -- -- -- --
Balance at June 30, 2004 53,767,715 53,768 -- --
============ ============ ============ ============
Total
Additional Treasury Retained Stockholders'
Paid-In Stock Earnings Equity
Capital Subscribed (Deficit) (Deficit)
------------ ------------ ------------ ------------
Balance at December 31, 2001 -- -- (119,118) (219,118)
Conversion of a related party
note payable for stock -- -- -- 12,000
Effect of Merger with eTech 482,570 -- -- 623,694
Tender offer of common shares -- (1,961,941) -- (1,961,941)
Net loss -- -- (293,676) (293,676)
------------ ------------ ------------ ------------
Balance at December 31, 2002 482,570 (1,961,941) (412,794) (1,839,041)
Detachable warrants issued
with convertible debt 57,200 -- -- 57,200
Payment of treasury stock
subscribed -- 1,961,941 -- 1,961,941
Net loss -- -- (786,188) (786,188)
------------ ------------ ------------ ------------
Balance at December 31, 2003 539,770 -- (1,198,982) (606,088)
Retirement of treasury stock (13,913) -- -- --
Issuance of new common stock
in private placement 1,039,500 -- -- 1,050,000
Warrants issued in conversion
of debt 694,562 -- -- 694,562
Issuance of bonus stock to
compensate outside directors 10,900 -- -- 11,000
Issuance of common stock for
consulting services 34,750 -- -- (35,000)
Conversion of convertible
promissory notes and interest 367,033 -- -- 370,740
Net loss -- -- (764,114) (764,114)
------------ ------------ ------------ ------------
Balance at June 30, 2004 2,700,428 -- (1,963,096) 791,100
============ ============ ============ ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, Year Ended December 31,
-------------------------- --------------------------
2004 2003 2003 2002
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net Loss $ (764,114) $ (245,898) $ (786,188) $ (293,676)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 42,623 38,656 80,298 95,695
Interest coverted to equity 740 -- -- --
Loss on disposal of property and equipment -- -- -- 51,294
Consulting fees paid through the issuance of stock 35,000 -- -- 25,000
Issuance of bonus stock to directors 11,000 -- -- --
Debt conversion expense 694,562
Relief of Debt -- -- (103,876) --
Treasury stock subscribed -- -- 1,961,941 --
Extraordinary gain -- -- -- (361,357)
Financing costs paid through the issuance of warrants -- (103,876) 57,200 81,318
Interest expense recognized through the conversion of -- 1,961,941 -- --
convertible notes payable -- -- -- 17,376
Changes in assets and liabilities:
Accounts receivable, net (163,717) (18,765) (815) (33,158)
Other receivables -- 1,000 1,000 (1,000)
Prepaid expenses (40,465) (28,088) 47,221 43,910
Income tax refund receivable 134,180
Receivable from stock transfer agent -- 594,715 594,715 --
Costs and estimated earnings in excess of billings on
uncompleted software contracts -- (35,425) 4,100 (4,100)
Other current assets -- --
Accounts payable (15,452) 3,393 157,583 98,488
Accrued compensation (1,329) (183,598) (192,753) 60,082
Accrued merger and tender offer redemption liabilities -- -- (2,378,029) --
Accrued customer claims (57,583) -- 168,508 6,634
Accrued furniture lease buyout (30,000) (15,000) (45,000) 67,563
Accrued merger and tender offer redemption liabilities -- (2,378,029) -- --
Deferred revenue (11,650) (9,625) 13,334 (6,042)
Billings in excess of costs and estimated earnings on
uncompleted software contracts -- (66,750) (89,250) 89,250
Income taxes payable -- -- --
Other liabilities and accrued expenses (5,008) 267,782 106,424 5,781
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (305,393) (217,567) (403,587) 77,238
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (11,530) (22,104) (22,104) (1,372)
Purchase of the pre-merger net assets of ImproveNet by
eTech through the Merger with eTech -- -- -- (519,000)
Cash and cash equivalents acquired in the Merger with eTech -- -- -- 418,284
---------- ---------- ---------- ----------
Net cash used in investing activities (11,530) (22,104) (22,104) (102,088)
========== ========== ========== ==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended June 30, Year Ended December 31,
----------------------------- ------------------------------
2004 2003 2003 2002
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Cash flows from financing activities:
Repayment of debt (30,000) (13,197)
Proceeds from convertible notes payable -- -- 400,000 250,000
Proceeds from eTech Common Stock sale -- -- -- 250,000
Proceeds from issuance of common stock 1,050,000
Repayment of notes payable -- -- (13,197) (19,526)
Payments on capital lease obligations (8,778) (6,352) (13,394) (46,363)
Line of credit, net (4,087) (10,045) (12,136) 5,942
Proceeds from debt incurred -- 75,000 -- --
Proceeds from related party note payable -- -- -- --
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,007,125 45,406 361,273 440,053
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 690,212 (194,265) (64,418) 415,203
Cash and cash equivalents at beginning of year 382415 446,833 446,833 31,630
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,072,627 $ 252,568 $ 382,415 $ 446,833
============ ============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 20,326 $ 6,965 $ 16,189 $ 81,080
============ ============ ============ ============
Income taxes $ -- $ -- $ -- $ --
============ ============ ============ ============
Non-Cash Activity:
Conversion of a related party note payable into
Common Stock $ -- $ -- $ -- $ 12,000
============ ============ ============ ============
Assumption of notes payable on automobiles by
related parties $ -- $ -- $ -- $ 80,444
============ ============ ============ ============
Conversion of convertible notes payable into
Common Stock $ 370,000 $ -- $ -- $ 250,000
============ ============ ============ ============
Issuance of common stock for consulting services $ 35,000 $ -- -- --
============ ============ ============ ============
Transfer of capital lease obligations to current assets $ -- $ -- $ -- $ 148,813
============ ============ ============ ============
Extraordinary gain recognized on the Merger with eTech $ -- $ -- $ -- $ 361,357
============ ============ ============ ============
Relief of Debt recognized on furniture lease settlement $ -- $ -- $ 103,876 $ --
============ ============ ============ ============
Financing costs paid through the issuance of warrants $ -- $ -- $ 57,200 $ --
============ ============ ============ ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-8
IMPROVENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
ImproveNet, Inc. ("ImproveNet" or the "Company") was incorporated in California
in January 1996 and was reincorporated in Delaware in September 1998. The
Company is headquartered in Scottsdale, Arizona. The Company is a source for
home improvement information services for homeowners, service providers and
suppliers nationwide.
eTechLogix, Inc. ("eTech"), a wholly-owned subsidiary of ImproveNet, licenses,
installs and maintains its proprietary e-commerce software products to companies
primarily operating in the building material industry. eTech was formerly known
as First Systech International, Inc. and was originally incorporated in March
1989 in the State of Texas. In July of 1994, eTech relocated to the State of
Arizona and incorporated itself under the laws of the State of Arizona.
BASIS OF PRESENTATION AND MERGER WITH ETECH
On December 23, 2002, eTech merged into Etech Acquisition, Inc., (the "Merger")
an Arizona corporation and wholly owned subsidiary of ImproveNet. Through this
merger, the former shareholders of eTech acquired a controlling interest in
ImproveNet and accordingly, the Merger is accounted for as a reverse merger,
with eTech being the accounting acquirer of ImproveNet. Accordingly, the
financial statements present the historic financial position, operations and
cash flows of eTech for all periods presented with the December 31, 2002 balance
sheet adjusted to consolidate and reflect the fair values assigned to the
acquisition balance sheet of ImproveNet. ImproveNet had de minimus operations
from December 23, 2002 to December 31, 2002. Refer to Note 8, Merger with eTech,
for additional information and disclosures related to the Merger.
GOING CONCERN
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has continued to sustain losses for
the past two years, but with funds received in 2004 from its recent private
placement in June 2004, the Company now has positive working capital and
positive net worth.
During 2003 the Company procured contracts for sales of its software products
with existing clients. The Company looks for increased sales volume of their
primary software products throughout 2004 and thereafter by adding new clients.
The Company also anticipates increased revenues from the home improvement
information services segment as a result of increasing lead generation,
recruiting contractors to the ImproveNet membership network, and through
increased efficiencies in operations. The Company also intends to raise
additional capital either through a public or private offering of securities.
The additional funds from continued software sales and capital financing will be
used to finance continued operations and increase the Company's sales and
marketing functions.
The financial statements do not include any adjustments to reflect the possible
future effects of the recoverability and classifications of assets of the
amounts and classifications of liabilities that may result from the uncertainty
of the Company's ability to continue as a going concern
PRINCIPLES OF CONSOLIDATION
As discussed above, the consolidated financial statements include the accounts
of eTech for all periods presented and ImproveNet from the effective date of the
Merger. All material intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
F-9
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an initial
maturity of three (3) months or less to be cash and cash equivalents.
CONCENTRATIONS OF RISK
The Company maintains its cash balances in a financial institution. Deposits not
to exceed $100,000 are insured by the Federal Deposit Insurance Corporation
(FDIC). At December 31, 2003 and 2002 and June 30, 2004, the Company had
uninsured cash of approximately $291,000, $388,000, $967,000 (unaudited)
respectively.
The Company extends credit to customers, which results in accounts receivable
arising from its normal business activities. The Company does not require
collateral or other security to support financial instruments subject to credit
risk. The Company routinely assesses the financial strength of its customers
and, based upon factors surrounding the credit risk of those customers, believes
that its accounts receivable credit risk exposure is limited. The Company's
customers are not concentrated in any specific geographic region, but are
concentrated in the building material and home improvement service industries.
ACCOUNTS RECEIVABLE
The Company follows the allowance method of recognizing uncollectible accounts
receivable. The allowance method recognizes bad debt expense as a percentage of
accounts receivable based on a review of the individual accounts outstanding and
the Company's prior history of uncollectible accounts receivable. As of December
31, 2003 and 2002, the Company has established an allowance for uncollectible
accounts receivable of approximately $275,000 and $37,000, respectively. As of
June 30, 2004, the Company had established an allowance for uncollectible
accounts receivable of approximately $283,000 (unaudited). The Company does not
record interest income on delinquent accounts receivable balances until it is
received.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation of property and equipment is computed by the straight-line method
at rates adequate to allocate the cost of applicable assets over their expected
useful lives. Maintenance and repairs that neither materially add to the value
of the property and equipment nor appreciably prolong its life are charged to
expense as incurred. Betterments or renewals are capitalized when incurred.
Amortization of leasehold improvements is computed using the shorter of the
lease term or the expected useful life of the assets.
Estimated useful lives are as follows:
Equipment 5 Years
Furniture and fixtures 5-7 Years
Automobiles 5 Years
Leasehold improvements 5 Years
The Company is the lessee of equipment and furniture and fixtures under various
capital lease agreements expiring through July, 2005. Assets under the capital
lease agreements are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are being depreciated
over their estimated productive lives.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
computer software development costs begins upon the establishment of
technological feasibility for the Company's computer software
F-10
products. Technological feasibility is generally based upon the achievement of a
detail program design free of high-risk development issues. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product-by-product basis and is the greater of the
amount computed using (a) the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product.
During the years ended 2003 and 2002 and the six months ended June 30, 2004
(unaudited), the Company did not capitalize any software development costs, as
amounts related to internal software development that could be capitalized under
this statement were immaterial.
Research and development costs are charged to expense as incurred. Research and
development costs incurred in relation to third-party contracts are included in
cost of revenue.
REVENUE RECOGNITION
SOFTWARE DEVELOPMENT AND SALES FOR THE BUILDING MATERIALS INDUSTRY SEGEMENT
The Company recognizes revenue in accordance with SOP 97-2, "Software Revenue
Recognition." This SOP provides guidance on revenue recognition of software
transactions. The Company recognizes revenue principally from the development
and licensing of its software and from consulting and maintenance services
rendered in connection with such development and licensing activities.
Maintenance contract revenue is recognized on a straight-line basis over the
life of the respective contract. The Company also derives revenue from the sale
of third party hardware and software which is recognized based on the terms of
each contract. Consulting revenue is recognized when the services are rendered.
No revenue is recognized prior to obtaining a binding commitment from the
customer.
Revenue from fixed price software development contracts, which require
significant modification to meet the customer's specifications, is recognized on
the percentage-of-completion method using the units-of-work-performed method to
measure progress towards completion. Revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Revenue from software package license agreements without
significant vendor obligations is recognized upon delivery of the software.
Contract terms may provide for billing schedules that differ from revenue
recognition and give rise to costs and estimated earnings in excess of billings
on uncompleted software contracts, and billings in excess of costs and estimated
earnings on uncompleted software contracts.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance and research and development related revenues, which
consist principally of staff payroll and applicable overhead, are expensed as
incurred.
HOME IMPROVEMENT SERVICES SEGMENT
Revenues in the home improvement services segment are derived from two sources:
Service revenues and marketing revenues.
SERVICE REVENUES:
-----------------
Service revenues include lead fees and win fees from ImproveNet's contractor
matching service, enrollment fees from new contractors joining the ImproveNet
network, and project revenues from those jobs in which ImproveNet acts as the
contractor of record. Lead fees are recognized at the time a homeowner and
contractor are matched by the Company and the service provider becomes obligated
to pay such fee. Win fees are recognized at the time the service provider or the
homeowner notifies the Company that a job has been sold and the service provider
becomes obligated to pay such fee. Enrollment fees from service providers are
recognized as revenue ratably over the expected period they participate in our
contractor matching service, which is initially estimated to be between one and
two years. Payments of enrollment fees received in advance of providing services
are deferred until the period the services are provided. This deferred revenue
is included in current liabilities. Project revenues are recognized on the
completed contract method. The Company establishes a refund reserve at the time
of revenue recognition based on the Company's historical experience.
MARKETING REVENUES:
-------------------
Marketing revenues include the sale of banner, SmartLeads and other Web site
advertisements. Revenues are generally derived from short-term advertising
contracts in which the Company typically guarantees that a minimum number of
impressions will be delivered
F-11
to its Web site visitors over a specified period of time for a fixed fee. Cash
marketing revenues from banner, button and other Web site advertisements are
recognized at the lesser of the amount recorded ratably over the period in which
the advertising is delivered or the percentage of guaranteed impressions
delivered. SmartLeads revenues are also paid for in cash and are recognized when
the SmartLeads have been delivered to the customer. Cash marketing is recognized
when the Company has delivered the advertising, evidence of an agreement is in
place and fees are fixed, determinable and collectible.
ADVERTISING COSTS
The Company recognizes advertising expenses in accordance with SOP 93-7,
"Reporting on Advertising Costs." As such, the Company expenses advertising
costs as they are incurred. Advertising expense totaled approximately $24,000
and $11,000 for the years ended December 31, 2003 and 2002, respectively.
Advertising expense totaled approximately $0.00 and $18,000 (unaudited) for the
six months ended June 30, 2004 and 2003, respectively.
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information." SFAS No. 131 requires publicly held companies to
report financial and other information about key revenue segments of an entity
for which this information is available and is utilized by the chief operating
decision maker. The Company operates in two segments: Software development and
sales for the building materials industry and home improvement information
services. As is discussed in the "Basis of Presentation" portion of this
footnote, the Company's consolidated statements of operations and cash flows do
not currently reflect operations for the home improvement services segment as
this segment was acquired effective December 31, 2002 through a merger between
ImproveNet and eTech. Refer to Note 8, Merger with eTech for additional
information and disclosures related to the Merger.
The following table highlights our revenue for the years ended December 31, 2003
and 2002, and the six months ended June 30, 2004 and 2003 (unaudited).
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
2004 2003 # CHANGE 2003 2002 # CHANGE
------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenues:
eTechLogix software revenues $ 281,926 287,250 (2)% $ 548,042 $ 777,257 (29)%
ImproveNet service revenues 1,598,321 1,361,298 17% 2,675,545 -- --
------------ ------------ ------------ ------------
Total Revenues 1,880,247 1,648,548 14% $ 3,223,587 $ 777,257 315%
============ ============ ============ ============
The following table highlights our cost of revenues for the years ended December
31, 2003 and 2002, and the six months ended June 30, 2004 and 2003 (unaudited).
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
2004 2003 # CHANGE 2003 2002 # CHANGE
------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
Cost of Revenues:
Software (eTechLogix) $ 56,386 57,432 (2)% $ 109,609 $ 240,394 (54)%
ImproveNet service revenues 788,657 908,991 (13)% 1,677,840 -- --
------------ ------------ ------------ ------------
Total Revenues 845,043 966,423 (13)% $ 1,787,449 $ 240,394 644%
============ ============ ============ ============
INCOME TAXES
Deferred income taxes are provided for on an asset and liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance, when in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
COMPREHENSIVE LOSS
The Company follows SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. There was no
difference between the Company's net loss and its comprehensive loss for any
periods presented in the accompanying consolidated financial statements.
STOCK-BASED COMPENSATION PLANS
The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." Under FAS No. 123, companies can, but are not required to, elect to
recognize compensation expense for all stock-based awards using a fair value
methodology. The company has adopted the disclosure-only provisions, as
permitted by FAS No. 123. The company applies APB Opinion No. 25 and related
interpretations in accounting for its stock-based plans. Accordingly, there is
no related compensation expense recorded in the Company's financial statements
for the periods presented. Had compensation cost for stock-based compensation
been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share for the six months ended June 30, 2004 and 2003 would have been reduced
to the pro forma amounts presented below:
For 2003 and 2002, there were no differences between net loss and net loss per
share as reported in these consolidated financial statements and on a pro forma
basis, as if the fair value based method described in SFAS No. 123 had been
adopted.
F-12
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------------ ------------------------------
2004 2003 2003 2002
------------ ------------ ------------ ------------
(UNAUDITED)
Net Loss:
As reported $ (764,114) $ (245,898) $ (786,188) $ (293,676)
Pro Forma $ (980,116) $ (320,898) $ (786,188) $ (293,676)
Loss Per Share
As Reported $ (0.02) $ (0.01) $ (0.02) $ (0.01)
Pro Forma $ (0.02) $ (0.01) $ (0.02) $ (0.01)
The fair value of the 1,900,016 option grants during the six months ended June
30, 2004 (inclusive of 1,200,016 issued in the quarter ending June 30, 2004) is
estimated as of the date of grant utilizing the Black-Scholes option-pricing
model with the following weighted average assumptions for all grants, expected
life of options of ten (10) years, risk-free interest rates of four percent
(4%), volatility varies from 140% to 177%, and a zero percent (0%) dividend
yield.
NET EARNINGS (LOSS) PER COMMON SHARE
Basic net loss per common share is calculated by dividing net loss by the
average number of outstanding common shares during the period. Diluted net loss
per common share is calculated by adjusting the average number of outstanding
common shares assuming conversion of all potentially dilutive stock options and
warrants under the treasury stock method. For all fiscal years presented,
potentially dilutive securities, including stock options and warrants, were
excluded from the calculation of diluted net loss per common share, as their
effect would have been anti-dilutive.
For purposes of reporting shares outstanding and weighted average shares
outstanding, the financial statements reflect the conversion of eTech common
shares as if the Merger (recapitalization) were effective for all periods
presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments included in current
assets and current liabilities approximated their respective fair values at each
balance sheet date due to the immediate or short-term maturity of these
financial instruments. The fair value of long-term notes payable and lease
obligations is based on current rates at which the Company could borrow funds
with similar remaining maturities.
RECLASSIFICATIONS
Certain items have been reclassified to be consistent with current presentation.
The reclassifications have no effect on previously disclosed net loss or
stockholders' equity (deficit).
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies
and simplifies existing accounting pronouncements, by rescinding SFAS No. 4,
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of any related income
tax effect. As a result, the criteria in APB No. 30 will now be used to classify
those gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Finally, SFAS No. 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The Company adopted the provisions of SFAS No. 145 that amended SFAS No. 13, as
required, on May 15, 2002 for transactions occurring after such date with no
material impact on its financial statements. The Company's management currently
does not expect that the adoption of the remaining provisions of SFAS No. 145,
as required, on January 1, 2003 will have a material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 was issued to address the
financial accounting and reporting for costs associated with exit or disposal
activities, unless specifically excluded. SFAS No. 146 requires that a liability
for a cost associated with a covered exit or disposal activity be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for a liability for one-time termination
F-13
benefits that is incurred over time. If employees are not required to render
service until they are terminated in order to receive the one-time termination
benefits or if employees will not be retained to render service beyond the
minimum retention period (as dictated by existing law, statute or contract, or
in the absence thereof, 60 days), a liability for the termination benefits shall
be recognized and measured at its fair value at the communication date. If
employees are required to render service until they are terminated in order to
receive the one-time termination benefits and will be retained to render service
beyond the minimum retention period, a liability for the termination benefits
shall be measured initially at the communication date based on the fair value of
the liability as of the termination date. The liability shall be recognized
ratably over the future service period. SFAS No. 146 also dictates that a
liability for costs to terminate an operating lease or other contract before the
end of its term shall be recognized and measured at its fair value when the
entity terminates the contract in accordance with the contract terms. A
liability for costs that will continue to be incurred under a contract for its
remaining term without economic benefit to the entity is to be recognized and
measured at its fair value when the entity ceases using the right conveyed by
the contract. SFAS No. 146 further dictates that a liability for other covered
costs associated with an exit or disposal activity be recognized and measured at
its fair value in the period in which the liability is incurred. The Company's
management currently does not expect that the adoption of SFAS No. 146, as
required, on January 1, 2003 will have a material impact on its financial
statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 requires that acquisitions of financial
institutions be accounted in accordance with SFAS Nos. 141 and 142. The Company
adopted SFAS No. 147 in October 2002, with no impact on its consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123 to provide methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation, as well as requiring prominent disclosure about the
method and effect of accounting for stock-based compensation. The Company
adopted the provisions of SFAS No. 148 as of December 31, 2002 with no material
effect on its consolidated financial statements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which clarifies the disclosure, recognition, and
measurement requirements related to certain guarantees. The provisions related
to recognizing a liability at the inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties or to
guarantees accounted for as derivative instruments. The disclosure requirements
are effective for financial statements issued after December 15, 2002 and the
recognition and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company adopted the
provisions of Interpretation No. 45 in December 2002, with no impact on its
consolidated financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." This issue addresses how revenue arrangements with multiple
deliverables should be divided into separate units of accounting and how the
arrangement consideration should be allocated to the identified separate
accounting units. Issue No. 00-21 is effective for fiscal periods beginning
after June 15, 2003. The Company does not expect the adoption of EITF 00-21 to
have a material impact on its financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150). This statement affects the classification,
measurement and disclosure requirements of the following three types of
freestanding financial instruments: 1) mandatory redeemable shares, which the
issuing company is obligated to buy back with cash or other assets; 2)
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets, which includes put options and forward
purchase contracts; and 3) obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. In general, SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 did not have an impact on the Company's consolidated financial position or
disclosures.
NOTE 2 - SOFTWARE CONTRACTS IN PROGRESS
At December 31, 2003, the Company did not have any contracts in progress that
resulted in costs and estimated earnings in excess of billings or billings in
excess of costs and estimated earnings on uncompleted software contracts.
NOTE 3 - PROPERTY AND EQUIPMENT
As of December 31, 2003 and 2002 and June 30, 2004 (unaudited), property and
equipment consist of the following:
F-14
June 30, December 31, December 31,
2004 2003 2002
---------- ---------- ----------
Equipment $ 205,214 $ 193,686 $ 185,892
Furniture and fixtures 234,123 234,123 231,985
Leasehold improvements 12,171 12,171 --
---------- ---------- ----------
$ 451,508 439,980 417,877
Less: accumulated depreciation (382,801) (340,180) (259,883)
---------- ---------- ----------
$ 68,707 $ 99,800 $ 157,994
========== ========== ==========
NOTE 4 - LINE OF CREDIT
The Company has an unsecured $95,000 line of credit agreement with a bank. The
agreement calls for interest at the bank's prime rate plus 2.75%, (6.75% at
December 31, 2003) and is due on demand. The Company had outstanding balances on
the line of credit of approximately $66,000 and $78,000 as of December 31, 2003
and 2002, respectively. The Company had an outstanding balance on the line of
credit of approximately $62,000 (unaudited) as of June 30 2004.
NOTE 5 - NOTES PAYABLE
In December 2003, ImproveNet, Inc. completed a private placement of $400,000 of
8% unsecured convertible promissory notes, each with a maturity of December 15,
2005, issued to accredited investors. The notes will accrue 8% interest per year
payable quarterly commencing March 15, 2004. The principal of each note and all
accrued but unpaid interest is convertible into shares of the Company's common
stock at the rate of five shares for each one dollar of debt represented by each
note. Proceeds received from the issuance of the notes will be used for working
capital and general corporate purposes.
As of December 31, 2003 and 2002 and June 30, 2004 (unaudited), notes payable
consist of the following:
June 30, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
9.00% note payable to a bank, monthly payments of $1,100 including
principal and interest, secured by equipment, due May 2004 $ -- $ 417 $ 13,197
8.00% unsecured convertible promissory note to accredited
investors, due December 2005 0 400,000 --
------------ ------------ ------------
-- 400,417 13,197
Less: current maturities (417) (12,592)
------------ ------------ ------------
$ -- $ 400,000 $ 605
============ ============ ============
The long-term portion of notes payable as of December 31, 2003 of $400,000 is
due in 2005.
On June 24, 2004 principal balance and all accrued interest on $370,000 of the
$400,000 outstanding convertible promissory notes issued to accredited investors
in December 2003 were converted into 3,707,400 shares of common stock. The
principal balance on the remaining $30,000 outstanding convertible promissory
notes along with all accrued interest was paid in full.
NOTE 6 - COMMITMENTS
CAPITAL LEASES
The Company leases phone equipment through 2005 under capital leases. The
following is an analysis of leased property under these capital leases:
F-15
June 30, December 31,
2004 2003 2002
---------- ---------- ----------
Capitalized cost $ 72,259 $ 72,259 $ 72,259
Less: accumulated depreciation 61,470 (54,244) (39,792)
---------- ---------- ----------
Net carrying value 10,789 $ 18,015 $ 32,467
========== ========== ==========
Depreciation expense on the equipment under the capital leases was approximately
$14,000 and $15,000 for the years ended December 31, 2003 and 2002, respectively
and $7,000 (unaudited) for the six months ended June 30, 2004.
The following is a schedule of future minimum lease payments under the capital
leases described above, together with the present value of the net minimum lease
payments:
Year
Ended
December 31,
-------------
2004 20,530
2005 11,976
----------
Total minimum lease payments 32,506
Less: imputed interest (3,782)
----------
Present value of net minimum lease payments 28,724
Less: current portion (17,824)
----------
Long-term portion $ 10,900
==========
The interest rates under the capital lease obligations range from approximately
13% to 14% per annum, and are imputed based on the lessor's implicit rate of
return at the inception of the lease.
During 2001, the Company ceased making payments under the terms of a furniture
lease agreement. This lease is being accounted for as a capital lease as of
December 31, 2001. During 2002, the Company decided to allow the leasing company
to obtain a judgment in the amount of $216,376. Accordingly, during 2002, the
Company has reclassified the total principal due under the furniture lease from
obligations under capital leases to accrued furniture lease buyout on the
accompanying balance sheets. The Company has adjusted the accrual for the amount
due the leasing company based on the amount of the judgment. The relief of debt
recognized in the first quarter 2003 of $103,876 is attributable to a favorable
settlement of a liability under the furniture lease agreement. Payments of
$5,000 per month are being made on this obligation under the furniture lease
agreement with a final payment due in February 2005.
OPERATING LEASES
On May 1, 2000, the Company entered into a lease agreement for its operating
facility in Scottsdale, Arizona. The lease is with Apple Investments, LLC, a
Company wholly owned by two of the Company's officers. Rent expense under the
lease was approximately $10,000 and $102,000 for the years ended December 31,
2002 and 2001, respectively.
On January 31, 2002, the Company terminated the related party lease agreement
and entered into a new operating lease agreement with an unrelated third party
that calls for monthly payments of $4,060 expiring in March, 2003. Rent expense
under this agreement for the year ended December 31, 2002 was approximately
$45,000. Future minimum lease payments under the lease through March 2003 are
approximately $12,000.
In connection with the termination of the related party lease agreement, the
Company expensed the net carrying value of certain leasehold improvements of
approximately $66,000.
F-16
On June 1, 2003 the Company entered into a lease agreement for its operating
facility in Scottsdale, Arizona consisting of approximately 3,529 square feet
with gross lease payments of $5,000.00 per month plus tax at 1.9%. The new
operating lease agreement expires in July, 2005. Rent expense under this
agreement for the year ended December 31, 2003 was approximately $21,000 and for
the six months ended June 30, 2004 was approximately $30,000.
NOTE 7 - RELATED PARTY TRANSACTIONS
RELATED PARTY NOTE PAYABLE
During 2001, the Company borrowed a total of $12,000 from a shareholder of a
related corporation under the same common control as that of the Company. During
the year ended December 31, 2002, this amount was converted to 1,800 shares of
Common Stock of eTech, which was converted to 10,000,000 Common Shares of
ImproveNet at the time of the Merger.
As described in Note 8, Merger with eTech, during 2002, eTech entered into
subordinated convertible notes payable. An aggregate of $30,000 of the $100,000
subordinated convertible notes payable issued during August 2002 were to
officers of eTech.
RELATED PARTY FACILITY LEASE
From May 1, 2001 to January 31, 2002, the Company leased office space for its
corporate headquarters under an operating lease from Apple Investments, a
company wholly owned by two of the Company's officers (Refer to Note 6,
Commitments).
ROYALTY FEE REVENUES
Included in revenues are royalty fees that were recognized by the Company from
Smart Fusion, Inc. ("Smart Fusion") a company wholly owned by two of the
Company's officers. The Company recognized royalty fees from Smart Fusion in the
amounts of approximately $285,000 and $26,000 for the years ended December 31,
2002 and 2001, respectively. The fees are based on a percentage of sales that
Smart Fusion generated as a result of sales of the Company's software products.
No royalty fees were recognized for 2003, as the license agreement to sell the
Company's software products expired.
RESEARCH AND DEVELOPMENT
The Company subcontracts a portion of its research and development to companies
wholly owned by two of the officers of the Company. During the years ended
December 31, 2003 and 2002 and the six months ended june 30, 2004 and 2003, the
Company incurred expenses from these companies totaling approximately $102,000,
$38,000, $198,000 (unaudited) and $193,000 (unaudited) respectively, which is
included in research and development expenses in the accompanying financial
statements.
ACCRUED OFFICER SALARIES PAYABLE
For cash management purposes, some of the Company's officers have elected to
defer their regular salary payments. Total amounts deferred by these officers
are approximately $0, $190,000 and $134,000 at December 31, 2003, 2002 and 2001,
respectively and are included in accrued compensation in the accompanying
balance sheets.
NOTE 8 - MERGER WITH ETECH
OVERVIEW
On December 23, 2002, eTech merged with eTech Acquisition, Inc., an Arizona
corporation and wholly-owned subsidiary of ImproveNet, that was created during
2002 to merge eTech and ImproveNet. This Merger occurred pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") dated July 30, 2002. As
consideration for this merger, eTech paid $500,000 to ImproveNet and incurred
$19,000 in costs directly related to the merger. At the time of the Merger, each
outstanding share of eTech Common Stock, no par value per share, was converted
into the right to receive and became exchangeable for 5,555.555556 shares of
ImproveNet Common Stock, par value $.001 per share. A total of 35,417,750 shares
of ImproveNet common stock were issued in the Merger to eleven (11) different
shareholders of eTech. Through the merger, the former directors of eTech
collectively received 30,310,740 shares of ImproveNet Common Stock and as a
result, acquired control of the Company.
Un-expired outstanding options to purchase eTech Common Stock were converted, on
the same vesting schedule, into options to purchase a number of shares of
ImproveNet Common Stock equal to the number of shares of eTech Common Stock that
could have
F-17
been purchased under such option multiplied by 5,555.555556, at a price per
share of ImproveNet Common Stock equal to the per share exercise price of $0.05
per share. Options to acquire 788,889 shares of ImproveNet Common Stock were
issued in the Merger as a result of these outstanding options, of which, 222,222
had vested as of the date of the Merger and carried an exercise price of $0.05
per share.
Warrants to purchase 1,500,000 shares of ImproveNet were issued as a result of
the Merger. These warrants were issued in conjunction with subordinated
convertible notes payable, as discussed below.
TENDER OFFER
Under the terms of the Merger Agreement, the Company agreed to present a cash
tender offer ("Tender Offer") to pre-merger shareholders of ImproveNet. The
price per share is based in part on ImproveNet's available cash balance at the
closing of the merger. The Tender Offer was available from the time of the
merger through January 2, 2003.
Prior to the closing of the merger, ImproveNet deposited approximately
$2,557,000 with its stock transfer agent for payments to be made under the
Tender Offer. In conjunction with the Tender Offer, the Company disbursed a
total of approximately $1,962,000 to various pre-merger ImproveNet shareholders
in January 2003 resulting in the acquisition of 13,913,975 treasury shares in
January 2003. Funds remaining with the stock transfer agent in excess of
disbursements of approximately $595,000 are classified as receivable from stock
transfer agent on the accompanying balance sheets.
CONVERSION OF SUBORDINATED CONVERTIBLE NOTES PAYABLE
During July 2002, eTech issued an aggregate of $150,000 of subordinated
convertible notes payable to two accredited investors. The notes are secured by
substantially all of the Company's assets and are subordinated to the eTech's
9.00% note payable to a bank (Refer to Note 5, Notes Payable). In conjunction
with the issuance of these subordinated convertible notes payable, eTech also
issued one-year warrants to purchase an aggregate of 1,500,000 shares of
ImproveNet at a purchase price of $0.15 per share. The subscription of the
warrants is expressly conditioned upon the closing of the Merger. The Company
expensed approximately $81,000 in connection with these warrants to recognize
the fair value of the warrants.
During August 2002, eTech issued an aggregate of $100,000 of subordinated
convertible notes payable to accredited investors and officers of eTech (refer
to Note 7, Related Party Transactions). The notes are secured by substantially
all of eTech's assets and are subordinated to the $150,000 of aggregate
subordinated notes payable discussed above and to the 9.00% note payable to bank
(Refer to Note 5, Notes Payable).
All of the subordinated convertible notes payable described above bear interest
at a rate of 10.00% per annum and are due two years after the date of issue,
provided they are not converted prior to this date. The notes are convertible
into Common Shares of eTech in whole, or in part, at the option of the lender at
any time during the term of the note at a rate of one share for every
$555.5555556 of debt converted. The notes will automatically be converted if
there is a transfer of more than 50% of the voting control of the Company, in
one transaction or a series of transactions with ImproveNet directly or by
merger or consolidation in which the existing shareholders of eTech do not
directly retain more than 50% of the voting control of eTech, or a sale of all
or substantially all assets of eTech to ImproveNet or one of ImproveNet's
subsidiaries. The shares of eTech that will be received by the note holders if
automatic conversion occurs will be converted to shares of ImproveNet using the
same conversion rate as all other eTech shares converted in a merger
transaction.
The proceeds of the subordinated notes payable of $250,000 were to be used for a
portion of a $500,000 deposit with ImproveNet. This deposit was made prior to
the Merger and in accordance with the Merger Agreement.
ACCOUNTING FOR THE MERGER
The Company accounted for this merger in accordance with SFAS No. 141, "Business
Combinations." As discussed above, the former shareholders of eTech acquired a
controlling interest in the Company, accordingly, the transaction has been
accounted for as a reverse merger and the total consideration given by eTech of
$519,000 has been allocated to the fair values of the pre-merger assets and
liabilities of ImproveNet. At the time of the acquisition, the fair value of the
net assets of ImproveNet was $361,351 in excess of the consideration given by
eTech after all applicable reductions of amounts that otherwise would have been
assigned to the acquired assets were considered. This excess is reported in the
statement of operations as an extraordinary gain.
A summary of the amounts assigned to the assets and liabilities of ImproveNet at
the time of the merger is as follows:
F-18
Consideration provided 519,000
Assets
Cash and cash equivalents $ 418,284
Accounts receivable 293,924
Receivable from stock transfer agent 594,715
Prepaid expenses and other current assets 98,964
----------
Allocation to assets (1,405,887)
Liabilities
Accounts payable 109,442
Accrued merger and tender offer redemption liabilities 2,378,029
----------
Allocation to liabilities 2,487,471
Allocation to treasury stock subscribed (1,961,941)
----------
Extraordinary gain recognized (361,357)
==========
NOTE 9 - STOCKHOLDERS' EQUITY
MERGER WITH ETECH
Refer to Note 8, Merger with eTech, for information related to the Merger with
eTech.
SALE OF ETECH COMMON STOCK
During October 2002, eTech issued an aggregate of 450 shares of eTech Common
Stock to accredited investors resulting in proceeds of $250,000. In conjunction
with this sale, eTech distributed 45 shares of its common stock to consultants
who assisted in the Common Stock sale and recognized financing expenses of
$25,000 related to the services performed. At the time of the Merger in December
2002, all 495 shares described above were converted into shares of ImproveNet at
a rate of 5,555.555556 per share of eTech Common Stock.
The proceeds of the eTech stock sale of $250,000 were to be used for a portion
of a $500,000 deposit with ImproveNet. This deposit was made prior to the Merger
and in accordance with the Merger Agreement.
COMMON STOCK OPTIONS
Prior to the Merger on May 1, 2002, eTech issued 142 common stock options to an
employee. The options vesting schedule is as follows: 10 options on June 1, 2002
and 5 options on July 1, 2002 and each succeeding month thereafter until
September 1, 2004 when all options shall be vested. The options expire on May 1,
2012 and have an exercise price of $277.78 per share. At the time of the Merger,
these options were converted to options to purchase a number of shares of
ImproveNet Common Stock equal to the number of shares of eTech Common Stock that
could have been purchased under such options multiplied by 5,555.555556, at a
price per share of ImproveNet Common Stock equal to the per share exercise price
of $.05 per share.
Subsequent to the Merger, the Company retained ImproveNet's already existing
stock option plans. These plans consist of the following:
1996 STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan, as amended, the Company may issue
incentive stock options or non-statutory stock options to purchase up to
2,700,000 shares of common stock. Incentive stock options may be granted to
employees at exercise prices not lower than fair market value at the date of
grant, as determined by the Board of Directors. Non-statutory stock options may
be
F-19
granted to employees, directors and consultants, at exercise prices not lower
than 85% of fair market value at the date of grant, as determined by the Board
of Directors. The Board also has the authority to set the term of the options up
to a maximum of ten years. Options granted generally vest over four years.
Unexercised options expire three months after termination of employment with the
Company.
1999 EQUITY INCENTIVE PLAN
The Company's Board of Directors adopted the 1999 Equity Incentive Plan (the
"Incentive Plan") on December 3, 1999 under which 1,300,000 shares have been
reserved for issuance. The number of shares reserved under the Incentive Plan
will automatically increase on January 1 of each year by the lesser of 4% of the
total number of shares outstanding or 1,300,000 shares. The Board of Directors
implemented a program of automatic option grants to each non-employee director
such that each non-employee director will receive options to purchase 20,000
shares of common stock upon commencement of service as a director, which will
vest monthly over three years and 5,000 shares annually thereafter, which will
vest monthly over twelve months.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors adopted the Employee Stock Purchase Plan (the
"Purchase Plan") on December 3, 1999 under which 300,000 shares have been
reserved for issuance. The Purchase Plan was effected upon the effective date of
the Company's initial public offering ("IPO"). The number of shares reserved
under the Purchase Plan will automatically increase on January 1 of each year by
the lesser of an amount equal to 1% of the total number of shares outstanding,
or 300,000 shares. Under the Purchase Plan, eligible employees may purchase
common stock valued at the lesser of $25,000 or 15% of their compensation. The
purchase price per share will be 85% of the common stock fair value at the lower
of certain plan defined dates. The Purchase Plan was suspended on June 29, 2001.
A summary of stock option activity is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- ----------
Outstanding - January 1, 2002 -- $ --
Options granted by eTech 142 277.78
Effect of eTech Merger
- conversion of eTech options
- reversal of eTech options (142) (277.78)
- conversion of eTech options 788,889 0.05
- recognition of ImproveNet options
existing prior to the merger 304,102 2.29
Outstanding - December 31, 2002 1,092,991 $ 0.67
Options granted 980,000 0.17
Options exercised --
Options forfeited during 2003 (67,000) (4.15)
Outstanding - December 31, 2003 2,005,991 $ 0.31
==========
Options granted 1,900,016
Options exercised --
Options forfeited --
Outstanding - June 30, 2004 3,906,007
==========
As of December 31, 2003, there were 5,286,809 shares available for grant under
the various stock option and incentive plans described above. As of June 30,
2004, there were 6,586,809 (unaudited) shares available for grant under the
various stock option and incentive plans described above.
The following table summarizes information with respect to stock options
outstanding at December 31, 2003:
F-20
Options Outstanding Options Exercisable
------------------------------------------------------------------ -------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Outstanding Price
---------------- -------------------- -------------------- -------------------- -------------------- --------------------
$0.05 788,889 8.4 $0.05 555,558 $0.05
$0.12 40,000 9.1 $0.12 12,222 $0.12
$0.15 540,000 9.1 $0.15 200,000 $0.15
$0.20 400,000 9.9 $0.20 - $0.20
$0.25 177,102 5.3 $0.25 177,102 $0.25
$6.25 60,000 6.3 $6.25 55,000 $6.25
-------------------- --------------------
2,005,991 $0.31 999,882 $0.45
==================== ====================
The following table summarizes information with respect to stock options
outstanding at June 30, 2004:
(Unaudited)
Options Outstanding Options Exercisable
---------------------------------------------------------- -----------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Outstanding Price
--------------- ------------------- ------------------- ------------ ------------------- ------------------
$0.05 788,889 8.4 $0.05 722,228 $0.05
$0.09 800,000 10.0 0.09 66,668 0.09
$0.11 300,016 10.0 0.11 33,336 0.11
$0.12 40,000 9.1 $0.12 20,000 $0.12
$0.13 100,000 10.0 0.13 58,332
$0.15 540,000 9.1 $0.15 200,000 $0.15
$0.20 750,000 9.9 $0.20 -- $0.20
$0.25 177,102 5.3 $0.25 177,102 $0.25
$6.25 60,000 6.3 $6.25 55,000 $6.25
-------- --------
3,906,007 $0.31 999,882 $0.45
========== ========
FAIR VALUE DISCLOSURES
The fair value of each option granted by the Company during years ended December
31, 2003 and 2002 and the six months ended June 30, 2004 has been estimated on
the date of grant using the minimum value method with the following assumptions:
F-21
June 30, December 31, December 31,
2004 2003 2002
---- ---- ----
(unaudited)
Assumptions
Risk-free interest rate 4.00% 3.00% 4.30%
Expected lives 10 years 4 years 4 years
Dividend yield -- --
Volatility 177.00% 146.00% 138.00%
COMMON STOCK WARRANTS
The Company issued warrants to approved finders of the participating accredited
investors in conjunction with the private placement completed in December 2003.
These warrants have an exercise price of $0.20 and expire in December 2005.
Compensation expense related to the issuance of these warrants was $57,200.
A summary of common stock warrant activity is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- ----------
Outstanding - January 1, 2002 -- $ --
Effect of eTech Merger
- grant of eTech warrants contingent on the
occurrence of the merger 1,500,000 0.15
- recognition of ImproveNet warrants
existing prior to the Merger 1,267,596 8.98
Outstanding - December 31, 2002 2,767,596 $ 4.19
----------
Warrants issued 2,370,000 0.16
Warrants exercised --
Warrants expired (1,500,000) (0.15)
----------
Outstanding - December 31, 2003 3,637,596 $ 0.15
Warrants issued 10,466,664 0.15
Warrants exercised --
Warrants expired -- --
----------
Outstanding - June 30, 2004 (unaudited) 14,104,260 $ 0.94
==========
The following table summarizes warrants outstanding at December 31, 2003:
F-22
Number of Exercise Term Expiration
Shares Price (Years) Date
--------- ------ ------- ------------------
245,000 $ 0.01 November 23, 2004
100,000 $ 0.01 December 6, 2004
75,000 $ 0.01 December 12, 2004
5,000 $ 0.01 June 16, 2007
1,500,000 $ 0.15 1.00 December 23, 2004
200,000 $ 0.10 2.00 June 27, 2005
150,000 $ 0.25 2.00 September 25, 2005
500,000 $ 0.16 2.00 December 4, 2005
20,000 $ 0.16 2.00 December 12, 2005
583,333 $13.50 December 6, 2004
The following table summarizes warrants outstanding at June 30, 2004:
Number of Exercise Term Expiration
Shares Price (Years) Date
--------- ------ ------- ------------------
245,000 $ 0.01 November 23, 2004
100,000 $ 0.01 December 6, 2004
75,000 $ 0.01 December 12, 2004
5,000 $ 0.01 June 16, 2007
1,500,000 $ 0.15 1.00 December 23, 2004
200,000 $ 0.10 2.00 June 27, 2005
150,000 $ 0.25 2.00 September 25, 2005
500,000 $ 0.16 2.00 December 4, 2005
20,000 $ 0.16 2.00 December 12, 2005
-----------
10,466,664 $ 0.15 3.00 June 23, 2004
583,333 $13.50 December 6, 2004
===========
259,263 $13.50 December 12, 2004
===========
14,104,260
===========
NOTE 10 - INCOME TAXES
The Company accounts for income taxes using an asset and liability approach.
Deferred income taxes arise from timing differences resulting from revenues and
costs reported for financial and tax reporting purposes in different periods. In
addition, a valuation allowance is recognized if it is more likely than not that
some or all of the deferred income tax assets will not be realized. A valuation
allowance is used to offset the related net deferred income tax assets due to
uncertainties of realizing the benefits of certain net operating losses.
Significant components of the Company's deferred income tax assets are as
follows:
F-23
June 30, December 31,
2004 2003 2002
------------ ------------ ------------
Deferred Income Tax Assets:
Allowance for doubtful accounts 119,000 $ 116,000 $ 16,000
Excess of book over tax depreciation (10,000) (12,000) (27,000)
Federal net operating loss carryforwards 1,290,000 960,000 790,000
State net operating loss carryforwards 169,000 108,000 68,000
------------ ------------ ------------
Total deferred income tax asset 1,568,000 1,172,000 847,000
Valuation allowance (1,568,000) (1,172,000) (847,000)
------------ ------------ ------------
Net deferred income tax asset $ -- $ -- $ --
============ ============ ============
At December 31, 2003 and 2002 and June 30, 2004, the Company had state net
operating loss carryforwards of approximately $1,346,000 and $843,000 and
$2,132,000 (unaudited), respectively which expire through 2008. At December 31,
2003, and June 30, 2004 the Company had a federal net operating loss of
approximately $2,825,000, and $3,611,000 (unaudited)which expires on various
dates up to the year 2023.
Due to the Merger with eTech, ImproveNet's pre-merger net operating losses are
limited in use subsequent to the merger. The amount of net operating losses that
can be used on an annual basis for the next twenty years is based on the value
of ImproveNet at the time of the merger and the adjusted applicable federal
long-term rate.
NOTE 11 - RETIREMENT PLAN
Effective April 16, 1997, the Company adopted a 401(k) retirement plan.
Employees are eligible to participate in the plan after four (4) months of
service. Salary deferral may range from 1% to 15%. The Company matches 100% of
the amounts deferred by employees, up to 6% of an employee's annual
compensation. The Company matched contributions totaling approximately $0, and
$1000 for the years ended December 31, 2002 and 2001 respectively.
Effective November 1, 2003 the Company amended the 401(k) retirement plan. The
Company provides a 401(k) retirement plan, which allows participating employees
to elect to contribute up to 90% of their gross compensation. The 401(k) plan is
subject to certain government-mandated restrictions which limit the amount of
each employee's contribution. Employees are eligible to participate 90 days
after their date of hire. The Company will not make a matching contribution at
this time. The Company matched contributions totaling approximately $0 for the
year ended December 31, 2003. The Company has made no match of contributions in
the six months ended June 30, 2004.
NOTE 12 - CONTINGENCIES
As of December 31, 2003 and 2002, the Company had various pending claims arising
from former customer disputes. The Company intends to vigorously defend these
claims and expects to prevail in all cases. In conjunction with the defense of
these claims, the Company has accrued approximately $306,000 and $137,000 as of
December 31, 2003 and 2002, respectively, which represents the Company's best
estimate of future costs associated with defending the claims. The Company has
accrued approximately $248,000 as of June 30, 2004 which represents the
Company's best estimate of future costs associated with defending the claims.
NOTE 13 - SERVICE AGREEMENT
The Company entered into an agreement with a third party service provider to
operate and manage the contractor matching operation of ImproveNet's home
improvement services segment. The agreement commenced on the date of the Merger,
has a term of two years, is cancelable by the Company with 90 days written
notice and cancelable by the service provider with 180 days written notice.
The agreement calls for the Company to remit, on a weekly basis, 25% of
collected revenues related to the contractor matching function that the service
provider manages and operates. On a monthly basis, the Company is required to
reconcile total revenues related to the service agreement. The Company is
required to pay the service provider an additional 2.5% of monthly revenues in
excess of $400,000 but less than $500,000 and an additional 5% of revenues
greater than $500,000.
F-24
NOTE 14 - CONCENTRATIONS
During 2002, the Company had four customers that accounted for 69% of the
Company's revenues (Customer A - 25%, Customer B - 19%, Customer C - 14% and
Customer D - 11%). During 2001, the Company had one customer (Customer A) that
accounted for 71% of the Company's revenues.
NOTE 15 - SUBSEQUENT EVENTS
Our customer service and operations for the service provider matching service
are performed under terms of a services agreement with a Canadian corporation in
Nova Scotia, Canada which provides for termination without cause upon 180 days
notice by the Canadian corporation. In January 2004, the Canadian corporation
provided written notice to us of termination of the services agreement. We have
staffed our Scottsdale, Arizona offices for the customer service and operations
for the service provider matching service. In late March 2004, the transition of
our customer service and operations was made to our Scottsdale, Arizona offices.
It is unclear if the transition has been implemented smoothly or if the customer
service and operations will be performed adequately in the new location. There
is an element of goodwill associated with the customer relationship aspect of
the customer service center and it is unclear if this will be maintained through
this transition. We have experienced some disruption in customer support,
collections of accounts receivable and revenues.
F-25
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO OR FROM ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
================================================================================
_____________________
TABLE OF CONTENTS
_____________________
PAGE
SUMMARY......................................................
THE OFFERING.................................................
SUMMARY FINANCIAL DATA.......................................
RISK FACTORS.................................................
DIVIDEND POLICY..............................................
MARKET FOR COMMON STOCK......................................
USE OF PROCEEDS..............................................
SELLING SECURITYHOLDERS......................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............
OUR BUSINESS.................................................
MANAGEMENT...................................................
PRINCIPAL SHAREHOLDERS.......................................
CERTAIN TRANSACTIONS.........................................
DESCRIPTION OF IMPROVENET'S SECURITIES.......................
SHARES ELIGIBLE FOR FUTURE SALE..............................
PLANS OF DISTRIBUTION .......................................
EXPERTS......................................................
LEGAL MATTERS................................................
ADDITIONAL INFORMATION.......................................
REPORTS TO SHAREHOLDERS......................................
INDEX TO COMBINED FINANCIAL STATEMENTS.......................
================================================================================
IMPROVENET, INC.
COMMON STOCK
________________
PROSPECTUS
________________
___________, 2004
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses of
ImproveNet in connection with this Offering.
Amount(1)
---------
SEC Registration Fee.............................................. $ 1,140
NASD Filing Fee...................................................
Legal Fees and Expenses...........................................
Accounting Fees and Expenses......................................
Printing Expenses.................................................
Blue Sky Fees and Expenses........................................
Miscellaneous.....................................................
Total.............................................................
(1) ALL FEES AND EXPENSES EXCEPT THE SEC REGISTRATION FEE AND THE NASD FILING
FEE ARE ESTIMATES.
ITEM 25. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a
corporation's board of directors to grant indemnity to directors and officers in
terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities, including reimbursement for expenses incurred,
arising under the Securities Act of 1933, as amended.
As permitted by Delaware law, our Fourth Amended and Restated
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability (1) for any breach of the director's duty of
loyalty to us or our stockholders; (2) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law; (3) under
Section 174 of the Delaware General Corporation Law regarding unlawful dividends
and stock purchases; or (4) for any transaction from which the director derived
an improper personal benefit.
As permitted by Delaware law, our Fourth Amended and Restated
Certificate of Incorporation provides that (1) we are required to indemnify our
directors and officers to the fullest extent permitted by Delaware law, subject
to certain very limited exceptions; (2) we are permitted to indemnify our other
employees to the extent that we indemnify our officers and directors, unless
otherwise required by law, our Restated Certificate of Incorporation, our bylaws
or agreements; (3) we are required to advance expenses, as incurred, to our
directors and officers in connection with a legal proceeding to the fullest
extent permitted by Delaware law, subject to certain very limited exceptions;
and (4) the rights conferred in the Restated Certificate of Incorporation are
not exclusive.
Our Amended and Restated Bylaws provide that we shall indemnify our
directors and executive officers and may indemnify our other offices and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Amended and Restated Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our Amended
II-1
and Restated Bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the Amended and Restated Bylaws
would permit indemnification.
We have entered into agreements to indemnify our directors and
executive officers, in addition to indemnification provided for in our Amended
and Restated Bylaws. These agreements, among other things, indemnify our
directors and executive officers for certain expenses, including attorneys'
fees, judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by us arising out of such person's
services as our director or executive officer, any of our subsidiaries or any
other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
ACQUISITION
On December 23, 2002, eTech Acquisition, Inc., an Arizona corporation and
wholly-owned subsidiary of ImproveNet, merged with and into eTechLogix, Inc.
("Etech"). This Merger occurred pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") dated July 30, 2002. Under the terms of the Merger
Agreement, eTech paid $500,000 to ImproveNet and incurred $19,000 in costs
directly related to the Merger. At the time of the Merger, each outstanding
share of eTech Common Stock, no par value per share, was converted into the
right to receive and became exchangeable for 5,555.555556 shares of ImproveNet
Common Stock, par value $.001 per share. A total of 35,417,750 shares of
ImproveNet common stock were issued in the Merger to eleven (11) different
shareholders of eTech. Through the Merger, the former directors, who were also
shareholders, of eTech collectively received 30,310,740 shares of ImproveNet
Common Stock and as a result, acquired control of the Company.
Un-expired outstanding options to purchase eTech Common Stock were
converted, on the same vesting schedule, into an option to purchase a number of
shares of ImproveNet Common Stock equal to the number of shares of eTech Common
Stock that could have been purchased under such option multiplied by
5,555.555556, at a price per share of ImproveNet Common Stock equal to the per
share exercise price of $.05 per share. Options to acquire 788,889 shares of
ImproveNet Common Stock were issued in the Merger as a result of these
outstanding options, of which, 222,222 had vested as of the date of the Merger.
Warrants to purchase 1,500,000 shares of ImproveNet were issued as a result
of the Merger. These warrants were issued in conjunction with subordinated
convertible notes payable, as discussed below.
TENDER OFFER
Under the terms of the Merger Agreement, the Company agreed to present a
cash tender offer ("Tender Offer") to pre-merger shareholders of ImproveNet. The
price per share was based in part on ImproveNet's available cash balance at the
closing of the Merger. The Tender Offer was available from the time of the
Merger through January 2, 2003.
Prior to the closing of the Merger, ImproveNet deposited approximately
$2,557,000 with its stock transfer agent for payments to be made under the
Tender Offer. In conjunction with the Tender Offer, the Company disbursed a
total of approximately $1,962,000 to various pre-merger ImproveNet shareholders
in January 2003 resulting in the acquisition of 13,913,975 treasury shares in
January 2003. Funds in excess of disbursements of approximately $595,000 were
returned to the Company from stock transfer agent in January 2003.
II-2
CONVERSION OF SUBORDINATED CONVERTIBLE NOTES PAYABLE
During July 2002, eTech issued an aggregate of $150,000 of subordinated
convertible notes payable to two accredited investors. The notes are secured by
substantially all of the Company's assets and are subordinated to the eTech's
9.00% note payable to a bank (Refer to Note 5, Notes Payable). In conjunction
with the issuance of these subordinated convertible notes payable, eTech also
issued one-year warrants to purchase an aggregate of 1,500,000 shares of
ImproveNet at a purchase price of $0.15 per share. The subscription of the
warrants was expressly conditioned upon the closing of the Merger. The Company
expensed approximately $81,000 in connection with these warrants to recognize
the fair value of the warrants.
During August 2002, eTech issued an aggregate of $100,000 of
subordinated convertible notes payable to accredited investors and officers of
eTech (refer to Note 7, Related Party Transactions). The notes are secured by
substantially all of eTech's assets and are subordinated to the $150,000 of
aggregate subordinated notes payable discussed above and to the 9.00% note
payable to a bank (Refer to Note 5, Notes Payable).
All of the subordinated convertible notes payable described above bear
interest at a rate of 10.00% per annum and are due two years after the date of
issue, provided they are not converted prior to this date. The notes are
convertible into common shares of eTech in whole, or in part, at the option of
the lender at any time during the term of the note at a rate of one share for
every $555.5555556 of debt converted. The notes will automatically be converted
if there is a transfer of more than 50% of the voting control of the Company, in
one transaction or a series of transactions with ImproveNet directly or by
merger or consolidation in which the existing shareholders of eTech do not
directly retain more than 50% of the voting control of eTech, or a sale of all
or substantially all assets of eTech to ImproveNet or one of ImproveNet's
subsidiaries. The shares of eTech that will be received by the note holders if
automatic conversion occurs will be converted to shares of ImproveNet using the
same conversion rate as all other eTech shares converted in a merger
transaction. Immediately prior to the closing of the Merger, all of the
subordinated convertible notes payable were converted into shares of Etech
common stock and upon closing of the Merger were exchanged into shares of
ImproveNet common stock.
The proceeds of the subordinated notes payable of $250,000 were to be
used for a portion of a $500,000 deposit by Etech with ImproveNet. This deposit
was made prior to the Merger and in accordance with the Merger Agreement.
SHORT TERM PROMISSORY
In June 2003 following the closing of the Merger, we borrowed
$75,000 for a 90-day period represented by a promissory note that we issued to
an accredited investor. Warrants to purchase 200,000 shares of our common stock
were also issued in that transaction. The promissory note was renewed in
September 2003 for $80,000 including accrued but unpaid interest, and a warrant
to purchase an additional 150,000 shares of our common stock was issued at that
time. The promissory note was paid in full in December 2003. The issuances of
the promissory notes and the warrants were made under applicable registration
exemptions from both state and federal securities laws including section 4(2) of
the Securities Act of 1933.
ISSUANCE OF UNSECURED CONVERTIBLE PROMISSORY NOTES
In December 2003, we completed a private placement of $400,000 of 8%
unsecured convertible promissory notes, each with a maturity of December 15,
2005, issued to a limited group of accredited investors. The issuance was made
under applicable registration exemptions from both state and federal securities
laws including section 4(2) of the Securities Act of 1933.
The notes will accrue 8% interest per year payable quarterly commencing
March 15, 2004. The first quarterly payment was made on March 15, 2004. The
principal of each note and all accrued but unpaid interest is convertible into
shares of our common stock at the rate of five (5) shares for each one dollar of
debt represented by each note. Proceeds received from the issuance of the notes
are being used for working capital and general corporate purposes. In addition,
approved finders of the participating accredited investors were collectively
issued warrants to purchase 520,000 shares of our common stock. The warrants
were also issued under applicable
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registration exemptions from both state and federal securities laws including
section 4(2) of the Securities Act of 1933.
PRIVATE PLACEMENT AND CONVERSION OF CONVERTIBLE PROMISSORY NOTES
On June 24, 2004, we completed a sale of 10,500,000 shares of our
common stock, par value $0.001 per share, for $0.10 per share to several
accredited investors (collectively, the "Investors"), for an aggregate purchase
price of $1,050,000 in a private placement transaction pursuant to provisions of
a Common Stock Subscription Agreement dated June 23, 2004 (the "Agreement"). We
also granted the Investors 3-year warrants to purchase a total of 8,000,000
shares of our common stock at an exercise price of $0.15 per share. The right to
designate a nominee to our Board of Director's was also granted to one of the
accredited investors. The funds received will be used for general corporate
purposes and to increase our financial flexibility.
As part of the transaction, the Investors also purchased 1,500,000
shares of common stock from affiliates of three of our officers and directors
for an aggregate purchase price $150,000. Each of these three selling parties
entered into a lock-up agreement restricting future sales of their common stock
for a specified period as well as a voting agreement regarding the accredited
investor's designated nominee to our Board of Directors.
In addition, the principal balance and all accrued interest on $370,000
of the $400,000 outstanding convertible promissory notes we issued to accredited
investors in December 2003 were converted into common stock and warrants on
similar terms to the private placement (the "Converting Investors") on June 24,
2004 as more specifically set forth in each respective Second Amendment to
ImproveNet, Inc. Unsecured Convertible Promissory Note Subscription Agreement
and 8% Unsecured Convertible Promissory Note (the "Second Amendments"). A total
of 3,707,400 shares of common stock were issued along with 3-year warrants to
purchase an additional 2,466,666 shares of common stock at an exercise price of
$0.15 per share.
We have agreed to file a registration statement with the Securities
Exchange Commission within sixty days of the closing of the Agreement covering
the resale of the common stock by the Investors and the Converting Investors.
There were no underwriters involved in these transactions, and no
underwriting discounts or commissions paid.
The securities were issued on the basis of the statutory exemption
provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act"),
or Regulation D promulgated thereunder or another exemption under the Act, or
both, relating to transactions by an issuer not involving any public offering
and under similar exemptions under certain state securities laws.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ --------------------------------------------------------------------
2.1 Stock Purchase Agreement by and between the Registrant and The J.L.
Price Corporation. (1)
2.2 Asset Purchase Agreement by and between the Registrant and Contractor
Referral Service, LLC. (1)
2.3 Agreement and Plan of Merger by and between the Registrant,
eTechLogix, Inc. and Etech Acquisition, Inc. dated July 30, 2002, as
amended (2)
2.4 Amendment No. 1 to Agreement and Plan of Merger dated October 1, 2002
(7)
2.5 Amendment No. 2 to Agreement and Plan of Merger dated November 12,
2002 (7)
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Registrant. (1)
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3.2 Amended and Restated Bylaws of the Registrant. (1)
4.1 Specimen Stock Certificate. (1)
5.1 Opinion of Law Office of Jeffrey R. Perry
10.1 Amended and Restated 1996 Stock Option Plan. (1)
10.2 Form of 1999 Equity Incentive Plan. (1)
10.3 Form of 1999 Employee Stock Purchase Plan. (1)
10.4 Commercial Office Lease by and between Florcor I Limited Partnership
and the Registrant. (1)
10.5 Commercial Office Lease by and between Chestnut Bay LLC and the
Registrant. (1)
10.6 Employment agreement by and between the Registrant and Ronald Cooper.
(1)
10.7 Series A Preferred Stock and Warrant Purchase Agreement by and between
the Registrant and certain investors of the Registrant dated June 30,
1997. (1)
10.8 Series B Preferred Stock and Warrant Purchase Agreement by and between
the Registrant and certain investors of the Registrant dated March 17,
1998. (1)
10.9 Series C Preferred Stock Agreement by and between the Registrant and
certain investors of the Registrant dated March 29, 1999. (1)
10.10 Series D Preferred Stock Purchase Agreement by and between the
Registrant and certain investors of the Registrant dated September 10,
1999. (1)
10.11 First Series E Preferred Stock Purchase Agreement by and between the
Registrant and certain investors of the Registrant dated November 23,
1999. (1)
10.12 Second Series E Preferred Stock Purchase Agreement by and between the
Registrant and certain investors of the Registrant dated November 23,
1999. (1)
10.13 Form of Warrant Purchase Agreement by and between the Registrant and
certain investors of the Registrant dated December 7, 1999. (1)
10.14 Fourth Amended and Restated Voting Agreement by and between the
Registrant and certain investors of the Registrant dated November 23,
1999. (1)
10.15 Form of Indemnity Agreement by and between the Registrant and each of
its directors and executive officers. (1)
10.16 Internet-based Service Agreement between the Registrant and Owens
Corning dated October 1, 1999. (1)
10.17 Collaboration Agreement between the Registrant and E.I. du Pont de
Nemours and Company dated December 3, 1999. (1)
10.18 Internet Development, Marketing and Distribution Agreement between the
Registrant and General Electric Appliances dated September 10, 1999.
(1)
10.19 Relationship Agreement between the Registrant and Microsoft
HomeAdvisor dated December 7, 1999. (1)
10.20 Agreement between the Registrant and CompleteHome Operations, Inc.
dated December 13, 1999. (1)
10.21 Form of 1996 Stock Option Plan Grant Notice. (1)
10.22 Form of 1999 Equity Incentive Plan Stock Option Agreement. (1)
10.23 Form of Warrant to Purchase an aggregate of 420,000 shares of common
stock. (1)
10.24 Form of Warrant to Purchase an aggregate of 10,000 shares of common
stock. (1)
10.25 Form of Warrant to Purchase an aggregate of 842,596 shares of common
stock. (1)
10.26 Form of Warrant to Purchase an aggregate of 96,400 shares of Series A
preferred stock. (1)
10.27 Form of Warrant to Purchase an aggregate of 47,009 shares of Series B
preferred stock. (1)
10.28 Form of Warrant to purchase 47,167 shares of Series C preferred stock.
(1)
10.29 Form of Warrant to purchase an aggregate of 326,000 shares of Series D
preferred stock. (1)
10.30 Fourth Amended and Restated Investor Rights Agreement by and between
the Registrant and certain investors of the Registrant dated November
23, 1999. (1)
10.33 Commercial Office Lease by and between Bennett Center, LLC and the
Registrant. (3)
10.34 Improvenet, Inc. Stock Repurchase Agreement dated July 12, 2001. (4)
10.35 Services Agreement dated December 16, 2002 regarding contractor
matching operation (confidential treatment requested) (7)
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10.36 Commercial Office Lease by and between Phil & Brenda Frandsen and
Registrant (8)
14.1 Code of Ethics
16.1 Concurrence of PricewaterhouseCoopers LLP, former independent
accountants, regarding resignation. (5)
23.1 Consent of Semple & Cooper LLP, Independent Accountants.
23.2 Consent of Law Office of Jeffrey R. Perry included in Exhibit 5.1.
24.1 Power of Attorney. (3)
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 333-92873), as amended.
(2) Incorporated by reference to the Registrant's Form 8-K filed on August 6,
2002.
(3) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2000.
(4) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2001.
(5) Incorporated by reference to the Registrant's Form 8-K filed on January 21,
2003.
(6) Incorporated by reference to the Registrant's Schedule TO with exhibits and
amendments thereto and eTechLogix's Schedule TO with exhibits and amendments
thereto.
(7) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
year ended December 31, 2002.
(8) Incorporated by reference to the Registrant's Form 10-QSB for the 2nd
quarter ended June 30, 2004.
ITEM 28. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been advised
that in the opinion of the Securities and Exchange Commission ("SEC") such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person in
connection with the securities being registered) the small business issuer will,
unless in the opinion of its counsel that the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act, and will be governed by the final adjudication
of such issue.
2. The undersigned small business issuer will: (i) for determining any
liability under the Securities Act, treat the information omitted from the form
of prospectus filed as a part of this Registration Statement in reliance upon
Rule 430A and contained in a form or prospectus filed by the small business
issuer under Rule 424(b)(1), or (4) 497(h) under the Securities Act as part of
this Registration Statement as of the time the SEC declared it effective and
(ii) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
3. The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the Registration
Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the
total dollar volume of securities offered would not
exceed that
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which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than
a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Scottsdale, County of
Maricopa, Arizona, on August 23, 2004.
IMPROVENET, INC.
By /s/ Jeffrey I. Rassas
------------------------------------
Jeffrey I. Rass?s
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey I. Rass?s and Homayoon J. Farsi
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and capacities, to sign any or all amendments, including
post-effective amendments, to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
SEC, granting unto said attorneys-in-fact and agents, and each of them full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Dated: August 23, 2004 /s/ Jeffrey I. Rassas
--------------------------------
Jeffrey I. Rassas, Director
Dated: August 23, 2004 /s/ Homayoon J. Farsi
--------------------------------
Homayoon J. Farsi, Director
Dated: August 23, 2004 /s/ Naser Ahmad
--------------------------------
Naser Ahmad, Director
Dated: August 23, 2004 /s/ Ronald B. Cooper
--------------------------------
Ronald B. Cooper, Director
Dated: August 23, 2004 /s/ Jay Stead
--------------------------------
Jay Stead, Director
Dated: August 23, 2004 /s/ Alok Mohan
--------------------------------
Alok Mohan, Director
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